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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 29, 1998
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: 5,708,150 shares outstanding as of
March 29, 1998.
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STRATTEC SECURITY CORPORATION
FORM 10-Q
March 29, 1998
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
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3
Item 1 Financial Statements
STRATTEC SECURITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
Three Months Ended Nine Months Ended
------------------ -----------------
March 29, March 30, March 29, March 30,
1998 1997 1998 1997
--------- ---------- ---------- ---------
(unaudited) (unaudited)
Net sales $ 47,420 $ 41,836 $ 140,010 $ 115,976
Cost of goods sold 36,797 32,800 110,757 92,159
--------- --------- --------- ---------
Gross profit 10,623 9,036 29,253 23,817
Engineering, selling and administrative
expenses 4,672 4,412 14,060 12,930
--------- --------- --------- ---------
Income from operations 5,951 4,624 15,193 10,887
Interest income 98 2 153 2
Interest expense - (30) (19) (167)
Other income, net 41 10 26 24
--------- --------- --------- ---------
Income before provision for income taxes 6,090 4,606 15,353 10,746
Provision for income taxes 2,255 1,704 5,687 4,045
--------- --------- --------- ---------
Net income $ 3,835 $ 2,902 $ 9,666 $ 6,701
========= ========= ========= =========
Earnings per share:
Basic $ 0.67 $ 0.51 $ 1.69 $ 1.17
========= ========= ========= =========
Diluted $ 0.65 $ 0.50 $ 1.65 $ 1.16
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
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4
STRATTEC SECURITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
March 29, June 29,
1998 1997
---------- ----------
ASSETS (unaudited)
Current Assets:
Cash and cash equivalents $ 4,494 $ 404
Receivables, net 31,423 29,687
Inventories-
Finished products 4,219 3,599
Work in process 11,685 12,446
Raw materials 1,145 1,671
LIFO adjustment (2,837) (2,837)
--------- ---------
Total inventories 14,212 14,879
Customer tooling in progress 8,658 6,615
Other current assets 3,969 4,390
--------- ---------
Total current assets 62,756 55,975
Deferred income taxes 186 186
Property, plant and equipment 73,737 69,123
Less: accumulated depreciation 33,768 29,615
--------- ---------
Net property, plant and equipment 39,969 39,508
--------- ---------
$ 102,911 $ 95,669
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 12,591 $ 12,367
Environmental 2,884 2,911
Other accrued liabilities 9,392 8,298
--------- ---------
Total current liabilities 24,867 23,576
Borrowings under revolving credit facility -- 5,037
Accrued pension and postretirement obligations 11,838 10,963
Shareholders' equity:
Common stock, authorized 12,000,000 shares $.01 par value,
issued 5,861,150 shares at March 29, 1998, and
5,799,150 shares at June 29, 1997 59 58
Capital in excess of par value 42,131 41,094
Retained earnings 28,613 18,947
Cumulative translation adjustments (1,863) (1,863)
Less: treasury stock, at cost (153,000 shares at March 29,
1998 and 132,000 shares at June 29, 1997) (2,734) (2,143)
--------- ---------
Total shareholders' equity 66,206 56,093
--------- ---------
$ 102,911 $ 95,669
========= =========
The accompanying notes are an integral part of these consolidated
balance sheets.
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5
STRATTEC SECURITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
March 29, March 30,
1998 1997
--------------- --------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,666 $ 6,701
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 5,069 4,039
Change in operating assets and liabilities:
Increase in receivables (1,758) (2,795)
Decrease in inventories 667 230
(Increase) Decrease in other assets (1,647) 1,228
Increase (Decrease) in accounts payable and
accrued liabilities 2,243 (198)
Other, net 212 74
-------- --------
Net cash provided by operating activities 14,452 9,279
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (5,706) (6,136)
-------- --------
Net cash used in investing activities (5,706) (6,136)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on borrowings under revolving
credit facility (5,037) (1,295)
Purchase of treasury stock (591) (1,907)
Exercise of stock options 1,038 49
-------- --------
Net cash used in financing activities (4,590) (3,153)
EFFECT OF FOREIGN CURRENCY FLUCTUATIONS
ON CASH (66) 2
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 4,090 (8)
CASH AND CASH EQUIVALENTS
Beginning of period 404 441
-------- --------
End of period $ 4,494 $ 433
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $ 5,273 $ 2,612
Interest paid 33 182
The accompanying notes are an integral part of these consolidated statements.
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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 March 29, 1998, 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 March 29, 1998 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 thousands, except per share amounts):
Nine Months Ended
-----------------
March 29, 1998 March 30, 1997
-------------- --------------
Net Per-Share Net Per-Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic Earnings Per Share $9,666 5,706 $1.69 $6,701 5,731 $1.17
===== =====
Stock Options 148 65
--- --
Diluted Earnings Per Share $9,666 5,854 $1.65 $6,701 5,796 $1.16
===== ===== ===== =====
Three Months Ended
------------------
March 29, 1998 March 30, 1997
-------------- --------------
Net Per-Share Net Per-Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic Earnings Per Share $3,835 5,725 $0.67 $2,902 5,670 $0.51
===== =====
Stock Options 155 80
--- --
Diluted Earnings Per Share $3,835 5,880 $0.65 $2,902 5,750 $0.50
===== ===== ===== =====
Options to purchase 80,000 shares of common stock at $31.98 per share and
153,528 shares of common stock at prices ranging from $19.28 to $19.68 per share
were outstanding as of March 29, 1998, and March 30, 1997, 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.
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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 March 29, 1998 compared to the three months ended
March 30, 1997
Net sales increased 13 percent to $47.4 million for the three months ended
March 29, 1998, from $41.8 million for the three months ended March 30, 1997.
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 $2.2 million or 11 percent,
Chrysler Corporation increasing $1.1 million or 19 percent and Ford Motor
Company increasing $.5 million or 5 percent. This sales growth is due to higher
value mechanical and electro-mechanical content. In addition, sales to Chrysler
Corporation reflect their production ramp-up of newly introduced models.
Gross profit as a percentage of net sales was 22.4 percent in the current
quarter compared to 21.6 percent in the prior year quarter. Gross profit margins
improved primarily due to decreased expedited freight costs in the current
quarter as compared to the prior year quarter. The cost of zinc, the Company's
primary raw material, during the current year quarter was comparable to the
prior years cost at an average of approximately $.62 per pound but was lower
than the cost during the first six months of the current year at an average of
approximately $.74 per pound. Gross profit margins were 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 the current
quarter and during calendar years 1997 and 1996 was approximately 5, 16 and 28
percent, respectively. The U.S. dollar/Mexican peso exchange rate remained
relatively stable during this period with moderate devaluation during the six
months ended March 29, 1998. 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 8.65 pesos to the dollar during the six months
ended March 29, 1998.
Engineering, selling and administrative expenses were $4.7 million in the
current quarter, compared to $4.4 million in the prior year quarter.
Income from operations was $6.0 million in the current quarter, compared
to $4.6 million in the prior year quarter. Income from operations increased
reflecting the increased sales volume and improved gross profit margins as
previously discussed above.
Nine months ended March 29, 1998 compared to the nine months ended March 30,
1997
Net sales increased 21 percent to $140.0 million for the nine months ended
March 29, 1998, from $116.0 million for the nine months ended March 30, 1997.
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 $16.7 million or 33 percent,
Chrysler Corporation increasing $3.0 million or 19 percent and Ford Motor
Company increasing $2.5 million or 8 percent. This sales growth is due to higher
value mechanical and electro-mechanical content, strong production levels of
vehicles the Company supplies, and
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sales to Chrysler Corporation reflecting their production ramp-up of newly
introduced models. 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 20.9 percent in the nine
months ended March 29, 1998, compared to 20.5 percent in the nine months ended
March 30, 1997. 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. During the first six months of the
current year period, 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 the three
months ended March 29, 1998 and during calendar years 1997 and 1996 was
approximately 5, 16 and 28 percent, respectively. The U.S. dollar/Mexican peso
exchange rate remained relatively stable during this period with moderate
devaluation during the six months ended March 29, 1998. 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 8.65 pesos to the
dollar during the six months ended March 29, 1998.
Engineering, selling and administrative expenses were $14.1 million for
the nine months ended March 29, 1998, compared to $12.9 million for the nine
months ended March 30, 1997. The increase is primarily due to increased
engineering expenses in support of current and future vehicle programs.
Income from operations was $15.2 million in the nine months ended March
29, 1998, compared to $10.9 million in the nine months ended March 30, 1997.
Income from operations increased reflecting the increased sales volume and
improved gross margin as previously discussed above.
The effective income tax rate for the nine months ended March 29, 1998 was
37.0 percent compared to 37.6 percent for the nine months ended March 30, 1997.
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 $14.4 million in
the nine months ended March 29, 1998. In the nine months ended March 30, 1997,
the Company generated $9.3 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 increased by approximately
$1.7 million to $31.4 million at March 29, 1998, as compared to $29.7 million at
June 29, 1997, primarily due to increased sales levels. Inventories of $14.2
million at March 29, 1998, are consistent with the June 29, 1997 levels.
Capital expenditures during the nine months ended March 29, 1998 were $5.7
million compared to $6.1 million during the nine months ended March 30, 1997.
The Company anticipates that capital expenditures will be approximately $8
million to $9 million in 1998, primarily in support of requirements for
additional product programs.
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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 153,000 shares
have been repurchased as of March 29, 1998, at a cost of approximately $2.7
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. There are no outstanding
borrowings under the Credit Facility at March 29, 1998. 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 - None
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: May 8, 1998 By /S/ John G. Cahill
----------------------
John G. Cahill
Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary
(Principal Accounting and Financial Officer)
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5
1,000
9-MOS
JUN-28-1998
JUN-30-1997
MAR-29-1998
4,494
0
31,673
250
14,212
62,756
73,737
33,768
102,911
24,867
0
0
0
59
66,147
102,911
140,010
140,010
110,757
110,757
0
0
19
15,353
5,687
9,666
0
0
0
9,666
1.69
1.65
5
1,000
9-MOS
JUN-29-1997
JUL-01-1996
MAR-30-1997
433
0
21,839
250
13,176
46,583
68,152
28,638
86,097
22,236
135
0
0
58
53,016
86,097
115,976
115,976
92,159
92,159
0
0
167
10,746
4,045
6,701
0
0
0
6,701
1.17
1.16
