Business Context and Reporting Period
Company: Strattec Security Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 27, 1998
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 Dec 27, 1998 |
6 Months Ended Dec 27, 1998 |
|---|---|---|
| Net Sales | $54,529 | $94,891 |
| Gross Profit | $12,373 | $21,208 |
| Gross Margin % | 22.7% | 22.3% |
| Income from Operations | $7,343 | $11,492 |
| Net Income | $4,662 | $7,475 |
| Diluted EPS | $0.81 | $1.29 |
| Cash from Operations (6mo) | $9,376 | |
| Cash and Equivalents (End) | $17,537 | |
| Debt (Revolving Credit) | $0 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 10% in the quarter and 2% for the six-month period compared to the prior year. Quarterly growth was driven by robust vehicle build schedules, higher value content, and General Motors replenishing inventory following labor disruptions.
- Margin Expansion: Gross profit margins improved to 22.7% (quarter) and 22.3% (six months) from 20.4% and 20.1% respectively in the prior year. Improvements were due to lower zinc costs ($0.50/lb vs. $0.69/lb in the quarter) and the exclusion of a $750,000 labor agreement charge present in the prior year.
- Customer Mix: Sales to Ford increased 16% and DaimlerChrysler 11% in the quarter. Sales to General Motors increased 4% in the quarter but decreased 7% for the six-month period due to first-quarter labor disruptions.
- Working Capital: Accounts receivable increased by $4.6 million to $29.9 million, and inventories increased by $0.75 million to support higher sales levels.
Outlook, Risks, and Management Commentary
- Capital Expenditures: Actual CapEx for the six months was $3.8 million. Management anticipates 1999 CapEx to be between $7 million and $8 million to support new product programs.
- Stock Repurchases: The Board authorized a repurchase of up to 589,395 shares. As of December 27, 1998, 271,500 shares were repurchased at a cost of approximately $6.0 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 general economic conditions, demand for automotive products, competitive developments, foreign currency fluctuations (specifically Mexican peso), and Year 2000 compliance issues.
Investor Verification Checklist
- Verify the sustainability of the 10% quarterly sales growth, specifically the extent to which it relies on General Motors' inventory replenishment versus organic demand.
- Monitor zinc commodity prices, as a significant portion of the margin improvement is attributed to lower zinc costs.
- Confirm the status of the Year 2000 compliance plan for high-risk suppliers, as the Company relies on on-site assessments for these entities.
- Review the impact of the Mexican peso devaluation on future margins, noting the functional currency of the Mexican operation is the U.S. dollar.
- Track the remaining authorized share repurchases and their impact on earnings per share.