1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended June 29, 1997.
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-25150
STRATTEC SECURITY CORPORATION
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1804239
(State of Incorporation) (I.R.S. Employer Identification No.)
3333 WEST GOOD HOPE ROAD, MILWAUKEE, WI 53209
(Address of principal executive offices)
(414) 247-3333
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
------------------- ------------------------------------
N/A N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [x] Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [x]
The aggregate market value of the voting Common Stock held by non-affiliates of
the registrant as of August 20, 1997 was approximately $133,188,000 (based upon
the last reported sale price of the Common Stock at August 20, 1997 on the
NASDAQ National Market). On August 20, 1997, there were outstanding 5,667,150
shares of $.01 par value Common Stock.
Documents Incorporated by Reference
Part of the Form 10-K
Document into which incorporated
-------- -----------------------
Portions of the Annual Report to Shareholders for the
fiscal year ended June 29, 1997. I, II, IV
Portions of the Proxy Statement dated September 10, 1997, for the
Annual Meeting of Shareholders to be held on October 23, 1997. III
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PART I
ITEM 1. BUSINESS
GENERAL
STRATTEC SECURITY CORPORATION (the "Company") designs, develops,
manufactures and markets mechanical locks, electro-mechanical locks and related
products for automotive manufacturers with operations in the United States,
Canada and Mexico ("North American Automotive Manufacturers"). The Company also
produces precision zinc die castings for the transportation, security and small
engine industries.
The Company was incorporated as a Wisconsin Corporation on September 15,
1994, as a wholly owned subsidiary of Briggs & Stratton Corporation ('Briggs').
On February 27, 1995, the Company received a distribution of substantially all
of the assets, related debt and liabilities of the mechanical and
electro-mechanical automotive lock and key business owned by Briggs (the
'Distribution').
As a division of Briggs, the Company has been in the automotive lock
manufacturing business for approximately 80 years. It has also been in the zinc
die casting business for approximately 70 years. The Company has been the
world's largest producer of automotive locks and keys since the late 1920's,
and currently maintains a dominant share of the North American markets for
these products.
The majority of the components that go into the Company's lock products
are manufactured at its facility in Milwaukee, Wisconsin. The Company's
products are assembled at the Milwaukee plant and at its plant in Juarez,
Mexico. The Company's general offices are located in the Milwaukee facility.
For information as to export sales, see Note 9 of Notes to Financial
Statements included in the Company's 1997 Annual Report to Shareholders, which
is incorporated herein by reference.
PRINCIPAL SERVICES AND PRODUCTS
The Company's principal products are locks and keys for cars and trucks. A
typical automobile contains a set of five locks: a steering column/ignition
lock, a glove box lock, two front door locks and a deck lid (trunk) lock.
Pickup trucks typically use three to four locks, while sport utility vehicles
and vans will use six or seven locks. Some vehicles have additional locks for
under-floor compartments or folding rear seat latches. T-top locks, spare tire
locks, burglar alarm locks and door locks with illuminated faces are offered as
options. Usually two pairs of keys are provided with each vehicle lockset.
The Company currently produces locks with simple electrical switch devices
and more sophisticated devices, such as resistive elements, radio frequency
identification (RFID) elements and Hall effects sensors. Additional
electronically assisted locksets are in various stages of development in
support of future model year introductions. The primary focus of this activity
is increased security and reliability through continued development of RFID
applications.
The Company's products are supported by an extensive staff of experienced
lock engineers who work directly with customer engineering departments. This
staff, which includes product design, quality and manufacturing engineers, is
capable of providing complete design, development and testing services of new
lock products for the Company's customers. Additionally, this staff is
available to customers for problem solving, warranty analysis and other
activities that arise during a product's life cycle. The Company also provides
after-sale support to its customers with the design of special field service
kits, writing and publishing of service manuals, and specific in-plant
production repair programs.
The Company's products are for the most part unique to specific vehicle
models. From time to time certain models require significant changes to their
lock designs. While these changes occur relatively infrequently on a model by
model basis, the Company's involvement in a broad range of models dictates
that, in any given year, some new designs are introduced which replace earlier
designs. These earlier designs continue to produce revenues from service
applications.
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EMERGING TECHNOLOGIES
New electronic technologies are expected to become increasingly important
in future product designs. These technologies may include radio frequency
transmission and receiving, Hall effects sensing, optical reading and sensing,
and custom integrated circuit technology. Further advancements with respect to
RFID applications such as encrypted signals and rolling codes are anticipated.
Specific applications of certain of these technologies began in prior model
years. Application will occur in both OEM and aftermarket products. In
connection with the development of these technologies, the Company intends to
utilize strategic alliances and/or strategic sourcing with respect to certain
components in order to remain competitive from both a cost and quality
standpoint.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The primary raw materials used by the Company are high-grade zinc and
brass. These materials are generally available from a number of suppliers, but
the Company has chosen to concentrate its sourcing with one primary vendor for
each commodity. The Company believes its sources for raw materials are very
reliable and adequate for its needs. The Company has not experienced any
significant long term supply problems in its operations and does not anticipate
any significant supply problems in the foreseeable future.
PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY
The Company believes that the success of its business will not only result
from the technical competence, creativity and marketing abilities of its
employees but also from the protection of its intellectual property through
patents, trademarks and copyrights. As part of its ongoing research,
development and manufacturing activities, the Company has a policy of seeking
patents on new products, processes and improvements when appropriate. The
Company owns nineteen issued United States patents, with expirations occurring
between 1999 and 2015.
Although, in the aggregate, the patents discussed above are of
considerable importance to the manufacturing and marketing of many of its
products, the Company does not consider any single patent or trademark or group
of patents or trademarks to be material to its business as a whole, except for
the STRATTEC and STRATTEC with logo trademarks.
The Company also relies upon trade secret protection for its confidential
and proprietary information. The Company maintains confidentiality agreements
with its key executives. In addition, the Company enters into confidentiality
agreements with selected suppliers, consultants and associates as appropriate
to evaluate new products or business relationships pertinent to the success of
the Company. However, there can be no assurance that others will not
independently obtain similar information and techniques or otherwise gain
access to the Company's trade secrets or that the Company can effectively
protect its trade secrets.
SEASONALITY
As an automotive supplier, the Company encounters the normal peaks and
valleys associated with the automotive industry. Typically, the months of July
and August are relatively slow while summer shut-downs and model year
changeover occur at the automotive assembly plants. September volumes increase
rapidly as the new model year begins and the "pipelines" to the retail dealer
are filled. This volume strength continues through October and into early
November. As the holiday and winter seasons approach, the demand for
automobiles slows and production is trimmed accordingly. March typically brings
a major sales and production increase which then continues through most of June
before tailing off for the model year build-out. This pattern has been
relatively consistent on a year-to-year basis, except when the general economy
suffered a significant slow-down. In this latter case, the month-to-month
swings as described above were still present, but the magnitude of the swings
was greatly diminished.
DEPENDENCE UPON SIGNIFICANT CUSTOMERS
A very significant portion of the Company's annual sales are to General
Motors Corporation, Ford Motor Company and Chrysler Corporation. In fiscal
years 1997, 1996 and 1995, these three customers accounted for 85%, 82% and 72%
respectively, of the Company's total net sales. The Company began production
volume shipments of locksets to the Ford Motor Company during fiscal year 1996.
Further information regarding sales to the Company's largest customers is
contained in Note 10 of Notes to Financial Statements, included in the
Company's 1997 Annual Report to Shareholders, which is incorporated herein by
reference.
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The products sold to these customers are model specific, fitting only
certain defined applications. Consequently, the Company is highly dependent on
its major customers for their business, and on these customers' ability to
produce and sell vehicles which utilize the Company's products. The Company has
enjoyed long term relationships with General Motors Corporation and Chrysler
Corporation in the past, and expects to do so in the future. However, a
significant change in the purchasing practices of, or a significant loss of
volume from, one or more of these customers could have a detrimental effect on
the Company's financial performance.
SALES AND MARKETING
The Company is a direct supplier to OEM auto and light truck
manufacturers, over-the-road heavy truck manufacturers and recreational vehicle
manufacturers, as well as other transportation related manufacturers. The
Company is also an OEM component supplier to residential/commercial door
hardware manufacturers and other miscellaneous industrial manufacturers. The
Company utilizes both direct sales personnel and manufacturers' representative
agencies to service its customers. OEM sales have traditionally represented
approximately 85 to 90% of the Company's total sales. The Company receives the
remainder of its revenue primarily through sales into the OEM service and the
locksmith aftermarket distribution channels. Sales through these two channels
are approximately equal.
The Company provides its customers with engineered locksets, which are
unique to specific vehicles. Any given vehicle will typically take 1 to 3 years
of development and engineering design time prior to being offered to the
public. The locksets are designed concurrently with the vehicle. Therefore,
commitment to the Company as the production source occurs 1 to 3 years prior to
the start of production.
The typical process used by the "Big Three" automotive manufacturers in
selecting a lock supplier is to offer the business opportunity to the Company
and various of the Company's competitors. Each competitor will pursue the
opportunity, doing its best to provide the customer with the most attractive
proposal. Price pressure is strong during this process but once an agreement is
reached, the price is fixed for each year of the product program. Typically,
price reductions resulting from productivity improvement by the Company are
included in the contract and are estimated in evaluating each of these
opportunities by the Company. A blanket purchase order is issued by customers
for each model year and releases are made to that purchase order for weekly
deliveries to the customer. As a consequence and because the Company is a
"Just-in-Time" supplier to the automotive industry, it does not maintain a
backlog of orders in the classic sense for future production and shipment.
COMPETITION
The Company competes with domestic and foreign-based competitors on the
basis of custom product design, engineering support, quality, delivery and
price. While the number of direct competitors is currently relatively small,
the auto manufacturers actively encourage competition between potential
suppliers. Although the Company may not be the lowest cost producer, it has a
dominant share of the North American market because of its ability to provide a
beneficial combination of price, quality and technical support. In order to
reduce lockset production costs while still offering a wide range of technical
support, the Company utilizes assembly operations in Mexico, which results in
lower labor costs as compared to the United States.
As locks become more sophisticated and involve additional electronics,
competitors with specific electronic expertise may emerge to challenge the
Company.
RESEARCH AND DEVELOPMENT
The Company engages in research and development activities pertinent to
the automotive security industry. A major area of focus for research is the
expanding role of electronic interlocks and modes of communicating
authorization data between consumers and vehicles. Development activities
include new products, applications and product performance improvement. In
addition, specialized data collection equipment is developed to facilitate
increased product development efficiency and continuous quality improvements.
For fiscal years 1997, 1996, and 1995, the Company spent $3,208,000,
$2,772,000, and $1,754,000, respectively, on research and development. The
Company believes that, historically, it has committed sufficient resources to
research and development and anticipates increasing such expenditures in the
future as required to support additional product programs associated with both
existing and new customers. Patents are pursued and will continue to be pursued
as appropriate to protect the Company's interests resulting from these
activities.
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CUSTOMER TOOLING
An important aspect of the Company's production processes is customer
program specific assembly lines and production tooling. In general, capital
equipment acquired by the Company for customer product programs is recognized
as a long-term asset and depreciated. Tooling for these same programs, obtained
primarily from third party tool suppliers, is accumulated as a current asset on
the Company's balance sheet and rebilled to the customer upon formal product
approval from the customer. For certain products, the Company retains ownership
of both the equipment and tooling. Recovery of these costs occurs over the life
of the program through the piece price. See Note 2 of Notes to Financial
Statements included in the Company's 1997 Annual Report to Shareholders, which
is incorporated herein by reference.
ENVIRONMENTAL COMPLIANCE
As is the case with other manufacturers, the Company is subject to
federal, state, local and foreign laws and other legal requirements relating to
the generation, storage, transport, treatment and disposal of materials as a
result of its lock and key manufacturing and assembly operations. These laws
include the Resource Conservation and Recovery Act (as amended), the Clean Air
Act (as amended), the Clean Water Act of 1990 (as amended) and the
Comprehensive Environmental Response, Compensation and Liability Act (as
amended). The Company believes that its existing environmental management
policies and procedures are adequate and it has no current plans for
substantial capital expenditures in the environmental area.
Contamination existing at the Company's Milwaukee site from an underground
waste coolant storage tank and a former above-ground solvent storage tank,
located on the east side of the facility, will be remediated in accordance with
federal, state and local requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing on pages
10 through 12 of the Company's 1997 Annual Report to Shareholders.
The Company does not currently anticipate any materially adverse impact on
its results of operations, financial condition or competitive position as a
result of compliance with federal, state, local and foreign environmental laws
or other legal requirements. However, risk of environmental liability and
charges associated with maintaining compliance with environmental laws is
inherent in the nature of the Company's business and there is no assurance that
material liabilities or charges could not arise.
EMPLOYEES
At June 29, 1997, the Company had approximately 2,665 full-time employees,
of which approximately 530 were represented by a labor union. The Company has
not experienced any work stoppages at its current operating plants since
October 29, 1983.
Prior to the February 27, 1995 distribution, the Company's Milwaukee
hourly employees were covered by collective bargaining agreements negotiated
between Briggs & Stratton and Local 7232 of the UPIU. On December 4, 1994,
Local 7232 members ratified a new collective bargaining agreement with Briggs
that provided for a successor contract with the Company relative to the
Company's represented employees. The Company assumed all obligations under the
successor contract in connection with the distribution. The agreement between
Local 7232 and the Company commenced on February 27, 1995 and expires on
December 31, 1997, and calls for certain wage increases that in the aggregate
average 4 percent in calendar year 1995 and 1 percent in each of calendar years
1996 and 1997.
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ITEM 2. PROPERTIES
The Company has two manufacturing plants, one warehouse, two distribution
centers, and a sales office. These facilities are described as follows:
LOCATION TYPE SQ. FT. OWNED OR LEASED
-------- ---- ------- ---------------
Milwaukee, Wisconsin Headquarters and General Offices; Component
Manufacturing and Assembly ................ 352,000 Owned
Juarez, Chihuahua Mexico Subsidiary Offices and Assembly ........... 97,000 Owned
Somerset, New Jersey Service Parts Distribution ................ 6,500 Leased*
Carpenteria, California Service Parts Distribution ................ 4,000 Leased*
El Paso, Texas Finished Goods Warehouse .................. 12,500 Leased**
Troy, Michigan Sales Office for Detroit Area ............. 3,000 Leased**
- -----------------------
* Leased floor space within a warehouse facility.
** Leased unit within a complex.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business the Company may be involved in various
legal proceedings from time to time. The Company does not believe it is
currently involved in any claim or action the ultimate disposition of which
would have a material adverse effect on the Company or its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders during the
fourth quarter of fiscal 1997.
EXECUTIVE OFFICERS OF REGISTRANT
The names, ages and positions of all executive officers of the Company as of
the date of this filing are listed below, together with their business
experience during the past five years. Executive officers are appointed
annually by the Board of Directors at the meeting of directors immediately
following the annual meeting of shareholders. There are no family
relationships among any of the executive officers of the Company, nor any
arrangements or understanding between any such officer and another person
pursuant to which he was appointed as an executive officer.
NAME, AGE AND POSITION BUSINESS EXPERIENCE
- ---------------------- -------------------
Harold M. Stratton II, 49 President and Chief Executive
Officer of the Corporation since
1994. Vice President of Briggs &
Stratton Corporation and General
Manager of the Technologies
Division of Briggs & Stratton
Corporation since 1989.
John G. Cahill, 40 Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary of the Corporation since
1994. Vice President, Chief
Financial Officer, Secretary and
Treasurer, Johnson Worldwide
Associates, Inc. (manufacturer and
marketer of recreational and
marking systems products) 1992 to
1994 and Corporate Controller from
1989 to 1992.
Michael R. Elliott, 41 Vice President -- Sales and
Marketing of the Company since
1994. Vice President -- Marketing
and Sales of the Technologies
Division since 1993. Vice
President -- Corporate Development
of Iverness Casting Group (a
producer of castings and injection
molded products) from 1991 to 1992.
Vice President -- Sales and
Marketing of Iverness Casting Group
from 1990 to 1991. Sales,
Marketing and Planning Manager of
the AC Rochester Division of
General Motors Corporation (an
automotive manufacturer) from 1988
to 1990.
Andrew G. Lechtenberg, 44 Vice President -- Engineering of the
Company since 1994. Vice President
-- Engineering of the Technologies
Division since 1989.
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Gerald L. Peebles, 54 Vice President and General Manager
of STRATTEC de Mexico -- since 1997.
Vice President -- Operations of the
Company 1995 -- 1997. Vice
President -- Operations of the
Technologies Division since 1994.
Operations Manager -- Juarez Plant
of the Technologies Division from
1990 to 1994. Plant Manager --
Juarez Plant of the Technologies
Division from 1988 to 1990.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information set forth in the "Quarterly Financial Data" section
appearing on page 24 of the Company's 1997 Annual Report to Shareholders is
incorporated herein by reference.
The Company does not intend to pay cash dividends on the Company Common
Stock in the foreseeable future; rather, it is currently anticipated that
Company earnings will be retained for use in its business. The future payment
of dividends will depend on business decisions that will be made by the Board
of Directors from time to time based on the results of operations and financial
condition of the Company and such other business considerations as the Board of
Directors considers relevant. The Company's revolving credit agreement
contains restrictions on the payment of dividends. See Note 3 of Notes to
Financial Statements included in the Company's 1997 Annual Report to
Shareholders, which is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under "Five Year Financial Summary" which
appears on page 24 of the Company's 1997 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The information set forth under "Management's Discussion and Analysis"
which appears on pages 10 through 12 of the Company's 1997 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company did not hold any market risk sensitive instruments during the
period covered by this report.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, together with the report thereon of Arthur
Andersen LLP dated July 31, 1997, which appear on pages 13 through 23 of the
Company's 1997 Annual Report to Shareholders, are incorporated herein by
reference.
The Quarterly Financial Data (unaudited) which appears on page 24 of the
Company's 1997 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information on pages 2, 3 and 4 of the Company's Proxy Statement,
dated September 10, 1997, under "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information on pages 7 through 14 of the Company's Proxy Statement,
dated September 10, 1997, under "Executive Compensation" is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information on pages 4 and 5 of the Company's Proxy Statement, dated
September 10, 1997, under "Security Ownership" is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information on pages 7 through 14 of the Company's Proxy Statement,
dated September 10, 1997, under "Executive Compensation" is incorporated herein
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as part of this Report
(1) Financial Statements - The following financial
statements of the Company, included on pages 13 through 23 of
the Company's 1997 Annual Report to Shareholders, are
incorporated by reference in Item 8.
Report of Independent Public Accountants
Balance Sheets - as of June 29, 1997 and June 30, 1996
Statements of Income - years ended June 29, 1997, June 30, 1996,
and July 2, 1995
Statements of Changes in Equity - years ended June 29, 1997,
June 30, 1996, and July 2, 1995
Statements of Cash Flows - years ended June 29, 1997, June 30,
1996, and July 2, 1995
Notes to Financial Statements
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(2) Financial Statement Schedules
Page in this
Form 10-K Report
----------------
Report of Independent Public Accountants 9
Schedule II - Valuation and Qualifying Accounts 10
All other schedules have been omitted because they are not applicable
or are not required, or because the required information has been
included in the Financial Statements or Notes thereto.
(3) Exhibits. See "Exhibit Index" beginning on page 12.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter
of fiscal 1997.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards the
consolidated and combined financial statements included in the STRATTEC
SECURITY CORPORATION Annual Report to Shareholders incorporated by reference in
this Form 10-K and have issued our report thereon dated July 31, 1997. Our
audit was made for the purpose of forming an opinion on those statements taken
as a whole. The schedule listed in the accompanying index is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic consolidated and combined financial statements. This schedule has
been subjected to the auditing procedures applied in the audit of the basic
consolidated and combined financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic consolidated and combined financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
July 31, 1997.
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SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(THOUSANDS OF DOLLARS)
Balance, Provision Payments Balance,
Beginning Charged to and Accounts End of
of Year Profit & Loss Written Off Year
--------- ------------- ------------ --------
Year ended June 29, 1997
- ------------------------
Allowance for doubtful accounts $ 250 $ 0 $ 0 $ 250
========= ============= ============ ========
Year ended June 30, 1996
- ------------------------
Allowance for doubtful accounts $ 250 $ 0 $ 0 $ 250
========= ============= ============ ========
Year ended July 2,1995
- ----------------------
Allowance for doubtful accounts $ 100 $ 150 $ 0 $ 250
========= ============= ============ ========
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
STRATTEC SECURITY CORPORATION
By: /s/ Harold M. Stratton II
------------------------------------
Harold M. Stratton II,
President and Chief Executive Officer
Date: August 20, 1997
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Harold M. Stratton II President, Chief Executive Officer August 20, 1997
- --------------------------
Harold M. Stratton II and Director
/s/ John G. Cahill Executive Vice President, August 20, 1997
- --------------------------
John G. Cahill Chief Financial Officer,
Treasurer, Secretary & Director
/s/ Frank J. Krejci Director August 20 , 1997
- --------------------------
Frank J. Krejci
/s/ Michael J. Koss Director August 20 , 1997
- --------------------------
Michael J. Koss
/s/ Robert Feitler Director August 20 , 1997
- --------------------------
Robert Feitler
13
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-K
Page Number in
Sequential Numbering
of all Form 10-K and
Exhibit Exhibit Pages
- --------- --------------------
3.1 (2) Amended and Restated Articles of Incorporation of the Company *
3.2 (2) By-laws of the Company *
4.1 (2) Rights Agreement between the Company and Firstar Trust Company, as Rights Agent *
4.2 (3) Revolving Credit Agreement dated as of February 27, 1995 by and between the Company *
and M&I Bank, together with Revolving Credit Note
10.1 (2) STRATTEC SECURITY CORPORATION Stock Incentive Plan *
10.2 (4) Employment Agreements between the Company and the identified executive officers *
10.3 (1) Change In Control Agreement between the Company and the identified executive officers *
10.4 (1) Contribution Agreement, Plan and Agreement of Reorganization and Distribution between *
Briggs & Stratton Corporation ("Briggs") and the Company, dated as of February 27, 1995
(the "Contribution Agreement")
10.5 (1) Quit Claim Deed dated as of February 27, 1995 *
10.6 (1) General Assignment, Assumption and Agreement Regarding Litigation, Claims and *
Other Liabilities between Briggs and the Company, dated as of February 27, 1995
10.7 (1) Transitional Trademark Use and License Agreement between Briggs and the Company, *
dated as of February 27, 1995
10.8 (1) Insurance Matters Agreement between Briggs and the Company, dated as of *
February 27, 1995
10.9 (1) Employee Benefits and Compensation Agreement between Briggs and the Company, dated *
as of February 27, 1995
10.10 (1) Tax Sharing and Indemnification Agreement between Briggs and the Company, dated as of *
February 27, 1995
10.11 (1) Interim Administrative Services Agreement between Briggs and the Company, dated as *
of February 27, 1995
10.12 (1) Confidentially and Nondisclosure Agreement between Briggs and the Company, dated as *
of February 27, 1995
10.13 (1) Assignments of Patents dated as of February 27, 1995 *
10.14 (1) Supply Agreement between Briggs and the Company, dated as of February 27, 1995 *
10.15 (4) STRATTEC SECURITY CORPORATION Economic Value Added Plan for Executive *
Officers and Senior Managers
13.1 Annual Report to Shareholders for the year ended June 29, 1997 14
14
Page Number in
Sequential Numbering
of all Form 10-K and
Exhibit Exhibit Pages
- ------- --------------------
21 (1) Subsidiaries of the Company *
23 Consent of Independent Public Accountants dated September 10, 1997 46
- -------------------------
(1) Incorporated by reference from Amendment No. 1 to the Form 10 filed on
January 20, 1995.
(2) Incorporated by reference from Amendment No. 2 to the Form 10 filed on
February 6, 1995.
(3) Incorporated by reference form the April 2, 1995 Form 10-Q filed on
May 17, 1995.
(4) Incorporated by reference from the July 2, 1995 Form 10-K filed on
September 14, 1995
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MANAGEMENT'S DISCUSSION AND ANALYSIS
The following Discussion and Analysis should be read in conjunction with the
Company's Financial Statements and Notes thereto. Unless otherwise indicated,
all references to years refer to fiscal years.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Net sales were $159.1 million in 1997, an increase of 14 percent compared to
net sales of $139.8 million in 1996. Sales to the Big Three North American
automakers continued to represent the majority of sales accounting for 85
percent in 1997 and 82 percent in 1996.
Sales to our largest customer, General Motors Corporation, were $70.4 million
in 1997 compared to $65.4 million in 1996, which was negatively affected by a
labor strike at a General Motors component plant. Sales to the Ford Motor
Company were $43.6 million in 1997 compared to $28.0 million in 1996, when the
Company was bringing several new Ford programs into production. Chrysler
Corporation sales were $21.0 million in 1997 compared to $20.3 million in 1996.
Lockset sales to these customers reflect increased product content from
enhanced mechanical and electromechanical features. The Company anticipates
that this trend will continue with further penetration of existing programs and
introductions of new programs.
Sales to Briggs & Stratton Corporation ("Briggs") declined to $3.5 million in
1997 from $6.8 million in 1996. The Company anticipates that sales to Briggs
will continue to decline as zinc die castings are resourced to other suppliers.
Gross profit as a percentage of net sales was 20.9 percent in 1997 and 1996.
Increased scrap and expedited freight costs incurred in late 1996 continued in
1997 before improving. Gross profit as a percentage of net sales in the fourth
quarter of 1997 was 22.1 percent compared to 18.3 percent in the fourth quarter
of 1996. Improved operating performance in the second half of 1997 was somewhat
diminished by rising zinc prices. Zinc is one of the Company's primary raw
materials and is subject to commodity pricing and variations in market prices.
The market price for zinc escalated during the last six months of fiscal 1997
after a period of relative stability for the previous 18 months. The increase
has negatively impacted operating results as the Company is generally not able
to recover zinc price fluctuations from its customers.
Also negatively impacting gross profits were increased costs of the Company's
Mexican assembly operations. The U.S. dollar/Mexican peso exchange rate has
been relatively stable for the past 18 months, while inflationary cost
pressures in Mexico have resulted in higher U.S. dollar costs.
Engineering, selling, and administrative expenses were $17.7 million, or 11.1
percent of net sales in 1997, compared to $16.6 million or 11.9 percent of
net sales in 1996. Engineering expenses increased $1.0 million during 1997 in
support of product programs. Selling and marketing expenses declined $300,000
during 1997, primarily due to lower costs for commissions and promotional
materials. Administrative expenses increased $400,000, primarily in the first
half of 1997 in support of the Company's new business system implementation.
As of January 27, 1997, the Company no longer purchased computer services from
Briggs. The Company anticipates that engineering expenses in support of new
programs will continue to increase but that in total, engineering, selling, and
administrative expenses will be leveraged as sales grow and will therefore
decline as a percentage of net sales.
Income from operations was $15.6 million in 1997 compared to $12.6 million in
1996, reflecting increased sales volumes.
The effective income tax rate for 1997 was 36.8 percent compared to 38.5
percent in 1996 due to increased tax benefits from research and development tax
credits, foreign tax credits, and the Company's foreign sales corporation. The
effective rate differs from the federal statutory rate, primarily due to the
effects of state income taxes.
10
2
MANAGEMENT'S DISCUSSION AND ANALYSIS (C0NTINUED)
1996 COMPARED TO 1995
Net sales were $139.8 million in 1996, an increase of 27 percent compared to
net sales of $110.4 million in 1995. The sales increase resulted primarily from
sales of $28.0 million to the Ford Motor Company. The Company began production
volume shipments of locksets to Ford during 1996. Sales to General Motors
Corporation and Chrysler Corporation increased by a total of approximately
eight percent in 1996 compared to 1995, despite the negative effect of a labor
strike at a General Motors component plant during the third quarter of 1996.
The increase is primarily due to increased product content and features in the
locksets supplied to these customers. Sales to aftermarket service providers
increased $2.4 million or approximately 29 percent compared to 1995,
primarily due to service parts sales supporting new OEM product programs. Sales
of zinc die castings to Briggs were $6.8 million in 1996, compared to $10.1
million in 1995. The decrease reflects the phaseout of castings produced by
older, high tonnage conventional casting equipment and lower demand for other
castings.
Gross profit as a percentage of net sales decreased to 20.9 percent in 1996,
compared to 25.3 percent in 1995. The decrease is primarily due to scrap,
expedited freight costs, and increased start-up costs associated with bringing
new programs into production.
Engineering, selling, and administrative expenses increased approximately 20
percent to $16.6 million in 1996, compared to $13.8 million in 1995. The prior
year amount included approximately $1.0 million of nonrecurring expenses
associated with the Company's separation from Briggs. Adjusted for the $1.0
million of nonrecurring expenses, expenses increased $3.8 million, or
approximately 30 percent, in 1996. Engineering expenses increased by
approximately $500,000, or nine percent, in support of new OEM product
programs. Selling expenses increased $1.0 million, or 29 percent, primarily due
to increased commissions and promotion expenses supporting aftermarket service
sales. Administrative expenses increased approximately $2.3 million, or 65
percent, as the Company incurred costs on a stand-alone basis for financial,
information systems, human resources, shareholder relations, and administrative
functions during the entire fiscal year.
Income from operations was $12.6 million in 1996, compared to $11.0 million in
1995. Adjusted for the $3.0 million environmental charge recorded in 1995,
income from operations decreased $1.5 million despite the increased sales
volume. The decrease is due to reduced gross profit margins.
The effective income tax rate for 1996 was 38.5 percent, compared to 41.8
percent for 1995. The decrease is due primarily to the nondeductibility of
certain nonrecurring expenses associated with the Company's separation from
Briggs during 1995 and the effect of the foreign sales corporation, which was
formed on July 3, 1995. The effective rate differs from the federal statutory
rate, primarily due to the effects of state income taxes.
LABOR ECONOMICS
Prior to the February 27, 1995 spin-off, the Company's Milwaukee hourly
associates were covered by collective bargaining agreements negotiated between
Briggs and Local 7232 of the UPIU. On December 4, 1994, Local 7232 members
ratified a new collective bargaining agreement with Briggs that provided for a
successor contract with the Company, relative to the Company's represented
employees. The Company assumed all obligations under the successor
contract in connection with the spin-off. The agreement between Local 7232 and
the Company commenced on February 27, 1995, expires on December 31, 1997, and
calls for certain wage increases that in the aggregate average four percent in
calendar year 1995 and one percent in each of calendar years 1996 and
1997.
11
3
MANAGEMENT'S DISCUSSION AND ANALYSIS (C0NTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures in 1997 were $8.0 million compared to $12.2 million in
1996. Expenditures were primarily for capital equipment in support of new
product programs and investments in information systems. Capital expenditures
in 1997 were less than originally anticipated, due primarily to the timing of
expenditures for product programs. The Company anticipates that capital
expenditures will be approximately $10 million in 1998, primarily in support of
requirements for additional product programs.
The Company's investment in accounts receivable increased by approximately
$10.9 million at June 29, 1997, as compared to June 30, 1996, primarily due to
increased sales levels and normal timing of periodic payments received from OEM
customers. The Company's largest customers typically make one payment per month
on a specified date. In accordance with this payment schedule, approximately
$7.8 million of payments were received on June 30, 1997. Inventories increased
by approximately $1.5 million at June 29, 1997, as compared to June 30, 1996,
in support of increased sales and production activity.
During 1997 the Company repurchased 132,000 outstanding shares with an
investment of $2.1 million. Additional repurchases may occur from time to time.
Funding for the repurchases was provided by cash flow from operations and
borrowings under existing credit facilities.
The Company has a $25.0 million unsecured, revolving credit facility (the
"Credit Facility"). Outstanding borrowings under the Credit Facility were $5.0
million at June 29, 1997. The Credit Facility is discussed in Note 3 to the
Financial Statements. The Company believes that the Credit Facility will be
adequate, along with cash flow from operations, to meet its anticipated capital
expenditure, working capital, and operating expenditure requirements.
The Company has not been significantly impacted by inflationary pressures over
the last several years, except for zinc and Mexican assembly operations as
noted elsewhere in this Management's Discussion and Analysis.
MEXICAN OPERATIONS
The Company has assembly operations in Juarez, Mexico. The functional currency
of the Mexican operation through December 29, 1996, was the Mexican peso. The
effects of currency fluctuations resulted in adjustments to the U.S. dollar
value of the Company's net assets and to the equity accounts in accordance with
SFAS No. 52, "Foreign Currency Translation." Effective December 30, 1996, the
functional currency of the Mexican operation is the U.S. dollar, as Mexico is
considered to be a highly inflationary economy in accordance with SFAS No. 52.
The effect of currency fluctuations in the remeasurement process is included in
the determination of income. The effect of currency fluctuations included in
the determination of income is not material.
PROSPECTIVE INFORMATION
A number of the matters and subject areas discussed in this Annual Report that
are not historical or current facts deal with potential future circumstances
and developments. These include expected future financial results, liquidity
needs, financing ability, management's or the Company's expectations and
beliefs and similar matters discussed in Management's Discussion and Analysis.
The discussions of such matters and subject areas are qualified by the inherent
risk and uncertainties surrounding future expectations generally, and also may
materially differ from the Company's actual future experience.
The Company's business, operations and financial performance are subject to
certain risks and uncertainties which could result in material differences in
actual results from the Company's current expectations. These risks and
uncertainties include, but are not limited to, general economic conditions,
demand for the Company's products and costs of operations.
12
4
STATEMENTS OF INCOME (IN THOUSANDS)
Years Ended
- -----------------------------------------------------------------------------
June 29, 1997 June 30, 1996 July 2, 1995
- -----------------------------------------------------------------------------
NET SALES $159,054 $139,745 $110,372
Cost of goods sold 125,735 110,514 82,479
- -----------------------------------------------------------------------------
GROSS PROFIT 33,319 29,231 27,893
Engineering, selling, and
administrative expenses 17,684 16,632 13,847
Environmental charge - - 3,000
- -----------------------------------------------------------------------------
INCOME FROM OPERATIONS 15,635 12,599 11,046
Interest expense 214 363 12
Other income, net 129 308 99
- -----------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 15,550 12,544 11,133
Provision for income taxes 5,730 4,830 4,657
- -----------------------------------------------------------------------------
NET INCOME $ 9,820 $ 7,714 $ 6,476
=============================================================================
NET INCOME PER COMMON SHARE $ 1.72 $ 1.33
=============================================================================
The accompanying notes are an integral part of these statements.
13
5
BALANCE SHEETS (IN THOUSANDS)
June 29, 1997 June 30, 1996
- ----------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 404 $ 441
Receivables, less allowance for doubtful
accounts of $250 at June 29, 1997,
and June 30, 1996 29,687 18,809
Inventories 14,879 13,406
Customer tooling in progress 6,615 7,346
Future income tax benefits 1,868 1,962
Other current assets 2,522 2,800
- ----------------------------------------------------------------------------------------
Total current assets 55,975 44,764
DEFERRED INCOME TAXES 186 463
PROPERTY, PLANT, AND EQUIPMENT, NET 39,508 37,591
- ----------------------------------------------------------------------------------------
$95,669 $82,818
========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $12,367 $13,017
Accrued liabilities:
Payroll and benefits 6,523 4,900
Environmental 2,911 2,966
Income taxes 452 655
Other 1,323 2,045
- ----------------------------------------------------------------------------------------
Total current liabilities 23,576 23,583
BORROWINGS UNDER REVOLVING CREDIT FACILITY 5,037 1,430
ACCRUED PENSION OBLIGATIONS 7,461 6,334
ACCRUED POST-RETIREMENT OBLIGATIONS 3,502 3,173
SHAREHOLDERS' EQUITY:
Common stock, authorized 12,000,000 shares
$.01 par value, issued and outstanding shares
5,667,150 at June 29, 1997, and 5,785,400 at
June 30, 1996 58 58
Capital in excess of par value 41,094 40,909
Retained earnings 18,947 9,127
Cumulative translation adjustments (1,863) (1,796)
Less: Treasury stock, at cost (132,000 shares at
June 29, 1997 (2,143) -
- ----------------------------------------------------------------------------------------
Total shareholders' equity 56,093 48,298
- ----------------------------------------------------------------------------------------
$95,669 $82,818
========================================================================================
The accompanying notes are an integral part of these balance sheets.
14
6
STATEMENTS OF CHANGES IN EQUITY (IN THOUSANDS)
Capital in Cumulative
Common Excess of Retained Translation Treasury Combined
Stock Par Value Earnings Adjustments Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JULY 3, 1994 $ - $ - $ - $ (399) $ - $ 28,778
Net income - - 1,413 - - 5,063
Translation adjustments - - - (1,038) - -
Capital contributions from
Briggs & Stratton
Corporation - - - - - 7,126
Receipt of net assets of
the Technologies
Business of
Briggs & Stratton
Corporation 58 40,909 - - - (40,967)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JULY 2, 1995 58 40,909 1,413 (1,437) - -
Net income - - 7,714 - - -
Translation adjustments - - - (359) - -
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 58 40,909 9,127 (1,796) - -
Net income - - 9,820 - - -
Translation adjustments - - - (67) - -
Purchase of common stock - - - - (2,143) -
Exercise of stock options - 185 - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 29, 1997 $58 $41,094 $18,947 $(1,863) $(2,143) $ -
===================================================================================================================================
The accompanying notes are an integral part of these statements.
15
7
STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Years Ended
-------------
June 29, 1997 June 30, 1996 July 2, 1995
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,820 $ 7,714 $ 6,476
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 5,639 3,961 2,794
Loss on disposition of property,
plant and equipment 171 254 707
Change in operating assets and liabilities:
Increase in receivables (10,897) (3,367) (1,938)
(Increase) decrease in receivables
from Briggs & Stratton Corporation - 1,337 (1,337)
Increase in inventories (1,473) (3,497) (4,586)
(Increase) decrease in other assets 1,421 (3,548) (140)
Increase in accounts payable
and accrued liabilities 1,459 4,128 8,418
Other, net (55) (103) 39
- ------------------------------------------------------------------------------------------------------
Net cash provided by
operating activities 6,085 6,879 10,433
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant,
and equipment (7,972) (12,177) (13,323)
Proceeds received on sale of property,
plant and equipment 196 60 118
- ------------------------------------------------------------------------------------------------------
Net cash used in
investing activities (7,776) (12,117) (13,205)
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from borrowings under
revolving credit facility 3,607 1,430 -
Purchase of common stock (2,143) - -
Exercise of stock options 185 - -
Net transactions with
Briggs & Stratton Corporation - - 7,126
- ------------------------------------------------------------------------------------------------------
Net cash provided by
financing activities 1,649 1,430 7,126
- ------------------------------------------------------------------------------------------------------
EFFECT OF FOREIGN CURRENCY
FLUCTUATIONS ON CASH 5 (13) (212)
- ------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (37) (3,821) 4,142
CASH AND CASH EQUIVALENTS
Beginning of year 441 4,262 120
- ------------------------------------------------------------------------------------------------------
End of year $ 404 $ 441 $ 4,262
======================================================================================================
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Income taxes paid $ 4,984 $ 6,422 $ 3,138
Interest paid 227 355 18
The accompanying notes are an integral part of these statements
16
8
NOTES TO FINANCIAL STATEMENTS
(1) SPIN-OFF
STRATTEC SECURITY CORPORATION (the "Company") was formed on September 15, 1994,
as a wholly owned subsidiary of Briggs & Stratton Corporation ("Briggs") to
receive substantially all of the assets and liabilities, including a wholly
owned foreign subsidiary, of the mechanical and electromechanical automotive
lock and key business owned by Briggs and operated as its Briggs & Stratton
Technologies Business (the "Technologies Business").
On February 27, 1995, the holders of Briggs common stock received a
distribution of one share of Company common stock for every five shares of
common stock of Briggs held on February 16, 1995 (the "Distribution"). In
connection with the Distribution, Briggs transferred substantially all of the
assets, related debt and liabilities of the Technologies Business to the
Company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company in the preparation
of these financial statements, as summarized in the following paragraphs, are
in conformity with generally accepted accounting principles.
PRINCIPLES OF CONSOLIDATION AND PRESENTATION: The accompanying financial
statements reflect the consolidated results of the Company, its wholly owned
subsidiary discussed in Note 1, and its foreign sales corporation for the years
ended June 29, 1997, and June 30, 1996, and for the period from February 27,
1995, to July 2, 1995. All periods prior to February 27, 1995, represent the
combined results of the Technologies Business. All significant intercompany
transactions have been eliminated. The accounting for the Distribution reflects
a reorganization of companies under common control and, accordingly, all assets
and liabilities are reflected at their historical cost.
Certain amounts previously reported have been reclassified to conform to the
June 29, 1997 presentation. These reclassifications have no effect on
previously reported net income or retained earnings.
FISCAL YEAR: The Company's fiscal year ends on the Sunday nearest June 30. The
years ended June 29, 1997, June 30, 1996, and July 2, 1995, are each comprised
of 52 weeks.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of financial instruments
does not materially differ from their carrying values.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include all short-term
investments with an original maturity of three months or less.
INVENTORIES: Inventories are stated at cost, which does not exceed market. The
last-in, first-out (LIFO) method was used for determining the cost of the
inventories at the end of each period.
Inventories consist of the following (thousands of dollars):
June 29, June 30,
1997 1996
- -------------------------------------------------------------------------------
Finished products $ 3,599 3,926
Work in process 12,446 10,415
Raw materials 1,671 1,591
LIFO adjustment (2,837) (2,526)
- -------------------------------------------------------------------------------
$14,879 $13,406
===============================================================================
17
9
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CUSTOMER TOOLING IN PROGRESS: The Company accumulates its costs for development
of certain tooling used in component production and assembly. The costs, which
are primarily from third-party tool vendors, are accumulated on the Company's
balance sheet. These amounts are then billed to the customer upon formal
acceptance by the customer of products produced with the individual tool.
PROPERTY, PLANT, AND EQUIPMENT: Property, plant, and equipment are stated at
cost, and depreciation is computed using the straight-line method at rates
based upon the estimated useful lives of the assets.
Property, plant, and equipment consist of the following (thousands of dollars):
June 29, June 30,
1997 1996
- -----------------------------------------------------------------------------------------
Land $ 801 788
Buildings and improvements 9,551 9,538
Machinery and equipment 58,771 53,346
- -----------------------------------------------------------------------------------------
69,123 63,672
Less: accumulated depreciation 29,615 26,081
- -----------------------------------------------------------------------------------------
$39,508 $37,591
=========================================================================================
Expenditures for repairs and maintenance are charged to expense as incurred.
Expenditures for major renewals and betterments, which significantly extend the
useful lives of existing plant and equipment, are capitalized and depreciated.
Upon retirement or disposition of plant and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in cost of goods sold.
RESEARCH AND DEVELOPMENT COSTS: Expenditures relating to the development of new
products and processes, including significant improvements and refinements to
existing products, are expensed as incurred.
FOREIGN CURRENCY TRANSLATION: The functional currency of the Company's Mexican
assembly operations through December 29, 1996, was the Mexican peso, and
through that date the financial statements of the Company's foreign subsidiary
were translated into U.S. dollars using the current rate method in accordance
with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign
Currency Translation." Balance sheet accounts were translated into U.S. dollars
at rates of exchange in effect at period end, and income and expenses were
translated at the average rates of exchange in effect during the period. The
related translation adjustments were made directly to a separate component of
shareholders' equity. Effective December 30, 1996, the functional currency of
the Mexican operation is the U.S. dollar, as Mexico is considered to be a
highly inflationary economy in accordance with SFAS No. 52. The effect of
currency fluctuations in the remeasurement process is included in the
determination of income. The effect of currency fluctuations in the
determination of income is not material.
REVENUE RECOGNITION: Revenue is recognized upon the shipment of products, net
of estimated costs of returns and allowances.
NET INCOME PER COMMON SHARE: Net income per common share is computed by
dividing net income by the weighted average number of common shares outstanding
during the period and is presented for fiscal years subsequent to the
Distribution. The weighted average common shares outstanding were 5,715,699 and
5,785,400 for fiscal years 1997 and 1996, respectively.
In February of 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." This Statement revises the computation and
presentation of earnings per share. In accordance with timing prescribed by the
Statement, the Company will adopt this Statement in the second quarter of
fiscal 1998. The Company does not expect adoption to have a significant impact
on reported earnings per share. Had the Company adopted this Statement for the
fiscal years ended June 29, 1997, and June 30, 1996, basic and diluted earnings
per share would have been $1.72 and $1.70, and $1.33 and $1.32, respectively.
18
10
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NET TRANSACTIONS WITH BRIGGS & STRATTON CORPORATION: The amount shown on this
line in the 1995 Statement of Cash Flows represents the net effect of cash used
by the Technologies Business and transferred from Briggs. It was Briggs' policy
to consolidate all cash positions from its operations on a daily basis and to
transfer cash to and from the operations as necessary to meet working capital
and other needs.
(3) REVOLVING CREDIT FACILITY
The Company has a $25 million unsecured, revolving credit facility (the "Credit
Facility"), which expires October 31, 1999. Interest on borrowings under the
Credit Facility are at varying rates based, at the Company's option, on the
London Interbank Offering Rate, the Federal Funds Rate, or the bank's prime
rate. Outstanding borrowings were $5,037,000 and $1,430,000 under the Credit
Facility at June 29, 1997, and June 30, 1996, respectively. The weighted
average interest rate on the revolving credit borrowings was 6.0 percent and
6.2 percent for the years ended June 29, 1997, and June 30, 1996, respectively.
The Credit Facility contains various restrictive covenants that require the
Company to maintain minimum levels for certain financial ratios, including
tangible net worth, ratio of indebtedness to tangible net worth and fixed
charge coverage.
(4) ENVIRONMENTAL MATTERS
In 1995, the Company recorded a provision of $3.0 million for estimated costs
to remediate a site at the Company's Milwaukee facility that was contaminated
by a solvent spill which occurred in 1985. The Company continues to monitor and
evaluate the site and believes, based upon findings-to-date and known
environmental regulations, that the environmental reserve at June 29, 1997, is
adequate.
(5) INCOME TAXES
Prior to February 27, 1995, the Company's operations were included in the
consolidated federal and state income tax returns of Briggs, and income tax
provisions and tax liabilities were allocated to the Technologies Business as
if it had been a stand-alone company. Briggs and the Company have entered into
a tax-sharing agreement under which Briggs is responsible for substantially all
income and franchise taxes with respect to the Company for periods prior to the
date of the Distribution. The Company is responsible for all taxes applicable
to periods after the Distribution and any amounts exceeding certain thresholds
that may result from tax audit adjustments for periods prior to the
Distribution. Foreign income before the provision for income taxes was not
significant for each of the years indicated.
The provision for income taxes consists of the following (thousands of dollars):
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
Currently payable:
Federal $ 4,469 $ 3,883 $5,505
State 1,037 861 1,120
Foreign 43 319 156
- -------------------------------------------------------------------------------------------------------------------------
5,549 5,063 6,781
- -------------------------------------------------------------------------------------------------------------------------
Deferred taxes 181 (233) (2,124)
- -------------------------------------------------------------------------------------------------------------------------
$ 5,730 $ 4,830 $4,657
=========================================================================================================================
A reconciliation of the U.S. statutory tax rates to the effective tax rates follows:
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
U.S. statutory rate 34.4% 34.2% 34.5%
State taxes, net of federal tax benefit 4.4 4.3 4.5
Foreign rate differential (.8) .4 .6
Other (1.2) (.4) 2.2
- -------------------------------------------------------------------------------------------------------------------------
36.8% 38.5% 41.8%
=========================================================================================================================
19
11
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The components of deferred tax assets are as follows (thousands of dollars):
June 29, June 30,
1997 1996
- -----------------------------------------------------------------------------------------------------------
Future income tax benefits:
Inventories $ (146) $ (125)
Customer tooling 156 160
Payroll-related accruals 410 487
Environmental reserve 1,136 1,186
Other 312 254
- -----------------------------------------------------------------------------------------------------------
$ 1,868 $ 1,962
===========================================================================================================
Deferred income taxes:
Accrued pension obligations $ 2,910 $ 2,534
Accumulated depreciation (4,116) (3,415)
Post-retirement obligations 1,366 1,269
Other 26 75
- -----------------------------------------------------------------------------------------------------------
$ 186 $ 463
===========================================================================================================
(6) RETIREMENT PLANS AND POSTRETIREMENT COSTS
Prior to February 27, 1995, the Technologies Business employees participated
in the Briggs' noncontributory defined benefit retirement plans covering
substantially all U.S. employees. The funded status for the Technologies
Business was allocated on the basis of the relationship of the prepaid pension
cost for the Technologies Business compared to the Briggs amounts. Effective
February 27, 1995, the Company assumed the accumulated pension benefit
obligation and post-retirement health care and life insurance benefit
obligations for former Technologies Business employees who became Company
employees. Briggs retained the accumulated pension benefit obligation relating
to all existing retirees at February 27, 1995.
Benefits are based on years of service and final average compensation. The
Company's policy is to fund at least the minimum actuarially computed annual
contribution required under the Employee Retirement Income Security Act of 1974
(ERISA). Plan assets consist primarily of listed equity and fixed income
securities.
The following tables summarize the plans' income and expense, actuarial
assumptions, and funded status for the years indicated (thousands of dollars):
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
INCOME AND EXPENSE:
Service cost-benefits
earned during the year $ 1,205 $ 1,057 $ 1,061
Interest cost on projected
benefit obligation 1,631 1,451 1,458
Actual return on
plan assets (3,138) (2,608) (1,897)
Net amortization
and deferral 1,428 1,028 311
- -----------------------------------------------------------------------------------------------------------
Net periodic pension
expense $ 1,126 $ 928 $ 933
===========================================================================================================
20
12
1997 1996
- -------------------------------------------------------------
FUNDED STATUS:
Actuarial present value
of benefit obligations:
Vested $13,187 $11,976
Nonvested 1,946 1,786
- -------------------------------------------------------------
Accumulated benefit
obligation 15,133 13,762
Effect of projected future
compensation increases 6,492 7,386
- -------------------------------------------------------------
Projected benefit
obligation 21,625 21,148
Plan assets at fair
market value 22,194 19,271
- -------------------------------------------------------------
Plan assets greater (less)
than projected
benefit obligation 569 (1,877)
Remaining unrecognized
net asset arising from
the initial application
of SFAS No. 87 1,096 1,245
Unrecognized net gain 6,885 3,170
Unrecognized prior
service cost 49 42
- -------------------------------------------------------------
Accrued pension obligation $ 7,461 $ 6,334
=============================================================
ACTUARIAL ASSUMPTIONS:
Discount rate used to determine
present value of projected
benefit obligation 7.75% 7.75%
Expected rate of future
compensation increases 4.0% 4.5%
Expected long-term rate
of return on plan assets 8.5% 8.5%
All U.S. employees of the Company may participate in a 401(K) Plan. The
Company contributes a fixed percentage of the first six percent of eligible
compensation that a participant contributes to the plan. The Company's
contributions totaled approximately $487,000 in 1997, $359,000 in 1996, and
$210,000 in 1995.
20a.
13
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In accordance with SFAS No. 106, "Employers Accounting for Post-retirement
Benefits other than Pensions," the Company recognizes the expected cost of
health care and life insurance benefits during the years that the employees
render service. For measurement purposes, a seven percent annual rate of
increase in the per capita cost of covered health care benefits was assumed for
1997; the rate was assumed to decrease to six percent by the year 1999 and
remain at that level thereafter. The health care cost trend assumption has a
significant effect on the amounts reported. To illustrate, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated post-retirement benefit obligation as of June 29, 1997,
by approximately $476,000 and the aggregate of the service and interest cost
components of net periodic post-retirement benefit cost for the year then ended
by approximately $65,000.
The discount rate used in determining the accumulated post-retirement benefit
obligations was 7.75 percent at June 29, 1997, and June 30, 1996, compounded
annually. The health care and life insurance plans are unfunded.
The components of the accumulated post-retirement benefit obligations were as
follows (thousands of dollars):
June 29, June 30,
1997 1996
- ----------------------------------------------------------------------------
Retirees $ 225 $ 202
Fully eligible
plan participants 435 356
Other active
participants 2,432 2,239
- ----------------------------------------------------------------------------
3,092 2,797
Unrecognized net
obligations (9) (10)
Unrecognized net
gain 419 386
- ----------------------------------------------------------------------------
$3,502 $3,173
============================================================================
The net periodic post-retirement costs recorded during 1997, 1996, and 1995 were
as follows (thousands of dollars):
1997 1996 1995
- ----------------------------------------------------------------------------
Service cost-benefits
attributed to service
during the year $ 153 $ 173 $ 156
Interest cost on
accumulated
benefit obligation 215 221 207
Other (7) 1 1
- ----------------------------------------------------------------------------
$ 361 $ 395 $ 364
============================================================================
Briggs retained the accumulated post-retirement health care and life insurance
benefit obligations relating to all retirees at February 27, 1995.
(7) SHAREHOLDERS' EQUITY
The Company has 12,000,000 shares of authorized common stock, par value $.01
per share, with 5,667,150 and 5,785,400 shares issued and outstanding at June
29, 1997, and June 30, 1996, respectively. Holders of Company common stock are
entitled to one vote for each share on all matters voted on by shareholders.
In conjunction with the Distribution, one common stock purchase right (a
"right") was distributed for each share of the Company's common stock
outstanding. The rights are not currently exercisable, but would entitle
shareholders to buy one-half of one share of the Company's common stock at an
exercise price of $30 per share if certain events occurred relating to the
acquisition or attempted acquisition of 20 percent or more of the outstanding
shares. The rights expire in the year 2005, unless redeemed or exchanged by the
Company earlier.
21
14
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
During 1997, the Company's Board of Directors authorized the purchase of up to
five percent of outstanding shares, or approximately 290,000 shares. As of June
29, 1997, 132,000 shares have been purchased at a cost of $2,143,000 and are
being held as Treasury Stock.
(8) STOCK OPTION PLAN
In conjunction with the Distribution, the Company adopted an omnibus stock
incentive plan, which provides for the granting of stock options. The Board of
Directors has designated 788,918 shares of the Company's common stock available
for grant under the plan at a price not less than the fair market value on the
date the option is granted. Options become exercisable as determined at the
date of grant by a committee of the Board of Directors and expire 10 years
after the date of grant unless an earlier expiration date is set at the time of
grant.
Information regarding the Company's stock option plan is summarized below:
Weighted
Average
Exercise
Shares Price
- ---------------------------------------------------------------------------
Granted at February 27, 1995 382,500 $11.75
--------
Balance as of July 2, 1995 382,500 $11.75
Granted 96,393 $18.57
Terminated 7,500 $11.75
--------
Balance as of June 30, 1996 471,393 $13.15
--------
Granted 157,135 $18.17
Exercised 13,750 $11.75
Terminated 15,889 $15.01
--------
Balance June 29, 1997 598,889 $14.45
========
Exercisable as of June 29, 1997 368,750 $11.86
========
Available for grant
as of June 29, 1997 176,279
========
During 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." As permitted by the statement, the Company will continue to
account for its stock-based compensation plans as presented by APB Opinion No.
25 and related Interpretations. Accordingly, no compensation cost related to
these plans was charged against earnings in 1997, 1996, and 1995. Had
compensation cost for these plans been determined consistent with SFAS No. 123,
the pro forma impact on earnings per share would have been a reduction of one
cent for 1997 and no change relating to 1996 and 1995. The following table
provides additional disclosure required by SFAS No. 123.
The range of options outstanding as of June 29, 1997, is as follows:
Weighted
Weighted Average
Number of Average Remaining
Options Exercise Price Contractual
Price Range Outstanding/ Outstanding/ Life
per Share Exercisable Exercisable (in years)
- ------------------------------------------------------------------------------------------
$11.75-$14.75 363,750/361,250 $11.79/$11.77 7.6
$15.50-$17.05 85,000/ 7,500 $16.91/$16.25 9.7
Over $19.28 150,139/ - $19.49/ - 3.7
- ------------------------------------------------------------------------------------------
598,889/368,750 $14.45/$11.86 6.9
==========================================================================================
22
15
(9) EXPORT SALES
Export sales are summarized below (thousands of dollars):
Export Sales Percent of Net Sales
- ----------------------------------------------------------------------
1997 $17,179 11%
1996 $14,713 11%
1995 $11,336 10%
These sales were primarily to vehicle manufacturing plants in Canada and
Mexico.
(10) SALES TO LARGEST CUSTOMERS
Sales to the Company's largest customers were as follows (thousands of dollars
and percent of total net sales):
1997 1996 1995
Sales % Sales % Sales %
- -----------------------------------------------------------------------
General Motors
Corporation $ 70,347 44% $ 65,441 47% $61,336 56%
Ford Motor
Company 43,617 27% 27,977 20% - -
Chrysler
Corporation 21,000 13% 20,318 15% 17,871 16%
- -----------------------------------------------------------------------
$134,964 85% $113,736 82% $79,207 72%
=======================================================================
22a.
16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF STRATTEC SECURITY CORPORATION:
We have audited the accompanying consolidated balance sheets of STRATTEC
SECURITY CORPORATION and subsidiaries, formerly the Technologies Business of
Briggs & Stratton Corporation, as of June 29, 1997, and June 30, 1996, and the
related consolidated and combined statements of income, shareholders' equity
and cash flows for each of the three years in the period ended June 29, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of STRATTEC SECURITY CORPORATION
and subsidiaries as of June 29, 1997, and June 30, 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended June 29, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
July 31, 1997
REPORT OF MANAGEMENT
The management of STRATTEC SECURITY CORPORATION is responsible for the fair
presentation and integrity of the financial statements and other information
contained in this Annual Report. We rely on a system of internal financial
controls to meet the responsibility of providing financial statements. The
system provides reasonable assurances that assets are safeguarded, that
transactions are executed in accordance with management's authorization and
that the financial statements are prepared in accordance with generally
accepted accounting principles, including amounts based upon management's best
estimates and judgments.
The financial statements for each of the years covered in this Annual Report
have been audited by independent auditors, who have provided an independent
assessment as to the fairness of the financial statements.
The Audit Committee of the Board of Directors meets with management and the
independent auditors to review the results of their work and to satisfy itself
that their responsibilities are being properly discharged. The independent
auditors have full and free access to the Audit Committee and have discussions
with the committee regarding appropriate matters, with and without management
present.
Harold M. Stratton II John G. Cahill
President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
23
17
FINANCIAL SUMMARY
FIVE-YEAR FINANCIAL SUMMARY
For 1997, 1996 and the period from February 27, 1995, to July 2, 1995, the
financial data reflect the consolidated results of the Company and its wholly
owned subsidiaries. For all periods prior to February 27, 1995, the financial
data reflect the combined results of the Technologies Business of Briggs &
Stratton Corporation. This information should be read in conjunction with
"Management's Discussion and Analysis," and the Financial Statements and Notes
thereto included elsewhere herein. The following data are in thousands of
dollars except per share amounts.
Fiscal Years
------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Net sales $159,054 $139,745 $110,372 $97,077 $82,005
Gross profit 33,319 29,231 27,893 23,248 13,449
Engineering, selling, and
administrative expenses 17,684 16,632 13,847 8,915 7,767
Environmental charges - - 3,000 1,250 4,080
- ---------------------------------------------------------------------------------------------------
Income from operations 15,635 12,599 11,046 13,083 1,602
Interest expense 214 363 12 - -
Other income, net 129 308 99 68 15
- ---------------------------------------------------------------------------------------------------
Income before taxes and cumulative
effect of accounting changes 15,550 12,544 11,133 13,151 1,617
Provision for income taxes 5,730 4,830 4,657 5,330 660
- ---------------------------------------------------------------------------------------------------
Net income before cumulative
effect of accounting changes 9,820 7,714 6,476 7,821 957
Cumulative effect of accounting changes - - - - (3,024) -
- ---------------------------------------------------------------------------------------------------
Net income $ 9,820 $ 7,714 $ 6,476 $ 4,797 $ 957
===================================================================================================
Net income per common share (a) $ 1.72 $ 1.33 - - -
BALANCE SHEET DATA
Net working capital $ 32,399 $ 21,181 $ 18,978 $13,714 $19,806
Total assets 95,669 82,818 70,103 49,496 54,473
Long-term liabilities 16,000 10,937 8,198 6,212 4,635
Equity 56,093 48,298 40,943 28,379 37,986
(a)Net income per common share is presented for fiscal years subsequent to the
distribution.
QUARTERLY FINANCIAL DATA (UNAUDITED)
Net Income Market Price
Net Gross Net Per Common Per Share
Quarter Sales Profit Income Share High Low
- -----------------------------------------------------------------------------------
1997 First $ 36,214 $ 6,253 $1,201 $ .21 18 1/2 13 3/4
Second 37,926 8,528 2,598 .45 18 1/2 14 1/2
Third 41,836 9,036 2,902 .51 19 3/4 16
Fourth 43,078 9,502 3,119 .55 21 16 1/2
----------------------------------------
TOTAL $159,054 $33,319 $9,820 $1.72
========================================
1996 First $ 27,817 $ 4,766 $ 600 $ .10 15 1/2 12
Second 35,537 8,672 2,872 .50 18 3/4 14
Third 37,500 8,681 2,623 .45 18 1/4 15 3/4
Fourth 38,891 7,112 1,619 .28 19 3/4 16 1/2
----------------------------------------
TOTAL $139,745 $29,231 $7,714 $1.33
========================================
Shareholders of record at June 29, 1997, were 5,446.
24
1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in this Form 10-K of our report
dated July 31, 1997, included in the 1997 Annual Report to
Shareholders of STRATTEC SECURITY CORPORATION.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
September 10, 1997.
5
1,000
12-MOS
JUN-29-1997
JUL-01-1996
JUN-29-1997
404
0
29,937
250
14,879
55,975
69,123
29,615
95,669
23,576
5,037
0
0
58
56,035
95,669
159,054
159,054
125,735
125,735
0
0
214
15,550
5,730
9,820
0
0
0
9,820
1.72
1.72
