STRATTEC SECURITY CORPORATION — Form 10-K Summary
Reporting period: Fiscal year ended July 1, 2012. The requested “2011 Q4” period does not match the filing; this is the fiscal 2012 annual report, with comparative fiscal years ended July 3, 2011 and June 27, 2010.
Business Context
STRATTEC manufactures automotive access-control products, including locksets, steering-column lock housings, keys with remote-entry electronics, ignition interfaces, latches, power liftgate systems, power sliding-door systems and related components. Manufacturing and assembly operations are located primarily in Milwaukee, Wisconsin, and Juarez, Mexico.
The company is developing electro-mechanical and electronic vehicle-access technologies, including passive-start systems and electronically enabled latches. It serves primarily automotive manufacturers and operates as a just-in-time supplier without a traditional backlog.
Financial Metrics and Liquidity
- Revenue, net income, operating cash flow, margins and balance-sheet liquidity: The filing text provided does not include clear consolidated financial statement values; these statements are incorporated by reference from the 2012 Annual Report to Shareholders.
- Debt: STRATTEC reported no outstanding third-party borrowings since December 1997. A credit agreement and security agreement with BMO Harris Bank were in place, but the filing does not provide a clear drawn balance.
- Research and development: $1.2 million in fiscal 2012, compared with $1.5 million in fiscal 2011 and $0.9 million in fiscal 2010.
- Foreign-exchange contracts: At July 1, 2012, Mexican peso option contracts had a fair value of $(395,000) recorded in other current liabilities. Fiscal 2012 pre-tax effects included a realized loss of $438,000 and an unrealized loss of $640,000.
- Share repurchases: No shares were repurchased during fiscal 2012. Cumulative repurchases totaled 3,655,322 shares at an approximate cost of $136.4 million; 3,839,395 shares were authorized under the program at year-end.
Material Changes Versus Prior Comparable Period
- The three largest customers—General Motors, Ford and Chrysler—represented approximately 68% of fiscal 2012 net sales, up from 66% in fiscal 2011 and 67% in fiscal 2010.
- Research and development spending declined to $1.2 million from $1.5 million in fiscal 2011, but remained above the $0.9 million spent in fiscal 2010.
- Foreign-exchange results worsened relative to fiscal 2011, when the company recorded a $245,000 unrealized gain and no realized loss from peso options; fiscal 2012 included realized and unrealized losses.
- The company entered into updated peso option contracts effective July 6, 2012 through June 28, 2013, with average contractual exchange rates of 12.40 and 13.40 Mexican pesos per U.S. dollar.
Outlook, Risks and Unusual Items
- Management expects continued investment in electronic vehicle-access products and engineering capabilities, but the filing does not provide quantified fiscal 2013 guidance.
- Business performance is highly dependent on vehicle production, model-specific programs and purchasing decisions by major customers. Loss of business or production slowdowns at GM, Ford or Chrysler could materially affect results.
- Key risks include automotive-industry demand, intense price competition, raw-material price fluctuations, foreign-currency movements, technological change, supplier concentration for commodities and labor disruptions.
- Raw materials include zinc, brass, nickel silver, steel, aluminum and plastic resins. The company generally uses one primary vendor for each commodity and has price-adjustment clauses with some, but not all, customers.
- A solvent spill from a former above-ground tank at the Milwaukee facility has resulted in site contamination that is being monitored. Management does not currently expect a material adverse financial impact, but environmental liabilities could arise.
- Effective September 1, 2012, Harold M. Stratton II retired as an employee and ceased serving as chief executive officer while remaining chairman. Frank J. Krejci became president and chief executive officer. A related letter agreement terminated certain prior employment agreements and addressed equity awards.
- Management concluded that disclosure controls and procedures were effective as of July 1, 2012, and reported no material change in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify fiscal 2012 revenue, net income, operating margin, cash flow, cash balance, working capital and capital expenditures in the incorporated financial statements and annual report.
- Review customer concentration, program awards and exposure to production changes at GM, Ford and Chrysler.
- Assess the impact of the fiscal 2012 peso-option losses and the sensitivity of Mexican operating costs to currency movements.
- Confirm the amount and availability of the BMO Harris credit facility and whether any borrowings were outstanding after year-end.
- Review raw-material pricing provisions, supplier concentration and potential margin pressure from customer price reductions.
- Examine the Milwaukee environmental matter and any associated reserves, remediation obligations or contingent liabilities.
- Evaluate the leadership transition and the financial terms of the September 2012 letter agreement with the former chief executive.