Strattec Security Corporation

3333 W. Good Hope Road
Milwaukee, Wisconsin 53209
U.S.A.
Telephone: (414) 247-3333
Fax: (414) 247-3329
Web site: http://www.strattec.com

Public Company
Incorporated: 1994
Employees: 2,000
Sales: $195.6 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: STRT
NAIC: 336399 All Other Motor Vehicle Parts Manufacturing

Milwaukee, Wisconsin-based Strattec Security Corporation is a spinoff of Briggs & Stratton Corporation's automotive lock division. Since gaining its independence in 1995, Strattec has become the largest maker of automotive locks and keys in the world. The company also serves the heavy truck, recreational vehicle, marine, and industrial markets. Product offerings include mechanical and electromechanical locks as well as security/access control products and latches. In addition to automakers, Strattec supports automotive aftermarket customers. More than 80 percent of the company's revenues come from four customers, automakers Ford, General Motors (GM), and Daimler-Chrysler, and auto parts manufacturer Delphi Corporation. Through a series of joint ventures in Germany, Brazil, and China, Strattec has gained a global presence. Strattec is a public company listed on the NASDAQ.

Lineage Dating to the Early 1900s

Although Briggs & Stratton is best known today for its lawnmower and other outdoor power equipment engines, when the company was founded it was very much focused on the automobile, eventually establishing a lucrative automotive key business. The men behind the Briggs & Stratton name were Stephen Foster Briggs, an electrical engineer and inventor, and Harold M. Stratton, who had launched a successful business career at his uncle's grain trading partnership. The two young men became partners in 1908, interested in manufacturing the six-cylinder, two-cycle automobile engine Briggs had designed while a student at South Dakota State College, from which he had recently graduated. Unfortunately the engine was not suited to mass production and the partners tried to become involved in automaking, creating a model called the Superior assembled from third-party parts. When this effort failed as well, all but forcing the company into bankruptcy, Briggs & Stratton looked to the specialty parts market. Briggs invented a new starter that gave the young company a foothold in the electrical specialties sector. By the start of the 1920s Briggs & Stratton was the United States' largest maker of ignitions, starting switches, regulators, and specialty lights. The company was casting about for other profitable niches as well, trying any number of products that it soon abandoned, such as oil filters and air cleaners. It also looked outside the automotive industry, trying its hand at producing radios, refrigerators, candy display stands, soap containers, and calendar banks. In 1924 Briggs & Stratton became involved in the automotive key business, a niche that proved profitable and became a mainstay.

Briggs & Stratton developed a new zinc die-cast lock cylinder that was far superior to the standard brass models. During this period, automobiles relied on a bevy of locks and keys, not just for the doors and ignition system but also the transmission, spare tire, and radio. Briggs & Stratton took advantage of this arrangement by creating a system of locks that could be opened by a single master key, which the company sold for 75 cents to many a frustrated driver. In 1929 Briggs & Stratton shipped more than 11 million automotive locks, more than 75 percent of the market, making it the largest maker of automotive locks in the world. The company added ancillary products, such as key cutting machines, key depth deciders, key code books, coding tools, and specialized tools used to service the locks. Automotive locks and accessories became Briggs & Stratton's main business, accounting for 70 percent of all sales, but the company also was pursuing a new product line that would eventually surpass locks in importance: small engines.

In 1919 Briggs & Stratton acquired the A.O. Smith Motor Wheel, which used a small gasoline engine that could propel a bicycle. The company reengineered the engine and found various applications for its different models, including lawnmowers and garden tractors, and compressors, generators, and pumps. But the most popular use of a Briggs & Stratton small engine was in washing machines, which became the main market in the 1930s. By the early 1940s Briggs & Stratton's business was almost equally divided between automotive locks and small engines.

With automobile production severely limited during World War II Briggs & Stratton's automotive key unit shifted its focus to war-related items such as ignition switches for airplanes and aircraft guns, and detonating fuses for bombs and artillery shells. The company's small engines found a multitude of applications in all branches of the military, used in generators, mobile kitchens, repair shops, emergency hospitals, water purification systems, pumps, compressors, and ventilating fans. Demand was so strong for the engines that sales, less $800,000 in 1938, grew to $6 million in 1944, the last full year of the war.

World War II: A Watershed Moment

World War II proved to be a watershed moment for Briggs & Stratton, as the automotive key business was surpassed in importance by the company's small engines. During the postwar housing boom, as servicemen returned home and began raising the Baby Boom generation of children in the country's new suburbs, Briggs & Stratton's small gasoline engines found an increasing market in lawn and garden equipment, so much so that Briggs & Stratton in the mind of many consumers became synonymous with the lawnmower. The lock business was now part of Briggs & Stratton's Automotive Division and, although overshadowed by the company's small engines, remained a leader in its field, due in large part to the contributions of Edward Jacobi, who during his 53 years with Briggs & Stratton was responsible for more than 225 patents relating to locks. During the 1940s, for example, Jacobi invented the unit shutter, the ubiquitous flap that slides over an exterior car lock to prevent the interior from being contaminated by the elements. Another important Jacobi contribution during this time was the pick-resistant side-bar lock.

Locks and the Automotive Division in general lessened in importance to Briggs & Stratton over the succeeding decades. By 1980 the company was in a dominant position in the world's small engine market, but new competition in the form of Japanese companies including Honda, Kawasaki, Suzuki, and Mitsubishi soon began to have an impact. Not only did the company have to deal with a shifting marketplace in small engines, as well as labor problems, it had to contend with a lock and key division that now accounted for just 7 percent of Briggs and Stratton's revenues. It too was struggling during the mid-1980s. Failing to win wage concessions from labor, and unable to gain further advantages through automation, the automotive division, renamed the Technologies Division in 1987, built a plant in Mexico, resulting in the loss of 200 jobs in Milwaukee.

For the first time in half a century Briggs & Stratton posted a major loss in 1989, some $20 million. The company began to rebound in the 1990s, regaining market share from its Japanese rivals. But to remain competitive in its core business, Briggs & Stratton needed to focus its resources and, to accomplish this task, management decided in May 1994 to spin off the automotive lock business, which would likely benefit as well from the separation, because an independent public company would be able to sell stock and secure loans to gain the funding it needed to pursue its own business strategies.

In September 1994 Briggs & Stratton formed a subsidiary to house the automotive key assets, naming it Strattec Security Corporation. A plan was then announced to distribute one share of Strattec as a special dividend to Briggs & Stratton shareholders for every five shares of the parent company they owned. At the same time, a shareholders rights plan, a poison pill, would be implemented, set to be triggered if any entity accumulated as much as 20 percent of Strattec's common stock. The distribution took place on February 27, 1995.

Life After Briggs & Stratton in the Late 1990s

Strattec, headed by President and CEO Harry Stratton, began its independent existence on an uptick. Revenues had improved more than 18 percent from the fiscal year ending June 30, 1993, to fiscal 1994, when sales totaled $97.1 million and net income amounted to $7.8 million. Through the first half of 1995, sales were up another 17 percent. Moreover, the company had little debt and recently landed new business from Ford, contracted to make locks for the Ford F150 pickup truck and the Ford Taurus, North America's number one selling pickup and auto. But now that it was on its own and a pure-play automotive parts company, Strattec had to contend with Wall Street's misgivings about auto industry stocks. It also faced rising competition from European and Japanese companies, which were beginning to enter the North American market.

Ironically, to curry favor with Ford, Strattec had to support one of its foreign rivals, German corporation Hulsbeck and Furst GmbH and its effort to break into the market through subsidiary Huf-North America. When Ford opted to drop Tennessee-based Hurd Corp. as its lockset supplier because, unlike Strattec, it failed to keep up with new developments in the field, the automaker divided its business between Strattec and Huf. Ford did not want to be dependent on a single supplier, and as a result be left vulnerable in pricing as well as to labor problems the supplier might encounter. Thus Ford strongly urged Strattec to help Huf get up to speed in establishing its North American manufacturing operation. Although the level of cooperation between the two companies was confidential, it was likely that Strattec was helping Huf in designing lock systems for automakers, a role the company had assumed over the years. The relationship between the two firms was cooperative, but remained competitive as well. Huf planned to gain market share in the United States, and that necessarily meant it would go after some of Strattec's business. On the other hand, Strattec was looking overseas, with a long-term plan to do business in Europe and compete with Huf in its home market.

Company Perspectives:

While a young company under its current name, Strattec brings a long tradition in innovation, adaptation and customer service into the future.

According to the Milwaukee Journal Sentinel in a June 1995 article, the newly independent Strattec displayed an entrepreneurial spirit and enthusiasm usually found in a young company, rather than one that had been exploiting its niche for 70 years. The article also quoted analyst David Leiker who believed that Strattec was "well-positioned to benefit from the evolution to electro-mechanical and, eventually, electronic lock systems. 'The real sizzle here and the real growth is on the ignition switch,' Leiker said. 'Thieves can break windows to bypass door locks, but steering wheel systems like the Strattecdeveloped GM Pass-Key are more difficult to penetrate.' " Moreover, these newer products offered a higher margin, and as the company continued in efforts to reduce costs, it improved its profitability, which in turn allowed it "to pick up additional business from this lower cost base," according to Leiker.

The price of Strattec shares grew over the ensuing months, but the company was unable to control all the variables inherent in its business. The production side fell short, turning out far too many parts that failed to meet requirements. Manufacturing was unable to keep up with sales, resulting in shipping delays, and greater than expected shipping costs because the late parts would have to go air freight. This led to lower profits, missed financial projections, and dissatisfied investors who in turn bid down the price of Strattec stock.

Not only did the company have to sort out its production problems, it had to gear up to be more of a global player to simply keep pace with its customers, automakers who were planning operations around the world and needed suppliers to follow suit. Strattec planned to expand internationally either through joint ventures or acquisitions. It first looked to Europe, where the automotive key business was highly fragmented and where there were ample opportunities for Strattec to ally itself with a small or mid-sized company. The first step in this direction was a 1996 alliance with British lock manufacturer C.E. Marshall Ltd. to produce locksets for Ford's Jaguar subsidiary.

As the U.S. economy soared during the second half of the 1990s, U.S. automakers prospered as well, as did Strattec. Sales grew from $139.8 million in fiscal 1996 to $202.6 million in fiscal 1999, while net income during this period increased from $7.7 million to $17 million. A 1998 GM strike caused some layoffs but did little to hinder Strattec's strong growth in the late 1990s. Throughout this time the company invested heavily in research and development to keep pace with the increasing influence of electronics in vehicle security. It also pursued globalization efforts, and in 1999 began talks with German company E. Witte Verwaltungsgesellschaft GmbH, which culminated in the November 2000 signing of an alliance agreement that allowed Strattec to sell Witte products in North America and Witte to sell Strattec products in Europe. The two companies also established a joint venture, Witte-Strattec LLC, to sell both companies' products outside of North America and Europe. Witte-Strattec then entered into a joint venture with IFER Estamparia e Ferramentaria Ltda., forming Witte-Strattec do Brasil to sell the parent companies' products in South America.

After completing a stellar year in 2000, when sales reached $224.8 million and net income totaled $18.5 million, Strattec experienced a challenging 2001. As the U.S. economy slumped, auto sales slipped, resulting in reduced automotive production and less demand for lockset and security systems. Strattec was further hurt by labor problems. Company and union negotiators reached a new three-year contract in June 2001 only to have the union's rank and file reject the deal. A 16-day strike ensued, not ending until the two sides hammered out a four-year agreement, which the union members finally ratified. In 2001, sales dipped to $203 million and net income dropped to $13 million.

Globalization efforts continued in the 2000s, as Witte-Strattec China was formed in 2002 and Witte-Strattec Great Shanghai Co. was formed in 2004. Strattec also had to contend with other changes in the automotive industry. Because of new remote keyless locking systems, automakers were eliminating trunk and passenger side lock cylinders. As a result, Strattec was providing fewer parts per car, leading to lower sales, which now hovered below the $200 million mark. Management took steps to restructure the company to make it less dependent on traditional product lines and the big three automakers. New products included ignition lock housings and integrated key systems. Moreover, a beefed-up sales team began to push Strattec's door latches and access control-related products. Strattec remained profitable, netting $17.3 million on sales of $195.6 million in 2004, but the company's future was both promising and uncertain.

Principal Subsidiaries

STRATTEC de Mexico S.A. de C.V.; STRATTEC Componentes Automotrices S.A. de C.V.

Principal Competitors

Chubb PLC; Directed Electronics, Inc.; The Eastern Company.

Key Dates:

1908:: Briggs & Stratton is founded to produce automobile engines.
1924:: Briggs & Stratton becomes involved in the automotive key business.
1994:: Strattec is formed as a Briggs & Stratton automotive key subsidiary.
1995:: Strattec is spun off as a separate company.
2000:: A joint venture with German company E. Witte Verwaltungsgesellschaft GmbH is established, forming Witte-Strattec LLC; Witte-Strattec enters into a joint venture with IFER Estamparia e Ferramentaria Ltda., forming Witte-Strattec do Brasil.
2002:: The Witte-Strattec China joint venture is formed.
2004:: Witte-Strattec Great Shanghai Co. is formed.