Strattec Security - 10-K annual report

      For the fiscal year ended June 27, 2004.

 

Commission File Number 0-25150

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

The aggregate market value of the voting Common Stock held by non-affiliates of the registrant as of December 28, 2003 (the last business day of the Registrant's most recently completed second quarter), was approximately $215,411,000 (based upon the last reported sale price of the Common Stock at December 28, 2003, on the NASDAQ National Market).

On August 2, 2004, there were outstanding 3,830,318 shares of $.01 par value Common Stock.

Documents Incorporated by Reference

      

 

The information set forth under “Company Description” which appears on pages 5 through 10 of the Company’s 2004 Annual Report to Shareholders is incorporated herein by reference. For information as to export sales, see the information set forth under “Export Sales” included on page 30 of the Company’s 2004 Annual Report to Shareholders, which is incorporated herein by reference.

 

Automotive vehicle access systems, which are both theft deterrent and end user friendly, are being developed as mechanical-electrical devices. Electronic companies are developing user identification systems such as bio-systems, card holder (transmitter) systems, etc., while locks and door latches are metamorphosing to accommodate the electronics. This will result in more secure vehicles and eventually passive entry and passive start. The Company believes it is positioning itself as a vehicle security system supplier by building its product, engineering and manufacturing expertise in the required electro-mechanical products, that include vehicle access latches, keys with assembled remote entry electronic systems, and passive entry systems.

Innovations in alternative materials could eliminate the need for grease and hexavalent chromiom, reduce mass and offer potential cost reductions for suppliers and original equipment manufacturers.

These technologies benefit the Company by increasing the potential customer base as a tier 2 supplier while attaining tier 1 status on some product lines and adding additional product line availability.

 

The primary raw materials used by the Company are high-grade zinc, brass, aluminum and plastic resins. These materials are generally available from a number of suppliers, but the Company has chosen to concentrate its sourcing with one primary vendor for each commodity. The Company believes its sources for raw materials are very reliable and adequate for its needs. The Company has not experienced any significant long term supply problems in its operations and does not anticipate any significant supply problems in the foreseeable future. See further discussion under “Risk Factors” included on page 15 of the Company’s 2004 Annual Report to Shareholders, which is incorporated herein by reference.

 

The Company believes that the success of its business will not only result from the technical competence, creativity and marketing abilities of its employees but also from the protection of its intellectual property through patents, trademarks and copyrights. As part of its ongoing research, development and manufacturing activities, the Company has a policy of seeking patents on new products, processes and improvements when appropriate.

Although, in the aggregate, the patents discussed above are of considerable importance to the manufacturing and marketing of many of its products, the Company does not consider any single patent or trademark or group of patents or trademarks to be material to its business as a whole, except for the STRATTEC and STRATTEC with logo trademarks.

 

The Company also relies upon trade secret protection for its confidential and proprietary information. The Company maintains confidentiality agreements with its key executives. In addition, the Company enters into confidentiality agreements with selected suppliers, consultants and associates as appropriate to evaluate new products or business relationships pertinent to the success of the Company. However, there can be no assurance that others will not independently obtain similar information and techniques or otherwise gain access to the Company's trade secrets or that the Company can effectively protect its trade secrets.

 

A very significant portion of the Company’s annual sales are to General Motors Corporation, Delphi Corporation, Ford Motor Company, and DaimlerChrysler Corporation. These four customers accounted for approximately 81 percent to 84 percent of the Company’s total net sales in each fiscal year 2002 through 2004. Further information regarding sales to the Company’s largest customers is set forth under “Risk Factors” included on page 14 of the Company’s 2004 Annual Report to Shareholders and “Sales and Receivable Concentration” included on page 30 of the Company’s 2004 Annual Report to Shareholders, both of which are incorporated herein by reference.

The products sold to these customers are model specific, fitting only certain defined applications. Consequently, the Company is highly dependent on its major customers for their business, and on these customers' ability to produce and sell vehicles which utilize the Company's products. The Company has enjoyed relationships with General Motors Corporation, DaimlerChrysler Corporation, Ford Motor Company, and Delphi Corporation in the past, and expects to do so in the future. However, a significant change in the purchasing practices of, or a significant loss of volume from, one or more of these customers could have a detrimental effect on the Company's financial performance.

 

On July 22, 2004, Mitsubishi publicly announced the discontinuation of second shift operations at their Normal, Illinois assembly plant by October 2004, thereby further reducing their production volumes to approximately 140,000 vehicles annually in North America. This will result in reduced Company sales to Mitsubishi in fiscal 2005 and 2006. In addition, due primarily to the economic pressures affecting Mitsubishi, they have informed the Company that they intend to consolidate the purchase of their lock set requirements with their Japanese supplier for the 2007 model year. This will effectively end the Company’s supply of production requirements to Mitsubishi by the start of its 2007 fiscal year. Mitsubishi represented approximately 3.5 percent of the Company’s fiscal 2004 sales.

 

The Company provides its customers with engineered locksets, steering column lock housings and latches, which are unique to specific vehicles. Any given vehicle will typically take 1 to 3 years of development and engineering design time prior to being offered to the public. The locksets, lock housings and latches are designed concurrently with the vehicle. Therefore, commitment to the Company as the production source occurs 1 to 3 years prior to the start of production. The Company employs an engineering staff that assists in providing design and technical solutions to its customers. The Company believes that its engineering expertise is a competitive advantage and contributes toward its strong market position. For example, the Company believes it has recently provided innovative design proposals for new model ignition locks, door locks, tailgate latches and ignition housing locks t o its customers that will improve vehicle security system quality, theft deterrence and system cost.

 

The typical process used by automotive manufacturers in selecting a lock, lock housing or latch supplier is to offer the business opportunity to the Company and various of the Company's competitors. Each competitor will pursue the opportunity, doing its best to provide the customer with the most attractive proposal. Price pressure is strong during this process but once an agreement is reached, the price is fixed for each year of the product program. Typically, price reductions resulting from productivity improvement by the Company are included in the contract and are estimated in evaluating each of these opportunities by the Company. A blanket purchase order, a contract indicating a specified part will be supplied at a specified price during a defined time period, is issued by customers for each model year. Product run releases or quantity commitments are made to that purchase order for weekly deliveries to the customer. As a consequence and because the Company is a "Just-in-Time" supplier to the automotive industry, it does not maintain a backlog of orders in the classic sense for future production and shipment.

 

 

The Company competes with domestic and foreign-based competitors on the basis of custom product design, engineering support, quality, delivery and price. While the number of direct competitors is currently relatively small, the automotive manufacturers actively encourage competition between potential suppliers. The Company has a dominant share of the North American market because of its ability to provide total value, which is a beneficial combination of price, quality, technical support, program management innovation and aftermarket support. In order to reduce lockset or housing production costs while still offering a wide range of technical support, the Company utilizes assembly and component manufacturing operations in Mexico, which results in lower labor costs as compared to the United States.

As locks become more sophisticated and involve additional electronics, competitors with specific electronic expertise may emerge to challenge the Company. To address this, the Company is strengthening its electrical engineering knowledge and service. It is also working with several electronics suppliers to jointly develop and supply these advanced products.

The Company’s lockset and housing competitors include Huf North America, Ushin-Ortech, Tokai-Rika, Alpha-Tech Valeo, Methode, Shin Chang, and Pollak. For additional information related to competition, see the information set forth under “Risk Factors” included on page 16 of the Company’s 2004 Annual Report to Shareholders, which is incorporated herein by reference.

The Company engages in research and development activities pertinent to automotive access control. A major area of focus for research is the expanding role of vehicle access via electronic interlocks and modes of communicating authorization data between consumers and vehicles. Development activities include new products, applications and product performance improvement. In addition, specialized data collection equipment is developed to facilitate increased product development efficiency and continuous quality improvements. For fiscal years 2004, 2003, and 2002, the Company spent $2,000,000, $2,400,000, and $2,200,000, respectively, on research and development. The Company believes that, historically, it has committed sufficient resources to research and development and anticipates increasing such expenditures in the future as required to support additional product programs associate d with both existing and new customers. Patents are pursued and will continue to be pursued as appropriate to protect the Company's interests resulting from these activities.

The Company incurs costs related to tooling used in component production and assembly. See the information set forth under “Customer Tooling in Progress” included on page 22 of the Company’s 2004 Annual Report to Shareholders, which is incorporated herein by reference.

 

 

As is the case with other manufacturers, the Company is subject to federal, state, local and foreign laws and other legal requirements relating to the generation, storage, transport, treatment and disposal of materials as a result of its housing, lock and key manufacturing and assembly operations. These laws include the Resource Conservation and Recovery Act (as amended), the Clean Air Act (as amended), the Clean Water Act of 1990 (as amended) and the Comprehensive Environmental Response, Compensation and Liability Act (as amended). The Company has an environmental management system that is ISO-14001 certified. The Company believes that its existing environmental management system is adequate and it has no current plans for substantial capital expenditures in the environmental area.

 

As discussed in “Commitments and Contingencies” included on page 25 of the Company’s 2004 Annual Report to Shareholders, which is incorporated herein by reference, a site at the Company’s Milwaukee facility is contaminated by a solvent spill from an above-ground solvent storage tank located on the east side of the facility, which occurred in 1985. This situation is being monitored by the Company.

 

The Company does not currently anticipate any materially adverse impact on its financial statements or competitive position as a result of compliance with federal, state, local and foreign environmental laws or other legal requirements. However, risk of environmental liability and charges associated with maintaining compliance with environmental laws is inherent in the nature of the Company's business and there is no assurance that material liabilities or charges could not arise.

 

 

At June 27, 2004, the Company had approximately 2,000 full-time employees, of which approximately 355 or 18% percent were represented by a labor union, which accounts for all production associates at the Company’s Milwaukee facility. During June 2001, there was a 16-day strike by the represented employees at the Company's Milwaukee facility. Further information regarding the strike, work stoppages and other labor matters is discussed under “Risk Factors” included on page 15 of the Company’s 2004 Annual Report to Shareholders, which is incorporated herein by reference.

 

 

The Company has three manufacturing plants, one warehouse, and a sales office. These facilities are described as follows:

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The Company believes its production facilities are adequate for the foreseeable future as they relate to the Company’s current products. As the Company evaluates and expands into other products, consideration of further production facilities will be necessary.

 

In the normal course of business the Company may be involved in various legal proceedings from time to time. The Company does not believe it is currently involved in any claim or action the ultimate disposition of which would have a material adverse effect on the Company’s financial statements.

There were no matters submitted to a vote of shareholders during the fourth quarter of fiscal 2004.

 

The information set forth under “Revolving Credit Facility” included on page 25 of the Company’s 2004 Annual Report to Shareholders is incorporated herein by reference.

The information set forth under “Five Year Financial Summary” which appears on page 32 of the Company’s 2004 Annual Report to Shareholders is incorporated herein by reference. Such information should be read along with the Company’s financial statements and the notes to those financial statements and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The information set forth under “Management’s Discussion and Analysis” which appears on pages 11 through 17 of the Company’s 2004 Annual Report to Shareholders is incorporated herein by reference.

The Company did not hold any market risk sensitive instruments during the period covered by this report.

The financial statements, together with the report thereon of Grant Thornton LLP dated July 27, 2004, and the quarterly financial data which appear on pages 18 through 32 of the Company’s 2004 Annual Report to Shareholders, are incorporated herein by reference. The report of Deloitte & Touche LLP is included on page 9 in this Form 10-K Report.

The Quarterly Financial Data (unaudited) which appears on page 32 of the Company’s 2004 Annual Report to Shareholders is incorporated herein by reference.

 

controls and procedures were effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic filings with the Securities and Exchange Commission. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company has designed its disclosure controls and procedures to reach a level of reasonable assurance of achieving the desired control objectives and, based on the evaluation described above, the Company's Chief Executive Officer and Chief Financial Officer conc luded that the Company's disclosure controls and procedures were effective at reaching that level of reasonable assurance.

There was no change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the Company's most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

Not applicable.

The information on pages 2, 5, 6, 8 and 11 of the Company’s Proxy Statement, dated August 26, 2004, under “Election of Directors,” “Code of Business Ethics,” “Audit Committee Financial Expert,” “Executive Officers,” and “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference.

The Audit Committee of the Company’s Board of Directors is an “audit committee” for purposes of Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the Audit Committee are Michael J. Koss, Robert Feitler and Frank J. Krejci.

The information on pages 7 and 15 through 19 of the Company’s Proxy Statement, dated August 26, 2004, under “Compensation of Directors” and “Executive Compensation” is incorporated herein by reference.

The information on pages 9 and 10 of the Company’s Proxy Statement, dated August 26, 2004, under “Security Ownership” is incorporated herein by reference.

The following table summarizes share information, as of June 27, 2004, for the Company's Stock Incentive Plan.

 

 

 

 

To the Board of Directors and Shareholders of STRATTEC SECURITY CORPORATION:

 

We have audited the accompanying consolidated balance sheet of STRATTEC SECURITY CORPORATION and subsidiaries as of June 29, 2003, and the related consolidated statements of income, shareholders’ equity and cash flows for the years ended June 29, 2003 and June 30, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such 2003 and 2002 financial statements present fairly, in all material respects, the financial position of STRATTEC SECURITY CORPORATION and subsidiaries, as of June 29, 2003, and the results of their operations and their cash flows for the years ended June 29, 2003 and June 30, 2002, in conformity with accounting principles generally accepted in the United States of America.

 

 

Deloitte & Touche LLP

Milwaukee, Wisconsin

July 29, 2003

 

Pursuant to the requirements of Section 13 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.

Date: August 17, 2004

STRATTEC SECURITY CORPORATION

 

  Harold M. Stratton II,

      Chairman and Chief Executive Officer

Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.