Item 1. Business
The information set forth under “Company Description” which appears on pages 5 through 10 of the Company’s 2007 Annual Report to Shareholders is incorporated herein by reference. For information as to export sales, see the information set forth under “Notes to Financial Statements-Export Sales” included on page 35 of the Company’s 2007 Annual Report to Shareholders, which is incorporated herein by reference.
Emerging Technologies
Automotive vehicle access systems, which are both theft deterrent and consumer friendly, are being developed as electro-mechanical devices. Electronic companies are developing user identification systems such as bio-systems, card holder (transmitter) systems, etc., while mechanical locks, keys, housings, and latches are evolving to accommodate the electronics. This will result in more secure vehicles and eventually accommodate passive entry and passive start systems. The Company believes it is positioning itself as a vehicle access control supplier by building its product, engineering and manufacturing expertise in the required electro-mechanical products, which include vehicle access latches, keys with remote entry electronic systems, and housing-ignition systems with passive start capabilities.
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.
Sources and Availability of Raw Materials
The primary raw materials used by the Company are high-grade zinc, brass, magnesium, 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-Sources of and Fluctuations in Market Prices of Raw Materials” included on page 17 of the Company’s 2007 Annual Report to Shareholders, which is incorporated herein by reference.
Patents, Trademarks and Other Intellectual Property
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.
Dependence Upon Significant Customers
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 80 percent, 80 percent and 82 percent of the Company’s total net sales in each fiscal year 2007, 2006 and 2005, respectively. Further information regarding sales to the Company’s largest customers is set forth under the caption “Risk Factors - Loss of Significant Customers, Vehicle Content and Market Share” included on page 17 of the Company’s 2007 Annual Report to Shareholders and “Notes to Financial Statements-Sales and Receivable Concentration” included on page 35 of the Company’s 2007 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.
The Company has recently added resources and increased its emphasis on the New Domestic and the Tier 1 customer base.
Sales and Marketing
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 regularly provides innovative design proposals for new model ignition locks, door locks, tailgate latches and ignition lock housings to 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 several 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, a commitment is made 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. Production quantity 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.
Competition
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 has strengthened 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, Honda Lock, Methode, and Shin Chang. For additional information related to competition, see the information set forth under “Risk Factors-Highly Competitive Automotive Supply Industry” included on page 18 of the Company’s 2007 Annual Report to Shareholders, which is incorporated herein by reference.
Research and Development
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 improvements. In addition, specialized data collection equipment is developed to facilitate increased product development efficiency and continuous quality improvements. For fiscal years 2007, 2006, and 2005, the Company spent approximately $1,500,000, $2,300,000, and $2,000,000, 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 associated 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.
Customer Tooling
The Company incurs costs related to tooling used in component production and assembly. See the information set forth under “Notes to Financial Statements-Customer Tooling in Progress” included on page 24 of the Company’s 2007 Annual Report to Shareholders, which is incorporated herein by reference.
Environmental Compliance
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 “Notes to Financial Statements-Commitments and Contingencies” included on pages 28 and 29 of the Company’s 2007 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 a former 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.
Employees
At July 1, 2007, the Company had approximately 2,150 full-time employees, of which approximately 246 or 11% percent were represented by a labor union, which accounts for all production associates at the Company’s Milwaukee facility. In June 2005, a new contract with the unionized associates was ratified and is effective through June 29, 2008. 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 are discussed under “Risk Factors-Disruptions Due to Work Stoppages and Other labor Matters” included on pages 17 and 18 of the Company’s 2007 Annual Report to Shareholders, which is incorporated herein by reference.
Available Information
The Company maintains its corporate website at www.strattec.com and makes available, free of charge, through this website its code of business ethics, annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports that the Company files with, or furnishes to, the Securities and Exchange Commission (the “Commission”) as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Commission. Information on the Company’s website is not part of this report.
Item 1A.
Item 1A. Risk Factors
The information set forth under “Risk Factors” which appears on pages 17 and 18 of the Company’s 2007 Annual Report to Shareholders is incorporated herein by reference.
Item 1B.
Item 1B. Unresolved Staff Comments
Not Applicable
Item 2.
Item 2. Properties
The Company has three manufacturing plants, one warehouse, and a sales office. These facilities are described as follows:
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.
Item 3.
Item 3. Legal Proceedings
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.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of shareholders during the fourth quarter of fiscal 2007.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s 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 under the program, most recently in February 2006 when an additional 200,000 shares was authorized for repurchase. The program currently authorizes the repurchase of up to 3,639,395 shares of the Company’s 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 July 1, 2007, a total of 3,384,700 shares have been repurchased at a cost of approximately $127.1 million.
Issuer Purchases of Equity Securities:
The Company’s common stock is traded on the NASDAQ Global Market under the symbol “STRT.”
The information set forth under “Financial Summary - Quarterly Financial Data (Unaudited)” included on page 39 of the Company’s 2007 Annual Report to Shareholders is incorporated herein by reference.
Item 6.
Item 6. Selected Financial Data
The information set forth under “Five Year Financial Summary” which appears on page 39 of the Company’s 2007 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” included elsewhere herein.
Item 7.
Item 7. 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 18 of the Company’s 2007 Annual Report to Shareholders is incorporated herein by reference.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company did not hold any market risk sensitive instruments during the period covered by this report.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements, together with the report thereon of Grant Thornton LLP dated August 21, 2007, the report of management on internal control over financial reporting and the report of Grant Thornton LLP on internal control over financial reporting dated August 21, 2007, which appear on pages 19 through 38 of the Company’s 2007 Annual Report to Shareholders, are incorporated herein by reference.
Our quarterly results of operations is included under “Financial Summary-Quarterly Financial Data (Unaudited)” which appears on page 39 of the Company’s 2007 Annual Report to Shareholders is incorporated herein by reference.
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.
Item 9A. Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a - 15(e) and 15d - 15(e) under the Securities Exchange Act of 1934, as amended). Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in reports that the Company files with or submits to the 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 was necessarily 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 concluded 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 Exchange Act) that occurred during the quarter ended July 1, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The report of management required under this Item 9a is included on page 36 of the Company’s 2007 Annual Report to Shareholders under the heading “Report on Management’s Assessment of Internal Control over Financial Reporting” and is incorporated herein by reference.
The attestation report required under this Item 9a is included on page 37 of the Company’s 2007 Annual Report to Shareholders under the heading “Report of Independent Registered Public Accounting Firm” and is incorporated herein by reference.
Item 9B.
Item 9B. Other Information
Effective August 24, 2007, the Company amended the Economic Value Added Plan for Executive Officers and Senior Managers (the “Executive EVA Plan”) and the Economic Value Added Plan for Non-Employee Members of the Board of Directors (the “Director EVA Plan”), the purposes of which are to provide incentive compensation to certain key employees, including all executive officers, and non-employee members of the Company’s board of directors in a form which relates the financial reward to an increase in the value of the Company to its shareholders. Copies of the amended Executive EVA Plan and amended Director EVA Plan are attached hereto as exhibits and are incorporated herein by reference.
The amendments to the Executive EVA Plan modify the plan as follows:
•
Under the Executive EVA plan as previously amended on August 22, 2006, a participant could not receive a bonus payment even if the individual participant met their own personal objectives if no bonuses were to be paid to participants in the Company’s Economic Value Added Bonus Plan for Salaried Employees or Economic Value Added Bonus Plan for Represented Employee Associates because the Company’s performance factor was below zero. This restriction has been eliminated so that individual performance can be rewarded based on the participants meeting his or her personal objectives.
•
A participant’s Bonus Bank balance may not be negative.
•
The plan no longer excludes cash and investments in determining the Company’s level of capital employed in its business. Additionally, the plan assumes that the Company’s capital structure is 80% equity and 20% debt. Using this assumed capital structure, the Company’s cost of capital under the amended plan has been set at 10% for fiscal 2008. The Company’s Compensation Committee will review the Company’s cost of capital annually prior to each fiscal year.
•
The EVA plan target for fiscal year 2008 was set at $1,154,000.
•
The EVA leverage factor under the plan was reduced from 5% to 3%. The EVA leverage factor for the plan for fiscal year 2008 was set at $3,316,000.
The amendments to the Director EVA Plan modify the plan as follows:
PART III
Item 10.
Item 10. Directors and Executive Officers and Corporate Governance
The information on pages 2, 3, 5, 6, 9 through 11 and 14 of the Company’s Proxy Statement, dated August 30, 2007, under “Proposal: Election of Directors,” “Code of Business Ethics,” “Audit Committee Financial Expert,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance”, and “Director Nominations” 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 consist of four outside independent Directors, Michael J. Koss, Audit Committee Chairman, Robert Feitler, Frank J. Krejci and David R. Zimmer.
Item 11.
Item 11. Executive Compensation
The information on pages 15 through 36 of the Company’s Proxy Statement, dated August 30, 2007, under “Director Compensation” and “Executive Compensation” is incorporated herein by reference.
The information incorporated by reference from “Report of Compensation Committee” in the Company’s Proxy Statement, dated August 30, 2007, shall not be deemed “Filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Security Exchange Act of 1933, except as shall be expressly set forth by specific reference in such filing.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information on pages 12 through 14 of the Company’s Proxy Statement, dated August 30, 2007, under “Security Ownership” is incorporated herein by reference.
Equity Compensation Plan Information
The following table summarizes share information, as of July 1, 2007, for the Company’s Stock Incentive Plan.
Item 13.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information on page 37 of the Company’s Proxy Statement, dated August 30, 2007, under “Executive Compensation” and “Director Independence” is incorporated herein by reference.
Item 14.
Item 14. Principal Accountant Fees and Services
The information on page 8 of the Company’s Proxy Statement, dated August 30, 2007, under “Fees of Independent Registered Public Accounting Firm” is incorporated herein by reference.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a)
The following documents are filed as part of this report:
(b)
Exhibits
The response to this portion of Item 15 is submitted as a separate section of this report.
(c)
Financial Statement Schedules
The response to this portion of Item 15 is submitted as a separate section of this report.
SIGNATURES
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 30, 2007
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.
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-K