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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 December 29, 2002
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: 3,755,896 shares outstanding as of
December 29, 2002.
STRATTEC SECURITY CORPORATION
FORM 10-Q
December 29, 2002
INDEX
Page
----
Part I - FINANCIAL INFORMATION
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
Item 2 Management's Discussion and Analysis of Results
of Operations and Financial Condition 7-13
Item 3 Quantitative and Qualitative Disclosures About Market Risk 13
Item 4 Controls and Procedures 13
Part II - OTHER INFORMATION
Item 1 Legal Proceedings 14
Item 2 Changes in Securities and Use of Proceeds 14
Item 3 Defaults Upon Senior Securities 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 5 Other Information 14
Item 6 Exhibits and Reports on Form 8-K 14
2
Item 1 Financial Statements
STRATTEC SECURITY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
Three Months Ended Six Months Ended
------------------ ----------------
December 29, December 30, December 29, December 30,
2002 2001 2002 2001
------------- -------------- ------------- -------------
(unaudited) (unaudited)
Net sales $ 48,680 $ 49,178 $ 96,586 $ 98,633
Cost of goods sold 37,742 39,072 74,295 78,445
------------- -------------- ------------- -------------
Gross profit 10,938 10,106 22,291 20,188
Engineering, selling and administrative
expenses 4,571 4,874 9,182 9,642
------------- -------------- ------------- -------------
Income from operations 6,367 5,232 13,109 10,546
Interest income 85 141 183 296
Other income (expense), net (45) (238) (248) 93
------------- -------------- ------------- -------------
Income before provision for income taxes 6,407 5,135 13,044 10,935
Provision for income taxes 2,371 1,900 4,827 4,046
------------- -------------- ------------- -------------
Net income $ 4,036 $ 3,235 $ 8,217 $ 6,889
============= ============== ============= =============
Earnings per share:
Basic $ 1.07 $ 0.79 $ 2.15 $ 1.68
============= ============== ============= =============
Diluted $ 1.05 $ 0.78 $ 2.11 $ 1.66
============= ============== ============= =============
Average Shares Outstanding:
Basic 3,756 4,096 3,816 4,089
Diluted 3,832 4,149 3,889 4,140
The accompanying notes are an integral part of these condensed
consolidated statements.
3
STRATTEC SECURITY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 29, June 30,
2002 2002
------------ ------------
ASSETS (unaudited)
Current Assets:
Cash and cash equivalents $ 23,703 $ 34,956
Receivables, net 25,734 27,860
Inventories-
Finished products 3,197 2,395
Work in process 9,410 7,909
Raw materials 602 427
LIFO adjustment (2,368) (2,489)
------------ ------------
Total inventories 10,841 8,242
Customer tooling in progress 2,931 3,499
Other current assets 7,790 7,690
------------ ------------
Total current assets 70,999 82,247
Deferred Income Taxes 469 469
Investment in Joint Venture 276 393
Property, plant and equipment 100,149 100,028
Less: accumulated depreciation (64,322) (61,497)
------------ ------------
Net property, plant and equipment 35,827 38,531
------------ ------------
$ 107,571 $ 121,640
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 11,599 $ 15,291
Payroll and benefits 7,963 9,725
Environmental 2,723 2,730
Other accrued liabilities 2,397 3,779
------------ ------------
Total current liabilities 24,682 31,525
Accrued pension and postretirement obligations 16,240 15,448
Shareholders' equity:
Common stock, authorized 12,000,000 shares $.01 par value,
Issued 6,495,780 shares 65 65
Capital in excess of par value 59,439 59,425
Retained earnings 104,811 96,594
Accumulated other comprehensive loss (2,560) (2,440)
Less: treasury stock, at cost (2,739,884 shares at December 29,
2002 and 2,364,145 shares at June 30, 2002) (95,106) (78,977)
------------ ------------
Total shareholders' equity 66,649 74,667
------------ ------------
$ 107,571 $ 121,640
============ ============
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
4
STRATTEC SECURITY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended
----------------
December 29, December 30,
2002 2001
------------ ------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,217 $ 6,889
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 3,916 4,148
Change in operating assets and liabilities:
Decrease in receivables 2,095 4,884
Increase in inventories (2,599) (1,903)
(Increase) decrease in other assets 378 (15)
Increase (decrease) in accounts payable and
accrued liabilities (5,917) 100
Tax benefit from options exercised - 527
Other, net 144 (52)
----------- -----------
Net cash provided by operating activities 6,234 14,578
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,373) (2,285)
----------- -----------
Net cash used in investing activities (1,373) (2,285)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (16,136) (2,452)
Exercise of stock options 22 3,342
----------- -----------
Net cash provided by (used in) financing activities (16,114) 890
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (11,253) 13,183
CASH AND CASH EQUIVALENTS
Beginning of period 34,956 15,298
----------- -----------
End of period $ 23,703 $ 28,481
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $ 6,007 $ 4,162
Interest paid - -
The accompanying notes are an integral part of these condensed
consolidated statements.
5
STRATTEC SECURITY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF FINANCIAL STATEMENTS
STRATTEC SECURITY CORPORATION (the "Company") designs, develops,
manufactures and markets mechanical locks, electro-mechanical locks and related
access-control products for North American and global automotive manufacturers.
The accompanying financial statements reflect the consolidated results of the
Company, its wholly owned Mexican subsidiaries, 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 29, 2002, and
the results of operations and cash flows for the three and six 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 2002 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):
Six Months Ended
----------------
December 29, 2002 December 30, 2001
----------------- -----------------
Net Per-Share Net Per-Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic Earnings Per Share $8,217 3,816 $2.15 $6,889 4,089 $1.68
===== =====
Stock Options 73 51
----- -----
Diluted Earnings Per Share $8,217 3,889 $2.11 $6,889 4,140 $1.66
===== ===== ===== =====
Three Months Ended
------------------
December 29, 2002 December 30, 2001
----------------- -----------------
Net Per-Share Net Per-Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic Earnings Per Share $4,036 3,756 $1.07 $3,235 4,096 $0.79
===== =====
Stock Options 76 53
----- -----
Diluted Earnings Per Share $4,036 3,832 $1.05 $3,235 4,149 $0.78
===== ===== ===== =====
Options to purchase 80,000 shares of common stock at a price of $58.59
per share were outstanding as of December 29, 2002, 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. Options to purchase 315,858
shares of common stock at prices ranging from $35.97 to $45.79 per share were
outstanding as of December 30, 2001, 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 29, 2002 December 30, 2001 December 29, 2002 December 30, 2001
----------------- ----------------- ----------------- -----------------
Net Income $4,036 $3,235 $8,217 $6,889
Change in Cumulative Translation
Adjustments, net (45) 231 (120) (108)
------ ------ ------ ------
Total Comprehensive Income $3,991 $3,466 $8,097 $6,781
====== ====== ====== ======
6
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 2002 Annual Report. Unless otherwise indicated, all
references to years refer to fiscal years.
Analysis of Results of Operations
Three months ended December 29, 2002 compared to the three months ended
December 30, 2001
Net sales for the three months ended December 29, 2002, were $48.6
million compared to net sales of $49.2 million for the three months ended
December 30, 2001. Overall sales to the Company's largest customers decreased
slightly in the current quarter compared to the prior year quarter levels and
were impacted by the elimination of certain mechanical and electronic content
within the Company's lockset products to help reduce vehicle cost. As a result,
sales to Ford Motor Company and DaimlerChrysler Corporation decreased in the
current quarter compared to the prior year quarter, with Ford at $10.1 million
compared to $10.7 million and DaimlerChrysler at $8.1 million compared to $9.1
million. Sales to Mitsubishi Motor Manufacturing of America, Inc. remained flat
at $2.1 million, while sales to General Motors increased to $15.7 million
compared to $15.1 million, and sales to Delphi Corporation increased to $7.5
million compared to $6.9 million in the prior year quarter. The increase in
sales to General Motors and Delphi was primarily the result of increased vehicle
production more than offsetting the impact of the elimination of certain
mechanical and electronic content as previously discussed.
Gross profit as a percentage of net sales was 22.5 percent in the
current quarter compared to 20.5 percent in the prior year quarter. The
improvement is primarily due to the Company's on-going manufacturing process
improvements at its Milwaukee, Wisconsin and Juarez, Mexico facilities along
with a favorable Mexican peso to U.S. dollar exchange rate.
Engineering, selling and administrative expenses were relatively
consistent between quarters and totaled $4.6 million in the current quarter
compared to $4.9 million in the prior year quarter.
Income from operations was $6.4 million in the current quarter compared
to $5.2 million in the prior year quarter. The increase is primarily the result
of the improved gross profit margin as discussed above.
The effective income tax rate for the current quarter was 37.0 percent,
which is consistent with the prior year quarter. The overall effective tax rate
differs from the federal statutory tax rate primarily due to the effects of
state income taxes.
Six months ended December 29, 2002 compared to the six months ended December 30,
2001
Net sales for the six months ended December 29, 2002, were $96.6
million compared to net sales of $98.6 million for the six months ended December
30, 2001. The current period sales were affected by several factors. Higher
overall customer vehicle production as compared to the prior year period was
offset by the elimination of certain mechanical and electronic content within
the Company's lockset products to help reduce vehicle cost. In addition, the
prior year period sales included the after-effects of a June 2001 strike at the
Company's Milwaukee facility, which resulted in approximately $1.5 million of
past due June orders being shipped in addition to
7
regular quarterly orders. The change in sales to the Company's largest customers
in the current year period compared to the prior year period include General
Motors Corporation at $30.5 million compared to $30.8 million, Delphi
Corporation at $14.3 million compared to $14.0 million, DaimlerChrysler
Corporation at $16.5 million compared to $17.8 million, Ford Motor Company at
$20.0 million compared to $19.6 million and Mitsubishi Motor Manufacturing of
America, Inc. at $4.5 million compared to $4.9 million.
Gross profit as a percentage of net sales was 23.1 percent in the
current year period compared to 20.5 percent in the prior year period. The
improvement is primarily due to the Company's on-going manufacturing process
improvements at its Milwaukee, Wisconsin and Juarez, Mexico facilities along
with a favorable Mexican peso to U.S. dollar exchange rate. In addition, during
the early part of the prior year period, additional costs were incurred to
expedite past due orders and rebuild inventories depleted during the June 2001
strike at the Milwaukee facility that reduced gross profit margins.
Engineering, selling and administrative expenses were relatively
consistent between periods and totaled $9.2 million in the six months ended
December 29, 2002, compared to $9.6 million in the prior year period.
Income from operations was $13.1 million in the six months ended
December 29, 2002, compared to $10.5 million in the prior year period. The
increase is primarily the result of the improved gross profit margin discussed
above.
The effective income tax rate for the current year period was 37.0
percent, which is consistent with the prior year period. 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 $6.2 million in
the six months ended December 29, 2002. In the six months ended December 30,
2001, the Company generated $14.6 million in cash from operating activities. The
decreased generation of cash between periods is primarily due to the timing of
the payment of accounts payable which is based on normal payment terms as well
as financial results, which impact the bonus amounts paid to eligible
associates.
The Company's investment in accounts receivable decreased by
approximately $2.2 million to $25.7 million at December 29, 2002, as compared to
$27.9 million at June 30, 2002, primarily due to a decrease in sales levels in
December resulting from the scheduled holiday shut-down. Inventories increased
by approximately $2.6 million at December 29, 2002, as compared to June 30, 2002
in support of increased customer production levels.
Capital expenditures during the six months ended December 29, 2002,
were $1.4 million compared to $2.3 million during the six months ended December
30, 2001. The Company anticipates that capital expenditures will be
approximately $5 million in 2003, 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 3,039,395 outstanding shares. A total of 2,752,192
shares have been repurchased as of December 29, 2002, at a cost of approximately
$95.3 million. There were no repurchases during the quarter ended December 29,
2002. Additional repurchases may occur from time to time. Funding for the
repurchases was provided by cash flow from operations.
The Company has a $20.0 million unsecured, revolving credit facility
(the "Credit Facility"), which expires October 31, 2003. The Company previously
had an additional $30 million under this Credit Facility, which expired October
31, 2002. The Company is currently in the process of negotiating a new credit
facility. There were no outstanding borrowings under the Credit Facility at
December 29, 2002. Interest on borrowings under
8
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 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 fluctuations in the market
price of zinc, which the Company uses at a rate of approximately 1 million
pounds per month, and inflation in Mexico, which impacts the U.S. dollar costs
of the Mexican assembly operations.
Mexican Operations
The Company has separate assembly and key finishing operations in
Juarez, Mexico. Since December 28, 1998, 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."
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 with sales of
200 million EUROs 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.
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 LLC
completed the formation of WITTE-STRATTEC China, a joint venture between
WITTE-STRATTEC LLC and a unit of Elitech Technology Co. Ltd. of Taiwan.
WITTE-STRATTEC China, located in Fuzhou, People's Republic of China, will be the
base of operations to service the Company's automotive customers in the Asian
market.
The joint ventures are accounted for on the equity basis of accounting.
The activities related to the joint ventures did not have a material impact on
the December 29, 2002 or December 30, 2001 financial statements.
Critical Accounting Policies and Estimates
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 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
9
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, returns reserve, incurred but not reported claim reserves for
self-insured health plans, 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.
Recently Issued Accounting Pronouncements
In June 2002, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," which is effective for exit or disposal activities initiated after
December 31, 2002. The provisions of this Statement requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred as opposed to the date management commits to an exit plan.
The adoption of SFAS No. 146 is not expected to have an impact on the Company's
financial position or its results of operations.
In December 2002, the Financial Accounting Standards Board authorized
the issuance of SFAS No. 148, "Accounting for Stock-Based Compensation." This
statement amends SFAS No. 123, to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company does not intend to adopt the recognition provisions of SFAS No. 123, as
amended by SFAS No. 148.
In November 2002, the Financial Accounting Standards Board authorized
the issuance of Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of Indebtedness of
Others." Interpretation No. 45, the accounting under which is effective for
guarantees issued or modified after December 31, 2002, also requires additional
disclosure. The Company has not yet completed the evaluation of the application
of the accounting provisions of these new rules.
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 or Vehicle Content -- Sales to General
Motors Corporation, Ford Motor Company, DaimlerChrysler Corporation and Delphi
Corporation represent approximately 85 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 4 to 5 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.
Cost Reduction -- There is continuing pressure from the Company's major
customers to reduce costs, including 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 would be adversely affected.
10
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 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, 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. 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 16-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 effective 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 materially adverse impact on its results of operations, financial condition
or competitive position as a result of compliance with federal, state, local and
foreign environmental laws or other legal requirements. However, risk of
environmental liability and charges
11
associated with maintaining compliance with environmental laws is inherent in
the nature of the Company's business and there is no assurance that material
liabilities or charges could not arise.
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 other resources. 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. 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.
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, 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.
12
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 assembly operations.
Item 4 Controls and Procedures
Within the 90 days prior to the date of 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 effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rules 13a-14 and
15d-14 of the Securities Exchange Act of 1934, as amended). Based upon that
evaluation, the chief executive officer and chief financial officer concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company required to be
included in the Company's periodic SEC filings.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
13
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 8, 2002, the shareholders
voted to elect Michael J. Koss and John G. Cahill as directors for a term
to expire in 2005. The number of votes cast for and withheld in the
election of Michael J. Koss were 3,083,212 and 495,293, respectively. The
number of votes cast for and withheld in the election of John G. Cahill
were 3,300,030 and 278,474, respectively. Directors whose term continued
after the meeting include Harold M. Stratton II and Robert Feitler each
with a term expiring in 2003, and Frank J. Krejci with a term expiring in
2004. The shareholders also voted to approve an amendment to the STRATTEC
SECURITY CORPORATION Stock Incentive Plan to increase the aggregate
number of shares of the Company's Common Stock that may be issued or
transferred upon exercise, payment or vesting of stock options and other
equity incentive awards granted under such plan from 1,200,000 to
1,600,000. The number of votes cast for, against and withheld in the
approval of the amendment were 2,115,248, 1,068,329 and 394,928,
respectively.
Item 5 Other Information - None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
3.1* Amended and Restated Articles of Incorporation of the
Company
3.2* By-Laws of the Company
4.1* Rights Agreement dated as of February 6, 1995 between
the Company and Firstar Trust Company, as Rights Agent
10.1 STRATTEC SECURITY CORPORATION Stock Incentive Plan, as
amended
99.1 Certification Pursuant to 18 U.S.C. Section 1350
(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 5, 2003 By /S/ Patrick J. Hansen
-----------------------
Patrick J. Hansen
Vice President,
Chief Financial Officer,
Treasurer and Secretary
(Principal Accounting and Financial Officer)
14
CERTIFICATION
I, Harold M. Stratton II, certify that:
1. I have reviewed this quarterly report on Form 10-Q of STRATTEC SECURITY
CORPORATION;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: February 5, 2003
/s/ Harold M. Stratton II
--------------------------------------
Harold M. Stratton II,
Chairman and Chief Executive Officer
15
CERTIFICATION
I, Patrick J. Hansen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of STRATTEC SECURITY
CORPORATION;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: February 5, 2003
/s/ Patrick J. Hansen
------------------------------------
Patrick J. Hansen,
Chief Financial Officer
16