Business Context and Reporting Period
Company: Strattec Security Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 28, 2010 (Nine months ended March 28, 2010)
Business Overview: Strattec designs, develops, and manufactures automotive security products (locks, keys, ignition housings) and access control products (latches, power sliding doors). The company operates primarily in North America with joint ventures in China, Brazil, and Mexico. It serves major automotive OEMs including General Motors, Ford, and Chrysler.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Mar 28, 2010 |
9 Months Ended Mar 28, 2010 |
9 Months Ended Mar 29, 2009 |
|---|---|---|---|
| Net Sales | $52,883 | $146,604 | $97,878 |
| Gross Profit | $8,861 | $23,312 | $10,398 |
| Gross Margin % | 16.8% | 15.9% | 10.6% |
| Operating Income | $1,241 | $3,361 | $(9,898) |
| Net Income (Attributable to Strattec) | $781 | $2,568 | $(4,004) |
| Diluted EPS | $0.24 | $0.78 | $(1.22) |
| Cash from Operations (9mo) | N/A | $1,498 | $(8,916) |
| Cash & Equivalents (Balance Sheet) | $15,198 | $15,198 | $22,598 |
| Debt | $0 | $0 | $0 |
Note: The company has no outstanding borrowings under its $20 million line of credit. The line of credit expires October 30, 2010.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 80% year-over-year for the nine-month period ($146.6M vs. $97.9M), driven by higher vehicle production volumes from major customers (GM, Chrysler, Ford) and the resolution of historical pricing issues.
- Profitability Turnaround: The company returned to profitability, reporting net income of $2.6M for the nine months ended March 28, 2010, compared to a net loss of $4.0M in the prior year period. Operating income improved from a loss of $9.9M to a profit of $3.4M.
- Margin Expansion: Gross margin improved to 15.9% from 10.6% due to better absorption of fixed costs from higher volumes and lower zinc prices, partially offset by a new warranty reserve and pension curtailment costs.
- Bad Debt Recovery: The company recorded a $421,000 recovery of the allowance for doubtful accounts related to Chrysler's 2009 bankruptcy, reversing a portion of the $500,000 provision taken in the prior year.
- Environmental Reserve Adjustment: A $1.1 million reduction in the environmental reserve was recorded due to updated third-party estimates for remediation costs at the Milwaukee facility.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Capital Expenditures: Anticipated to be approximately $6 million for fiscal 2010, focused on new product programs and equipment upgrades.
- Stock Repurchases: No shares were repurchased in the current period. Management anticipates minimal or no repurchase activity for the remainder of fiscal 2010 to conserve cash.
- Liquidity: Management believes the $20 million line of credit, combined with cash balances and operating cash flow, is adequate to meet requirements.
Unusual Items and Contingencies
- Warranty Reserve: A $1.2 million provision was recorded to establish a warranty reserve due to customers extending warranty programs and demanding higher cost-sharing from suppliers.
- Pension Curtailment: A $505,000 non-cash curtailment loss was recorded following an amendment to the qualified defined benefit pension plan that discontinued benefit accruals for salary increases and service after Dec 31, 2009.
- Goodwill Impairment: A $223,000 impairment charge was recognized to write off goodwill related to the STRATTEC POWER ACCESS LLC (SPA) acquisition.
- Tax Recovery: Approximately $4.8 million in tax recoveries related to Federal operating loss carry-backs was received in April 2010 following a change in the carry-back period from 2 to 5 years.
Risk Factors
- Customer Concentration: Sales to GM, Ford, Chrysler, and Delphi represented ~71% of annual net sales. Financial distress or production cuts by these customers pose significant risk.
- Raw Material Costs: Exposure to fluctuations in zinc, brass, and other raw material prices, though price adjustment clauses exist with some customers.
- Foreign Currency: Expenses incurred in Mexican pesos create exposure to exchange rate fluctuations.
- Supply Chain: Risk of supply shortages due to the financial distress of the broader automotive supply base.
Investor Verification Checklist
- Customer Concentration: Verify the stability of production schedules for GM, Ford, and Chrysler, which drive the majority of revenue.
- Warranty Exposure: Monitor the adequacy of the new $1.2 million warranty reserve against actual claims as OEMs extend warranty terms.
- Cash Flow Sustainability: Assess whether operating cash flow can sustain capital expenditures and working capital needs without drawing on the line of credit.
- Raw Material Hedging: Confirm the effectiveness of price adjustment clauses with customers in offsetting zinc and brass price volatility.
- Joint Venture Performance: Review the financial health of VAST LLC and other joint ventures, particularly regarding the recent $9.6 million purchase of non-controlling interests in China.