STRATTEC
SECURITY CORPORATION
3333
West Good Hope Road
Milwaukee,
WI 53209
April
8,
2009
SENT
VIA
EDGAR
Ms.
Lyn
Shenk, Branch Chief
United
States Securities and Exchange Commission
Division
of Corporation Finance
Washington,
D.C. 20549
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Re:
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STRATTEC
SECURITY
CORPORATION
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Form
10-K: For the fiscal year ended June 29, 2008
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Form
10-Q: For the quarterly period ended December 28, 2008
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Commission
file number: 0-25150
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Dear
Ms.
Shenk,
The
following are the responses of STRATTEC SECURITY CORPORATION (“STRATTEC,” “we”
or the “Company”) to the comments in the letter of the staff of the United
States Securities and Exchange Commission (the “Commission”) dated March 30,
2009 (the “Comment Letter”) related to the Company’s Annual Report on Form 10-K
for the fiscal year ended June 29, 2008 and the Company’s Quarterly Report on
Form 10-Q for the quarterly period ended December 28, 2008. For
reference purposes, the text of the Comment Letter has been reproduced below
for
each numbered paragraph.
Form
10-K for the fiscal year ended June 29, 2008
Exhibit
13, 2008 Annual Report
Financial
Highlights, page
4
Comment
No.
1
We
note that you consider the use of the non-GAAP measure EVA (economic value
added) to be a measure of performance and shareholder value. Please
provide a more detailed discussion on the use of this measure by management
and
why it is believed to be useful for investors, including why it provides
investors with a greater visibility of economic profit. Also
specifically explain what it means to have negative EVA. Include in
the discussion how the capital cost percentage is computed and the factors
that
would cause this calculation to change. See Item 10 of Regulation S-K
and the Frequently Asked Questions Regarding Management’s Use of Non-GAAP
Measures located on the Commission website at www.sec.gov
for further guidance.
Response
to Comment No.
1
On
page 9
of our 2008 Annual Report and on page 18 and 19 of our 2008 definitive Proxy
Statement, we further describe our Economic Value Added (“EVA”) philosophy and
the Company EVA Plan.
The
purpose of using EVA as a non-GAAP measure is to drive for continuous
improvement year over year, enhance shareholder value and provide a framework
for determining incentive compensation for our associates that financially
rewards them for increases in shareholder value.
In
general, EVA is our net operating profit after cash basis taxes, less a capital
charge. The capital charge is determined based on our cost of capital
(weighted average debt and equity capital structure as defined by Stern, Stewart
& Co., a management consultant firm that originated the concept of EVA). At
the beginning of each fiscal year, we calculate STRATTEC’s cost of capital and
expected Company EVA Performance Target. In fiscal 2008, the cost of
capital was determined to be at 10% and the Company EVA Performance Target
was a
positive $1.15 million. Actual Company EVA Performance in fiscal 2008
was a negative $6.3 million. See below (in millions of
dollars):
Net
Operating Profit After Cash-Basis
Taxes $
4.1
Average
Net Capital
Employed $ 104.1
Cost
of
Capital 10%
Capital
Charge (10.4)
Negative
Economic Value
Added $ (6.3)
During
the last three fiscal years (2006-2008) our actual Company performance did
not
exceed our fiscal year EVA targeted goals, and consequently no incentive bonus
compensation has been awarded to our associates during those
periods.
Negative
EVA means that the calculated Cost of Capital charge (Cost of Capital X Net
monthly average Capital employed in the business) exceeds our Net Operating
Profit after cash basis taxes. The only affect of having a negative EVA for
a
particular period is in failing to achieve the Company EVA Performance Target
for that particular year.
Average
net capital employed in the business is generally calculated by averaging the
net amount of operating assets (i.e. operating assets less operating
liabilities) used in the Company’s business during a particular period. In
fiscal year 2008, our EVA plan was modified to include cash and cash equivalents
as part of the Company’s net capital employed in the business (see page 4 of the
2008 Annual Report). Because cash and cash equivalents were a
significant component of the capital employed in the business they increased
the
capital charge, thereby contributing to our negative EVA.
Strattec
calculates its cost of capital (or capital charge) by averaging its cost
of
equity and its cost of debt assuming a weighted average value for the equity
of
80% and 20% for the debt. The cost of the equity is calculated multiplying
a
market risk premium rate established by Stern, Stewart and multiplying that
premium rate by the transportation industry risk index (which is established
by
Stern, Stewart for the transportation industry) and then adding that product
to
the average effective interest rate during the month of April each year that
would be earned by investing in ten year U.S. Treasury Notes. The cost of
the
Company's debt is calculated based upon Strattec's expected weighted average
interest cost on its available borrowing base with its lender on an after
tax
basis. As a result, Strattec's cost of capital is predominantly affected
by
changes in interest rates and Stern, Stewart's evaluation of the risks and
economic climate in the transportation industry that influence its determination
of the market premium and the industry index rate.
In
our
future filings we will expand the above EVA discussion in our Annual Report
and
Proxy Statement.
Management’s
Discussion and
Analysis, Liquidity and Capital Resources, page 13
2
Comment
No.
2
We
note that you were able to recover some of the increases in the cost of raw
materials from your customers through price increases. Please tell us
and provide a discussion within MD&A explaining whether this is a common
practice with your customers and discuss how the amount to be recovered is
determined.
Response
to Comment No.
2
The
financial impact resulting from increases in the cost of zinc and brass, our
primary raw materials, was significant during our past three fiscal years
(2006-2008). Up until fiscal 2008, it was not a common practice to
recover the impact of increases in the cost of raw materials from our major
OEM
customers (General Motors, Ford, Chrysler LLC, etc.). However, due to
the significant financial impact on us, we approached each of our customers
in
an attempt to negotiate a recovery of some or all of the raw material cost
increases. The negotiations, including the amount to be recovered,
were performed separately with each customer. The results of the
negotiations varied by customer. We were successfully able to recover
a portion of the financial impact of the material cost increases from some
customers through one time price adjustments on a going forward
basis. The amount recovered was simply a result of this negotiation
process. We, however, were not successful in recovering a portion of
the material cost increases from all of our customers. Commencing
with fiscal 2008, we began quoting quarterly material price adjustments for
changes in our material costs in our negotiations with our
customers. Our success in obtaining these quarterly adjustments in
our customer contracts depends on the separate negotiations with each
customer. We discuss this in the MD&A Risk Factors section
“Sources of and Fluctuations in Market Prices of Raw Materials” on pages 17 and
18 of our 2008 Annual Report and disclose the possible adverse effect on our
financial results if the increased raw material costs cannot be recovered from
our customers.
In
our
future filings we will expand our discussion of the recoverability of raw
material price increases in our MD&A.
Comment
No.
3
We
note that your sales, gross profit, and net income have declined each year
from
2004 to 2008. In this regard, we believe it would be useful to
investors for you to revise your MD&A to include an overview section that
discusses the existence of and reasons for long-term trends in your business
and
your current expectation as it relates to these trends in the
future.
Response
to Comment No.
3
In
the
MD&A “Results of Operations” 2008 compared to 2007, we discuss the impact of
various factors on our sales, gross profit and net income and describe how
those
factors cause changes in our sales, gross profit and net income. For
example, in fiscal year 2008, the 12-week strike by a major supplier to General
Motors reduced their production and, as a result, our sales to General Motors
declined. During the same time period, gasoline prices exceeded $4.00
gallon, causing
3
consumer
preferences to shift away from large vehicles which represent a significant
portion of our product applications. We also described this factor in our 2008
Annual report as one of the reasons for our lower sales.
Each
of
the above items impacted our sales and profitability during 2008. We
believe we describe these items, as well as others, elsewhere in our 2008 Annual
Report, including in the Risk Factors section on pages 17 and 18.
We
agree,
in our future filings, including in our fiscal year 2009 Annual Report, we
will
provide an overview section in our MD&A describing these trends as they
relate to our current and future business.
Comment
No.
4
We
note the severity of the decline in sales and the decrease in gross profit
for
the six months ended December 28, 2008 as compared to the same period ended
December 30, 2007, the disclosures regarding the risks associated with the
significant underfunded legacy liabilities and continuing losses of your major
customers, and the recent expiration of your line of credit. Please
expand your liquidity discussion to address how you expect these recent economic
events including those specific to your major customers, may affect your ability
to collect on your receivables, fund operational costs, and recover fixed assets
should the negative economic factors continue to a prolonged period of
time. Finally, discuss what, if any, plans management may have should
the present level of costs and operations not be sustainable.
Response
to Comment No.
4
In
comment #4 you are referring to the six month periods ended December 28, 2008
and December 30, 2007. We believe this comment relates to our Form
10-Q Report for the period ended December 28, 2008, filed on February 5, 2009,
as opposed to our 2008 Annual Report, MD&A Liquidity and Capital Resources
discussion on page 13.
Assuming
the above is correct, your reference to our recently expired line of credit
is
incorrect. Our $50 million line of credit was renewed with M&I
Bank prior to the filing of our Form 10-Q Report on November 7, 2008 for the
quarter ended September 28, 2008 and was noted in that filing. The
renewed line of credit now expires on October 31, 2009.
In
regards to STRATTEC’s liquidity as of December 28, 2008, we had cash and cash
equivalents of $31.8 million and no borrowings on our $50 million current line
of credit. We believe as of December 28, 2008 our financial position
to be adequate to address our customer risks and exposures (primarily our
outstanding accounts receivable balances).
We
agree
we will provide added disclosure in future filings regarding our customer
financial viability in our MD&A, such as describing their continuing
negative operating results, their actions in seeking loans from the U.S.
Government, and our outstanding accounts receivable balance exposure with these
customers. In addition to the foregoing, we will include in
future
4
filings
a
description of the actions the Company may implement to reduce overall costs
during the current economic downturn and how we are trying to mitigate our
risk
exposures to the problems facing our key customers.
Critical
Accounting
Policies, page 15
Other
Reserves
Comment
No.
5
Your
discussion regarding the estimates and judgments used with regard to recording
reserves is vague. Please disclose the significant judgments,
assumptions, and uncertainties associated with each reserve and discuss the
respective factors subject to estimation and variability. For factors
that are variable, disclose those most subject to change and the related
sensitivity to change. Refer to Section V of
“Interpretation: Commission Guidance Regarding Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
available on our website at http://www.sec.gov/rules/interp/33-8350.htm
for guidance.
Response
to Comment No.
5
Our
significant judgments, assumptions and uncertainties associated with each
reserve for the Company and the factors subject to estimation are described
below:
- Environmental
Reserve –
We
have a
liability recorded related to the estimated costs to remediate a site at our
Milwaukee facility, which was contaminated by a solvent spill from a former
above-ground solvent storage tank occurring in 1985.
The
recorded liability balance involves judgment and estimates. Our
estimates are based on a third party assessment of the costs to adequately
cover
the cost of active remediation of the contamination. Actual costs
might vary from these estimates for a variety of reasons including changes
in
laws and changes in the assessment of the level of remediation actually
required. Therefore, future changes in laws or the assessment of the
level of remediation required could result in changes in our estimate of the
required liability.
Please
refer to the discussion of Commitments and Contingencies included in the Notes
to Financial Statements on page 28 of our 2008 Annual Report.
- Incurred
but not reported claim reserve for self-insured health plans and workers’
compensation reserve:
We
have
self-insured medical and dental plans covering all eligible U.S.
associates. We also maintain an insured workers’ compensation
program
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covering
all U.S. associates. The insurance is renewed annually and may be
covered under a loss sensitive plan. Under a loss sensitive plan the
ultimate cost is dependent upon losses incurred during the policy
period. The incurred loss amount for loss sensitive policies will
continue to change as claims develop and are settled in future reporting
periods.
The
expected ultimate cost of claims incurred under these plans is subject to
judgment and estimation. We estimate the ultimate expected cost of
claims incurred under these plans based upon the aggregate liability for
reported claims and an estimated liability for claims incurred but not
reported. Our estimate of claims incurred but not reported is based
on analysis of historical data, current trends related to claims and health
care
costs and information available from the insurance carrier. Actual
ultimate costs may vary from estimates due to variations in actual claims
experience from past trends and large unexpected claims being
filed. Therefore, changes in claims experience and large unexpected
claims could result in changes to our estimate of the claims incurred but not
reported liability.
Please
refer to the discussion of Self Insurance and Loss Sensitive Plans under
Organization and Summary of Significant Accounting Policies included in the
Notes to Financial Statements on page 25 of our 2008 Annual Report.
- Allowance
for doubtful accounts related to trade accounts receivable:
Our
trade
accounts receivable consist primarily of receivables due from Original Equipment
Manufacturers in the automotive industry and locksmith distributors relating
to
our service and aftermarket business.
Our
evaluation of the collectibility of our trade accounts receivable involves
judgment and estimates and includes a review of past due items, general economic
conditions and the economic climate of the industry as a whole. The
estimate of the required reserve involves uncertainty as to the future
collectability of receivable balances. This uncertainty is magnified
by the financial difficulty currently experienced by our major customers as
discussed under Risk Factors-Loss of Significant Customers, Vehicle Content,
Vehicle Models and Market Share on page 17 of our 2008 Annual
Report.
Please
refer to the discussion of Receivables under Organization and Summary of
Significant Accounting Policies included in the Notes to Financial Statements
on
page 23 of our 2008 Annual Report.
- Repair
and maintenance supply parts reserve:
We
maintain an inventory of repair and maintenance supply parts in support of
operations. The inventory includes critical repair parts for all
production
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equipment
as well as general maintenance items. The inventory of critical
repair parts is required to avoid disruptions in our customers’ just-in-time
production schedules due to a lack of spare parts when equipment break-downs
occur. Depending on maintenance requirements during the life of the
equipment, excess quantities of repair parts arise. A repair and
maintenance supply parts reserve is maintained to recognize the normal
adjustment of inventory for obsolete and slow-moving repair and maintenance
supply parts.
Our
evaluation of the reserve level involves judgment and estimates, which are
based
on a review of historical obsolescence and current inventory
levels. Actual obsolescence may differ from estimates due to actual
maintenance requirements differing from historical levels. This could
result in changes to our estimated required reserve.
Please
refer to the discussion of Repair and Maintenance Supply Parts under
Organization and Summary of Significant Accounting Policies included in the
Notes to Financial Statements on page 24 of our 2008 Annual Report.
The
information discussed above will be added to the discussion of “Critical
Accounting Policies – Other Reserves” in future filings.
Notes
to Financial
Statements, Organization and Summary of Significant Accounting Policies, page
23
Comment
No.
6
Reference
is made to the guidance in paragraph 37 of SFAS 131 in reporting revenues for
each similar group of products. As your company description section
on page 7 discusses that your engineering resources are organized by product
type, please separately disclose revenue earned for your four product groups
(i)
locks and keys; (ii) latches; (iii) driver control/ignition lock housings;
and
(iv) electrical.
Response
to Comment No.
6
Paragraph
37 of SFAS 131 states “An enterprise shall report the revenues from external
customers for each product and service or each group of similar products and
services unless it is impracticable to do so. The amounts of revenues
reported shall be based on the financial information used to produce the
enterprise’s general-purpose financial statements. If providing the
information is impracticable, that fact shall be disclosed”. STRATTEC
SECURITY CORPORATION is in the business of engineering, manufacturing and
selling access control products for vehicular applications. In this
context, access control refers to the devices we provide that allow user control
of access points to the interior of a vehicle, as well as access to the
operation of a vehicle. This includes secure access devices such as
locks and keys used on doors and compartments, and ignition
systems. Also included in this category are non-secure devices that
include door handles and latches used at entry points. Certain
ancillary components
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that
are
integral to the access control functions are included in this product group,
which can be mechanical or electro-mechanical in nature, such as power assist
mechanisms, or imbedded electronics which interface with vehicle electronic
control modules provided by other suppliers directly to our
customers. All of our revenue from external customers are from the
sale of “vehicle access control” products. We therefore have only one
group of saleable products that generates revenue for the Company, which is
consistent with our financial reporting system used to generate the general
purpose financial statements. The product types included in the
company description on page 7 of our Annual Report are classifications for
our
engineering resources and describe the points of focus for our
engineers. In reality there is cross-over among all our engineers as
our products are inter-related. For example, the electrical
engineering group covers the electrical requirements of all saleable
products. We do not sell electrical products
separately. They are incorporated into our access control
products. Therefore, we do not believe paragraph 37 of SFAS 131 is
applicable to us as we do not have more than one product group that generates
revenue from external customers.
Form
10-Q For the quarter
ended December 28, 2008
Analysis
of Results of
Operations, page 11
Comment
No.
7
We
note that you are vacating two leased facilities, one in Juarez and one in
Matamoros, Mexico, and that you anticipate annual savings of $500,000 as a
result. Please tell us whether you will be obligated to pay to
terminate these leases and, if so, how you plan to account for such
costs.
Response
to Comment No.
7
We
are
not contractually obligated to pay to terminate the leases related to our two
leased facilities in Mexico. The contractual lease term for the
facility in Matamoros, Mexico expires in July, 2009. The building was
occupied through February 2009. The lease related to this facility
was assumed as part of the purchase of Delphi Power Products on November 30,
2008. Lease payments will be made through the end of the lease term,
which expires on July 31, 2009. The lease payments made during the
period the building was occupied were recorded as rent expense. A
purchase accounting reserve was established as of the purchase date in
accordance with management’s plan to move the operations from the Matamoros
facility to a STRATTEC owned facility in Juarez, Mexico. The lease payments
made
from March 2009 through July 2009 will be charged against this reserve. The
contractual lease term for the facility in Juarez, Mexico expired on February
2,
2009. The building was occupied through the end of January
2009. Lease payments were made and recorded as rent expense through
the end of the lease term.
In
responding to the Comment Letter, STRATTEC acknowledges that:
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the company is responsible for the adequacy and accuracy of the disclosure in its filings; |
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staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filings; and |
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the company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. |
Thank
you
for your consideration of our responses to the Comment Letter. Please
do not hesitate to contact the undersigned at (414) 247-3435 with any questions
or comments regarding any of the foregoing.
Very
truly yours,
STRATTEC
SECURITY CORPORATION
/s/
Patrick J.
Hansen
Patrick
J. Hansen
Senior
Vice President-Chief Financial Officer,
Treasurer
and Secretary
lmo
cc: Theresa
Messinese
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