strt10qdec09.htm
UNITED
STATES
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 27, 2009
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). YES
___ NO ___
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
Accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting
company) Smaller Reporting Company X
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES
NO X
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: 3,272,483 shares outstanding as of December
27, 2009
STRATTEC
SECURITY CORPORATION
FORM
10-Q
December
27, 2009
INDEX
Part
I - FINANCIAL INFORMATION
|
Page |
Item
1
|
Financial
Statements
|
|
|
Condensed
Consolidated Statements of Operations and Comprehensive Income
(Loss)
|
3
|
|
Condensed
Consolidated Balance Sheets
|
4
|
|
Condensed
Consolidated Statements of Cash Flows
|
5
|
|
Notes
to Condensed Consolidated Financial Statements
|
6-12
|
Item
2
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
13-24
|
Item
3
|
Quantitative
and Qualitative Disclosures About Market Risk
|
24
|
Item
4T
|
Controls
and Procedures
|
24
|
|
|
|
Part
II - OTHER INFORMATION
|
Item
1
|
Legal
Proceedings
|
25
|
Item
1A
|
Risk
Factors
|
25 |
Item
2
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
25
|
Item
3
|
Defaults
Upon Senior Securities
|
25
|
Item
4
|
Submission
of Matters to a Vote of Security Holders
|
25
|
Item
5
|
Other
Information
|
25
|
Item
6
|
Exhibits
|
25
|
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,” or the negative of these terms or words of similar
meaning. These statements 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 this Form 10-Q. The discussions of such
matters and subject areas are qualified by the inherent risks and uncertainties
surrounding future expectations generally, and also may materially differ from
the Company's actual future experience.
The
Company's business, operations and financial performance are subject to certain
risks and uncertainties, which could result in material differences in actual
results from the Company's current expectations. These risks and
uncertainties include, but are not limited to, general economic conditions, in
particular relating to the automotive industry, customer demand for the
Company’s and its customers’ products, the impact on the Company from bankruptcy
filings involving the Company’s customers, competitive and technological
developments, customer purchasing actions, foreign currency fluctuations, costs
of operations and other matters described under “Risk Factors” in the
Management’s Discussion and Analysis of Financial Condition and Results of
Operations section of this Form 10-Q and in the section titled “Risk Factors” in
the Company’s Form 10-K report filed with the Securities and Exchange Commission
on August 28, 2009, for the year ended June 28, 2009.
Shareholders,
potential investors and other readers are urged to consider these factors
carefully in evaluating the forward-looking statements and are cautioned not to
place undue reliance on such forward-looking statements. The
forward-looking statements made herein are only made as of the date of this Form
10-Q and the Company undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances
occurring after the date of this Form 10-Q.
Item
1 Financial Statements
STRATTEC
SECURITY CORPORATION AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations and Comprehensive Income
(Loss)
(In
Thousands, Except Per Share Amounts; Unaudited)
|
|
Three
Months Ended |
|
|
Six
Months Ended |
|
|
|
December
27, |
|
|
December
28, |
|
|
December 27, |
|
|
December
28, |
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
sales
|
|
$ |
52,540 |
|
|
$ |
33,799 |
|
|
$ |
93,721 |
|
|
$ |
68,530 |
|
Cost
of goods sold
|
|
|
44,887 |
|
|
|
30,888 |
|
|
|
79,270 |
|
|
|
60,195 |
|
Gross
profit
|
|
|
7,653 |
|
|
|
2,911 |
|
|
|
14,451 |
|
|
|
8,335 |
|
Engineering,
selling and administrative expenses
|
|
|
7,455 |
|
|
|
6,669 |
|
|
|
13,654 |
|
|
|
12,621 |
|
Recovery
of bad debts
|
|
|
(201 |
) |
|
|
- |
|
|
|
(421 |
) |
|
|
- |
|
Impairment
charge
|
|
|
223 |
|
|
|
- |
|
|
|
223 |
|
|
|
- |
|
Environmental
reserve adjustment
|
|
|
(1,125 |
) |
|
|
- |
|
|
|
(1,125 |
) |
|
|
- |
|
Income (loss) from operations
|
|
|
1,301 |
|
|
|
(3,758 |
) |
|
|
2,120 |
|
|
|
(4,286 |
) |
Interest
income
|
|
|
19 |
|
|
|
284 |
|
|
|
42 |
|
|
|
602 |
|
Other
income, net
|
|
|
247 |
|
|
|
557 |
|
|
|
675 |
|
|
|
780 |
|
Income (loss) before provision for income taxes
|
|
|
1,567 |
|
|
|
(2,917 |
) |
|
|
2,837 |
|
|
|
(2,904 |
) |
Provision
(benefit) for income taxes
|
|
|
721 |
|
|
|
(1,428 |
) |
|
|
1,062 |
|
|
|
(1,621 |
) |
Net
income (loss)
|
|
|
846 |
|
|
|
(1,489 |
) |
|
|
1,775 |
|
|
|
(1,283 |
) |
Net
(income) loss attributed to non-controlling
interest
|
|
|
(2 |
) |
|
|
287 |
|
|
|
12 |
|
|
|
101 |
|
Net
income (loss) attributable to STRATTEC
SECURITY CORPORATION
|
|
$ |
844 |
|
|
$ |
(
1,202 |
) |
|
$ |
1,787 |
|
|
$ |
(
1,182 |
) |
Comprehensive
Income (Loss):
|
|
Net
income (loss)
|
|
$ |
846 |
|
|
$ |
(1,489 |
) |
|
$ |
1,775 |
|
|
$ |
(1,283 |
) |
Change
in cumulative translation adjustments,
net
|
|
|
601 |
|
|
|
(2,237 |
) |
|
|
289 |
|
|
|
(2,695 |
) |
Pension
Funded Status Adjustment, net
of tax of $192
|
|
|
313 |
|
|
|
- |
|
|
|
313 |
|
|
|
- |
|
Total
other comprehensive income (loss)
|
|
|
914 |
|
|
|
(2,237 |
) |
|
|
602 |
|
|
|
(2,695 |
) |
Comprehensive
income (loss)
|
|
|
1,760 |
|
|
|
(3,726 |
) |
|
|
2,377 |
|
|
|
(3,978 |
) |
Comprehensive
(income) loss attributed to non-controlling
interest
|
|
|
(4 |
) |
|
|
299 |
|
|
|
10 |
|
|
|
118 |
|
Comprehensive
income (loss) attributable to STRATTEC
SECURITY
CORPORATION
|
|
$ |
1,756 |
|
|
$ |
(3,427 |
) |
|
$ |
2,387 |
|
|
$ |
(3,860 |
) |
|
|
Earnings
(Loss) Per Share:
|
|
Basic
|
|
$ |
0.26 |
|
|
$ |
(
0.37 |
) |
|
$ |
0.55 |
|
|
$ |
(
0.36 |
) |
Diluted
|
|
$ |
0.26 |
|
|
$ |
(
0.37 |
) |
|
$ |
0.55 |
|
|
$ |
(
0.36 |
) |
Average
Shares Outstanding:
|
|
Basic
|
|
|
3,272 |
|
|
|
3,264 |
|
|
|
3,269 |
|
|
|
3,298 |
|
Diluted
|
|
|
3,272 |
|
|
|
3,267 |
|
|
|
3,271 |
|
|
|
3,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per share
|
|
$ |
- |
|
|
$ |
0.15 |
|
|
$ |
- |
|
|
$ |
0.30 |
|
The
condensed consolidated statement of operations and comprehensive income (loss)
for the three and six month periods ended December 28, 2008 have been
retrospectively adjusted for our change in 2009 from the last-in, first-out
method of inventory accounting to the first-in, first-out
method. Additional details are available in the accompanying
notes. The accompanying notes are an integral part of these condensed
consolidated statements of operations and comprehensive income
(loss).
STRATTEC
SECURITY CORPORATION AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
(In
Thousands, Except Share Amounts)
|
|
December
27,
2009
|
|
|
June
28,
2009
|
|
ASSETS
|
|
(Unaudited)
|
|
|
|
Current
Assets:
|
|
Cash
and cash equivalents
|
|
$ |
22,016 |
|
|
$ |
22,764 |
|
Receivables,
net
|
|
|
26,450 |
|
|
|
17,235 |
|
Restricted
cash
|
|
|
2,100 |
|
|
|
- |
|
Inventories-
|
|
Finished
products
|
|
|
3,836 |
|
|
|
3,812 |
|
Work
in process
|
|
|
4,518 |
|
|
|
3,432 |
|
Purchased
materials
|
|
|
8,081 |
|
|
|
9,345 |
|
Total
inventories
|
|
|
16,435 |
|
|
|
16,589 |
|
Other
current assets
|
|
|
15,989 |
|
|
|
15,970 |
|
Total
current assets
|
|
|
82,990 |
|
|
|
72,558 |
|
Deferred
income taxes
|
|
|
10,121 |
|
|
|
13,143 |
|
Investment
in joint ventures
|
|
|
4,652 |
|
|
|
4,483 |
|
Loan
to joint venture
|
|
|
1,500 |
|
|
|
- |
|
Other
long-term assets
|
|
|
790 |
|
|
|
1,069 |
|
Property,
plant and equipment
|
|
|
133,631 |
|
|
|
131,502 |
|
Less:
accumulated depreciation
|
|
|
(96,959 |
) |
|
|
(94,566 |
) |
Net
property, plant and equipment
|
|
|
36,672 |
|
|
|
36,936 |
|
|
|
$ |
136,725 |
|
|
$ |
128,189 |
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
Current
Liabilities:
|
|
Accounts
payable
|
|
$ |
18,727 |
|
|
$ |
11,369 |
|
Accrued Liabilities:
|
|
Payroll
and benefits
|
|
|
9,758 |
|
|
|
8,232 |
|
Environmental
reserve
|
|
|
1,500 |
|
|
|
2,636 |
|
Other
|
|
|
8,504 |
|
|
|
8,611 |
|
Total current liabilities
|
|
|
38,489 |
|
|
|
30,848 |
|
Accrued
pension obligations
|
|
|
13,787 |
|
|
|
15,183 |
|
Accrued
postretirement obligations
|
|
|
9,698 |
|
|
|
9,601 |
|
|
|
Shareholders'
Equity:
|
|
Common
stock, authorized 12,000,000 shares, $.01 par value, issued
6,906,957
shares at December 27, 2009 and 6,897,957 shares at June 28,
2009
|
|
|
69 |
|
|
|
69 |
|
Capital
in excess of par value
|
|
|
79,039 |
|
|
|
79,247 |
|
Retained
earnings
|
|
|
161,072 |
|
|
|
159,285 |
|
Accumulated
other comprehensive loss
|
|
|
(30,494 |
) |
|
|
(31,094 |
) |
Less:
treasury stock, at cost (3,634,474 shares at December
27,
|
2009
and 3,635,989 shares at June 28, 2009) |
|
|
(136,064 |
) |
|
|
(136,089 |
) |
Total
STRATTEC SECURITY CORPORATION shareholders' equity
|
|
|
73,622 |
|
|
|
71,418 |
|
Non-controlling
interest
|
|
|
1,129 |
|
|
|
1,139 |
|
Total
shareholders’ equity
|
|
|
74,751 |
|
|
|
72,557 |
|
|
|
$ |
136,725 |
|
|
$ |
128,189 |
|
The
accompanying notes are an integral part of these condensed consolidated balance
sheets.
STRATTEC
SECURITY CORPORATION AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(In
Thousands; Unaudited)
|
|
Six Months Ended
|
|
|
|
December
27, |
|
|
December
28, |
|
|
|
2009
|
|
|
2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
Net
income (loss) attributable to STRATTEC SECURITY
CORPORATION |
|
$ |
1,787 |
|
|
$ |
(1,182 |
) |
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
Non-controlling
interest |
|
|
(12 |
) |
|
|
(101 |
) |
Depreciation
and amortization |
|
|
3,578 |
|
|
|
2,855 |
|
Foreign
currency transaction gain |
|
|
157 |
|
|
|
(1,147 |
) |
Stock
based compensation expense |
|
|
204 |
|
|
|
217 |
|
Deferred
Tax Provision |
|
|
3,258 |
|
|
|
- |
|
Recovery
of bad debts |
|
|
(421 |
) |
|
|
- |
|
Impairment
charge |
|
|
223 |
|
|
|
- |
|
Environmental
reserve adjustment |
|
|
(1,125 |
) |
|
|
- |
|
Loss on curtailment of employee benefits |
|
|
505 |
|
|
|
- |
|
Change in operating assets and liabilities: |
|
Receivables |
|
|
(8,709 |
) |
|
|
5,275 |
|
Inventories |
|
|
154 |
|
|
|
(1,317 |
) |
Other
assets |
|
|
(28 |
) |
|
|
(4,624 |
) |
Accounts
payable and accrued liabilities |
|
|
7,043 |
|
|
|
(2,285 |
) |
Other, net
|
|
|
(457 |
) |
|
|
(123 |
) |
Net
cash provided by (used in) operating activities
|
|
|
6,157 |
|
|
|
(2,432 |
) |
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
Investment in joint ventures
|
|
|
(100 |
) |
|
|
(388 |
)
|
Restricted cash
|
|
|
(2,100 |
) |
|
|
- |
|
Loan to joint venture, net
|
|
|
(1,500 |
) |
|
|
- |
|
Acquisition of Delphi Power Products Business
|
|
|
- |
|
|
|
(3,813 |
) |
Purchase of property, plant and equipment
|
|
|
(3,104 |
) |
|
|
(8,511 |
) |
Proceeds from sale of property, plant and equipment
|
|
|
10 |
|
|
|
- |
|
Net cash used in investing activities
|
|
|
(6,794 |
) |
|
|
(12,712 |
) |
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
Purchase of treasury stock
|
|
|
- |
|
|
|
(6,214 |
) |
Dividends paid
|
|
|
- |
|
|
|
(1,023 |
) |
Exercise of stock options and employee stock purchases
|
|
|
22 |
|
|
|
20 |
|
Loan from non-controlling interest
|
|
|
- |
|
|
|
1,175 |
|
Contribution from non-controlling interest
|
|
|
- |
|
|
|
762 |
|
Net cash provided by (used in) financing activities
|
|
|
22 |
|
|
|
(5,280 |
) |
Foreign
currency impact on cash |
|
|
(133 |
) |
|
|
801 |
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(748 |
) |
|
|
(19,623 |
) |
CASH
AND CASH EQUIVALENTS
|
|
Beginning of period
|
|
|
22,764 |
|
|
|
51,501 |
|
End of period
|
|
$ |
22,016 |
|
|
$ |
31,878 |
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
Income taxes paid (recovered)
|
|
$ |
307 |
|
|
$ |
(
1,717 |
) |
Interest paid
|
|
|
- |
|
|
|
- |
|
The
condensed consolidated statement of cash flows for the six month period ended
September 28, 2008 has been retrospectively adjusted for our change in 2009 from
the last-in, first-out method of inventory accounting to the first-in, first-out
method. Additional details are available in the accompanying
notes. The accompanying notes are an integral part of these condensed
consolidated statements of cash flows.
STRATTEC
SECURITY CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
Basis
of Financial Statements
STRATTEC
SECURITY CORPORATION designs, develops, manufactures and markets automotive
security products, including mechanical locks and keys, electronically enhanced
locks and keys, and ignition lock housings; and access control products,
including latches, power sliding door systems, power lift gate systems, power
deck lid systems, door handles and related access control products for North
American automotive customers. We also supply global automotive
manufacturers through the VAST Alliance (VAST ALLIANCE) in which we participate
with WITTE Automotive of Velbert, Germany and ADAC Automotive of Grand Rapids,
Michigan. Our products are shipped to customer locations in the
United States, Canada, Mexico, Europe, South America, Korea and China, and we
provide full service and aftermarket support. We have only one
reporting segment.
The
accompanying condensed consolidated financial statements reflect the
consolidated results of STRATTEC SECURITY CORPORATION, its wholly owned Mexican
subsidiary, STRATTEC de Mexico, and its majority owned subsidiaries,
ADAC-STRATTEC, LLC and STRATTEC POWER ACCESS LLC. STRATTEC SECURITY
CORPORATION is located in Milwaukee, Wisconsin. STRATTEC de Mexico is
located in Juarez, Mexico. ADAC-STRATTEC, LLC and STRATTEC POWER
ACCESS LLC have operations in El Paso, Texas and Juarez,
Mexico. Equity investments in Vehicle Access Systems Technology LLC
(VAST LLC) for which we exercise significant influence but do not control and
are not the primary beneficiary, are accounted for using the equity
method. VAST LLC consists primarily of two wholly owned subsidiaries in
China and one joint venture in Brazil.
In the
opinion of management, the accompanying condensed consolidated balance sheet as
of June 28, 2009, which has been derived from our audited financial statements,
and the related unaudited interim condensed consolidated financial statements
contain all adjustments, consisting only of normal recurring items, necessary
for their fair presentation in conformity with accounting principles generally
accepted in the United States of America (“U.S. GAAP”) and in accordance with
Rule 10-01 of Regulation S-X. All significant intercompany
transactions have been eliminated.
Interim
financial results are not necessarily indicative of operating results for an
entire year. The information included in this Form 10-Q should be
read in conjunction with Management’s Discussion and Analysis and the financial
statements and notes thereto included in the STRATTEC SECURITY CORPORATION 2009
Annual Report, which was filed with the Securities and Exchange Commission as an
exhibit to our Form 10-K on August 28, 2009.
Certain
reclassifications have been made to the fiscal 2009 interim financial statements
to conform to the fiscal 2010 presentation. The fiscal 2010
presentation is based on the first quarter of fiscal 2010 adoption of a new
accounting standard issued by the Financial Accounting Standards Board (FASB)
related to non-controlling interests in consolidated financial
statements. The adoption of the new standard resulted in the
retrospective adjustment to the presentation of prior year period financial
information and additional disclosures. The adoption did not impact
previously reported net income or retained earnings amounts but did require a
reclassification of the non-controlling interest to a component of total
shareholders’ equity. The FASB Accounting Standards Codification
(ASC) were also adopted during the first quarter of fiscal 2010. The
adoption of the ASC did not result in any restatements of previously reported
financial statements.
On
December 30, 2008, the FASB issued a new accounting standard which significantly
expands the disclosures required by employers for postretirement plan
assets. The new standard requires plan sponsors to provide extensive
new disclosures about assets in defined benefit postretirement benefit plans as
well as any concentrations of associated risks. The new standard is
effective for periods ending after December 15, 2009. The disclosure
requirements are annual and do not apply to interim financial
statements. We are required to provide the expanded pension plan
asset disclosure in our annual financial statements for the year ending June 27,
2010.
Subsequent
Events
Subsequent
events have been evaluated through February 4, 2010, the date the interim
financial statements were issued. As discussed in Pension and Other
Postretirement Benefits below, voluntary contributions to the qualified pension
plan made to date during the third quarter of fiscal 2010 totaled $1.0
million. No
additional events impacting the financial statements or disclosure items were
identified.
Purchase
of Delphi Power Products Business
Effective
November 30, 2008, STRATTEC, in combination with WITTE Automotive of Velbert,
Germany, completed the acquisition of certain assets, primarily equipment and
inventory, and assumption of certain employee liabilities of Delphi
Corporation’s Power Products business for approximately $7.3
million. For purposes of owning and operating the North American
portion of this acquired business, STRATTEC established a new subsidiary,
STRATTEC POWER ACCESS LLC (SPA), which is 80 percent owned by STRATTEC and 20
percent owned by WITTE. The purchase price of the North American
portion of the business totaled approximately $4.4 million, of which STRATTEC
paid approximately $3.5 million. WITTE acquired the European portion
of the business for approximately $2.4 million. Effective February
12, 2009, SPA acquired the Asian portion of the business for approximately
$500,000.
The
acquisition of the North American and Asian portions of this business by SPA was
not material to STRATTEC’s consolidated financial
statements. Amortizable intangible assets acquired totaled $890,000
and are subject to amortization over a period of nine years. In
addition, goodwill of approximately $223,000 was recorded as part of the
transaction. The amortizable intangibles are included in other
long-term assets in the Condensed Consolidated Balance Sheets. Refer
to Goodwill Impairment discussed on page 9 herein.
The
financial results of SPA are consolidated with the financial results of STRATTEC
and resulted in decreased net income to STRATTEC of approximately $325,000
during the six month period ended December 27, 2009 and decreased net income to
STRATTEC of approximately $640,000 during the six month period ended December
28, 2008.
SPA
designs, develops, tests, manufacturers, markets and sells power systems to
operate vehicle sliding side doors and rear compartment access points such as
liftgates and truck lids. In addition, the product line includes
power cinching latches and cinching strikers used in these
systems. Current customers for these products supplied from North
America are Chrysler Group LLC, Hyundai Kia Automotive Group, General Motors
Company and Ford Motor Company.
VAST
LLC Purchase of Non-Controlling Interest of VAST China
Effective
November 20, 2009, VAST LLC purchased the non-controlling interest of its two
Chinese joint ventures, VAST Fuzhou and VAST Great Shanghai, for $9.6
million. STRATTEC’s share of the purchase price totaled $3.2
million. Effective with the purchase, VAST LLC owns 100% of the
Chinese entities. In connection with this transaction, $7.5 million
of the purchase price was paid in November 2009. A loan of $2.5
million was made from STRATTEC to VAST LLC to cover STRATTEC’s share of this
$7.5 million payment. The outstanding loan balance of $1.5 million as
of December 2009 is reflected as Loan to Joint Venture in the Condensed
Consolidated Balance Sheets. The remaining purchase price of $2.1
million will be paid in three installments over the next 18 months. A
$2.1 million stand-by letter of credit was issued by VAST LLC, and is guaranteed
by STRATTEC, related to the future installment payments. Cash of $2.1
million has been transferred to a separate account in support of the stand-by
letter of credit guarantee and is reflected as Restricted Cash in the Condensed
Consolidated Balance Sheets. In connection with this
purchase, VAST LLC recorded a loss equal to the difference between the purchase
price and the carrying value of the non-controlling interest of approximately
$1.2 million as a reduction of equity in its consolidated financial
statement. STRATTEC’s share of this loss totaled $409,000 and is
recorded as a reduction of Capital In Excess of Par Value in the Condensed
Consolidated Balance Sheets.
Fair
Value of Financial Instruments
The fair
value of our cash and cash equivalents, accounts receivable and accounts payable
approximate book value as of December 27, 2009. Fair value is defined
as the exchange price that would be received for an asset or paid for a
liability in the principal or most advantageous market in an orderly transaction
between market participants on the measurement date. The following
table summarizes our financial assets and liabilities measured at fair value on
a recurring basis as of December 27, 2009 (in thousands of
dollars):
|
|
Fair Value Inputs
|
|
|
|
Quoted
Prices In
Active Market
|
|
|
Observable
Inputs
Other
Than Market Prices
|
|
|
Unobservable
Inputs
|
|
|
|
|
|
|
|
|
|
|
|
Rabbi
Trust assets
|
|
$ |
3,910 |
|
|
$ |
- |
|
|
$ |
- |
|
The Rabbi
Trust assets fund our supplemental executive retirement plan and are included in
Other Current Assets in the Condensed Consolidated Balance
Sheets. Assets held in the Trust include U.S. Treasury Securities and
large, medium and small-cap index funds.
Inventories
Inventories are comprised of material, direct labor and manufacturing overhead,
and are stated at the lower of cost or market using the first-in, first-out
(FIFO) cost method of accounting. Prior to the fourth quarter of
fiscal 2009, the majority of our inventories were accounted for using the
last-in, first-out (LIFO) method of accounting. During the fourth
quarter of 2009, we changed our method of accounting for this inventory from the
LIFO method to the FIFO method. We believe the FIFO method is a
preferable method which better reflects the current cost of inventory on our
consolidated balance sheets. After this change, all inventories have
a consistent costing method. For comparative purposes, all periods
presented have been retrospectively adjusted on a FIFO basis. The
following table summarizes the effect of the accounting change on our condensed
consolidated financial statements for the three and six months ended December
28, 2008 (in thousands, except per share amounts):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
As
Reported
Under FIFO
|
|
|
Originally
Reported
|
|
|
As
Reported
Under FIFO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
$ |
30,919 |
|
|
$ |
30,888 |
|
|
$ |
60,208 |
|
|
$ |
60,195 |
|
Net
loss attributable to STRATTEC
|
|
$ |
(1,233 |
) |
|
$ |
(1,202 |
) |
|
$ |
(1,195 |
) |
|
$ |
(1,182 |
) |
Basic
earnings per share
|
|
$ |
(0.38 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.36 |
) |
|
$ |
(0.36 |
) |
Diluted
Earnings per share
|
|
$ |
(0.38 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.36 |
) |
|
$ |
(0.36 |
) |
Condensed
Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in inventories
|
|
|
|
|
|
|
|
|
|
$ |
(1,304 |
) |
|
$ |
(1,317 |
) |
Environmental
Reserve
In 1995,
we recorded a provision of $3 million for estimated costs to remediate a site at
our Milwaukee facility. The site was contaminated by a solvent spill,
which occurred in 1985, from a former above ground solvent storage tank located
on the east side of the facility. The reserve was originally
established based on third party estimates to adequately cover the cost for
active remediation of the contamination. As of December 27, 2009,
costs of approximately $400,000 have been incurred related to the installation
of monitoring wells on the property and ongoing monitoring costs. Due to
changing technology and related costs associated with active remediation of the
contamination, an updated third party analysis and estimate was obtained during
the quarter ended December 27, 2009. The reserve was reduced by
approximately $1.1 million, to $1.5 million at December 27, 2009, to reflect the
revised third party monitoring and remediation cost estimate. We
continue to monitor and evaluate the site with the use of groundwater monitoring
wells that are installed on the property. An environmental consultant
samples these wells one or two times a year to determine the status of the
contamination and the potential for remediation of the contamination by natural
attenuation, the dissipation of the contamination over time to concentrations
below applicable standards. If such sampling evidences a sufficient
degree of and trend toward natural attenuation of the contamination, we may be
able to obtain a closure letter from the regulatory authorities resolving the
issue without the need for active remediation. If a sufficient degree
and trend toward natural attenuation is not evidenced by sampling, a more active
form of remediation beyond natural attenuation may be required. The
sampling has not yet satisfied all of the requirements for closure by natural
attenuation. As a result, sampling continues and the reserve remains
at an amount to reflect the cost of active remediation. The reserve
is not measured on a discounted basis. We believe, based on
findings-to-date and known environmental regulations, that the environmental
reserve at December 27, 2009 is adequate to cover any future
developments.
Shareholder’s
Equity
A summary
of activity impacting shareholders’ equity for the six month period ended
December 27, 2009 is as follows (in thousands):
|
|
Total
Shareholders’
Equity
|
|
|
Equity
Attributed
to
STRATTEC
|
|
|
Equity
Attributed
to
Non-Controlling
Interest
|
|
Balance,
June 28, 2009
|
|
$ |
72,557 |
|
|
$ |
71,418 |
|
|
$ |
1,139 |
|
Net
income (loss)
|
|
|
1,775 |
|
|
|
1,787 |
|
|
|
(12 |
) |
Translation
adjustments
|
|
|
289 |
|
|
|
287 |
|
|
|
2 |
|
Pension
funded status adjustment, net of tax of $192
|
|
|
313 |
|
|
|
313 |
|
|
|
- |
|
VAST
LLC loss on purchase of non-controlling interest
|
|
|
(409 |
) |
|
|
(409 |
) |
|
|
- |
|
Stock
Based Compensation
|
|
|
204 |
|
|
|
204 |
|
|
|
- |
|
Employee
Stock Purchases
|
|
|
22 |
|
|
|
22 |
|
|
|
- |
|
Balance,
December 27, 2009
|
|
$ |
74,751 |
|
|
$ |
73,622 |
|
|
$ |
1,129 |
|
Goodwill
Impairment
During
the quarter ended December 27, 2009, we performed our annual goodwill impairment
test and determined that goodwill related to SPA, which resulted from the
purchase of Delphi Power Products in fiscal 2009, was
impaired. Accordingly, a non-cash impairment charge of $223,000 was
recognized to write-off the related goodwill.
Other
Income, net
Net other
income included in the Condensed Consolidated Statements of Operations primarily
includes foreign currency transaction gains and losses, Rabbi Trust gains and
losses and equity earnings of joint ventures. Foreign currency
transaction gains are the result of foreign currency transactions entered into
by our Mexican subsidiaries and foreign currency cash balances. The
Rabbi Trust funds our supplemental executive retirement plan. The
investments held in the Trust are considered trading securities. The
impact of these items for each of the periods presented is as follows (in
thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December
27,
|
|
|
December
28,
|
|
|
December
27,
|
|
|
December
28
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Foreign
Currency Transaction (Loss) Gain
|
|
$ |
(222 |
) |
|
$ |
910 |
|
|
$ |
(157 |
) |
|
$ |
1,147 |
|
Rabbi
Trust Gain (Loss)
|
|
$ |
93 |
|
|
$ |
(470 |
) |
|
$ |
376 |
|
|
$ |
(530 |
) |
Equity
Earnings of Joint Ventures
|
|
$ |
383 |
|
|
$ |
85 |
|
|
$ |
479 |
|
|
$ |
126 |
|
Income
Taxes
The
income tax provision (benefit) for the three and six month periods ended
December 27, 2009 and December 28, 2008 is impacted by a lower effective tax
rate for income subject to tax in Mexico as compared to the effective tax rate
for income subject to tax in the U.S. The effective tax rate for
income subject to tax in Mexico is approximately 19 percent.
We did
not have a significant change to the total amount of unrecognized tax benefits
during the six months ended December 27, 2009. However, STRATTEC is
currently the subject of an income tax examination
in our Wisconsin jurisdiction for fiscal years 2005, 2006, 2007 and
2008. The audit is currently in process and preliminary results are
not yet available.
During
the quarter ended December 31, 2009, the available Federal operating loss
carry-back period changed from 2 years to 5 years. As a result,
approximately $2.8 million of long-term deferred tax assets related to Federal
operating loss carry-forwards were reclassified as current tax recoverable,
which is reflected in Other Current Assets in the Condensed Consolidated Balance
Sheets.
Earnings
(Loss) Per Share (EPS)
Basic
earnings (loss) per share is computed on the basis of the weighted average
number of shares of common stock outstanding during the
period. Diluted earnings per share is computed on the basis of the
weighted average number of shares of common stock plus the dilutive potential
common shares outstanding during the period using the treasury stock
method. Dilutive potential common shares include outstanding stock
options and unvested restricted stock awards.
A
reconciliation of the components of the basic and diluted per-share computations
follows (in thousands, except per share amounts):
|
|
Three Months Ended |
|
|
|
December 27, 2009
|
|
|
December 28, 2008
|
|
|
|
Net
Income
Attributable
to STRATTEC
|
|
|
Weighted
Average
Shares
|
|
|
Per-Share
Amount
|
|
|
Net
Loss
Attributable
to STRATTEC
|
|
|
Weighted
Average
Shares
|
|
|
Per-Share
Amount
|
|
Basic
Earnings (Loss) Per Share
|
|
$ |
844 |
|
|
|
3,272 |
|
|
$ |
0.26 |
|
|
$ |
(1,202 |
) |
|
|
3,264 |
|
|
$ |
(0.37 |
) |
Stock-Based
Compensation
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
Diluted
Earnings (Loss) Per Share
|
|
$ |
844 |
|
|
|
3,272 |
|
|
$ |
0.26 |
|
|
$ |
(1,202 |
) |
|
|
3,267 |
|
|
$ |
(0.37 |
) |
|
|
Six
Months Ended |
|
|
|
December
27, 2009 |
|
|
December 28, 2008 |
|
|
|
Net
Income Attributable
to STRATTEC
|
|
|
Weighted
Average
Shares
|
|
|
Per-Share
Amount
|
|
|
Net
Loss
Attributable
to STRATTEC
|
|
|
Weighted
Average
Shares
|
|
|
Per-Share
Amount
|
|
Basic
Earnings Per Share
|
|
$ |
1,787 |
|
|
|
3,269 |
|
|
$ |
0.55 |
|
|
$ |
(1,182 |
) |
|
|
3,298 |
|
|
$ |
(0.36 |
) |
Stock-Based
Compensation
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
Diluted
Earnings Per Share
|
|
$ |
1,787 |
|
|
|
3,271 |
|
|
$ |
0.55 |
|
|
$ |
(1,182 |
) |
|
|
3,303 |
|
|
$ |
(0.36 |
) |
As of
December 27, 2009, options to purchase 290,840 shares of common stock at a
weighted-average exercise price of $33.70 were excluded from the calculation of
diluted earnings per share because their inclusion would have been
anti-dilutive. As of December 28, 2008, options to purchase 157,440
shares of common stock at a weighted-average exercise price of $54.39 were
excluded from the calculation of diluted loss per share because their inclusion
would have been anti-dilutive.
Stock-based
Compensation
We
maintain an omnibus stock incentive plan. This plan provides for the
granting of stock options, shares of restricted stock and stock appreciation
rights. The Board of Directors has designated 1,700,000 shares of
common stock available for the grant of awards under the
plan. Remaining shares available to be granted under the plan as of
December 27, 2009 were 259,703. Awards that expire or are canceled
without delivery of shares become available for re-issuance under the
plan. We issue new shares of common stock to satisfy stock option
exercises.
Nonqualified and incentive stock options and shares of restricted stock have
been granted to our officers and specified employees under our stock incentive
plan. Stock options granted under the plan may not be issued with an
exercise price less than the fair market value of the common stock on the date
the option is granted. Stock options become exercisable as determined
at the date of grant by the Compensation Committee of the Board of
Directors. The options expire 5 to 10 years after the grant date
unless an earlier expiration date is set at the time of grant. The
options vest 1 to 4 years after the date of grant. Shares of
restricted stock granted under the plan are subject to vesting criteria
determined by the Compensation Committee of the Board of Directors at the time
the shares are granted and have a minimum vesting period of three years from the
date of grant. Restricted shares granted have voting and dividend
rights. The restricted stock grants issued to date vest 3 years after
the date of grant.
The fair value of each stock option grant was estimated as of the date of grant
using the Black-Scholes pricing model. The resulting compensation
cost for fixed awards with graded vesting schedules is amortized on a straight
line basis over the vesting period for the entire award. The fair
value of each restricted stock grant was based on the market price of the
underlying common stock as of the date of grant. The resulting
compensation cost is amortized on a straight line basis over the vesting
period.
A summary
of stock option activity under the plan for the six months ended December 27,
2009 is as follows:
|
|
Shares
|
|
|
Weighted
Average Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding,
June 28, 2009
|
|
|
227,240 |
|
|
$ |
38.07 |
|
|
|
|
|
|
|
Granted
|
|
|
68,000 |
|
|
$ |
17.59 |
|
|
|
|
|
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
Expired
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
Forfeited
|
|
|
(4,400 |
) |
|
$ |
10.92 |
|
|
|
|
|
|
|
Outstanding,
December 27, 2009
|
|
|
290,840 |
|
|
$ |
33.70 |
|
|
|
6.6 |
|
|
$ |
621 |
|
Exercisable,
December 27, 2009
|
|
|
134,440 |
|
|
$ |
56.40 |
|
|
|
3.2 |
|
|
$ |
1 |
|
The
intrinsic value of stock options exercised and the fair value of stock options
vesting during the three and six month periods presented is as follows (in
thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December
27,
|
|
|
December
28,
|
|
|
December
27,
|
|
|
December
28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Intrinsic
Value of Options Exercised
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Fair
Value of Stock Options Vesting
|
|
$ |
18 |
|
|
$ |
- |
|
|
$ |
18 |
|
|
$ |
469 |
|
A summary
of restricted stock activity under the stock incentive plan for the six months
ended December 27, 2009 is as follows:
|
|
Shares
|
|
|
Weighted
Average
Grant
Date
Fair Value
|
|
Nonvested
Balance, June 28, 2009
|
|
|
28,200 |
|
|
$ |
38.64 |
|
Granted
|
|
|
10,000 |
|
|
$ |
14.75 |
|
Vested
|
|
|
(9,000 |
) |
|
$ |
40.00 |
|
Forfeited
|
|
|
(1,300 |
) |
|
$ |
30.39 |
|
Nonvested
Balance, December, 2009
|
|
|
27,900 |
|
|
$ |
30.02 |
|
|
|
|
|
|
|
|
|
|
As of December 27, 2009, there was $257,000 of total unrecognized compensation
cost related to stock options granted under the stock incentive
plan. This cost is expected to be recognized over a weighted average
period of 1.5 years. As of December 27, 2009, there was $357,000 of
total unrecognized compensation cost related
to restricted stock grants under the plan. This cost is expected to
be recognized over a weighted average period of 11 months. Total
unrecognized compensation cost will be adjusted for any future changes in
estimated and actual forfeitures of awards granted under the plan.
Pension
and Other Postretirement Benefits
We have a
noncontributory qualified defined benefit pension plan covering substantially
all U.S. associates. Benefits are based on years of service and final
average compensation. Our policy is to fund at least the minimum actuarially
computed annual contribution required under the Employee Retirement Income
Security Act of 1974 (ERISA). Plan assets consist primarily of listed
equity and fixed income securities. We have a noncontributory
supplemental executive retirement plan (SERP), which is a nonqualified defined
benefit plan. The SERP will pay supplemental pension benefits to
certain key employees upon retirement based upon the employees’ years of service
and compensation. The SERP is being funded through a Rabbi trust with
M&I Trust Company. We also sponsor a postretirement health care
plan for all of our U.S. associates hired prior to June 2, 2001. The
expected cost of retiree health care benefits is recognized during the years
that the associates who are covered under the plan render service. The
postretirement health care plan is unfunded.
An
amendment to the qualified defined benefit pension plan, which was effective
January 1, 2010, discontinued the benefit accruals for salary increases and
credited service rendered after December 31, 2009. A curtailment loss
related to unrecognized prior service cost of $505,000 was recorded during the
quarter ended December 27, 2009, of which approximately $375,000 increased cost
of goods sold and approximately $130,000 increased engineering, selling and
administrative expenses.
The
following tables summarize the net periodic benefit cost recognized for each of
the periods indicated under these two plans (in thousands):
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
December
27,
2009
|
|
|
December
28,
2008
|
|
|
December
27,
2009
|
|
|
December
28,
2008
|
|
Service
cost
|
|
$ |
471 |
|
|
$ |
474 |
|
|
$ |
31 |
|
|
$ |
48 |
|
Interest
cost
|
|
|
1,285 |
|
|
|
1,271 |
|
|
|
175 |
|
|
|
184 |
|
Expected
return on plan assets
|
|
|
(1,587 |
) |
|
|
(1,641 |
) |
|
|
- |
|
|
|
- |
|
Curtailment
Loss
|
|
|
505 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Amortization
of prior service cost
|
|
|
19 |
|
|
|
20 |
|
|
|
(97 |
) |
|
|
(97 |
) |
Amortization
of unrecognized net loss
|
|
|
201 |
|
|
|
64 |
|
|
|
171 |
|
|
|
174 |
|
Net
periodic benefit cost
|
|
$ |
894 |
|
|
$ |
188 |
|
|
$ |
280 |
|
|
$ |
309 |
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
December
27,
2009
|
|
|
December
28,
2008
|
|
|
December
27,
2009
|
|
|
December
28,
2008
|
|
Service
cost
|
|
$ |
941 |
|
|
$ |
936 |
|
|
$ |
62 |
|
|
$ |
95 |
|
Interest
cost
|
|
|
2,570 |
|
|
|
2,542 |
|
|
|
350 |
|
|
|
369 |
|
Expected
return on plan assets
|
|
|
(3,175 |
) |
|
|
(3,281 |
) |
|
|
- |
|
|
|
- |
|
Curtailment
Loss
|
|
|
505 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Amortization
of prior service cost
|
|
|
39 |
|
|
|
40 |
|
|
|
(194 |
) |
|
|
(194 |
) |
Amortization
of unrecognized net loss
|
|
|
402 |
|
|
|
127 |
|
|
|
342 |
|
|
|
348 |
|
Net
periodic benefit cost
|
|
$ |
1,282 |
|
|
$ |
364 |
|
|
$ |
560 |
|
|
$ |
618 |
|
Voluntary
contributions made to the qualified pension plan totaled $2.0 million during the
six month period ending December 27, 2009. Voluntary contributions
made to the qualified pension plan totaled $3.0 million during the six month
period ending December 28, 2008. Voluntary contributions made to date
during the third quarter of fiscal 2010 totaled $1.0
million. Additional voluntary contributions of $1.0 million are
anticipated to be made during the remainder of the third quarter and the fourth
quarter of fiscal 2010.
Item
2
STRATTEC
SECURITY CORPORATION AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following Management’s Discussion and Analysis should be read in conjunction
with STRATTEC SECURITY CORPORATION’s accompanying Condensed Consolidated
Financial Statements and Notes thereto and its 2009 Annual Report which was
filed with the Securities and Exchange Commission as an exhibit to our Form 10-K
on August 28, 2009. Unless otherwise indicated, all references to
years refer to fiscal years.
Purchase
of Delphi Power Products Business
Effective
November 30, 2008, STRATTEC, in combination with WITTE Automotive of Velbert,
Germany, completed the acquisition of certain assets, primarily equipment and
inventory, and assumption of certain employee liabilities of Delphi
Corporation’s Power Products business for approximately $7.3
million. For purposes of owning and operating the North American
portion of this acquired business, STRATTEC established a new subsidiary,
STRATTEC POWER ACCESS LLC (SPA), which is 80 percent owned by STRATTEC and 20
percent owned by WITTE. The purchase price of the North American
portion of the business totaled approximately $4.4 million, of which STRATTEC
paid approximately $3.5 million. WITTE acquired the European portion
of the business for approximately $2.4 million. Effective February
12, 2009, SPA acquired the Asian portion of the business for approximately
$500,000.
The
acquisition of the North American and Asian portions of this business by SPA was
not material to STRATTEC’s consolidated financial
statements. Amortizable intangible assets acquired totaled $890,000
and are subject to amortization over a period of nine years. In
addition, goodwill of approximately $223,000 was recorded as part of the
transaction. The amortizable intangibles are included in other
long-term assets in the Condensed Consolidated Balance Sheets. Refer
to the discussion of goodwill impairment under Analysis of Results of Operations
below.
The
financial results of SPA are consolidated with the financial results of STRATTEC
and resulted in decreased net income to STRATTEC of approximately $325,000
during the six month period ended December 27, 2009 and decreased net income to
STRATTEC of approximately $640,000 during the six month period ended December
28, 2008.
SPA
designs, develops, tests, manufacturers, markets and sells power systems to
operate vehicle sliding side doors and rear compartment access points such as
liftgates and truck lids. In addition, the product line includes
power cinching latches and cinching strikers used in these
systems. Current customers for these products supplied from North
America are Chrysler Group LLC, Hyundai Kia Automotive Group, General Motors
Company and Ford Motor Company.
Analysis
of Results of Operations
Three
months ended December 27, 2009 compared to the three months ended December 28,
2008
Net sales
for the three months ended December 27, 2009 were $52.5 million compared to net
sales of $33.8 million for the three months ended December 28,
2008. Sales to our largest customers overall increased in the current
quarter compared to the prior year quarter levels. Sales to Chrysler
Group LLC were $16.5 million in the current quarter compared to $7.7 million in
the prior year quarter. Included in the current quarter were sales to
Chrysler Group LLC generated by STRATTEC POWER ACCESS, offset by a combination
of lower vehicle production volume and reduced component content in the other
security products we supply. Sales to General Motors Company were
$12.3 million in the current quarter compared to $11.6 million in the prior year
quarter. Sales to Ford Motor Company were $5.2 million in the current
quarter compared to $3.0 million in the prior year quarter due to higher Ford
vehicle production volumes. Also, in the current quarter, sales
generated by SPA to Hyundai/Kia were $4.3 million.
Gross profit as a percentage of net sales was 14.6 percent in the current
quarter compared to 8.6 percent in the prior year quarter. The
improvement in the gross profit margin in the current year quarter was primarily
the result of favorable customer vehicle production volumes compared to the
prior year, partially offset by premium freight costs and overtime incurred
during the months of October and November 2009 to meet significantly increased
production requirements from our largest customers as they continued to rebuild
retail inventories following the U.S. Government’s “Cash for Clunkers” program
that ended in August 2009. These negative factors reduced the current
quarter gross profit margin by approximately 3 percentage
points. Also impacting the current quarter gross margin was a
curtailment loss related to the qualified defined benefit pension plan. An
amendment to this plan, which was effective January 1, 2010, discontinued the
benefit accruals for salary increases and credited service rendered after
December 31, 2009. A curtailment loss related to unrecognized prior
service cost of $505,000 was recorded, of which approximately $375,000 increased
cost of goods sold and approximately $130,000 increased engineering, selling and
administrative expenses.
Engineering,
selling and administrative expenses were $7.5 million in the current quarter
compared to $6.7 million in the prior year quarter. The current
quarter includes three months of expenses for SPA engineering and administrative
personnel compared to one month in the prior year quarter, due to the timing of
the acquisition of this business. The prior year quarter included outside
legal costs incurred to defend a STRATTEC patent. Also, as
discussed above, included in the current quarter costs was a curtailment loss of
$130,000.
An annual
goodwill impairment analysis was completed during the current quarter related to
the goodwill recorded as part of the acquisition of SPA in November
2008. A $223,000 impairment charge to write off the goodwill balance
was recorded as a result of the analysis.
In 1995,
we recorded a provision of $3 million for estimated costs to remediate a site at
our Milwaukee facility. The site was contaminated by a solvent spill,
which occurred in 1985, from a former above ground solvent storage tank located
on the east side of the facility. The reserve was originally
established based on third party estimates to adequately cover the cost for
active remediation of the contamination. Due to changing technology
and related costs associated with active remediation of the contamination, an
updated third party analysis and estimate was obtained during the current
quarter. The reserve was reduced by approximately $1.1 million to
reflect the revised third party monitoring and remediation cost
estimate.
In our third quarter ended March 29, 2009, we recorded a $500,000 provision for
doubtful accounts in connection with Chrysler LLC’s filing for Chapter 11
bankruptcy protection for certain of their U.S. legal entities on April 30,
2009. All receivables related to the bankruptcy were written off
against the $500,000 reserve. However, as a result of payments
received from Chrysler as of December 27, 2009, $201,000 of the $500,000
provision was recorded as a recovery of allowance for doubtful accounts during
the current quarter.
The income from operations in the current quarter was $1.3 million compared to a
loss from operations of $3.8 million in the prior year quarter. This
change was the result of the increase in sales and gross profit margin, and the
favorable impact of the reduction in the environmental reserve and the allowance
for doubtful account recoveries partially offset by the increase in engineering,
selling and administrative expenses and the goodwill impairment charge as
discussed above.
Net other income was $247,000 in the current quarter compared to $557,000 in the
prior year quarter. The change between periods was primarily due to
gains and losses on the Rabbi Trust, transaction gains and losses resulting from
foreign currency transactions entered into by our Mexican subsidiaries and
equity earnings of joint ventures. The Rabbi Trust funds our
supplemental executive retirement plan. Gains related to the Rabbi
Trust totaled $93,000 in the current quarter compared to losses of $470,000 in
the prior year quarter. The investments held in the Trust are
considered trading securities. Foreign currency transaction losses
totaled $222,000 in the current quarter compared to gains of $909,000 in the
prior year quarter. Equity earnings of joint ventures totaled
$383,000 in the current quarter compared to $85,000 in the prior year
quarter. The improvement in equity earnings of joint ventures is
primarily due to the favorable economic conditions in China.
The
income tax provision (benefit) for the three month periods ended December 27,
2009 and December 28, 2008 is impacted by a lower effective tax rate for income
subject to tax in Mexico as compared to the effective tax rate for income
subject to tax in the U.S.
Six
months ended December 27, 2009 compared to the six months ended December 28,
2008
Net sales
for the six months ended December 27, 2009 were $93.7 million compared to net
sales of $68.5 million for the six months ended December 28,
2008. Sales to our largest customers overall increased in the current
period compared to the prior year period levels. Sales to Chrysler
Group LLC were $29.3 million in the
current period compared to $14.8 million in the prior year
period. Included in the current quarter were sales to Chrysler Group
LLC generated by SPA, offset by a combination of lower vehicle production
volumes and reduced component content in the other security products we
supply. Sales to General Motors Company were $22.2 million in the
current period compared to $23.9 million in the prior year
quarter. The reduction was primarily due to lower vehicle production
volumes. Sales to Ford Motor Company increased to $8.8 million in the
current period compared to $5.3 million in the prior year period largely due to
higher Ford vehicle production volumes. Also, in the current period,
sales generated by SPA to Hyundai Kia were $7.3 million.
Gross
profit as a percentage of net sales was 15.4 percent in the current period
compared to 12.2 percent in the prior year period. The improvement in
the gross profit margin in the current period was primarily the result of
favorable customer vehicle production volumes compared to the prior year as well
as a favorable Mexican Peso to U.S. Dollar exchange rate affecting our
operations in Mexico, partially offset by premium freight costs and overtime
incurred during the months of September, October and November 2009 to meet
significantly increased production requirements from our largest customers as
they continued to rebuild retail inventories following the U.S. Government’s
“Cash for Clunkers” program that ended in August 2009. These negative
factors reduced the current quarter gross profit margin by approximately 3
percentage points in the current period. The inflation rate in Mexico
for the twelve months ended December 27, 2009 was approximately 3.6 percent and
increased our operating costs by approximately $325,000 in the current period
over the prior year period. The average U.S. dollar/Mexican peso
exchange rate increased to approximately 13.20 pesos to the dollar in the
current period from approximately 11.50 pesos to the dollar in the prior year
period. This resulted in decreased costs related to our Mexican
operations of approximately $1.4 million in the current period over the prior
year period. Also impacting the current period gross margin was a
curtailment loss related to the qualified defined benefit pension plan. An
amendment to this plan, which was effective January 1, 2010, discontinued the
benefit accruals for salary increases and credited service rendered after
December 31, 2009. A curtailment loss related to unrecognized prior
service cost of $505,000 was recorded, of which approximately $375,000 increased
cost of goods sold and approximately $130,000 increased engineering, selling and
administrative expenses.
Engineering,
selling and administrative expenses were $13.7 million in the current period
compared to $12.6 million in the prior year period. The current
period includes six months of expenses for SPA engineering and administrative
personnel compared to one month in the prior year period, due to the timing of
the acquisition of this business. These additional costs
were partially offset by reduced salary costs due to the majority of U.S.
associates taking unpaid time off in July 2009 and a January 2009 reduction in
our salaried workforce. The prior year period included outside legal costs
incurred to defend a STRATTEC patent. These legal costs did not continue
into the current period. Also, as discussed above, included in the current
period costs was a curtailment loss of $130,000.
An annual
goodwill impairment analysis was completed during the quarter ended December 27,
2009 related to the goodwill recorded as part of the acquisition of SPA in
November 2008. A $223,000 impairment charge to write off the goodwill
balance was recorded as a result of the analysis.
In 1995,
we recorded a provision of $3 million for estimated costs to remediate a site at
our Milwaukee facility. The site was contaminated by a solvent spill,
which occurred in 1985, from a former above ground solvent storage tank located
on the east side of the facility. The reserve was originally
established based on third party estimates to adequately cover the cost for
active remediation of the contamination. Due to changing technology
and related costs associated with active remediation of the contamination, an
updated third party analysis and estimate was obtained during the quarter ended
December 27, 2009. The reserve was reduced by approximately $1.1
million to reflect the revised third party monitoring and remediation cost
estimate.
In our third quarter ended March 29, 2009, we recorded a $500,000 provision for
doubtful accounts in connection with Chrysler LLC’s filing for Chapter 11
bankruptcy protection for certain of their U.S. legal entities on April 30,
2009. All receivables related to the bankruptcy were written off
against the $500,000 reserve. However, as a result of payments
received from Chrysler as of December 27, 2009, $421,000 of the $500,000
provision was recorded as a recovery of allowance for doubtful accounts during
the current period.
The income from operations in the current period was $2.1 million compared to a
loss from operations of $4.3 million in the prior year period. This
change was the result of the increase in sales and gross profit margin, and the
favorable impact of the reduction in the environmental reserve and the allowance
for doubtful account recoveries partially offset by the increase in engineering,
selling and administrative expenses and the goodwill impairment charge as
discussed above.
Net other income was $675,000 in the current period compared to $780,000 in the
prior year period. The change between periods was primarily due to
gains and losses on the Rabbi Trust, transaction gains and losses resulting from
foreign currency transactions entered into by our Mexican subsidiaries and
equity earnings of joint ventures. The Rabbi Trust funds our
supplemental executive retirement plan. Gains related to the Rabbi
Trust totaled $376,000 in the current period compared to losses of $530,000 in
the prior year period. The investments held in the Trust are
considered trading securities. Foreign currency transaction losses
totaled $157,000 in the current period compared to gains of approximately $1.1
million in the prior year period. Equity earnings of joint ventures
totaled $479,000 in the current quarter compared to $126,000 in the prior year
quarter. The improvement in equity earnings of joint ventures is
primarily due to the favorable economic conditions in China.
The
income tax provision (benefit) for the six month periods ended December 27, 2009
and December 28, 2008 is impacted by a lower effective tax rate for income
subject to tax in Mexico as compared to the effective tax rate for income
subject to tax in the U.S.
Liquidity
and Capital Resources
Our
primary source of cash flow is from our major customers, which include General
Motors Company, Ford Motor Company, and Chrysler Group LLC. As of the
date of filing this Form 10-Q with the Securities and Exchange Commission, all
of our customers are making payments on their outstanding accounts receivable in
accordance with the payment terms included on their purchase orders. A
summary of our outstanding receivable balances from our major customers as of
December 27, 2009 is as follows (in thousands of dollars):
|
|
U.S.
|
|
|
Canada
|
|
|
Mexico
|
|
|
Total
|
|
General
Motors
|
|
$ |
4,491 |
|
|
$ |
1,142 |
|
|
$ |
1,116 |
|
|
$ |
6,749 |
|
Ford
|
|
|
1,834 |
|
|
|
226 |
|
|
|
70 |
|
|
|
2,130 |
|
Chrysler
|
|
|
3,263 |
|
|
|
4,910 |
|
|
|
776 |
|
|
|
8,949 |
|
On April
30, 2009, Chrysler LLC filed for Chapter 11 bankruptcy protection for certain of
their U.S. legal entities. During the quarter ended March 29, 2009,
we increased our provision for bad debts by $500,000 to cover the portion of the
pre-bankruptcy receivable balances which we believed could be
uncollectible. As of December 27, 2009, all uncollectible amounts
related to the bankruptcy filings were written off against the reserve and
$421,000 of amounts previously written-off were paid by Chrysler LLC during the
six months ended December 27, 2009.
Cash flow
provided by operating activities was $6.2 million during the six months ended
December 27, 2009 compared to cash used in operations of $2.4 million during the
six months ended December 28, 2008. Current period operating cash
flow was negatively impacted by planned assembly plant downtime experienced by
both General Motors and Chrysler during the months of May through
July. The improvement in cash flow from operations is primarily the
result of improved operating results in the current year period as compared to
the prior year period. Also, pension contributions to our qualified
plan totaled $2 million during the current year period compared to $3 million
during the prior year period.
Accounts
receivable balances at December 27, 2009 increased $9.2 million from the June
28, 2009 balances. This increase was primarily the result of
increased sales during the current quarter as compared to the quarter ended June
28, 2009. The restricted cash balance of $2.1 million and loan to
joint ventures balance of $1.5 million at December 27, 2009 relate to the
purchase by VAST LLC effective November 20, 2009 of the non-controlling interest
of its two Chinese joint ventures, VAST Fuzhou and VAST Great Shanghai for $9.6
million. A loan of $2.5 million was made from STRATTEC to VAST LLC to
cover STRATTEC’s share of a November 2009 $7.5 million payment made in
connection with the purchase. The outstanding loan balance at
December 27, 2009 is $1.5 million. The remaining purchase price of
$2.1 million will be paid by VAST LLC in three installments over the next 18
months. A $2.1 million stand-by letter of credit was issued by VAST
LLC, and is guaranteed by STRATTEC, related to the future installment
payments. Cash of $2.1 million has been transferred to a separate
account in support of the stand-by letter of credit guarantee. The
long-term deferred tax asset balance at December 27, 2009 decreased
approximately $3.0 million from the balance at June 28, 2009. The
decrease is primarily due to a change in the available Federal operating loss
carry-back period from 2 years to 5 years. As a result of this
change, approximately $2.8 million of long-term deferred tax assets related to
Federal operating loss carry-forwards were reclassified as current tax
recoverable, which is reflected in Other Current Assets in the Condensed
Consolidated Balance Sheets. The other current asset balance at
December 27, 2009 is consistent with the balance at June 28,
2009. The increase in the balance due to the Federal operating loss
carry-back period changing from 2 years to 5 years was offset by a reduction in
prepaid zinc and brass balances. Accounts payable balances at
December 27, 2009 increased $7.4 million from the June 28, 2009 balances as a
result of increased production activity during the current period.
Capital expenditures during the six months ended December 27, 2009, were $3.1
million. Capital expenditures during the six months ended December
28, 2008, were $8.5 million. Capital expenditures during the prior
year period included approximately $5.2 million for the construction of a new
facility in Mexico. The construction of the new facility was
completed in fiscal 2009. We anticipate that capital expenditures
will be approximately $6 million in fiscal 2010, primarily relating to
expenditures in support of requirements for new product programs and the upgrade
and replacement of existing equipment.
Our Board
of Directors has authorized a stock repurchase program to buy back outstanding
shares of our common stock. Shares authorized for buy back under the
program totaled 3,839,395 at December 27, 2009. A total of 3,655,322
shares have been repurchased as of December 27, 2009, at a cost of approximately
$136.4 million. No shares were repurchased during the six months
ended December 27, 2009. Additional repurchases may occur from time
to time and are expected to continue to be funded by cash flow from operations
and current cash balances. Based on the current economic environment
and our preference to conserve cash, we anticipate minimal or no stock
repurchase activity during the balance of fiscal year 2010.
We have a
$20.0 million unsecured line of credit (the “Line of Credit”) with M&I
Marshall & Ilsley Bank, which expires October 30, 2010. This
unsecured line of credit replaced a $50.0 million unsecured line of credit with
M&I Marshall & Ilsley Bank which terminated on October 31,
2009. There were no outstanding borrowings under the Line of Credit
at December 27, 2009 or December 28, 2008. Interest on borrowings
under our line of credit is at varying rates based on the London Interbank
Offering Rate with a minimum annual rate of 4 percent. We believe
that the Line of Credit is adequate, along with existing cash balances and cash
flow from operations, to meet our anticipated capital expenditure, working
capital and operating expenditure requirements. The Line of Credit is
not subject to any covenants.
Over the
past several years, we have been impacted by rising health care costs, which
have increased our cost of employee medical coverage. A portion of
these increases have been offset by plan design changes and employee wellness
initiatives. We have also been impacted by increases in the market
price of zinc and brass and inflation in Mexico, which impacts the U. S. dollar
costs of our Mexican operations. We have negotiated raw material
price adjustment clauses with certain customers to offset some of the market
price fluctuations. We do not hedge against our Mexican peso
exposure.
Joint
Ventures
We
participate in certain Alliance Agreements with WITTE Automotive (“WITTE”) and
ADAC Automotive (“ADAC”). WITTE, of Velbert, Germany, is a privately
held automotive supplier. WITTE designs, manufactures and markets
components including locks and keys, hood latches, rear compartment latches,
seat back latches, door handles and specialty fasteners. WITTE’s
primary market for these products has been Europe. ADAC, of Grand
Rapids, Michigan, is a privately held automotive supplier and manufactures
engineered products, including door handles and other automotive trim parts,
utilizing plastic injection molding, automated painting and various assembly
processes.
The
Alliance provides a set of cross-licensing agreements for the manufacture,
distribution and sale of WITTE products by STRATTEC and ADAC in North America,
and the manufacture, distribution and sale of STRATTEC and ADAC products by
WITTE in Europe. Additionally, a joint venture company, Vehicle
Access Systems Technology LLC (“VAST LLC”), in which WITTE, STRATTEC and ADAC
each hold a one-third interest, exists to seek opportunities to manufacture and
sell the companies’ products in areas of the world outside of North America and
Europe.
VAST do
Brasil, a joint venture between VAST LLC and Ifer do Brasil Ltda., was formed to
service customers in South America. VAST Fuzhou and VAST Great
Shanghai (collectively known as VAST China) began as joint ventures between VAST
LLC and a Taiwanese partner to provide a base of operations to service our
automotive customers in the Asian market. Effective November 20,
2009, VAST LLC purchased the non-controlling interest of these two Chinese joint
ventures for $9.6 million. STRATTEC’s share of the purchase price
totaled $3.2 million. VAST LLC now owns 100% of VAST Fuzhou and
VAST Great Shanghai. VAST LLC also maintains branch offices in South
Korea and Japan in support of customer sales and engineering
requirements.
The VAST
LLC investments are accounted for using the equity method of
accounting. The activities related to the VAST LLC joint ventures
resulted in equity earnings of joint ventures of approximately $479,000 during
the six months ended December 27, 2009 and $126,000 during the six months ended
December 28, 2008. During the six months ended December 27, 2009,
capital contributions totaling $300,000 were made to VAST LLC in support of
general operating expenses. STRATTEC’s portion of the capital
contributions totaled $100,000. During the six months ended December
28, 2008, capital contributions totaling approximately $1.2 million were made to
VAST LLC in support of general operating expenses. STRATTEC’s portion
of the capital contributions totaled $388,000.
In fiscal
year 2007, we entered into a joint venture with ADAC, in which STRATTEC holds a
50.1 percent interest and ADAC holds a 49.9 percent interest. The
joint venture, ADAC-STRATTEC LLC, a Delaware limited liability company, was
formed on October 27, 2006. In addition, a Mexican entity,
ADAC-STRATTEC de Mexico, which is wholly owned by ADAC-STRATTEC LLC, was formed
on February 21, 2007 to establish injection molding and assembly operations for
door handle components. ADAC-STRATTEC de Mexico production activities
began in Juarez, Mexico in July 2007. ADAC-STRATTEC
LLC’s financial results are consolidated with the financial results of STRATTEC
and resulted in an increase in net income to STRATTEC of $49,000 during the six
months ended December 27, 2009 and $59,000 during the six months ended December
28, 2008.
Effective
November 30, 2008, STRATTEC established a new entity, STRATTEC POWER ACCESS
LLC (SPA), which is 80 percent owned by STRATTEC and 20 percent owned by
WITTE. SPA operates the North American portion of the Power Products
business which was acquired from Delphi Corporation. The financial
results of SPA are consolidated with the financial results of STRATTEC and
resulted in decreased net income to STRATTEC of approximately $325,000 during
the six month period ended December 27, 2009 and decreased net income to
STRATTEC of approximately $640,000 during the six month period ended December
28, 2008.
Recently
Issued Accounting Standards
On
December 30, 2008, the FASB issued a new accounting standard which significantly
expands the disclosures required by employers for postretirement plan
assets. The new standard requires plan sponsors to provide extensive
new disclosures about assets in defined benefit postretirement benefit plans as
well as any concentrations of associated risks. The new standard is
effective for periods ending after December 15, 2009. The disclosure
requirements are annual and do not apply to interim financial
statements. We are required to provide the expanded pension plan
asset disclosure in our annual financial statements for the year ending June 27,
2010.
Critical
Accounting Policies
The
Company believes the following represents its critical accounting
policies:
Pension and Postretirement Health
Benefits – Pension and postretirement health obligations and costs are
developed from actuarial valuations. The determination of the
obligation and expense for pension and postretirement health benefits is
dependent on the selection of certain assumptions used by actuaries in
calculating such amounts. Those assumptions are described in the
Notes to Financial Statements in our 2009 Annual Report and include, among
others, the discount rate, expected long-term rate of return on plan assets,
retirement age and rates of increase in compensation and health care
costs. We evaluate and update all of the assumptions annually on June
30, the measurement date. Actual results that differ from these
assumptions are deferred and, under certain circumstances, amortized over future
periods. While we believe that the assumptions used are appropriate,
significant differences in the actual experience or significant changes in the
assumptions may materially affect our pension and postretirement health
obligations and future expense. Refer to the discussion of Critical
Accounting Policies included in the Management’s Discussion and Analysis and
Retirement Plans and Postretirement Costs included in the Notes to Financial
Statements in our 2009 Annual Report filed with the Securities and Exchange
Commission as an exhibit to our Form 10-K on August 28, 2009.
Other
Reserves – We have reserves such as an environmental reserve, an incurred
but not reported claim reserve for self-insured health plans, a workers’
compensation reserve, an allowance for doubtful accounts related to trade
accounts receivable and a repair and maintenance supply parts
reserve. These reserves require the use of estimates and judgment
with regard to risk exposure, ultimate liability and net realizable
value.
Environmental
Reserve – We have a liability recorded related to the estimated costs to
remediate a site at our Milwaukee facility, which was contaminated by a solvent
spill from a former above ground solvent storage tank occurring in
1985. The recorded environmental liability balance involves judgment
and estimates. Our reserve estimate is based on a third party
assessment of the costs to adequately cover the cost of active remediation of
the contamination at this site. Actual costs might vary from this
estimate for a variety of reasons including changes in laws and changes in the
assessment of the level of remediation actually required at this
site. Therefore, future changes in laws or the assessment of the
level of remediation required could result in changes in our estimate of the
required liability. Refer to the discussion of Environmental Reserve
included in the Notes to Condensed Consolidated Financial Statements this Form
10-Q.
Incurred
But Not Reported Claim Reserve for Self-Insured Health Plans and Workers’
Compensation Reserve – We have self-insured medical and dental plans covering
all eligible U.S. associates. We also maintain an insured workers’
compensation program covering all U.S. associates. The insurance is
renewed annually and may be covered under a loss sensitive
plan. Under a loss sensitive plan, the ultimate cost is dependent
upon losses incurred during the policy period. The incurred loss
amount for loss sensitive policies will continue to change as claims develop and
are settled in future periods. The expected ultimate cost of claims
incurred under these plans is subject to judgment and estimation. We
estimate the ultimate expected cost of claims incurred under these plans based
upon the aggregate liability for reported claims and an estimated additional
liability for claims incurred but not reported. Our estimate of
claims incurred but not reported is based on an analysis of historical data,
current trends related to claims and health care costs and information available
from the insurance carrier. Actual ultimate costs may vary from
estimates due to variations in actual claims experience from past trends and
large unexpected claims being filed. Therefore, changes in claims
experience and large unexpected claims could result in changes to our estimate
of the claims incurred but not reported liabilities. Refer to the
discussion of Self Insurance and Loss Sensitive Plans under Organization and
Summary of Significant Accounting Policies included in Notes to Financial
Statements in our 2009 Annual Report filed with the Securities and Exchange
Commission as an exhibit to our Form 10-K on August 28, 2009.
Allowance
for Doubtful Accounts Related to Trade Accounts Receivable – Our trade accounts
receivable consist primarily of receivables due from Original Equipment
Manufacturers in the automotive industry and locksmith distributors relating to
our service and aftermarket business. Our evaluation of the
collectibility of our trade accounts receivable involves judgment and estimates
and includes a review of past due items, general economic conditions and the
economic climate of the industry as a whole. The estimate of the
required reserve involves uncertainty as to future collectibility of receivable
balances. This uncertainty is magnified by the financial difficulty
currently experienced by our customers as discussed under Risk Factors-Loss of
Significant Customers, Vehicle Content, Vehicle Models and Market Share included
herein and in the Management’s Discussion and Analysis in our 2009 Annual Report
filed with the Securities and Exchange Commission as an exhibit to our Form 10-K
on August 28, 2009. Also, refer to the discussion of Receivables
under Organization and Summary of Significant Accounting Policies included in
Notes to Financial Statements in our 2009 Annual Report filed with the
Securities and Exchange Commission as an exhibit to our Form 10-K on August 28,
2009. We increased our allowance for uncollectible trade accounts
receivable by $500,000 during 2009 in connection with Chrysler LLC’s filing for
Chapter 11 bankruptcy protection for certain of their U.S. legal entities on
April 30, 2009. General Motors filed for Chapter 11 bankruptcy
protection for their U.S. legal entities on June 1, 2009. The
bankruptcy filings did not significantly impact the collection of pre-bankruptcy
receivable balances as both Companies were able to subsequently make payments to
suppliers for parts they had purchased prior to their bankruptcy
filings. All receivables related to the bankruptcy filings which were
assumed to be uncollectible were written off against the $500,000
reserve. However, as a result of payments received from Chrysler as
of December 27, 2009, $421,000 of the $500,000 provision was recorded as a
recovery of allowance for doubtful accounts.
Repair and Maintenance Supply Parts Reserve – We maintain an inventory of repair
and maintenance parts in support of operations. The inventory
includes critical repair parts for all production equipment as well as general
maintenance items. The inventory of critical repair parts is required
to avoid disruptions in our customers’ just-in-time production schedules due to
lack of spare parts when equipment break-downs occur. Depending on
maintenance requirements during the life of the equipment, excess quantities of
repair parts arise. A repair and maintenance supply parts reserve is
maintained to recognize the normal adjustment of inventory for obsolete and
slow-moving repair and maintenance supply parts. Our evaluation of
the reserve level involves judgment and estimates, which are based on a review
of historical obsolescence and current inventory levels. Actual
obsolescence may differ from estimates due to actual maintenance requirements
differing from historical levels. This could result in changes to our
estimated required reserve. Refer to the discussion of Repair and
Maintenance Supply Parts under Organization and Summary of Significant
Accounting Policies included in the Notes to Financial Statements in our 2009
Annual Report filed with the Securities and Exchange Commission as an exhibit to
our Form 10-K on August 28, 2009.
We
believe the reserves discussed above are estimated using consistent and
appropriate methods. However, changes to the assumptions could
materially affect the recorded reserves.
Stock-Based Compensation – Stock-based compensation cost is measured at
the grant date based on the value of the award and is recognized as expense over
the vesting period. Determining the fair value of stock-based awards
at the grant date requires judgment, including estimating future volatility of
our stock, the amount of stock-based awards that are expected to be forfeited
and the expected term of awards granted. We estimate the fair value
of stock options granted using the Black-Scholes option valuation
model. We amortize the fair value of all awards on a straight-line
basis over the vesting periods. The expected term of awards granted
represents the period of time they are expected to be outstanding. We
determine the expected term based on historical experience with similar awards,
giving consideration to the contractual terms and vesting
schedules. We estimate the expected volatility of our common stock at
the date of grant based on the historical volatility of our common
stock. The volatility factor used in the Black-Scholes option
valuation model is based on our historical stock prices over the most recent
period commensurate with the estimated expected term of the award. We
base the risk-free interest rate used in the Black-Scholes option valuation
model on the implied yield currently available on U.S. Treasury zero-coupon
issues with a remaining term commensurate with the expected term of the award.
We use historical data to estimate pre-vesting option forfeitures. We
record stock-based compensation only for those awards that are expected to
vest. If actual results differ significantly from these estimates,
stock-based compensation expense and our results of operations could be
materially impacted.
Risk
Factors
We
recognize we are subject to the following risk factors based on our operations
and the nature of the automotive industry in which we operate:
Loss of Significant Customers, Vehicle Content, Vehicle Models and Market
Share – Sales to General Motors
Company, Ford Motor Company, Chrysler Group LLC and Delphi Corporation represent
approximately 71 percent of our annual net sales (based on fiscal 2009 results)
and, accordingly, these customers account for a significant percentage of our
outstanding accounts receivable. The contracts with these customers
provide for supplying the customer’s requirements for a particular
model. The contracts do not specify a specific quantity of
parts. The contracts typically cover the life of a model, which
averages approximately four to five years. Components for 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, early cancellation of a specific
vehicle model, technological changes or a significant reduction in demand for
certain key models could occur, and if so, could have a material adverse effect
on our existing and future revenues and net income.
On April 27, 2009, General Motors announced certain aspects of its Revised
Viability Plan including reduced production volumes for calendar year 2009 and
the subsequent five years. The announcement indicated that certain
vehicle brands, including Pontiac, Saturn, Hummer and Saab, will be discontinued
or sold. In addition, subsequent to Chrysler LLC’s filing for Chapter
11 bankruptcy protection on April, 30 2009, they announced certain vehicle
models planned for discontinuation (Jeep Commander, Jeep Compass, Jeep Patriot,
Dodge Nitro, Dodge Avenger, Dodge Caliber, Dodge Durango, Dodge Dakota, Dodge
Viper, Chrysler Sebring, Chrysler Aspen etc.). Subsequently, certain
of the models have been reaffirmed for continued production over the next two
years. We continue to evaluate the impact these evolving plans have
on our business as more details become available.
Our major
customers also have significant under-funded legacy liabilities related to
pension and postretirement health care obligations. The future impact
of these items along with a continuing loss in their North American automotive
market share to the “New Domestic” automotive manufacturers (primarily the
Japanese automotive manufacturers) and/or a significant decline in the overall
market demand for new vehicles may ultimately result in severe financial
difficulty for these customers, including bankruptcy. If our major
customers cannot fund their operations, we may incur significant write-offs of
accounts receivable, incur impairment charges or require additional
restructuring actions. For example, on October 8, 2005, Delphi
Corporation filed for Chapter 11 bankruptcy protection. As a result,
we wrote-off $1.6 million of uncollectible pre-petition Chapter 11 accounts
receivable due from Delphi Corporation. This directly reduced our
pre-tax net income during fiscal 2006. On April 30, 2009, Chrysler
LLC filed for Chapter 11 bankruptcy protection for certain of their U.S. legal
entities. As discussed under Critical Accounting Policies - Other
Reserves - Allowance for Doubtful Accounts Related to Trade Accounts Receivable
herein, during fiscal year 2009 we recorded a provision for bad debts of
$500,000 related to this filing, of which we subsequently recovered $421,000 of
the $500,000 provision. This directly reduced our pre-tax net income
during 2009.
Production Slowdowns by Customers
– Our major customers and many of their suppliers have been significantly
impacted by the recession of 2008/2009. Many of our major customers
have instituted production cuts during fiscal 2009 and fiscal
2010. Moreover, certain of our major customers have announced plans
to continue these production cuts into future fiscal years. For
example, during April 2009, General Motors Corporation announced assembly plant
downtime for the months of May through July in order to reduce excess
inventories at their dealer locations. Consequently, this downtime
reduced our production schedules and affected both our sales and profitability
for our fiscal fourth quarter ending June 28, 2009 and our fiscal 2010 first
quarter ending September 27, 2009. Additionally, on April 27, 2009,
General Motors announced some aspects of its Revised Viability Plan including
reduced production volumes for the remainder of calendar 2009 and the subsequent
five calendar years. The continuation of these production cuts could
have a material adverse effect on our existing and future revenues and net
income.
Financial Distress of Automotive
Supply Base – Automotive industry conditions have adversely affected
STRATTEC and our supply base. Lower production levels at our major
customers, increases in certain raw material and energy costs and the global
credit market crisis have resulted in severe financial distress among many
companies within the automotive supply base. During calendar year
2009, several automotive suppliers filed for bankruptcy protection or
ceased operations. The continuation of financial distress within the
supply base and suppliers’ inability to obtain credit from lending institutions
may lead to commercial disputes and possible supply chain
interruptions. In addition, the adverse industry environment may
require us to take measures to ensure uninterrupted production. The
continuation or worsening of these industry conditions could have a material
adverse effect on our existing and future revenues and net income.
Cost Reduction – There is
continuing pressure from our major customers to reduce the prices we charge for
our products. This requires us to generate cost reductions, including
reductions in the cost of components purchased from outside
suppliers. If we are unable to generate sufficient production cost
savings in the future to offset pre-programmed price reductions, our gross
margin and profitability will be adversely affected.
Cyclicality and Seasonality in the
Automotive Market – The automotive market is 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, such as rising fuel costs, could
adversely impact our net sales and net income. We typically
experience decreased sales 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”, we have joint venture investments in Mexico,
Brazil and China. These operations are currently not
material. However, as these operations expand, their success will
depend, in part, on our and our partners’ ability to anticipate and effectively
manage certain risks inherent in international operations including: enforcing
agreements and collecting receivables through certain foreign legal systems,
payment cycles of foreign customers, compliance with foreign tax laws, general
economic and political conditions in these countries and compliance with foreign
laws and regulations.
Currency Exchange Rate Fluctuations
– We incur a portion of our expenses in Mexican
pesos. Exchange rate fluctuations between the U.S. dollar and the
Mexican peso could have an adverse effect on our financial results.
Sources of and Fluctuations in Market
Prices of Raw Materials – Our primary raw materials are high-grade zinc,
brass, magnesium, aluminum, steel and plastic resins. These materials
are generally available from a number of suppliers, but we have chosen to
concentrate our sourcing with one primary vendor for each commodity or purchased
component. We believe our sources of raw materials are reliable and
adequate for our needs. However, the development of future sourcing
issues related to using existing or alternative raw materials and the global
availability of these materials as well as significant fluctuations in the
market prices of these materials may have an adverse affect on our financial
results if the increased raw material costs cannot be recovered from our
customers.
Given the
significant financial impact on us relating to changes in the cost of our
primary raw materials, commencing with fiscal 2008, we began quoting quarterly
material price adjustments for changes in our raw material costs in our
negotiations with our customers. Our success in obtaining these
quarterly price adjustments in our customer contracts is dependent on separate
negotiations with each customer. It is not a standard practice for
our customers to include such price adjustments in their
contracts. We have been successful in obtaining quarterly price
adjustments in some of our customer contracts. However, we have not
been successful in obtaining the adjustments with all of our
customers.
Disruptions Due to Work Stoppages and
Other Labor Matters – Our major customers and many of their suppliers
have unionized work forces. Work stoppages or slow-downs experienced
by our customers or their suppliers could result in slow-downs or closures of
assembly plants where our products are included in assembled
vehicles. For example, strikes at a critical supplier called by the
United Auto Workers led to extended shut-downs of most of General Motors’ North
American assembly plants in February 2008 and in 1998. A material
work stoppage experienced by one or more of our customers could have an adverse
effect on our business and our financial results. In addition, all production
associates at our Milwaukee facility are unionized. A sixteen-day
strike by these associates in June 2001 resulted in increased costs 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 29,
2014. We may encounter further labor disruption after the expiration
date of this contract and may also encounter unionization efforts in our other
plants or other types of labor conflicts, any of which could have an adverse
effect on our business and our financial results.
Environmental and Safety Regulations
– We are 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 our 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). We have an environmental management system that is
ISO-14001 certified. We believe that our existing environmental
management system is adequate for current and anticipated operations and we have
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 our Milwaukee facility. The site was
contaminated by a former above-ground solvent storage tank, located on the east
side of the facility. The contamination occurred in
1985. The site is being monitored in accordance with Federal, state
and local requirements. We do not currently anticipate any material
adverse impact on our results of operations, financial condition or competitive
position as a result of compliance with Federal, state, local and foreign
environmental laws or other legal requirements. However, risk of
environmental liability and changes associated with maintaining compliance with
environmental laws is inherent in the nature of our business and there is no
assurance that material liabilities or changes could not arise.
Highly Competitive Automotive Supply
Industry – The automotive component supply industry is highly
competitive. Some of our competitors are companies, or divisions or
subsidiaries of companies, that are larger than STRATTEC and have greater
financial and technology capabilities. Our 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 sales and
profitability. Some of our major customers have also announced that
they will be reducing their supply base. This could potentially
result in the loss of these customers and consolidation within the supply
base. The loss of any of our major customers could have a material
adverse effect on our existing and future net sales and net income.
In addition, our competitive position
in the North American automotive component supply industry could be adversely
affected in the event that we are unsuccessful in making strategic acquisitions,
alliances or establishing joint ventures that would enable us to expand
globally. We principally compete for new business at the beginning of
the development of new models and upon the redesign of existing models by our
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 our business and financial
results. In addition, as a result of relatively long lead times for
many of our components, it may be difficult in the short-term for us to obtain
new sales to replace any unexpected decline in the sale of existing
products. Finally, we may incur significant product development
expense in preparing to meet anticipated customer requirements which may not be
recovered.
Program Volume and Pricing
Fluctuations – We incur costs and make capital expenditures for new
program awards based upon certain estimates of production volumes over the
anticipated program life for certain vehicles. While we attempt to
establish the price of our products for variances in production volumes, if the
actual production of certain vehicle models is significantly less than planned,
our net sales and net income may be adversely affected. We cannot
predict our customers’ demands for the products we supply either in the
aggregate or for particular reporting periods.
Investments in Customer Program
Specific Assets – We make 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 our major customers, the loss of specific vehicle models or the early
cancellation of a vehicle model could result in impairment in the value of these
assets which may have a material adverse effect on our financial
results.
Financial Industry / Credit Market
Risk - The U.S. capital and credit markets have been experiencing
volatility and disruption for over a year. In many cases this has
resulted in pressures on borrowers and reduced credit availability from certain
issuers without regard to the underlying financial strength of the borrower or
issuer. If current levels of financial market disruption and
volatility continue or worsen, there can be no assurance that such conditions
will not have an effect on the Company’s ability to access debt and, in turn,
result in a material adverse effect on the Company’s business, financial
condition and results of operations.
Item
3 Quantitative and Qualitative Disclosures About Market
Risk
Our
exposure to market risk is limited to foreign currency exchange rate risk
associated with STRATTEC’s foreign operations. We do not utilize
financial instruments for trading purposes and hold no derivative financial
instruments which would expose us to significant market risk. We have
not had outstanding borrowings since December 1997. There is,
therefore, currently no significant exposure to market risk for changes in
interest rates. To the extent that we incur future borrowings under
our line of credit, we would be subject to interest rate risk related to such
borrowings. However, we are subject to foreign currency exchange rate
exposure related to the U.S. dollar costs of our Mexican
operations. A material increase in the value of the Mexican peso
relative to the U.S. dollar would increase our expenses and, therefore, could
adversely affect our profitability.
Item
4T Controls and Procedures
We maintain disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) that are designed to ensure that information
required to be disclosed in the Company's reports filed or submitted under the
Exchange Act, is recorded, processed, summarized and reported within the time
periods specified in the Security and Exchange Commission's rules and forms, and
that the information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is accumulated and communicated to its
management, including its Principal Executive Officer and Principal Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of such period, our disclosure
controls and procedures were effective at reaching a level of reasonable
assurance. It should be noted that in designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost benefit relationship of
possible controls and procedures. We have designed our disclosure controls and
procedures to reach a level of reasonable assurance of achieving the desired
control objectives.
There was no change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934,
as amended) during our most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Part
II
Other
Information
Item 1
Legal Proceedings
In the normal course of business, we may be involved in various legal
proceedings from time to time. We do not believe we are currently
involved in any claim or action the ultimate disposition of which would have a
material adverse effect on our financial statements.
Item 1A.
- Risk Factors
Please refer to the section titled “Risk Factors” herein for disclosures
regarding the risks and uncertainties relating to our business. There
have been no material changes to the risk factors disclosed in Part 1, Item 1A,
of our Form 10-K as filed with the Securities and Exchange Commission on August
28, 2009.
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds –
Issuer
Purchases of Equity Securities
Our Board of Directors authorized a stock repurchase program on October 16,
1996, and the program was publicly announced on October 17, 1996. The
Board of Directors has periodically increased the number of shares authorized
for repurchase under the program, most recently in August 2008. The
program currently authorizes the repurchase of up to 3,839,395 shares of our
common stock from time to time, directly or through brokers or agents, and has
no expiration date. Over the life of the repurchase program through
December 27, 2009, a total of 3,655,322 shares have been repurchased at a cost
of approximately $136.4 million. No shares were repurchased during
the current quarter or six months ended December 27, 2009.
Item 3
Defaults Upon Senior Securities - None
Item 4
Submission of Matters to a Vote of Security Holders –
At our
Annual Meeting held on October 6, 2009, the shareholders voted to elect Harold
M. Stratton II and Robert Feitler as directors each for a term to expire in
2012. The number of votes cast for and withheld in the election of
Harold M. Stratton II were 2,661,683 and 9,510, respectively. The
number of votes cast for and withheld in the election of Robert Feitler were
2,666,986 and 4,207, respectively. Directors whose terms continued
after the meeting included Frank J. Krejci with a term to expire in 2010, and
Michael J. Koss and David R. Zimmer with terms expiring in 2011.
Item 5
Other Information - None
Item 6
Exhibits
(a) |
Exhibits |
|
4.4(1) |
Promissory Note
dated as of October 31, 2009 by and between the Company and M&I
Bank |
|
31.1 |
Rule
13a-14(a) Certification for Harold M. Stratton II, Chairman and Chief
Executive Officer |
|
31.2 |
Rule
13a-14(a) Certification for Patrick J. Hansen, Chief Financial
Officer |
|
32
(2) |
18
U.S.C. Section 1350 Certifications |
_____________________
(1) Incorporated
by reference from the September 28, 2009 Form 10-Q filed on November 5,
2009.
(2) This
certification is not "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or incorporated by reference
into any filing under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended.
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
STRATTEC
SECURITY CORPORATION (Registrant)
Date:
February 4,
2010
By /s/ Patrick J.
Hansen
Patrick
J. Hansen
Senior
Vice President,
Chief
Financial Officer,
Treasurer
and Secretary
(Principal
Accounting and Financial Officer)
26