Business Context and Reporting Period
Company: Strattec Security Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 27, 2009
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 facilities in the U.S. and Mexico, and participates in the VAST Alliance for global expansion. It serves major automotive OEMs including General Motors, Ford, and Chrysler.
Key Financial Metrics
| Metric (in thousands) | Q1 FY2010 (Ended Sep 27, 2009) |
Q1 FY2009 (Ended Sep 28, 2008) |
|---|---|---|
| Net Sales | $41,181 | $34,731 |
| Gross Profit | $6,798 | $5,424 |
| Gross Margin | 16.5% | 15.6% |
| Operating Income | $819 | $(528) |
| Net Income (Total) | $929 | $206 |
| Net Income Attributable to Strattec | $943 | $20 |
| Diluted EPS | $0.29 | $0.01 |
| Cash from Operations | $1,186 | $683 |
| Cash and Equivalents (Ending) | $22,230 | $41,058 |
| Total Debt | $0 | $0 |
Note: Prior year figures have been retrospectively adjusted for a change in inventory accounting from LIFO to FIFO.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 18.6% to $41.2 million, driven by higher sales to Chrysler ($12.8M vs $7.1M) and new business from the acquired Delphi Power Products unit (SPA). Sales to GM declined due to lower production volumes.
- Profitability Improvement: The company returned to profitability with $819k in operating income compared to a $528k loss in the prior year. This was aided by a favorable Mexican Peso exchange rate (approx. 13.30 vs 10.25) which reduced costs by $1.2M, partially offset by higher expediting costs.
- Bad Debt Recovery: A $220,000 recovery of bad debts was recorded, reversing a portion of a $500,000 provision taken in the prior year related to Chrysler's bankruptcy.
- Other Income: Net other income increased to $428k, primarily due to a $283k gain on the Rabbi Trust (supplemental executive retirement plan), compared to a loss in the prior year.
Guidance, Outlook, and Risks
- Capital Expenditures: Management anticipates capital expenditures of $5 million to $6 million for fiscal 2010, focused on new product programs and equipment upgrades.
- Stock Repurchases: While authorized to repurchase up to 3.84 million shares, the company anticipates minimal or no repurchase activity in fiscal 2010 to conserve cash.
- Pension Plan Changes: Subsequent to the period end, the company amended its U.S. pension plans to discontinue benefit accruals for salary increases and service after Dec 31, 2009, and delayed wage increases. Financial impacts are pending actuarial calculation.
- Joint Venture Acquisition: VAST LLC (in which Strattec holds an interest) agreed to purchase the non-controlling interest in its Chinese joint ventures for $9.6 million (Strattec's share: $3.2M), pending government approval.
- Risk Factors: Significant risks include the financial distress of major customers (GM, Chrysler, Ford), production slowdowns, raw material price fluctuations (zinc, brass), and foreign currency exposure (Mexican Peso).
Investor Verification Checklist
- Customer Concentration: Verify the stability of the top three customers (GM, Ford, Chrysler), which represent approximately 71% of annual net sales.
- Chrysler Receivables: Confirm the collectibility of the $10.7 million outstanding receivable balance from Chrysler following their bankruptcy restructuring.
- Inventory Accounting: Review the impact of the retrospective change from LIFO to FIFO on inventory valuation and cost of goods sold.
- Pension Obligations: Monitor the final actuarial impact of the pension plan amendments announced in October 2009 on future expense and cash flow.
- Foreign Currency: Assess the sensitivity of future margins to fluctuations in the U.S. Dollar/Mexican Peso exchange rate.