STRATTEC First Quarter 2005 Form 10-Q
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 March 27, 2005
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
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). 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: 3,782,507 shares outstanding as of March 27,
2005.
STRATTEC
SECURITY CORPORATION
FORM
10-Q
March 27,
2005
INDEX
Part I -
FINANCIAL INFORMATION
| |
|
Page |
|
|
|
|
Item
1 |
Financial
Statements |
|
| |
Condensed
Consolidated Statements of Income |
3 |
| |
Condensed
Consolidated Balance Sheets |
4 |
| |
Condensed
Consolidated Statements of Cash Flows |
5 |
| |
Notes
to Condensed Consolidated Financial Statements |
6-8 |
|
Item
2 |
Management’s
Discussion and Analysis of Financial Condition and |
|
| |
Results
of Operations |
9-15 |
|
Item
3 |
Quantitative
and Qualitative Disclosures About Market Risk |
15 |
|
Item
4 |
Controls
and Procedures |
15 |
Part II -
OTHER INFORMATION
|
Item
1 |
Legal
Proceedings |
16 |
|
Item
2 |
Unregistered
Sales of Equity Securities and Use of Proceeds |
16 |
|
Item
3 |
Defaults
Upon Senior Securities |
16 |
|
Item
4 |
Submission
of Matters to a Vote of Security Holders |
16 |
|
Item
5 |
Other
Information |
16 |
|
Item
6 |
Exhibits |
16 |
Item 1
Financial Statements
STRATTEC
SECURITY CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(In
Thousands, Except Per Share Amounts)
(Unaudited)
| |
|
Three Months Ended |
|
Nine Months Ended |
|
| |
|
March 27, |
|
March 28, |
|
March 27, |
|
March 28, |
|
| |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales |
|
$ |
46,102 |
|
$ |
49,266 |
|
$ |
139,129 |
|
$ |
143,700 |
|
Cost
of goods sold |
|
|
35,892 |
|
|
37,082 |
|
|
106,700 |
|
|
108,956 |
|
|
Gross
profit |
|
|
10,210 |
|
|
12,184 |
|
|
32,429 |
|
|
34,744 |
|
|
Engineering,
selling and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses |
|
|
4,822 |
|
|
5,132 |
|
|
14,836 |
|
|
15,033 |
|
|
Income
from operations |
|
|
5,388 |
|
|
7,052 |
|
|
17,593 |
|
|
19,711 |
|
|
Interest
income |
|
|
326 |
|
|
112 |
|
|
742 |
|
|
289 |
|
Other
(expense) income, net |
|
|
(50 |
) |
|
(49 |
) |
|
109 |
|
|
237 |
|
|
Income
before provision for income taxes |
|
|
5,664 |
|
|
7,115 |
|
|
18,444 |
|
|
20,237 |
|
Provision
for income taxes |
|
|
1,933 |
|
|
2,668 |
|
|
6,662 |
|
|
7,589 |
|
|
Net
income |
|
$ |
3,731 |
|
$ |
4,447 |
|
$ |
11,782 |
|
$ |
12,648 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.98 |
|
$ |
1.17 |
|
$ |
3.10 |
|
$ |
3.35 |
|
|
Diluted |
|
$ |
0.98 |
|
$ |
1.15 |
|
$ |
3.07 |
|
$ |
3.30 |
|
|
Average
Shares Outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
3,798 |
|
|
3,802 |
|
|
3,803 |
|
|
3,775 |
|
|
Diluted |
|
|
3,815 |
|
|
3,873 |
|
|
3,836 |
|
|
3,838 |
|
The
accompanying notes are an integral part of these condensed consolidated
statements.
STRATTEC
SECURITY CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
Thousands, Except Share Amounts)
| |
|
March
27, |
|
June
27, |
|
| |
|
2005 |
|
2004 |
|
|
ASSETS |
|
(unaudited)
|
|
|
|
|
Current
Assets: |
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
51,357 |
|
$ |
54,231 |
|
|
Receivables,
net |
|
|
28,793 |
|
|
30,931 |
|
|
Inventories- |
|
|
|
|
|
|
|
|
Finished
products |
|
|
3,761 |
|
|
2,659 |
|
|
Work
in process |
|
|
5,177 |
|
|
4,620
|
|
|
Purchased
Materials |
|
|
5,684 |
|
|
4,441
|
|
|
LIFO
adjustment |
|
|
(2,863 |
) |
|
(3,359 |
) |
|
Total
inventories |
|
|
11,759 |
|
|
8,361
|
|
|
Other
current assets |
|
|
9,943 |
|
|
10,903
|
|
|
Total
current assets |
|
|
101,852 |
|
|
104,426
|
|
| |
|
|
|
|
|
|
|
|
Investment
in joint ventures |
|
|
1,349 |
|
|
1,336 |
|
|
Prepaid
pension obligations |
|
|
605 |
|
|
- |
|
| |
|
|
|
|
|
|
|
|
Property,
plant and equipment |
|
|
104,236 |
|
|
102,610 |
|
Less:
accumulated depreciation |
|
|
(74,909 |
) |
|
(71,182 |
) |
|
Net
property, plant and equipment |
|
|
29,327 |
|
|
31,428
|
|
| |
|
|
|
|
|
|
|
| |
|
$ |
133,133 |
|
$ |
137,190 |
|
| |
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
Current
Liabilities: |
|
|
|
|
|
|
Accounts
payable |
|
$ |
16,409 |
|
$ |
18,787 |
|
|
Accrued
Liabilities: |
|
|
|
|
|
|
|
|
Payroll
and benefits |
|
|
6,940 |
|
|
11,067 |
|
|
Environmental
reserve |
|
|
2,701 |
|
|
2,710
|
|
Other
|
|
|
4,211 |
|
|
2,720
|
|
|
Total
current liabilities |
|
|
30,261 |
|
|
35,284
|
|
| |
|
|
|
|
|
|
|
|
Deferred
income taxes |
|
|
543 |
|
|
543 |
|
|
Accrued
postretirement obligations |
|
|
5,096 |
|
|
11,511
|
|
| |
|
|
|
|
|
|
|
|
Shareholders'
equity: |
|
|
|
|
|
|
|
|
Common
stock, authorized 12,000,000 shares $.01 par value, |
|
|
|
|
|
|
|
|
issued
6,853,647 shares at March 27, 2005 and 6,754,892 shares at June 27,
2004 |
|
|
69 |
|
|
68 |
|
|
Capital
in excess of par value |
|
|
74,793 |
|
|
70,415
|
|
|
Retained
earnings |
|
|
142,012 |
|
|
130,230
|
|
|
Accumulated
other comprehensive loss |
|
|
(5,348 |
) |
|
(5,385 |
) |
|
Less:
treasury stock, at cost (3,071,140 shares at March 27, |
|
|
|
|
|
|
|
|
2005
and 2,926,687 shares at June 27, 2004) |
|
|
(114,293 |
) |
|
(105,476 |
) |
Total
shareholders' equity |
|
|
97,233 |
|
|
89,852
|
|
| |
|
|
|
|
|
|
|
| |
|
$ |
133,133 |
|
$ |
137,190 |
|
The
accompanying notes are an integral part of these condensed consolidated balance
sheets.
STRATTEC
SECURITY CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
Thousands)
| |
|
Nine Months Ended |
|
| |
|
March 27, |
|
March 28, |
|
| |
|
2005 |
|
2004 |
|
| |
|
(unaudited) |
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
Net
income |
|
$ |
11,782 |
|
$ |
12,648 |
|
|
Adjustments
to reconcile net income to net cash provided |
|
|
|
|
|
|
|
|
by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation
|
|
|
5,440 |
|
|
5,842 |
|
|
Change
in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Receivables |
|
|
2,145 |
|
|
(746 |
) |
|
Inventories |
|
|
(3,398 |
) |
|
(984 |
) |
|
Other
assets |
|
|
363 |
|
|
1,627 |
|
|
Accounts
payable and accrued liabilities |
|
|
(11,458 |
) |
|
(3,106 |
) |
|
Tax
benefit from options exercised |
|
|
949 |
|
|
1,107 |
|
Other,
net |
|
|
224 |
|
|
(121 |
) |
|
Net
cash provided by operating activities |
|
|
6,047 |
|
|
16,267 |
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Investment
in joint ventures |
|
|
(75 |
) |
|
(125 |
) |
|
Purchase
of property, plant and equipment |
|
|
(3,455 |
) |
|
(3,550 |
) |
|
Net
cash used in investing activities |
|
|
(3,530 |
) |
|
(3,675 |
) |
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase
of treasury stock |
|
|
(8,826 |
) |
|
(3,614 |
) |
Exercise
of stock options |
|
|
3,435 |
|
|
4,504 |
|
|
Net
cash (used in) provided by financing activities |
|
|
(5,391 |
) |
|
890 |
|
| |
|
|
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH AND |
|
|
|
|
|
|
|
|
CASH
EQUIVALENTS |
|
|
(2,874 |
) |
|
13,482 |
|
| |
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS |
|
|
|
|
|
|
|
|
Beginning
of period |
|
|
54,231 |
|
|
29,902 |
|
End
of period |
|
$ |
51,357 |
|
$ |
43,384 |
|
| |
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Income
taxes paid |
|
$ |
4,957 |
|
$ |
4,893 |
|
|
Interest
paid |
|
|
- |
|
|
- |
|
The
accompanying notes are an integral part of these condensed consolidated
statements.
STRATTEC
SECURITY CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis
of Financial Statements
STRATTEC
SECURITY CORPORATION and subsidiaries (collectively the “Company”) designs,
develops, manufacturers and markets mechanical locks, electro-mechanical locks,
latches and related security/access control products for global automotive
manufacturers. The
accompanying condensed unaudited financial statements reflect the consolidated
results of the Company and its wholly owned Mexican subsidiaries.
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 of the Company as of March 27, 2005, and the
results of operations and cash flows for the three and nine month periods then
ended. All significant intercompany transactions have been eliminated. Interim
financial results are not necessarily indicative of operating results for an
entire year.
These
financial statements and notes thereto should be read in conjunction with the
financial statements and notes thereto included in the Company’s 2004 Annual
Report.
Earnings
Per Share (EPS)
A
reconciliation of the components of the basic and diluted per-share computations
follows (in thousands, except per share amounts):
| |
|
Three
Months Ended |
|
| |
|
|
|
| |
|
March
27, 2005 |
|
March
28, 2004 |
|
|
|
|
|
|
|
| |
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
Net |
|
Average |
|
Per-Share |
|
Net |
|
Average |
|
Per-Share |
|
|
|
Income |
|
Shares |
|
Amount |
|
Income |
|
Shares |
|
Amount |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share |
|
$ |
3,731 |
|
|
3,798 |
|
$ |
0.98 |
|
$ |
4,447 |
|
|
3,802 |
|
$ |
1.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options |
|
|
|
|
|
17 |
|
|
|
|
|
|
|
|
71 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share |
|
$ |
3,731 |
|
|
3,815 |
|
$ |
0.98 |
|
$ |
4,447 |
|
|
3,873 |
|
$ |
1.15 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine
Months Ended |
|
| |
|
|
|
| |
|
March
27, 2005 |
|
March
28, 2004 |
|
| |
|
|
|
|
|
| |
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
Net |
|
Average |
|
Per-Share |
|
Net |
|
Average |
|
Per-Share |
|
|
|
Income |
|
Shares |
|
Amount |
|
Income |
|
Shares |
|
Amount |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share |
|
$ |
11,782 |
|
|
3,803 |
|
$ |
3.10 |
|
$ |
12,648 |
|
|
3,775 |
|
$ |
3.35 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options |
|
|
|
|
|
33 |
|
|
|
|
|
|
|
|
63 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share |
|
$ |
11,782 |
|
|
3,836 |
|
$ |
3.07 |
|
$ |
12,648 |
|
|
3,838 |
|
$ |
3.30 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All outstanding
options were included in the computation of diluted EPS as of March 28, 2004.
Options to purchase the following shares of common stock were outstanding as of
March 27, 2005, but were not included in the computation of diluted EPS because
the options’ exercise prices were greater than the average market price of the
common shares:
|
|
|
Exercise |
|
Period
Ended |
Shares |
Price |
|
|
|
|
|
March
27, 2005 |
48,540 |
$58.59 |
|
|
53,290 |
$61.68 |
|
|
4,500 |
$63.25 |
|
|
45,000 |
$62.20 |
|
|
58,040 |
$76.70 |
Comprehensive
Income
The
following table presents the Company’s comprehensive income (in
thousands):
| |
|
Three
Months Ended |
|
Nine
Months Ended |
|
|
|
|
|
|
|
|
|
March
27, |
|
March
28, |
|
March
27, |
|
March
28, |
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net
Income |
|
$ |
3,731 |
|
$ |
4,447 |
|
$ |
11,782 |
|
$ |
12,648 |
|
|
Change
in Cumulative Translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments,
net |
|
|
(57 |
) |
|
34 |
|
|
37 |
|
|
(202 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Total
Comprehensive Income |
|
$ |
3,674 |
|
$ |
4,481 |
|
$ |
11,819 |
|
$ |
12,446 |
|
| |
|
|
|
|
|
|
|
|
|
Stock
Based Compensation
The
Company accounts for its stock-based compensation plans using the intrinsic
value method. Accordingly, no compensation cost related to these plans was
charged against earnings during fiscal 2005 and 2004. Had compensation cost for
these plans been determined using the fair value method rather than the
intrinsic value method, the pro forma impact on earnings per share would have
been as follows (in thousands, except per share amounts):
| |
|
Three
Months Ended |
|
Nine
Months Ended |
|
|
|
|
|
|
|
|
|
March
27, |
|
March
28, |
|
March
27, |
|
March
28, |
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net
Income as Reported |
|
$ |
3,731 |
|
$ |
4,447 |
|
$ |
11,782 |
|
$ |
12,648 |
|
|
Less
Compensation Expense Determined |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
Fair Value Method, net of tax |
|
|
(227 |
) |
|
(218 |
) |
|
(721 |
) |
|
(689 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro
Forma Net Income |
|
$ |
3,504 |
|
$ |
4,229 |
|
$ |
11,061 |
|
$ |
11,959 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic
EPS as Reported |
|
$ |
0.98 |
|
$ |
1.17 |
|
$ |
3.10 |
|
$ |
3.35 |
|
|
Pro
Forma Basic EPS |
|
$ |
0.92 |
|
$ |
1.11 |
|
$ |
2.91 |
|
$ |
3.17 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS as Reported |
|
$ |
0.98 |
|
$ |
1.15 |
|
$ |
3.07 |
|
$ |
3.30 |
|
|
Pro
Forma Diluted EPS |
|
$ |
0.92 |
|
$ |
1.10 |
|
$ |
2.90 |
|
$ |
3.13 |
|
In
December 2004, the Financial Accounting Standards Board (FASB) issued a revision
to Statement of Financial Accounting Standards No. 123, “Share Based Payment,”
which requires the recognition of compensation cost related to stock-based
compensation plans in the financial statements using a fair value based method.
The pro-forma impact as stated above will be recognized in the financial
statements for reporting periods beginning in fiscal 2006.
Pension
and Other Post-retirement Benefits
The
Company has a noncontributory defined benefit pension plan covering
substantially all U.S. associates. 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 Company has a noncontributory
supplemental executive retirement plan (SERP), which is a nonqualified defined
benefit plan pursuant to which the Company will pay supplemental pension
benefits to certain key employees upon retirement based upon the employees’
years of service and compensation. The SERP is being funded through a rabbi
trust with M&I Trust Company.
The
Company also sponsors a post-retirement health care plan. The Company recognizes
the expected cost of retiree health care benefits for substantially all U.S.
associates during the years that the associates render service. Any new U.S.
associates hired after June 1, 2001 are no longer eligible for post-retirement
plan benefits. The postretirement health care plan is
unfunded.
The following
table summarizes the net periodic benefit cost recognized for each of the
periods indicated (in thousands):
| |
|
Pension
Benefits |
|
Postretirement
Benefits |
|
| |
|
Three
Months Ended |
|
Three
Months Ended |
|
| |
|
March
27,
2005 |
|
March
28,
2004 |
|
March
27,
2005 |
|
March
28,
2004 |
|
|
COMPONENTS
OF NET PERIODIC BENEFIT COST: |
|
|
|
|
|
|
|
|
|
|
Service
cost |
|
$ |
545 |
|
$ |
548 |
|
$ |
74 |
|
$ |
79 |
|
|
Interest
cost |
|
|
871 |
|
|
814 |
|
|
147 |
|
|
141 |
|
|
Expected
return on plan assets |
|
|
(1,049 |
) |
|
(864 |
) |
|
- |
|
|
- |
|
|
Amortization
of prior service cost |
|
|
2 |
|
|
2 |
|
|
4 |
|
|
4 |
|
|
Amortization
of unrecognized net loss |
|
|
49 |
|
|
46 |
|
|
61 |
|
|
58 |
|
|
Amortization
of net transition asset |
|
|
(12 |
) |
|
(36 |
) |
|
- |
|
|
- |
|
Net
periodic benefit cost |
|
$ |
406 |
|
$ |
510 |
|
$ |
286 |
|
$ |
282 |
|
| |
|
Pension
Benefits |
|
Postretirement
Benefits |
|
| |
|
Nine
Months Ended |
|
Nine
Months Ended |
|
| |
|
March
27,
2005 |
|
March
28,
2004 |
|
March
27,
2005 |
|
March
28,
2004 |
|
|
COMPONENTS
OF NET PERIODIC BENEFIT COST: |
|
|
|
|
|
|
|
|
|
|
Service
cost |
|
$ |
1,637 |
|
$ |
1,648 |
|
$ |
220 |
|
$ |
237 |
|
|
Interest
cost |
|
|
2,613 |
|
|
2,440 |
|
|
443 |
|
|
423 |
|
|
Expected
return on plan assets |
|
|
(3,147 |
) |
|
(2,594 |
) |
|
- |
|
|
- |
|
|
Amortization
of prior service cost |
|
|
6 |
|
|
6 |
|
|
8 |
|
|
8 |
|
|
Amortization
of unrecognized net loss |
|
|
145 |
|
|
140 |
|
|
187 |
|
|
176 |
|
|
Amortization
of net transition asset |
|
|
(36 |
) |
|
(112 |
) |
|
- |
|
|
- |
|
Net
periodic benefit cost |
|
$ |
1,218 |
|
$ |
1,528 |
|
$ |
858 |
|
$ |
844 |
|
During
the nine months ended March 27, 2005 and March 28, 2004, the Company contributed
$8 million and $5 million, respectively, to the qualified pension. No additional
contributions are anticipated to be made during the remainder of fiscal
2005.
In May
2004, the FASB issued Financial Staff Position No. 106-2, “Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003” (the Act), to address the impact of the Act
enacted in December 2003. The Act provides a prescription drug benefit for
Medicare eligible employees starting in 2006. The impact of the Act on the
Company is not expected to be material.
Item
2
STRATTEC
SECURITY CORPORATION AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 2004 Annual Report. Unless otherwise indicated, all references to
years refer to fiscal years.
Analysis
of Results of Operations
Three
months ended March 27, 2005 compared to the three months ended March 28,
2004
Net sales
for the three months ended March 27, 2005, decreased $3.2 million to $46.1
million compared to net sales of $49.3 million for the three months ended March
28, 2004. Overall sales to the Company’s largest customers decreased in the
current quarter compared to the prior year quarter levels. Sales to
DaimlerChrysler Corporation increased significantly during the quarter to $13.1
million compared to $11.5 million due to additional product content. Sales to
General Motors Corporation were $9.8 million compared to $11.9 million due to a
combination of price reductions, discontinued models and lower levels of
production on certain vehicles the Company supplies. Sales to Delphi Corporation
were $6.8 million compared to $7.6 million due to pre-programmed price
reductions and lower vehicle production volumes. Sales to Mitsubishi Motor
Manufacturing of America, Inc. were $1.1 million in the current quarter compared
to $1.6 million in the prior year quarter due to lower vehicle production
volumes. Sales to Ford Motor Company were $8.3 million compared to $8.8 million
due to pre-programmed price reductions and lower vehicle production volumes.
Sales to Auto Alliance International, Ford Motor’s Company’s joint venture
assembly plant with Mazda, were $667,000 in the current quarter and represents
new lockset content related to the Ford Mustang. Reduced aftermarket and
industrial sales represent the remaining decrease in the current quarter’s
overall sales.
Gross
profit as a percentage of net sales was 22.1 percent in the current quarter
compared to 24.7 percent in the prior year quarter. The lower gross profit
margins in the current year quarter were primarily the result of higher raw
material costs for brass, zinc and magnesium, lower production volumes and a
less favorable overall sales mix. The average zinc price per pound increased to
$0.61 in the current quarter compared to $0.46 in the prior year quarter. The
average brass price per pound increased to $1.92 in the current quarter from
$1.80 in the prior year quarter. The Company uses an average of approximately
750,000 pounds of zinc per month and an average of approximately 200,000 pounds
of brass per month. Increases in the cost of magnesium resulted in price
increases in purchased housing components from vendors of approximately $165,000
during the current quarter.
Engineering,
selling and administrative expenses were $4.8 million in the current quarter,
compared to $5.1 million in the prior year quarter.
Income
from operations was $5.4 million in the current quarter compared to $7.1 million
in the prior year quarter. The decrease is primarily the result of the decreased
sales and gross profit margin as discussed above.
The
effective income tax rate for the current quarter was 34.1 percent compared to
37.5 percent in the prior year quarter. The current quarter income tax provision
includes a state refund claim recovery. The claim recovery net of the federal
income tax impact was $162,000. The overall effective tax rate differs from the
federal statutory tax rate primarily due to the effects of state income taxes.
Nine
months ended March 27, 2005 compared to the nine months ended March 28,
2004
Net sales
for the nine months ended March 27, 2005, decreased $4.6 million to $139.1
million compared to net sales of $143.7 million for the nine months ended March
28, 2004. The overall reduction in sales is the result of lower customer vehicle
production, discontinued models and pre-programmed price decreases. The negative
factors were partially offset by new program sales and additional content
changes on existing products. The change in sales to the Company’s largest
customers in the current period compared to the prior year period include
General Motors Corporation at $32.0 million compared to $38.5 million, Delphi
Corporation at $21.6 million compared to $22.6 million, DaimlerChrysler
Corporation at $36.8 million compared to $29.8 million, Ford Motor Company at
$23.8 million compared to $25.2 million and Mitsubishi Motor Manufacturing of
America, Inc. at $3.4 million compared to $5.5 million. Sales to Auto Alliance
International, Ford Motor’s Company’s joint venture assembly plant with Mazda,
were $1.4 million in the current year period and represents new lockset content
related to the Ford Mustang.
Gross
profit as a percentage of net sales was 23.3 percent in the current year period
compared to 24.2 percent in the prior year period. Gross profit margins were
favorably impacted by the Company’s ongoing cost reduction initiatives including
lean manufacturing initiatives and the movement of certain assembly operations
from Milwaukee to the Juarez, Mexico facilities. This was offset as a result of
reduced sales as noted above, which resulted in lower production volumes,
changes in customer product content with lower margins and higher purchased
material costs for brass, zinc and magnesium. The average zinc price per pound
increased to $0.54 in the current period compared to $0.45 in the prior year
period. The average brass price per pound increased to $1.89 in the current
period from $1.57 in the prior year period. The Company uses an average of
approximately 750,000 pounds of zinc per month and an average of approximately
200,000 pounds of brass per month. Increases in the cost of magnesium resulted
in price increases in purchased housing components from vendors of approximately
$165,000 during the current year period.
Engineering,
selling and administrative expenses were $14.8 million in the nine months ended
March 27, 2005, compared to $15.0 million in the prior year period.
Income
from operations was $17.6 million in the current period compared to $19.7
million in the prior year period. The decrease is primarily the result of the
decreased sales and gross profit margin as discussed above.
The
effective income tax rate for the current period was 36.1 percent compared to
37.5 percent in the prior year period. The current quarter income tax provision
includes a state refund claim recovery. The claim recovery net of the federal
income tax impact was $162,000. The overall effective tax 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 $6.0 million in the nine
months ended March 27, 2005, compared to $16.3 million in the nine months ended
March 28, 2004. The decreased generation of cash from operating activities is
primarily due to a decrease in accounts payable and accrued liabilities of $11.5
million in the current period compared to $3.1 million in the prior year period,
which primarily resulted from contributions to the Company’s qualified pension
plan, the changes in accounts payable balances and the changes in accrued
payroll and benefits balances. An $8 million contribution to the Company’s
qualified pension plan was made during the current period compared to $5 million
in the prior year period. There was a significant increase in the accounts
payable balance in the prior year period as a result of lengthening payment
terms with a significant supplier as well as the timing of payments in
accordance with normal payment terms. Additionally, there was a reduction in the
accounts payable balance in the current year which was based on normal payment
terms with suppliers. Also, there was a larger reduction in accrued payroll and
benefits in the current year period as compared to the prior year period
primarily due to lower bonus amounts accrued to be paid to eligible
associates.
Capital
expenditures during the nine months ended March 27, 2005, were $3.5 million
compared to $3.6 million during the nine months ended March 28, 2004. The
Company anticipates that capital expenditures will be approximately $5.0 million
in fiscal 2005, primarily in support of requirements for new product programs
and the upgrade and replacement of existing equipment.
The Board
of Directors of the Company has authorized a stock repurchase program to buy
back up to 3,439,395 outstanding shares. Over the life of the repurchase program
through March 27, 2005, a total of 3,085,392 shares have been repurchased at a
cost of approximately $114.5 million. During the quarter ended March 27, 2005,
44,800 shares were repurchased at a cost of approximately $2.6 million.
Additional repurchases may occur from time to time. Funding for the repurchases
was provided by cash flow from operations.
The
Company has a $50.0 million unsecured, line of credit (the “Line of Credit”),
which expires October 31, 2005. There were no outstanding borrowings under the
Line of Credit at March 27, 2005. Interest on borrowings under the Line of
Credit are at varying rates based, at the Company’s option, on the London
Interbank Offering Rate or the bank’s prime rate. The Line of Credit contains
various restrictive non-financial covenants. The Company believes that the Line
of Credit is 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 rising health care costs which have increased the
Company’s cost of employee medical coverage, fluctuations in the market price of
zinc and brass, and inflation in Mexico, which impacts the U.S. dollar costs of
the Mexican operations. The Company has entered into purchase commitments for a
percentage of its zinc requirements through June 2005. These commitments will
reduce the financial impact of future price fluctuations. The Company does not
hedge the peso exposure.
Joint
Ventures
On
November 28, 2000, the Company signed certain alliance agreements with E. WITTE
Verwaltungsgesellschaft GmbH, and its operating unit, WITTE-Velbert GmbH &
Co. KG (“WITTE”). WITTE, of Velbert, Germany, is a privately held, QS 9000 and
VDA 6.1 certified automotive supplier. WITTE designs, manufactures and markets
components including locks and keys, hood latches, rear compartment latches,
seat back latches, door handles and specialty fasteners. WITTE’s primary market
for these products has been Europe. The WITTE-STRATTEC alliance provides a set
of cross-licensing agreements for the manufacture, distribution and sale of
WITTE products by the Company in North America, and the manufacture,
distribution and sale of the Company’s products by WITTE in Europe.
Additionally, a joint venture company (“WITTE-STRATTEC LLC”) - in which each
company holds a 50 percent interest - has been established to seek opportunities
to manufacture and sell both companies’ products in areas of the world outside
of North America and Europe.
In
November 2001, WITTE-STRATTEC do Brasil, a joint venture formed between
WITTE-STRATTEC LLC and Ifer Estamparia e Ferramentaria Ltda. was formed to
service customers in South America. On March 1, 2002, WITTE-STRATTEC China was
formed and in April 2004, WITTE-STRATTEC Great Shanghai Co. was formed.
WITTE-STRATTEC China and WITTE-STRATTEC Great Shanghai Co. are joint ventures
between WITTE-STRATTEC LLC and a unit of Elitech Technology Co. Ltd. of Taiwan
and are the base of operations to service the Company’s automotive customers in
the Asian market.
The
investments are accounted for using the equity method of accounting. The
activities related to the joint ventures resulted in a loss of approximately
$75,000 in the nine month period ended March 27, 2005 and a gain of
approximately $94,000 in the prior year period.
Critical
Accounting Policies
The
Company believes the following represents its critical accounting
policies:
Pension
and Post-Retirement Health Benefits - The determination of the obligation and
expense for pension and post-retirement health benefits is dependent on the
selection of certain assumptions used by actuaries in calculating such amounts.
Those assumptions are described in the Notes to Financial Statements in the
Company’s 2004 Annual Report and include, among others, the discount rate,
expected long-term rate of return on plan assets and rates of increase in
compensation and health care costs. In accordance with accounting principles
generally accepted in the United States of America, actual results that differ
from these assumptions are accumulated and amortized over future periods. While
the Company believes that the assumptions used are appropriate, significant
differences in the actual experience or significant changes in the assumptions
may materially affect the pension and post-retirement health obligations and
future expense.
Other
Reserves - The Company has reserves such as an environmental reserve, an
incurred but not reported claim reserve for self-insured health plans, a
worker’s compensation reserve, and a repair and maintenance supply parts
reserve. These reserves require the use of estimates and judgement with regard
to risk exposure, ultimate liability and net realizable value. The Company
believes such reserves are estimated using consistent and appropriate methods.
However, changes to the assumptions could materially affect the recorded
reserves.
Risk
Factors
The
Company understands it is subject to the following risk factors based on its
operations and the nature of the automotive industry in which it
operates:
Loss of
Significant Customers, Vehicle Content and Market Share - Sales to General
Motors Corporation, Ford Motor Company, DaimlerChrysler Corporation and Delphi
Corporation represent approximately 81 percent of the Company’s annual sales.
The contracts with these customers provide for supplying the customer’s
requirements for a particular model. The contracts do not specify a specific
quantity of parts. The contracts typically cover the life of a model, which
averages approximately four to five years. Certain customer models may also be
market tested annually. Therefore, the loss of any one of these customers, the
loss of a contract for a specific vehicle model, reduction in vehicle content,
technological changes or a significant reduction in demand for certain key
models could have a material adverse effect on the Company’s existing and future
revenues and net income.
The
Company’s major customers also have significant underfunded legacy liabilities
related to pension and post-retirement health care obligations. The future
impact of these items along with a continuing decline in their North American
automotive market share to the Foreign-Owned North American Automotive
Manufacturers (primarily the Japanese Automotive Manufacturers) may have a
significant impact on the Company’s future sales and collectibility
risks.
Cost
Reduction - There is continuing pressure from the Company’s major customers to
reduce the prices the Company charges for its products. This requires the
Company to generate cost reductions, including reductions in the cost of
components purchased from outside suppliers. If the Company is unable to
generate sufficient production cost savings in the future, to offset programmed
price reductions, the Company’s gross margin and profitability will be adversely
affected.
Cyclicality
and Seasonality in the Automotive Market - The automotive market is highly
cyclical and is dependent on consumer spending and to a certain extent on
customer sales incentives. Economic factors adversely affecting consumer demand
for automobiles and automotive production could adversely impact the Company’s
revenues and net income. The Company typically experiences decreased revenue and
operating income during the first fiscal quarter of each year due to the impact
of scheduled customer plant shut-downs in July and new model
changeovers.
Foreign
Operations - As discussed under Joint Ventures, the Company has joint venture
investments in both Brazil and China. These operations are currently not
material. However, as these operations expand, their success will depend, in
part, on the Company’s and its partners’ ability to anticipate and effectively
manage certain risks inherent in international operations including: enforcing
agreements and collecting receivables through certain foreign legal systems,
payment cycles of foreign customers, compliance with foreign tax laws, general
economic and political conditions in these countries, and compliance with
foreign laws and regulations.
Currency
Exchange Rate Fluctuations - The Company incurs a portion of its expenses in
Mexican pesos. Exchange rate fluctuations between the U.S. dollar and the
Mexican peso could have an adverse effect on financial results.
Sources
of and Fluctuations in Market Prices of Raw Materials - The primary raw
materials used by the Company are high-grade zinc, brass, magnesium, aluminum,
steel and plastic resins. 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 or purchased component. The Company believes
its sources of raw materials are reliable and adequate for its needs. However,
the development of future sourcing issues related to the availability of these
materials as well as significant fluctuations in the market prices of these
materials may have an adverse affect on the Company’s financial
results.
Disruptions
Due to Work Stoppages and Other Labor Matters - The Company’s major customers
and many of their suppliers have unionized work forces. Work stoppages or
slow-downs experienced by the Company’s customers or their suppliers could
result in slow-downs or closures of assembly plants where the Company’s products
are included in assembled vehicles. For example, strikes by the United Auto
Workers led to a shut-down of most of General Motors Corporation’s North
American assembly plants in June and July of 1998. A material work stoppage
experienced by one or more of the Company’s customers could have an adverse
effect on the Company’s business and its financial results. In addition, all
production associates at the Company’s Milwaukee facility are unionized. A
sixteen-day strike by these associates in June 2001 resulted in increased costs
by the Company as all salaried associates worked with additional outside
resources to produce the components necessary to meet customer requirements. The
current contract with the unionized associates is effective through June 26,
2005. The Company may encounter further labor disruption after the expiration
date of this contract and may also encounter unionization efforts in its other
plants or other types of labor conflicts, any of which could have an adverse
effect on the Company’s business and its financial results.
Environmental
and Safety Regulations - The Company is subject to federal, state, local and
foreign laws and other legal requirements related to the generation, storage,
transport, treatment and disposal of materials as a result of its manufacturing
and assembly operations. These laws include the Resource Conservation and
Recovery Act (as amended), the Clean Air Act (as amended) and the Comprehensive
Environmental Response, Compensation and Liability Act (as amended). The Company
has an environmental management system that is ISO-14001 certified. The Company
believes that its existing environmental management system is adequate and it
has no current plans for substantial capital expenditures in the environmental
area. An environmental reserve was established in 1995 for estimated costs to
remediate a site at the Company’s Milwaukee facility that was contaminated by a
former above-ground solvent storage tank, located on the east side of the
facility. The contamination occurred in 1985. This is being monitored in
accordance with federal, state and local requirements. The Company does not
currently anticipate any material 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 changes 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
changes could not arise.
Highly
Competitive Automotive Supply Industry - The automotive component supply
industry is highly competitive. Some of the Company’s competitors are companies,
or divisions or subsidiaries of companies, that are larger than the Company and
have greater financial and technology capabilities. The Company’s products may
not be able to compete successfully with the products of these other companies,
which could result in loss of customers and, as a result, decreased revenues and
profitability. In addition, the Company’s competitive position in the North
American automotive component supply industry could be adversely affected in the
event that it is unsuccessful in making strategic acquisitions, alliances or
establishing joint ventures that would enable it to expand globally. The Company
principally competes for new business at the beginning of the development of new
models and upon the redesign of existing models by its major customers. New
model development generally begins two to five years prior to the marketing of
such new models to the public. The failure to obtain new business on new models
or to retain or increase business on redesigned existing models could adversely
affect the Company’s business and financial results. In addition, as a result of
relatively long lead times for many of its components, it may be difficult in
the short-term for the Company to obtain new sales to replace any unexpected
decline in the sale of existing products. Finally, the Company may incur
significant product development expense in preparing to meet anticipated
customer requirements which may not be recovered.
Program
Volume and Pricing Fluctuations - The Company incurs costs and makes capital
expenditures for new program awards based upon certain estimates of production
volumes over the anticipated program life for certain vehicles. While the
Company attempts to establish the price of its products for variances in
production volumes, if the actual production of certain vehicle models is
significantly less than planned, the Company’s revenues and net income may be
adversely affected. The Company cannot predict its customers’ demands for the
products it supplies either in the aggregate or for particular reporting
periods.
Investments
in Customer Program Specific Assets - The Company makes investments in machinery
and equipment used exclusively to manufacture products for specific customer
programs. This machinery and equipment is capitalized and depreciated over the
expected useful life of each respective asset. Therefore, the loss of any one of
the Company’s major customers or specific vehicle models could result in
impairment in the value of these assets and have a material adverse effect on
the Company’s financial results.
Prospective
Information
A number
of the matters and subject areas discussed in this Form 10-Q contain
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements may be identified by the use of
forward-looking words or phrases such as “anticipate,” “believe,” “would,”
“expect,” “intend,” “may,” “planned,” “potential,” “should,” “will,” and
“could.” These include expected future financial results, product offerings,
global expansion, 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's Discussion and Analysis
of Financial Condition and Results of Operations. The discussions of such
matters and subject areas are qualified by the inherent risks 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, in particular
relating to the automotive industry, customer demand for the Company’s and its
customers’ products, competitive and technological developments, customer
purchasing actions, foreign currency fluctuations, costs of operations and other
matters described under “Risk Factors” above.
Shareholders,
potential investors and other readers are urged to consider these factors
carefully in evaluating the forward-looking statements and are cautioned not to
place undue reliance on such forward-looking statements. The forward-looking
statements made herein are only made as of the date of this Form 10-Q and the
Company undertakes no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances occurring after the
date of this Form 10-Q.
Item 3
Quantitative and Qualitative Disclosures About Market Risk
The
Company does not utilize financial instruments for trading purposes and holds no
derivative financial instruments which would expose the Company to significant
market risk. The Company has not had outstanding borrowings since December 1997.
The Company has been in an investment position since this time and expects to
remain in an investment position for the foreseeable future. There is therefore
no significant exposure to market risk for changes in interest rates.
The
Company is subject to foreign currency exchange rate exposure related to the
Mexican operations.
Item 4
Controls and Procedures
As of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, of
the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended). Based on this evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective in timely alerting them to material information
relating to the Company required to be included in the Company's periodic
filings with the Securities and Exchange Commission. It should be noted that in
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
The Company has designed its disclosure controls and procedures to reach a level
of reasonable assurance of achieving the desired control objectives and, based
on the evaluation described above, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective at reaching that level of reasonable
assurance.
There was
no change in the Company's internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934,
as amended) during the Company's most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
Part
II
Other
Information
Item 1
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’s financial statements.
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds -
Issuer
Purchases of Equity Securities
Period |
|
Total
Number Of Shares Purchased |
|
Average
Price Paid Per Share |
|
Total
Number Of Shares Purchased As Part of
Publicly Announced Program |
|
Maximum
Number Of Shares that May Yet be
Purchased Under the Program |
|
|
|
|
|
|
|
|
|
|
|
|
December
27, 2004-January 30, 2005 |
|
|
16,300 |
|
$ |
59.30 |
|
|
16,300 |
|
|
182,503 |
|
|
January
31, 2005-February 27, 2005 |
|
|
20,400 |
|
$ |
56.44 |
|
|
20,400 |
|
|
362,103 |
|
|
February
28, 2005-March 27, 2005 |
|
|
8,100 |
|
$ |
56.02 |
|
|
8,100 |
|
|
354,003 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
44,800 |
|
$ |
57.41 |
|
|
44,800 |
|
|
354,003 |
|
The
Company’s Board of Director’s authorized a stock repurchase program on October
16, 1996, and the program was publicly announced on October 17, 1996. The Board
of Director’s has periodically increased the number of shares authorized under
the program, most recently in February 2005 when an additional 200,000 shares
was authorized for repurchase. The program currently authorizes the repurchase
of up to 3,439,395 shares of the Company’s common stock from time to time,
directly or through brokers or agents, and has no expiration date.
Item 3
Defaults Upon Senior Securities - None
Item 4
Submission of Matters to a Vote of Security Holders - None
Item 5
Other Information - None
Item 6
Exhibits
(a) Exhibits
10.1 Employment
Agreement between the Company and the identified executive officer
10.2 Change in
Control Agreement between the Company and the identified executive
officer
31.1 Rule
13a-14(a) Certification for Harold M. Stratton II, Chairman and Chief Executive
Officer
31.2 Rule
13a-14(a) Certification for Patrick J. Hansen, Chief Financial
Officer
32
(1) 18 U.S.C.
Section 1350 Certifications
__________________________
(1)
This
certification is not "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or incorporated by reference into any filing
under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended.
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:
April 29,
2005 By
/s/
Patrick J.
Hansen
Patrick J.
Hansen
Chief Financial
Officer,
Treasurer and
Secretary
(Principal Accounting
and Financial Officer)