STRATTEC SECURITY CORP annual report, FY2015

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Business Context and Reporting Period

STRATTEC SECURITY CORPORATION filed this Form 10-K for the fiscal year ended June 28, 2015. The request references “2014 Q4,” but the provided filing is an annual fiscal 2015 report, not a fiscal 2014 fourth-quarter filing.

The Company supplies automotive access-control products, including locksets, keys and fobs, ignition systems, latches, door handles, power liftgate systems and related components. Manufacturing and assembly operations are located in the United States and Mexico. Approximately 3,420 full-time employees were employed at June 28, 2015.

Key Financial Metrics

  • Revenue, net income, operating income, margins and operating cash flow: The filing text provided does not include clear values. The consolidated financial statements and MD&A are incorporated by reference from the 2015 Annual Report to Shareholders.
  • Debt: $10 million of borrowings were outstanding under secured revolving credit facilities at June 28, 2015.
  • Interest expense: $71,000 for fiscal 2015. Management stated that a 10% change in interest rates would not materially affect financial position, results or cash flows.
  • Liquidity: The filing does not provide a clear cash balance, available revolver capacity or liquidity ratio in the supplied text.
  • Research and development: Fiscal 2015 spending was approximately $280,000, compared with $700,000 in fiscal 2014 and $1.3 million in fiscal 2013.
  • Customer concentration: General Motors, Ford and Fiat Chrysler accounted for approximately 65% of fiscal 2015 net sales, versus 70% in fiscal 2014 and 66% in fiscal 2013.
  • Share repurchases: No shares were repurchased during fiscal 2015. Cumulative repurchases through June 28, 2015 totaled 3,655,322 shares at an aggregate cost of approximately $136.4 million. The program had 3,839,395 shares authorized and no expiration date.

Material Changes Versus Prior Comparable Period

  • Customer concentration declined to approximately 65% of sales in fiscal 2015 from 70% in fiscal 2014.
  • Research and development spending declined to approximately $280,000 from $700,000 in fiscal 2014.
  • The filing states that no shares were repurchased during fiscal 2015 or during the fiscal 2015 fourth quarter.
  • No Mexican peso currency option contracts were in effect during fiscal 2015 or fiscal 2014. The prior contracts expired June 28, 2013.
  • The credit agreements were amended on June 25, 2015; the supplied text does not describe the economic terms of those amendments.

Guidance, Outlook, Risks and Unusual Items

The filing does not provide a quantified financial forecast or formal earnings guidance in the supplied text. Management indicated that existing production facilities were expected to support operations for the foreseeable future and that the Company intended to continue investing in research and development as required to support product programs.

  • Customer dependence: Products are generally model-specific, and a loss of volume, purchasing changes or production slowdowns at General Motors, Ford or Fiat Chrysler could materially affect results.
  • Automotive cyclicality: Results depend on vehicle production, consumer demand, economic conditions and customers’ product platforms.
  • Raw materials: Key inputs include zinc, brass, nickel silver, steel, aluminum and plastic resins. The Company concentrates sourcing with one primary vendor for each commodity or purchased component, creating supply and pricing exposure.
  • Pricing recovery: The Company has obtained quarterly zinc price adjustments from some, but not all, customers; unrecovered cost increases could pressure margins.
  • Foreign currency: Mexican peso fluctuations affect the U.S.-dollar cost of Mexican operations. No currency options were outstanding at fiscal year-end.
  • Competition and technology: Increasing electronic content in vehicle access systems may attract competitors with greater electronic expertise and increase development requirements.
  • Environmental contingency: A Milwaukee facility site was contaminated by a 1985 solvent spill and is being monitored. Management did not expect a material adverse impact but acknowledged inherent environmental-liability risk.
  • Legal matters: The Company stated that no current legal proceeding was expected to have a material adverse effect on its financial statements.
  • Controls: Management concluded that disclosure controls and procedures were effective as of June 28, 2015, and reported no material change in internal control over financial reporting during the fourth quarter.

Investor Verification Checklist

  1. Verify fiscal 2015 and fiscal 2014 revenue, net income, diluted earnings per share, operating margins and operating cash flow in the incorporated Annual Report to Shareholders.
  2. Verify cash, working capital, revolver capacity, covenant compliance and total liquidity at June 28, 2015.
  3. Review the MD&A for the drivers of the decline in research and development spending and the change in customer concentration.
  4. Review the June 25, 2015 amendments to the Company and ADAC-STRATTEC credit agreements.
  5. Assess exposure to General Motors, Ford and Fiat Chrysler, including vehicle-program concentration and production outlook.
  6. Review raw-material price-adjustment provisions and the status of the Milwaukee environmental matter.
  7. Confirm whether subsequent Mexican peso options or other subsequent events materially changed currency or liquidity exposure.