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 31, 2000 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: 4,384,777 shares outstanding as of December 31, 2000.

2 STRATTEC SECURITY CORPORATION FORM 10-Q December 31, 2000 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 7-10 Item 3 Quantitative and Qualitative Disclosures About Market Risk 10 Part II - OTHER INFORMATION Item 1 Legal Proceedings 11 Item 2 Changes in Securities and Use of Proceeds 11 Item 3 Defaults Upon Senior Securities 11 Item 4 Submission of Matters to a Vote of Security Holders 11 Item 5 Other Information 11 Item 6 Exhibits and Reports on Form 8-K 11 2

3 Item 1 Financial Statements STRATTEC SECURITY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Per Share Amounts) Three Months Ended Six Months Ended ------------------ ---------------- December 31, December 26, December 31, December 26, 2000 1999 2000 1999 --------------- ---------------- --------------- --------------- (unaudited) (unaudited) Net sales $ 49,988 $ 56,726 $ 102,409 $ 106,393 Cost of goods sold 40,002 43,977 81,085 82,956 ---------------- --------------- --------------- --------------- Gross profit 9,986 12,749 21,324 23,437 Engineering, selling and administrative expenses 4,657 4,895 9,690 9,783 --------------- --------------- --------------- ---------------- Income from operations 5,329 7,854 11,634 13,654 Interest income 190 291 383 679 Interest expense - - - - Other income (expense), net 11 (41) (176) (149) ---------------- --------------- --------------- --------------- Income before provision for income taxes 5,530 8,104 11,841 14,184 Provision for income taxes 2,101 3,160 4,531 5,532 ---------------- --------------- --------------- --------------- Net income $3,429 $4,944 $7,310 $8,652 ================ =============== =============== =============== Earnings per share: Basic $ 0.77 $ 0.98 $ 1.64 $ 1.64 ================ =============== =============== =============== Diluted $ 0.76 $ 0.95 $ 1.61 $ 1.60 ================ =============== =============== =============== The accompanying notes are an integral part of these consolidated statements. 3

4 STRATTEC SECURITY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, July 2, 2000 2000 -------------- --------------- ASSETS (unaudited) Current Assets: Cash and cash equivalents $ 9,882 $ 13,915 Receivables, net 22,453 28,731 Inventories- Finished products 6,150 3,630 Work in process 14,059 12,374 Raw materials 860 1,054 LIFO adjustment (2,406) (2,716) -------------- --------------- Total inventories 18,663 14,342 Customer tooling in progress 2,558 4,248 Other current assets 5,856 5,365 -------------- --------------- Total current assets 59,412 66,601 Property, plant and equipment 93,914 89,912 Less: accumulated depreciation (50,562) (47,531) -------------- --------------- Net property, plant and equipment 43,352 42,381 -------------- --------------- $ 102,764 $108,982 ============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 13,492 $ 19,694 Environmental 2,765 2,770 Other accrued liabilities 6,100 11,637 -------------- --------------- Total current liabilities 22,357 34,101 Deferred income taxes 299 299 Accrued pension and postretirement obligations 14,720 14,132 Shareholders' equity: Common stock, authorized 12,000,000 shares $.01 par value, issued 6,143,342 shares at December 31, 2000, and 6,120,788 shares at July 2, 2000 61 61 Capital in excess of par value 48,439 47,924 Retained earnings 75,274 67,964 Cumulative translation adjustments (2,155) (2,239) Less: treasury stock, at cost (1,758,565 shares at December 31, 2000 and 1,668,179 shares at July 2, 2000) (56,231) (53,260) -------------- --------------- Total shareholders' equity 65,388 60,450 -------------- --------------- $ 102,764 $108,982 ============== =============== 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 31, December 26, 2000 1999 -------------- --------------- (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 7,310 $ 8,652 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 3,879 3,735 Change in operating assets and liabilities: Decrease in receivables 6,312 5,966 Increase in inventories (4,321) (2,501) (Increase) decrease in other assets 1,234 (813) Increase (decrease) in accounts payable and accrued liabilities (11,216) 1,201 Tax benefit from options exercised 141 315 Other, net 167 242 -------------- --------------- Net cash provided by operating activities 3,506 16,797 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (4,942) (4,326) -------------- --------------- Net cash used in investing activities (4,942) (4,326) CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of treasury stock (2,996) (31,590) Exercise of stock options 399 983 -------------- --------------- Net cash used in financing activities (2,597) (30,607) -------------- --------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (4,033) (18,136) CASH AND CASH EQUIVALENTS Beginning of period 13,915 28,611 -------------- --------------- End of period $ 9,882 $ 10,475 ============== =============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Income taxes paid $ 5,178 $ 4,931 Interest paid - - The accompanying notes are an integral part of these consolidated statements. 5

6 STRATTEC SECURITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BASIS OF FINANCIAL STATEMENTS STRATTEC SECURITY CORPORATION (the "Company") designs, develops, manufactures and markets mechanical locks, electro-mechanical locks and related access security products for major 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 31, 2000, and the results of operations and cash flows for the period 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 31, 2000 presentation. EARNINGS PER SHARE (EPS) A reconciliation of the components of the basic and diluted per-share computations follows (in thousands, except per share amounts): Six Months Ended ---------------- December 31, 2000 December 26, 1999 ----------------- ----------------- Net Per-Share Net Per-Share Income Shares Amount Income Shares Amount ------ ------ ------ ------ ------ ------ Basic Earnings Per Share $7,310 4,447 $1.64 $8,652 5,269 $1.64 ===== ===== Stock Options 100 155 --- --- Diluted Earnings Per Share $7,310 4,547 $1.61 $8,652 5,424 $1.60 ===== ===== ===== ===== Three Months Ended ------------------ December 31, 2000 December 26, 1999 ----------------- ----------------- Net Per-Share Net Per-Share Income Shares Amount Income Shares Amount ------ ------ ------ ------ ------ ------ Basic Earnings Per Share $3,429 4,433 $0.77 $4,944 5,026 $0.98 ===== ===== Stock Options 96 151 -- --- Diluted Earnings Per Share $3,429 4,529 $0.76 $4,944 5,177 $0.95 ===== ===== ===== ===== Options to purchase 263,623 shares of common stock at prices ranging from $33.63 to $45.79 per share and 163,623 shares of common stock at prices ranging from $35.79 to $45.79 per share were outstanding as of December 31, 2000, and December 26, 1999, respectively, 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. COMPREHENSIVE INCOME The following table presents the Company's comprehensive income (in thousands): Three Months Ended Six Months Ended ------------------ ---------------- December 31, 2000 December 26, 1999 December 31, 2000 December 26, 1999 ----------------- ----------------- ----------------- ----------------- Net Income $3,429 $4,944 $7,310 $8,652 Change in Cumulative Translation Adjustments, net (119) (59) 84 25 ----- ---- --- --- Total Comprehensive Income $3,310 $4,885 $7,394 $8,677 ====== ====== ====== ====== 6

7 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 2000 Annual Report. Unless otherwise indicated, all references to years refer to fiscal years. Analysis of Results of Operations Three months ended December 31, 2000 compared to the three months ended December 26, 1999 Net sales for the three months ended December 31, 2000, were $50.0 million compared to net sales of $56.7 million for the three months ended December 26, 1999. Sales to the Company's largest customers overall decreased in the current quarter compared to the robust prior year levels, with General Motors Corporation at $13.4 million compared to $15.8 million, Delphi Automotive Systems at $7.0 million compared to $8.0 million, DaimlerChrysler Corporation at $7.1 million compared to $8.1 million, and Ford Motor Company at $10.6 million compared to $13.3 million. Sales to Mitsubushi Motor Manufacturing of America, Inc. increased during the current quarter to $3.1 million compared to $2.2 million in the prior year quarter due to the Company's increased market share of Mitsubishi lockset requirements. Gross profit as a percentage of net sales was 20.0 percent in the current quarter compared to 22.5 percent in the prior year quarter. The lower gross margin is the result of several factors including lower production volumes resulting from the decline in automotive production, particularly in the last half of the quarter, an increase in the cost of zinc, and increased U.S. dollar costs at the Company's Mexico assembly facility. The cost of zinc per pound, which the Company uses at a rate of approximately 1 million pounds per month, increased to an average of $.57 in the current quarter compared to an average of $.53 in the prior year quarter. The inflation rate in Mexico for the 12 months ended December 31, 2000, was approximately 12% while the U.S. dollar/Mexican peso exchange rate increased slightly to approximately 9.57 in the current quarter from approximately 9.48 in the prior year quarter. Engineering, selling and administrative expenses were relatively consistent between quarters and totaled $4.7 million in the current quarter compared to $4.9 million in the prior year quarter. Income from operations was $5.3 million in the current quarter, compared to $7.9 million in the prior year quarter. The decrease is the result of the reduced sales and a reduction in the gross profit margin as previously discussed. The effective income tax rate for the current quarter was 38 percent compared to 39 percent in the prior year quarter. The decrease is due to a decrease in the state effective tax rate. The overall effective rate differs from the federal statutory tax rate primarily due to the effects of state income taxes. 7

8 Six months ended December 31, 2000 compared to the six months ended December 26, 1999 Net sales for the six months ended December 31, 2000, were $102.4 million compared to net sales of $106.4 million for the six months ended December 26, 1999. Sales to the Company's largest customers overall decreased in the six months ended December 31, 2000, compared to the robust prior year levels, with General Motors Corporation at $30.6 million compared to $34.1 million, Delphi Automotive Systems at $13.9 million compared to $15.1 million, DaimlerChrysler Corporation at $16.0 million compared to $16.2 million, and Ford Motor Company at $22.6 million compared to $25.2 million. Sales to Mitsubushi Motor Manufacturing of America, Inc. increased during the current period to $6.8 million compared to $4.1 million in the prior year period due to the Company's increased market share of Mitsubishi lockset requirements. Gross profit as a percentage of net sales was 20.8 percent in the six months ended December 31, 2000, compared to 22.0 percent in the prior year period. The lower gross margin is the result of several factors including lower production volumes resulting from the decline in automotive production, particularly in the last half of the December quarter, an increase in the cost of zinc, and increased U.S. dollar costs at the Company's Mexico assembly facility. The cost of zinc per pound, which the Company uses at a rate of approximately 1 million pounds per month, increased to an average of $.58 in the six months ended December 31, 2000, compared to an average of $.53 in the prior year period. The inflation rate in Mexico for the 12 months ended December 31, 2000, was approximately 12% while the U.S. dollar/Mexican peso exchange rate remained relatively flat between periods at approximately 9.45. Engineering, selling and administrative expenses were relatively consistent between periods and totaled $9.7 million in the six months ended December 31, 2000 compared to $9.8 million in the prior year period. Income from operations was $11.6 million in the six months ended December 31, 2000, compared to $13.7 million in the prior year period. The decrease is the result of the reduced sales and a reduction in the gross profit margin as previously discussed. The effective income tax rate for the current period was 38 percent compared to 39 percent in the prior year period. The decrease is due to a decrease in the state effective tax rate. The overall 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 $3.5 million in the six months ended December 31, 2000. In the six months ended December 26, 1999, the Company generated $16.8 million in cash from operating activities. The decreased generation of cash is primarily due to the timing of payments of accounts payable. The Company's investment in accounts receivable decreased by approximately $6.3 million to $22.5 million at December 31, 2000, as compared to $28.7 million at July 2, 2000, primarily due to a decrease in sales levels in the last half of the December quarter resulting from the decline in automotive production as previously discussed. Inventories increased by approximately $4.4 million at December 31, 2000, as compared to July 2, 2000. The increase is the result of a typical reduction in inventory levels in the fourth quarter due to model year change-overs. Capital expenditures during the six months ended December 31, 2000, were $4.9 million compared to $4.3 million during the six months ended December 26, 1999. The Company anticipates that capital expenditures will be approximately $9 million in 2001, primarily in support of requirements for new product programs and the upgrade and replacement of existing equipment. 8

9 The Board of Directors of the Company has authorized a stock repurchase program to buy back up to 2,389,395 outstanding shares of common stock. A total of 1,767,726 shares have been repurchased as of December 31, 2000, at a cost of approximately $56.4 million. Additional repurchases may occur from time to time. Funding for the repurchases was provided by cash flow from operations and to a lesser extent from borrowings under existing credit facilities. The Company has a $25 million unsecured, revolving credit facility (the "Credit Facility") which expires October 2001. There were no outstanding borrowings under the Credit Facility at December 31, 2000. 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. Inflationary pressures have not significantly impacted the Company 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. Since December 28, 1998, and prior to December 30, 1996, the functional currency of the Mexican operation has been the Mexican peso. The effects of currency fluctuations result in adjustments to the U.S. dollar value of the Company's net assets and to the equity accounts in accordance with Statement of Financial Accounting Standard (SFAS) No. 52, "Foreign Currency Translation." During the period December 30, 1996, to December 27, 1998, the functional currency of the Mexican Operation was the U.S. dollar, as Mexico was then considered to be a highly inflationary economy in accordance with SFAS No. 52. The effect of currency fluctuations in the remeasurement process was included in the determination of income. The effect of the December 28, 1998, functional currency change was not material to the financial results of the Company. Other 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 with sales of over DM300 million in their last fiscal year. 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 other areas of the world outside of North America and Europe. These activities did not have a material impact on the December 31, 2000, financial statements. 9

10 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, 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 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, in particular, relating to the automotive industry, consumer demand for the Company's and its customer's products, competitive and technological developments, foreign currency fluctuations and costs of operations. 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. 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 assembly operations. 10

11 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 24, 2000, the shareholders voted to elect Harold M. Stratton II and Robert Feitler as directors for a term to expire in 2003. The number of votes cast for and withheld in the election of Harold M. Stratton II were 4,010,108 and 21,416, respectively. The number of votes cast for and withheld in the election of Robert Feitler were 4,005,058 and 26,466, respectively. Directors whose term continued after the meeting include Frank J. Krejci with a term expiring in 2001 and Michael J. Koss and John G. Cahill each with a term expiring in 2002. 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 (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 12, 2001 By /S/ Patrick J. Hansen -------------------------- Patrick J. Hansen Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Accounting and Financial Officer) 11