STRATTEC SECURITY CORPORATION — Fiscal 2014 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended June 29, 2014, with comparative balance-sheet information as of June 30, 2013 and comparative operating and cash-flow information for fiscal 2013 and 2012. STRATTEC designs and manufactures automotive access-control products, including locksets, keys, fobs, ignition systems, latches, handles, power doors and liftgates, and related components. Manufacturing and assembly operations are located primarily in the United States and Mexico.
The company is pursuing electro-mechanical vehicle-access technologies, including passive-start ignition systems, electronic keys and remote-entry systems. It generally operates as a just-in-time supplier and does not maintain a traditional backlog.
Financial metrics and liquidity
- Revenue, net income, operating income, margins and operating cash flow: The filing text incorporates the Annual Report to Shareholders for the detailed financial statements, but does not provide clear values for these metrics.
- Debt: Borrowings under secured revolving credit facilities totaled $2.5 million at June 29, 2014. Fiscal 2014 interest expense on these borrowings was $45,000.
- Interest-rate exposure: Management stated that a 10% change in interest rates would not materially affect financial position, results of operations or cash flows.
- Capital allocation: No shares were repurchased during fiscal 2014. Cumulative repurchases under the program totaled 3,655,322 shares at an aggregate cost of approximately $136.4 million; 3,839,395 shares remained authorized for repurchase at year-end.
- Research and development: Fiscal 2014 spending was approximately $700,000, compared with $1.3 million in fiscal 2013 and $1.2 million in fiscal 2012.
- Liquidity detail: The filing text does not provide clear cash, current assets, current liabilities, revolver capacity or free-cash-flow values.
Material changes versus prior comparable periods
- The company’s three largest customers—General Motors, Ford and Chrysler—represented approximately 70% of fiscal 2014 net sales, up from 66% in fiscal 2013 and 68% in fiscal 2012.
- No Mexican peso currency-option contracts were in effect during fiscal 2014, compared with contracts in fiscal 2013. The contracts had generated fiscal 2013 other-income effects including a $27,000 realized gain, a $39,000 realized loss and a $395,000 unrealized gain.
- Fiscal 2014 research-and-development spending declined by approximately $600,000 from fiscal 2013.
- The prior labor agreement covering Milwaukee production employees expired on June 29, 2014. A replacement agreement was rejected, and operations continued under the prior contract’s terms and conditions.
- In July 2014, after year-end, the company entered into agreements to purchase buildings in Michigan and Juarez, Mexico. The Michigan property is expected to replace two leased facilities, while the Juarez property is expected to support additional Mexican operations.
Guidance, outlook, risks and unusual items
- No specific financial guidance or quantified outlook is provided in the filing text.
- Management expects existing production facilities, together with the planned Mexico facility, to support production for the foreseeable future and intends to continue investing in research and development as needed for new and existing product programs.
- Major risks include dependence on General Motors, Ford and Chrysler; model-specific product demand; customer production slowdowns or purchasing changes; intense automotive-supplier competition; pricing pressure and required productivity reductions; raw-material price volatility; foreign-exchange exposure from Mexican peso costs; and technological shifts toward electronics.
- The company concentrates sourcing with one primary vendor for each major commodity or purchased component. Although management reports no significant long-term supply problems, disruptions or unrecovered material-cost increases could adversely affect results.
- A solvent spill from 1985 contaminated a site at the Milwaukee facility. The matter is being monitored, and management does not currently expect a material adverse financial impact, but environmental liabilities could arise.
- Approximately 232 of 3,276 full-time employees, or 7.1%, were union-represented at year-end. Work stoppages and labor negotiations remain a risk.
- The company had no outstanding Mexican peso options at year-end, leaving its Mexican operating costs exposed to currency fluctuations.
- Management concluded that disclosure controls and procedures were effective at a reasonable-assurance level, with no material change in internal control over financial reporting during the quarter ended June 29, 2014.
- The company reported no unresolved SEC staff comments and no legal proceeding that it believed would materially adversely affect its financial statements.
Important facts for investors to verify
- Verify fiscal 2014 revenue, gross margin, operating income, net income, diluted earnings per share and operating cash flow in the incorporated Annual Report to Shareholders.
- Review cash balances, working capital, revolver availability, debt maturities and covenant terms.
- Assess the sustainability of the approximately 70% sales concentration among General Motors, Ford and Chrysler.
- Evaluate the effect of the rejected union contract and any subsequent labor developments at Milwaukee.
- Review the financial commitments and operating benefits associated with the post-year-end Michigan and Juarez property purchases.
- Assess exposure to zinc, steel, aluminum, plastics and other raw-material prices, including the extent of customer pass-through provisions.
- Review the status and potential cost of the Milwaukee environmental contamination matter.