Business Context and Reporting Period
Company: Strattec Security Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 28, 1999
Business Overview: The Company designs, develops, manufactures, and markets mechanical and electro-mechanical locks and security products for major automotive manufacturers. Operations include a wholly owned Mexican subsidiary and a foreign sales corporation.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Mar 28, 1999 | 9 Months Ended Mar 28, 1999 |
|---|---|---|
| Net Sales | $51,220 | $146,111 |
| Gross Profit | $12,071 | $33,279 |
| Gross Margin % | 23.6% | 22.8% |
| Income from Operations | $6,993 | $18,485 |
| Net Income | $4,471 | $11,946 |
| Diluted EPS | $0.77 | $2.06 |
| Cash from Operations (9mo) | $14,825 | |
| Cash and Equivalents (Ending) | $21,089 | |
| Debt (Revolving Credit) | $0 (No outstanding borrowings) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 8% in the quarter and 4% for the nine-month period compared to the prior year. Growth was driven by robust vehicle build schedules and higher value content.
- Customer Mix: Sales to DaimlerChrysler (+20% Q/Q, +19% 9mo) and Ford (+19% Q/Q, +12% 9mo) increased significantly. Sales to General Motors decreased 3% for the nine-month period due to labor disruptions in the first quarter.
- Margin Expansion: Gross profit margins improved to 23.6% (quarter) and 22.8% (nine months) from 22.4% and 20.9% respectively. Drivers included favorable product mix, higher production volumes absorbing fixed overhead, lower zinc costs ($0.53/lb vs $0.70/lb prior year), and a devalued Mexican peso.
- Expense Increases: Engineering, selling, and administrative expenses rose due to hiring associates to support current and future programs.
- Working Capital: Accounts receivable increased by $9.4 million to $34.7 million, primarily due to higher sales levels and outstanding billings for customer tooling.
Guidance, Outlook, and Risks
- Capital Expenditures: The Company anticipates fiscal 1999 capital expenditures of approximately $8 million to support new product programs.
- Stock Repurchases: The Board authorized a program to repurchase up to 589,395 shares. As of March 28, 1999, 278,000 shares were repurchased at a cost of approximately $6.2 million.
- Liquidity: The Company maintains a $25 million unsecured revolving credit facility with no outstanding borrowings. Management believes cash flow and the credit facility are adequate for future needs.
- Year 2000 Compliance: The Company is classified as a "low risk" supplier by the Automotive Industries Action Group. Costs incurred to date are not material, and future costs are not expected to be material.
- Risks: Key risks include dependence on significant customers, general economic conditions, foreign currency fluctuations (specifically the Mexican peso), and competitive developments.
Investor Verification Checklist
- Verify the sustainability of sales growth with DaimlerChrysler and Ford versus the impact of GM labor disruptions.
- Monitor zinc commodity prices, as a significant portion of raw material costs is tied to this metal.
- Assess the impact of Mexican peso exchange rate fluctuations on future margins given the assembly operations in Juarez.
- Confirm the timeline and cost implications of Year 2000 compliance for high-risk suppliers.
- Review the progress of the stock repurchase program and its impact on share count and EPS.