Eastern Co · 10-K · For 1/3/04 · EX-99
Filed On 3/22/04 3:55pm ET · SEC File 0-00599 · Accession Number 31107-4-20
As Of Filer Filing As/For/On Docs:Pgs
3/22/04 Eastern Co 10-K 1/03/04 6:58
Annual Report · Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K Annual Report 49 275K
2: EX-10 Amendment to Directors Fee Program 2 15K
3: EX-23 Consent of Independent Auditors 1 6K
4: EX-31 Certifications Section 302 2 16K
5: EX-32 Certifications Section 906 1 8K
6: EX-99 Letter to the Shareholders 3 18K
EX-99 · Letter to the Shareholders
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EXHIBIT 99
Letter to the Shareholders
The U.S. economy began to show some signs of recovery in 2003, and toward the
end of the year our businesses began to reflect the improvement. This was a
welcome relief after the difficult economic conditions we operated in during the
prior two years. The question still remains as to whether this apparent rebound
in the economy will last, or whether, as happened in those previous two years,
it will fizzle out. Nevertheless, our current backlogs of business are somewhat
stronger than they were a year ago, and we are optimistic about 2004.
Sales in 2003 increased 9% to $88.3 million from $81.3 million in 2002.
Industrial Hardware sales increased by 21% while sales in the Security Products
segment were up by 8%. Our Metal Products segment experienced a decrease of 13%
in sales. Net income for the year grew by 2% to $3.4 million from $3.3 million
in 2002.
The sales increase in the Industrial Hardware segment totaled $6.2 million.
While sales grew in all of the segment's business units, a significant
proportion of the increase ($4.9 million) was due to the inclusion of a full
year of sales from Canadian Commercial Vehicles Corporation (CCV). We acquired
this subsidiary, which is located in Kelowna, British Columbia, in the latter
part of 2002.
The acquisition of CCV has brought our Industrial Hardware segment into a new
but related market. CCV produces the "sleeper boxes" used to provide sleeping
accommodations on Class 8 trailer trucks, the vehicles that travel extensively
on overnight trips. We anticipate that the production of that class of trucks
will grow significantly in the next few years based on the trucking industry's
current projections.
CCV manufactures sleeper boxes using a lightweight composite material which
results in a beneficial weight reduction of the truck. The reduced weight allows
for greater cargo volume and/or fuel economies. We are actively exploring
potential opportunities in other markets where the use of such lightweight
composite material might be feasible.
During 2003, the business units in the Industrial Hardware segment received ISO
(International Organization for Standardization) certification, which represents
the achievement of standards recognized by the international manufacturing
community. This certification of our manufacturing quality has brought further
business opportunities to the group. Also in 2003, we invested in a rapid
prototype machine which will provide the tools needed to create more new and
innovative products in a much-shortened design cycle. We have already begun to
introduce some of these products into the recreational vehicle, utility truck,
marine and military markets.
-56-
In our Security Products segment, sales increased by $2.9 million. The increase
was due to greater penetration of the various niche markets we serve (such as
computers, vending and gaming equipment, and vehicular security), as well as the
introduction of innovative new products.
One such product, which we introduced in December 2003, came about as the result
of a joint effort of the Transportation Security Administration (TSA), Travel
Sentry (a standard-setting group affiliated with the TSA) and our Illinois
Lock/CCL division. The TSA had asked travelers to refrain from putting locks on
their checked luggage, but many of them ignored the request and continued to
lock their bags. To inspect selected luggage, security personnel often had to
destroy the locks. As a result, claims by passengers alleging theft from their
bags increased to levels that became difficult for the TSA to manage. To address
the problem, the TSA encouraged the creation of the privately funded Travel
Sentry organization, whose objective would be the development of an acceptable
system and products to enable airline passengers to lock their luggage.
The new system that Travel Sentry has developed is based on codes that are
etched into luggage locks and that are accessible only to TSA screeners. The
screeners are able to utilize the code, unlock the bag without breaking the
lock, and then relock the lock. Manufacturers who want their luggage locks to be
Travel Sentry-certified must meet the group's specifications. In light of the
new system, the TSA announced in December 2003 that the public would once again
be allowed to lock their luggage.
Responding to the Travel Sentry initiative, our Illinois Lock/CCL division
developed and introduced a new keyless lock called "SearchAlert"(TM). This
product enables travelers to lock their luggage without being concerned that the
lock will be destroyed by inspectors. "SearchAlert" has the distinctive feature
of a green and red color code to indicate if the lock had been opened. We expect
this product to benefit our sales in 2004 and beyond.
Our Illinois Lock/CCL division is well known for its high-security mechanical
and switch locks with weather-resistant qualities (if required). In addition to
the "SearchAlert" lock, our R&D efforts have led to the introduction of a
modular lock for tonneau covers which can be configured for a variety of uses.
We are currently moving ahead with the development of several additional
security products.
At our Greenwald division, we continue to search for new applications of our
"smart cards" beyond the commercial laundry market. Markets such as parking lots
and tanning salons are particularly attractive. With further development, our
smart card products will be an important complement to our well-known
traditional coin acceptance products. This division will be celebrating its 50th
anniversary in 2004.
-57-
Sales in our Metal Products Group declined by $2.1 million in 2003. The reason
was that we decided in the latter part of 2002 to reduce our low-margin contract
casting business and to put a greater emphasis on our proprietary products for
mine roof safety. Sales of mine roof supports were essentially unchanged from
2002. We intend to continue focusing on mine roof products for both the domestic
and foreign mining industry.
During 2003, the Company made an additional investment to produce castings made
from ductile iron. Superior to malleable iron castings and cheaper to produce
(and therefore providing higher margins), ductile iron products are one of the
more significant growth areas in the markets for cast metals.
We now must operate in a global economy, and this circumstance is going to have
a very important impact on our future as a manufacturing company. For one thing,
it will require an even greater presence in Asia, specifically China, than we
now have. Therefore, during 2003 we established Eastern Industrial Ltd. in
Shanghai, China, as a subsidiary of World Security Industries Co. Ltd. World
Security, located in Hong Kong, is a subsidiary of The Eastern Company.
Eastern Industrial Ltd. will not only increase our manufacturing presence in
China but will also allow us to introduce the current and future products of The
Eastern Company into the Chinese market. Under Chinese governmental regulations,
our preexisting Asian operations were allowed only to export product from China.
Eastern Industrial Ltd. will also serve as a source of parts and assemblies to
support the marketing needs of our U.S. divisions; in that capacity, the new
unit will provide those divisions with competitive pricing advantages
domestically.
Such advantages will be welcome. One of the difficulties we had to combat in the
past few years were severe pricing pressures arising from both domestic and
foreign sources. These pressures, which lowered our gross margins, sprang from
the impact of the sluggish U.S. economy on our customers, who responded by
seeking out low-cost imports.
In 2003, we also had to deal with significant increases in the cost of health
care (up 20%) and property and liability insurance (up 22%). Further affecting
our net earnings were pension charges, which jumped 160% because of the stock
market decline and the resulting reduction in the value of our pension fund
assets. We were not able to recover many of these costs and still remain
competitive in the current economic environment.
While the numbers for 2003 are not what we would have liked to see, the progress
we made last year has left the Company well positioned to take advantage of
stronger economic times. We continued to diligently monitor and control our
operating and financial fundamentals. As always, our highest priorities were to
develop new products that will strengthen our market position; build
productivity; and advance our sales and marketing programs. We met these
objectives while keeping our financial condition strong.
We have a very dedicated and solid management team which is, and will continue
to be, focused on growing the Company and adding to shareholder value. I am very
proud of and thankful for all their efforts.
Leonard F. Leganza
President and Chief Executive Officer
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