Business Context and Reporting Period
Company: Strattec Security Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 27, 2009 (First Quarter of Fiscal 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. Major customers include General Motors, Ford, and Chrysler.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Dec 27, 2009 |
6 Months Ended Dec 27, 2009 |
6 Months Ended Dec 28, 2008 |
|---|---|---|---|
| Net Sales | $52,540 | $93,721 | $68,530 |
| Gross Profit | $7,653 | $14,451 | $8,335 |
| Gross Margin % | 14.6% | 15.4% | 12.2% |
| Operating Income | $1,301 | $2,120 | $(4,286) |
| Net Income (Attributable to Strattec) | $844 | $1,787 | $(1,182) |
| Diluted EPS | $0.26 | $0.55 | $(0.36) |
| Cash from Operations (6mo) | $6,157 | ||
| Cash and Equivalents (Balance) | $22,016 | ||
| Debt | None (Line of Credit: $20M available, $0 drawn) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 55% year-over-year for the three-month period and 37% for the six-month period. This was driven by higher vehicle production volumes from major customers (Chrysler, Ford) and the inclusion of the newly acquired Delphi Power Products business (SPA).
- Profitability Turnaround: The company returned to profitability, reporting net income of $1.8 million for the six months ended Dec 27, 2009, compared to a net loss of $1.2 million in the prior year period. Operating income improved from a loss of $4.3 million to a profit of $2.1 million.
- Margin Expansion: Gross margin improved to 15.4% (6 months) from 12.2% in the prior year, aided by favorable foreign exchange rates (USD/MXN) and higher production volumes, partially offset by premium freight costs and a pension curtailment loss.
- Accounting Change: The company changed its inventory accounting method from LIFO to FIFO in the fourth quarter of fiscal 2009. Prior period data has been retrospectively adjusted to reflect this change.
Guidance, Outlook, and Risks
Management Commentary and Unusual Items
- Environmental Reserve Adjustment: A non-cash gain of $1.1 million was recorded due to a reduction in the environmental reserve for a Milwaukee facility site, based on updated third-party remediation cost estimates.
- Bad Debt Recovery: The company recorded a recovery of $421,000 related to previous bad debt provisions for Chrysler, following payments received post-bankruptcy.
- Goodwill Impairment: A non-cash impairment charge of $223,000 was recorded to write off goodwill associated with the SPA acquisition.
- Pension Curtailment: A $505,000 curtailment loss was recognized due to an amendment of the qualified defined benefit pension plan effective Jan 1, 2010, which discontinued benefit accruals for salary increases.
- Joint Venture Investment: Strattec's joint venture, VAST LLC, purchased the non-controlling interest of its Chinese entities for $9.6 million. Strattec's share was $3.2 million, funded partly by a $2.5 million loan from Strattec to VAST LLC.
Risks and Contingencies
- Customer Concentration: Sales to GM, Ford, Chrysler, and Delphi represent approximately 71% of annual net sales. Financial distress or production cuts by these customers pose significant risk.
- Raw Material Costs: Fluctuations in zinc, brass, and other raw material prices impact margins. While price adjustment clauses exist, they are not guaranteed with all customers.
- Foreign Currency: Operations in Mexico expose the company to exchange rate fluctuations between the USD and Mexican Peso.
- Legal Proceedings: No material legal proceedings are currently pending that would have a material adverse effect.
Investor Verification Checklist
- Customer Concentration: Verify the stability of production schedules for GM, Ford, and Chrysler, which drive the majority of revenue.
- Environmental Liability: Confirm the adequacy of the remaining $1.5 million environmental reserve and the likelihood of achieving closure via natural attenuation.
- Pension Obligations: Monitor future funding requirements for the defined benefit pension plan following the recent curtailment and voluntary contributions.
- Joint Venture Exposure: Assess the financial health and performance of VAST LLC, particularly regarding the recent $9.6 million acquisition of Chinese joint ventures.
- Raw Material Hedging: Review the effectiveness of price adjustment clauses with customers in offsetting rising zinc and brass costs.