1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 28, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
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)
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. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common stock, par value $0.01 per share: 5,729,150 shares outstanding as of
December 28, 1997.
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STRATTEC SECURITY CORPORATION
FORM 10-Q
December 28, 1997
INDEX
Page
----
Part I - FINANCIAL INFORMATION
Item 1 Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Results
of Operations and Financial Condition 7-9
Part II - OTHER INFORMATION
Item 1 Legal Proceedings 10
Item 2 Changes in Securities and Use of Proceeds 10
Item 3 Defaults Upon Senior Securities 10
Item 4 Submission of Matters to a Vote of Security Holders 10
Item 5 Other Information 10
Item 6 Exhibits and Reports on Form 8-K 10
2
3
STRATTEC SECURITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
Item 1 Financial Statements
Three Months Ended Six Months Ended
---------------------------- ---------------------------
December 28, December 29, December 28, December 29,
1997 1996 1997 1996
------------- ------------- ------------- ------------
(unaudited) (unaudited)
Net sales $49,722 $37,926 $92,590 $74,140
Cost of goods sold 39,580 29,398 73,960 59,359
------- ------- ------- -------
Gross profit 10,142 8,528 18,630 14,781
Engineering, selling and administrative
expenses 4,741 4,356 9,388 8,518
------- ------- ------- -------
Income from operations 5,401 4,172 9,242 6,263
Interest expense (7) (57) (19) (137)
Other income, net 59 73 40 14
------- ------- ------- -------
Income before provision for income taxes 5,453 4,188 9,263 6,140
Provision for income taxes 2,020 1,590 3,432 2,341
------- ------- ------- -------
Net income $3,433 $2,598 $5,831 $3,799
======= ======= ======= =======
Earnings per share:
Basic $ 0.60 $ 0.45 $ 1.02 $ 0.66
======= ======= ======= =======
Diluted $ 0.59 $ 0.45 $ 1.00 $ 0.65
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated statements.
3
4
STRATTEC SECURITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 28, June 29,
1997 1997
------------ --------
ASSETS (unaudited)
Current Assets:
Cash and cash equivalents $ 2,730 $ 404
Receivables, net 30,130 29,687
Inventories-
Finished products 4,522 3,599
Work in process 12,355 12,446
Raw materials 1,409 1,671
LIFO adjustment (2,837) (2,837)
-------- -------
Total inventories 15,449 14,879
Customer tooling in progress 7,350 6,615
Other current assets 4,342 4,390
-------- -------
Total current assets 60,001 55,975
Deferred Income Taxes 186 186
Property, Plant and Equipment 72,916 69,123
Less: accumulated depreciation 32,695 29,615
-------- -------
Net property, plant and equipment 40,221 39,508
-------- -------
$100,408 $95,669
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 14,719 $12,367
Environmental 2,890 2,911
Other accrued liabilities 7,302 8,298
-------- -------
Total current liabilities 24,911 23,576
Borrowings under revolving credit facility 1,000 5,037
Accrued pension and postretirement obligations 11,535 10,963
Shareholders' equity:
Common stock, authorized 12,000,000 shares
$.01 par value, issued 5,861,150 shares at
December 28, 1997, and 5,799,150 shares at
June 29, 1997 59 58
Capital in excess of par value 42,131 41,094
Retained earnings 24,778 18,947
Cumulative translation adjustments (1,863) (1,863)
Less: Treasury stock, at cost (132,000 shares at
December 28, 1997 and June 29, 1997) (2,143) (2,143)
-------- -------
Total shareholders' equity 62,962 56,093
-------- -------
$100,408 $95,669
======== =======
The accompanying notes are an integral part of these consolidated balance
sheets.
4
5
STRATTEC SECURITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended
---------------------------
December 28, December 29,
1997 1996
------------- ------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,831 $3,799
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 3,267 2,604
Change in operating assets and liabilities:
Increase in receivables (444) (2,140)
Increase in inventories (570) (554)
(Increase) Decrease in other assets (695) 2,182
Increase (Decrease) in accounts payable and
accrued liabilities 1,931 (3,187)
Other, net 81 46
--------- --------
Net cash provided by operating activities 9,401 2,750
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (4,025) (3,364)
-------- --------
Net cash used in investing activities (4,025) (3,364)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) borrowings
under revolving credit facility (4,037) 2,235
Purchase of treasury stock - (1,907)
Exercise of stock options 1,038 31
--------- --------
Net cash provided by (used in) financing activities (2,999) 359
EFFECT OF FOREIGN CURRENCY FLUCTUATIONS
ON CASH (51) (8)
---------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,326 (263)
CASH AND CASH EQUIVALENTS
Beginning of period 404 441
--------- --------
End of period $2,730 $178
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $3,447 $942
Interest paid 33 146
The accompanying notes are an integral part of these consolidated statements.
5
6
STRATTEC SECURITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF FINANCIAL STATEMENTS
STRATTEC SECURITY CORPORATION (the "Company") designs, develops,
manufacturers and markets mechanical locks, electro-mechanical locks and
related security products for North American and select European automotive
manufacturers. The accompanying financial statements reflect the consolidated
results of the Company, its wholly owned Mexican subsidiary, and its foreign
sales corporation.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments which are of a normal recurring nature,
necessary to present fairly the financial position as of December 28, 1997, and
the results of operations and cash flows for the periods then ended. All
significant intercompany transactions have been eliminated. Interim financial
results are not necessarily indicative of operating results for an entire year.
Certain amounts previously reported have been reclassified to conform to
the December 28, 1997 presentation.
(2) ENVIRONMENTAL MATTERS
In 1995, the Company recorded a provision of $3 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 environmental
reserve reflects this provision.
(3) EARNINGS PER SHARE (EPS)
In the second quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." The
Company's previously reported EPS is consistent with basic EPS as calculated
below under SFAS No. 128. A reconciliation of the components of the basic and
diluted per-share computations follows (in 000's, except per share amounts):
Six Months Ended
-------------------
December 28, 1997 December 29, 1996
------------------------- ---------------------------
Net Per-Share Net Per-Share
Income Shares Amount Income Shares Amount
------ ------ --------- -------- ------ ---------
Basic Earnings Per Share $5,831 5,696 $1.02 $3,799 5,762 $0.66
========= =========
Stock Options 145 58
------ ------
Diluted Earnings Per Share $5,831 5,841 $1.00 $3,799 5,820 $0.65
====== ========= ====== =========
Three Months Ended
--------------------
December 28, 1997 December 29, 1996
------------------------- ----------------------------
Net Per-Share Net Per-Share
Income Shares Amount Income Shares Amount
------ ------ --------- --------- ------ ---------
Basic Earnings Per Share $3,433 5,716 $0.60 $2,598 5,737 $0.45
========= =========
Stock Options 157 61
------ ------
Diluted Earnings Per Share $3,433 5,873 $0.59 $2,598 5,798 $0.45
====== ========= ====== =========
Options to purchase 80,000 shares of common stock at $31.98 per share and
163,528 shares of common stock at prices ranging from $16.63 to $19.68 per
share were outstanding as of December 28, 1997, and December 29, 1996,
respectively, but were not included in the computation of diluted EPS because
the options' exercise price was greater than the average market price of the
common shares.
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Item 2
STRATTEC SECURITY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following Management's Discussion and Analysis should be read in
conjunction with the Company's accompanying Financial Statements and Notes
thereto and the Company's 1997 Annual Report. Unless otherwise indicated, all
references to years refer to fiscal years.
Analysis of Results of Operations
Three months ended December 28, 1997 compared to the three months ended
December 29, 1996
Net sales increased 31 percent to $49.7 million for the three months ended
December 28, 1997, from $37.9 million for the three months ended December 29,
1996. The sales increase is primarily due to increased sales to all three of
the Company's largest customers in the current quarter compared to prior year
levels, with General Motors Corporation increasing $9.3 million or 61 percent,
Chrysler Corporation increasing $2.9 million or 57 percent and Ford Motor
Company increasing $1.3 million or 11 percent. This sales growth is due to
higher value mechanical and electro-mechanical content, and continued strong
production levels of vehicles the Company supplies. In addition, prior year
sales to General Motors Corporation had been negatively affected by labor
disruptions at their operations.
Gross profit as a percentage of net sales was 20.4 percent in the current
quarter compared to 22.5 percent in the prior year quarter. Gross profit
margins decreased reflecting a $750,000 charge during the current quarter as a
result of cash payments to the Company's represented employees upon
ratification of a new collective bargaining agreement. The charge reduced the
gross profit margins by 1.5 percentage points. The cost of zinc, the Company's
primary raw material, remained significantly above prior year levels increasing
to an average of approximately $.69 per pound in the current quarter from an
average of approximately $.55 per pound in the prior year quarter resulting in
a negative effect on gross profit margins. The market cost of zinc declined in
the current quarter after increasing dramatically over the previous 12 months.
Gross profit margins were also negatively impacted as inflationary cost
pressures in Mexico over the past two years have resulted in higher U.S. dollar
costs. The rate of inflation in Mexico during calendar years 1997 and 1996 was
approximately 16 and 28 percent, respectively. The U.S. dollar/Mexican peso
exchange rate remained relatively stable during this period with moderate
devaluation during the current quarter. The exchange rate ranged from
approximately 7.40 to 7.90 pesos to the dollar during the period January 1996
through September 1997 and from approximately 7.80 to 8.40 pesos to the dollar
during the current quarter.
Engineering, selling and administrative expenses were $4.7 million in the
current quarter, compared to $4.4 million in the prior year quarter. The
increase is primarily due to increased engineering expenses in support of
current and future vehicle programs.
Income from operations was $5.4 million in the current quarter, compared
to $4.2 million in the prior year quarter. Income from operations increased
reflecting the increased sales volume as previously discussed above.
The effective income tax rate for the current quarter was 37.0 percent
compared to 38.0 percent in the prior year quarter. The current quarter rate
is comparable to the effective rate for the entire 1997 fiscal year. The
effective rate differs from the federal statutory tax rate primarily due to the
effects of state income taxes.
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8
Six months ended December 28, 1997 compared to the six months ended
December 29, 1996
Net sales increased 25 percent to $92.6 million for the six months ended
December 28, 1997, from $74.1 million for the six months ended December 29,
1996. The sales increase is primarily due to increased sales to all three
of the Company's largest customers in the current year period compared to prior
year levels, with General Motors Corporation increasing $14.3 million or 47
percent, Chrysler Corporation increasing $4.4 million or 45 percent and Ford
Motor Company increasing $2.6 million or 12 percent. This sales growth is due
to higher value mechanical and electro-mechanical content, and continued strong
production levels of vehicles the Company supplies. In addition, prior year
sales to General Motors Corporation had been negatively affected by labor
disruptions at their operations.
Gross profit as a percentage of net sales was 20.1 percent in the six
months ended December 28, 1997, compared to 19.9 percent in the six months
ended December 29, 1996. Gross profit margins improved slightly compared to
the prior year period as scrap and expedited freight costs decreased in the
current year period as compared to the prior year period. The gross profit
margin was negatively impacted by a $750,000 charge during the current year
period as a result of cash payments to the Company's represented employees upon
ratification of a new collective bargaining agreement. The cost of zinc, the
Company's primary raw material, remained significantly above prior year levels
increasing to an average of approximately $.74 per pound in the six months
ended December 28, 1997 from an average of approximately $.53 per pound in the
six months ended December 29, 1996 resulting in a negative effect on gross
profit margins. The market cost of zinc declined in the second quarter of
fiscal 1998 after increasing dramatically over the previous 12 months. Gross
profit margins were also negatively impacted as inflationary cost pressures in
Mexico over the past two years have resulted in higher U.S. dollar costs. The
rate of inflation in Mexico during calendar years 1997 and 1996 was
approximately 16 and 28 percent, respectively. The U.S. dollar/Mexican peso
exchange rate remained relatively stable during this period with moderate
devaluation during the current quarter. The exchange rate ranged from
approximately 7.40 to 7.90 pesos to the dollar during the period January 1996
through September 1997 and from approximately 7.80 to 8.40 pesos to the dollar
during the period October 1997 through December 1997.
Engineering, selling and administrative expenses were $9.4 million for the
six months ended December 28, 1997, compared to $8.5 million for the six months
ended December 29, 1996. The increase is primarily due to increased
engineering expenses in support of current and future vehicle programs.
Income from operations was $9.2 million in the six months ended December
28, 1997, compared to $6.3 million in the six months ended December 29, 1996.
Income from operations increased reflecting the increased sales volume as
previously discussed above.
The effective income tax rate for the six months ended December 28, 1997
was 37.1 percent compared to 38.1 percent for the six months ended December 29,
1996. The current period rate is comparable to the effective rate for the
entire 1997 fiscal year. The effective rate differs from the federal statutory
tax rate primarily due to the effects of state income taxes.
Liquidity and Capital Resources
The Company generated cash from operating activities of $9.4 million in
the six months ended December 28, 1997. In the six months ended December 29,
1996, the Company generated $2.8 million in cash from operating activities.
The increased generation of cash is primarily due to increased income and
increases in accounts payable and accrued liabilities in support of increased
production activities.
The Company's investment in accounts receivable of $30.1 million at
December 28, 1997, is consistent with the June 29, 1997 balance. Inventories
increased by approximately $570,000 at December 28, 1997, as compared to June
29, 1997, in support of the increased sales levels.
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Capital expenditures during the six months ended December 28, 1997 were
$4.0 million compared to $3.4 million during the six months ended December 29,
1996. The Company anticipates that capital expenditures will be approximately
$9 million to $10 million in 1998, primarily in support of requirements for
additional product programs.
The Board of Directors of the Company has authorized a stock repurchase
program to buy back up to 289,395 outstanding shares. A total of 132,000
shares have been repurchased as of December 28, 1997, at a cost of
approximately $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 million unsecured, revolving credit facility (the
"Credit Facility") which expires October 2000. Outstanding borrowings under
the Credit Facility were $1.0 million at December 28, 1997. 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. The credit facility contains various
restrictive covenants including covenants that require the Company to maintain
minimum levels for certain financial ratios such as tangible net worth, ratio
of indebtedness to tangible net worth and fixed charge coverage. 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 the Management's Discussion and Analysis.
The Company has developed a plan to ensure its information systems are
compliant with the requirements to process transactions in the year 2000. The
Company does not expect that the cost to modify its information systems to be
year 2000 compliant will be material to its financial condition or results of
operations. The Company does not anticipate any material disruption in its
operations as a result of any failure by the Company to be year 2000 compliant.
Mexican Operations
The Company has assembly operations in Juarez, Mexico. Effective December
30, 1996, the functional currency of the Mexican operation was the U.S. dollar,
as Mexico is currently considered to be a highly inflationary economy in
accordance with SFAS No. 52, "Foreign Currency Translation." 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. Prior to December 30, 1996, the
functional currency of the Mexican operation 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.
Forward Looking Statements
A number of the matters and subject areas discussed in this Form 10-Q that
are not historical or current facts deal with potential future circumstances
and developments. These include expected future financial results, liquidity
needs, financing ability, planned capital expenditures, management's or the
Company's expectations and beliefs and similar matters discussed in the
Company's Management Discussion and Analysis of Results of Operations and
Financial Condition. 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, competitive and
technological developments, foreign currency fluctuations, year 2000 compliance
issues and costs of operations.
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Part II
Other Information
Item 1 Legal Proceedings - None
Item 2 Changes in Securities and Use of Proceeds - None
Item 3 Defaults Upon Senior Securities - None
Item 4 Submission of Matters to a Vote of Security Holders -
At the Company's Annual Meeting held on October 23, 1997, the shareholders
voted to elect Harold M. Stratton II and Robert Feitler as directors for a
term to expire in 2000. The number of votes cast for and withheld in the
election of Harold M. Stratton II were 5,296,656 and 39,339, respectively.
The number of votes cast for and withheld in the election of Robert
Feitler were 5,294,885 and 41,110, respectively. The shareholders also
voted to approve an amendment to the STRATTEC SECURITY CORPORATION Stock
Incentive Plan to, among other things, increase the aggregate number of
shares of the Company's Common Stock that may be issued or transferred
upon exercise, payment or vesting of stock options and other equity
incentive awards granted under such plan from 788,817 to 1,200,000. The
number of votes cast for, against and withheld in the approval of the
amendment were 2,896,233, 2,013,243 and 27,400, respectively.
Item 5 Other Information - None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
3.1* Amended and Restated Articles of Incorporation of the Company
3.2* By-Laws of the Company
4.1* Rights Agreement dated as of February 6, 1995 between the
Company and Firstar Trust Company, as Rights Agent
27 Financial Data Schedule
(b) Reports on Form 8-K - None
* Incorporated by reference to Amendment No. 2 to the Company's Form 10 filed
on February 6, 1995.
SIGNATURE
Pursuant to the requirements 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 (Registrant)
Date: February 6, 1998 By /S/ John G. Cahill
----------------------
John G. Cahill
Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary
(Principal Accounting and Financial Officer)
10
5
1,000
6-MOS
JUN-28-1998
JUN-30-1997
DEC-28-1997
2,730
0
30,380
250
15,449
60,001
72,916
32,695
100,408
24,911
1,000
0
0
59
62,903
100,408
92,590
92,590
73,960
73,960
0
0
19
9,263
3,432
5,831
0
0
0
5,831
1.02
1.00
5
1,000
3-MOS 6-MOS 3-MOS
JUN-28-1998 JUN-29-1997 JUN-29-1997
JUN-30-1997 JUL-01-1996 JUL-01-1996
SEP-28-1997 DEC-29-1996 SEP-29-1996
178 178 247
0 0 0
31,727 21,185 26,262
250 250 250
13,856 13,960 13,637
57,231 45,506 49,857
70,812 65,923 65,047
31,169 27,700 27,316
97,060 83,729 87,588
24,384 19,624 21,036
2,375 3,665 7,090
0 0 0
0 0 0
58 58 58
59,000 50,096 49,483
97,060 83,729 87,588
42,868 74,140 36,214
42,868 74,140 36,214
34,380 59,359 29,961
34,380 59,359 29,961
0 0 0
0 0 0
12 137 80
3,810 6,140 1,952
1,412 2,341 751
2,398 3,799 1,201
0 0 0
0 0 0
0 0 0
2,398 3,799 1,201
.42 .66 .21
.41 .65 .21
