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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q


[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 27, 2005

or

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number 0-25150
 

STRATTEC SECURITY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
 
Wisconsin
  
39-1804239
(State of Incorporation)
  
(I.R.S. Employer Identification No.)

3333 West Good Hope Road, Milwaukee, WI 53209
(Address of Principal Executive Offices)

(414) 247-3333
(Registrant’s Telephone Number, Including Area Code)
 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES  X   NO ___

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES  X    NO ___

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Common stock, par value $0.01 per share: 3,782,507 shares outstanding as of March 27, 2005.


STRATTEC SECURITY CORPORATION

FORM 10-Q

March 27, 2005

INDEX


Part I - FINANCIAL INFORMATION

   
Page
Item 1
Financial Statements
  
 
Condensed Consolidated Statements of Income
3
 
Condensed Consolidated Balance Sheets
4
 
Condensed Consolidated Statements of Cash Flows
5
 
Notes to Condensed Consolidated Financial Statements
6-8
Item 2
Management’s Discussion and Analysis of Financial Condition and
  
 
Results of Operations
9-15
Item 3
Quantitative and Qualitative Disclosures About Market Risk
15
Item 4
Controls and Procedures
15


Part II - OTHER INFORMATION

Item 1
Legal Proceedings
16
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
16
Item 3
Defaults Upon Senior Securities
16
Item 4
Submission of Matters to a Vote of Security Holders
16
Item 5
Other Information
16
Item 6
Exhibits
16
 

2

Item 1 Financial Statements
 
STRATTEC SECURITY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)

 
   
Three Months Ended 
  
Nine Months Ended
  
   
March 27,
  
March 28,
  
March 27,
  
March 28,
  
   
 2005
  
2004
  
2005
  
2004
  
                   
                           
Net sales
  
$
46,102
  
$
49,266
  
$
139,129
  
$
143,700
  
Cost of goods sold
    
35,892
    
37,082
    
106,700
    
108,956
  
Gross profit
    
10,210
    
12,184
    
32,429
    
34,744
  
Engineering, selling and administrative
                          
expenses
    
4,822
    
5,132
    
14,836
    
15,033
  
Income from operations
    
5,388
    
7,052
    
17,593
    
19,711
  
Interest income
    
326
    
112
    
742
    
289
  
Other (expense) income, net
    
(50
)
  
(49
)
  
109
    
237
  
Income before provision for income taxes
    
5,664
    
7,115
    
18,444
    
20,237
  
Provision for income taxes
    
1,933
    
2,668
    
6,662
    
7,589
  
Net income
  
$
3,731
  
$
4,447
  
$
11,782
  
$
12,648
  
                           
Earnings per share:
                          
Basic
  
$
0.98
  
$
1.17
  
$
3.10
  
$
3.35
  
Diluted
  
$
0.98
  
$
1.15
  
$
3.07
  
$
3.30
  
Average Shares Outstanding:
                          
Basic
    
3,798
    
3,802
    
3,803
    
3,775
  
Diluted
    
3,815
    
3,873
    
3,836
    
3,838
  

The accompanying notes are an integral part of these condensed consolidated statements.


3

STRATTEC SECURITY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
 
   
March 27, 
    June 27,  
   
2005
  
2004
  
ASSETS
  
(unaudited)
     
Current Assets:
          
Cash and cash equivalents
  
$
51,357
  
$
54,231
  
Receivables, net
    
28,793
    
30,931
  
Inventories-
              
Finished products
    
3,761
    
2,659
  
Work in process
    
5,177
    
4,620
 
Purchased Materials
    
5,684
    
4,441
 
LIFO adjustment
    
(2,863
)
  
(3,359
)
Total inventories
    
11,759
    
8,361
 
Other current assets
    
9,943
    
10,903
 
Total current assets
    
101,852
    
104,426
 
               
Investment in joint ventures
    
1,349
    
1,336
  
Prepaid pension obligations
    
605
    
-
  
               
Property, plant and equipment
    
104,236
    
102,610
  
Less: accumulated depreciation
    
(74,909
)
  
(71,182
)
Net property, plant and equipment
    
29,327
    
31,428
 
               
   
$
133,133
  
$
137,190
  
               
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
          
Accounts payable
  
$
16,409
  
$
18,787
  
Accrued Liabilities:
              
Payroll and benefits
    
6,940
    
11,067
  
Environmental reserve
    
2,701
    
2,710
 
Other
   
4,211
    
2,720
 
Total current liabilities
    
30,261
    
35,284
 
               
Deferred income taxes
    
543
    
543
  
Accrued postretirement obligations
    
5,096
    
11,511
 
               
Shareholders' equity:
              
Common stock, authorized 12,000,000 shares $.01 par value,
              
 issued 6,853,647 shares at March 27, 2005 and 6,754,892 shares at June 27, 2004
    
69
    
68
  
Capital in excess of par value
    
74,793
    
70,415
 
Retained earnings
    
142,012
    
130,230
 
Accumulated other comprehensive loss
    
(5,348
)
  
(5,385
)
Less: treasury stock, at cost (3,071,140 shares at March 27,
              
2005 and 2,926,687 shares at June 27, 2004)
    
(114,293
)
  
(105,476
)
Total shareholders' equity
    
97,233
    
89,852
 
               
   
$
133,133
  
$
137,190
  
 
The accompanying notes are an integral part of these condensed consolidated balance sheets.

4

STRATTEC SECURITY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
 
   
Nine Months Ended 
  
   
March 27,
  
March 28,
  
   
2005 
  
2004
  
   
(unaudited)
  
CASH FLOWS FROM OPERATING ACTIVITIES:
          
Net income
  
$
11,782
  
$
12,648
  
Adjustments to reconcile net income to net cash provided
              
by operating activities:
              
Depreciation
   
5,440
    
5,842
  
Change in operating assets and liabilities:
              
Receivables
    
2,145
    
(746
)
Inventories
    
(3,398
)
  
(984
)
Other assets
    
363
    
1,627
  
Accounts payable and accrued liabilities
    
(11,458
)
  
(3,106
)
Tax benefit from options exercised
    
949
    
1,107
  
Other, net
    
224
    
(121
)
Net cash provided by operating activities
    
6,047
    
16,267
  
               
CASH FLOWS FROM INVESTING ACTIVITIES:
              
Investment in joint ventures
    
(75
)
  
(125
)
Purchase of property, plant and equipment
    
(3,455
)
  
(3,550
)
Net cash used in investing activities
    
(3,530
)
  
(3,675
)
               
CASH FLOWS FROM FINANCING ACTIVITIES:
              
Purchase of treasury stock
    
(8,826
)
  
(3,614
)
Exercise of stock options
    
3,435
    
4,504
  
Net cash (used in) provided by financing activities
    
(5,391
)
  
890
  
               
NET (DECREASE) INCREASE IN CASH AND
              
CASH EQUIVALENTS
    
(2,874
)
  
13,482
  
               
CASH AND CASH EQUIVALENTS
              
Beginning of period
    
54,231
    
29,902
  
End of period
  
$
51,357
  
$
43,384
  
               
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
              
Income taxes paid
  
$
4,957
  
$
4,893
  
Interest paid
    
-
    
-
  
 
The accompanying notes are an integral part of these condensed consolidated statements.

5

STRATTEC SECURITY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Basis of Financial Statements
STRATTEC SECURITY CORPORATION and subsidiaries (collectively the “Company”) designs, develops, manufacturers and markets mechanical locks, electro-mechanical locks, latches and related security/access control products for global automotive manufacturers. The accompanying condensed unaudited financial statements reflect the consolidated results of the Company and its wholly owned Mexican subsidiaries.

In the opinion of management, the accompanying unaudited financial statements contain all adjustments, which are of a normal recurring nature, necessary to present fairly the financial position of the Company as of March 27, 2005, and the results of operations and cash flows for the three and nine month periods then ended. All significant intercompany transactions have been eliminated. Interim financial results are not necessarily indicative of operating results for an entire year.

These financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company’s 2004 Annual Report.

Earnings Per Share (EPS)
A reconciliation of the components of the basic and diluted per-share computations follows (in thousands, except per share amounts):

   
Three Months Ended
  
   
 
   
March 27, 2005
  
March 28, 2004
  
   
 
 
Weighted
 
 
 
 
 
Weighted
 
 
 
 
 
Net
 
Average
 
Per-Share
 
Net
 
Average
 
Per-Share
 
 
 
Income
 
Shares
 
Amount 
 
Income
 
Shares
 
Amount
  
   
 
 
 
 
 
 
Basic Earnings Per Share
  
$
3,731
    
3,798
  
$
0.98
  
$
4,447
    
3,802
  
$
1.17
  
     
     
Stock Options
          
17
                
71
        
         
             
       
Diluted Earnings Per Share
  
$
3,731
    
3,815
  
$
0.98
  
$
4,447
    
3,873
  
$
1.15
  
         
 
       
 
 
 

   
Nine Months Ended
  
   
 
   
March 27, 2005
  
March 28, 2004
  
   
 
 
   
 
  
Weighted
  
 
  
 
  
Weighted
  
 
  
 
  
Net
  
Average
  
Per-Share
  
Net
  
Average
  
Per-Share
  
 
  
Income
  
Shares
  
Amount 
  
Income
  
Shares
  
Amount
  
   
 
 
 
 
 
 
Basic Earnings Per Share
  
$
11,782
    
3,803
  
$
3.10
  
$
12,648
    
3,775
  
$
3.35
  
               
             
 
Stock Options
    
 
    
33
    
 
    
 
    
63
        
         
             
       
Diluted Earnings Per Share
  
$
11,782
    
3,836
  
$
3.07
  
$
12,648
    
3,838
  
$
3.30
  
         
 
       
 
 
 
    All outstanding options were included in the computation of diluted EPS as of March 28, 2004. Options to purchase the following shares of common stock were outstanding as of March 27, 2005, but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares:

Exercise
Period Ended
Shares
  Price
 
 
 
March 27, 2005
48,540
$58.59
 
53,290
$61.68
 
4,500
$63.25
 
45,000
$62.20
 
58,040
$76.70
 
6
 
Comprehensive Income
The following table presents the Company’s comprehensive income (in thousands): 

   
 Three Months Ended
  
Nine Months Ended
  
 
  
 
 
 
  
March 27,
  
March 28,
  
March 27,
  
March 28,
  
 
  
2005
  
2004
  
2005
  
2004
  
   
 
 
 
 
Net Income
  
$
3,731
  
$
4,447
  
$
11,782
  
$
12,648
  
Change in Cumulative Translation
   
 
    
 
    
 
    
 
  
Adjustments, net
    
(57
)
  
34
    
37
    
(202
)
   
 
 
 
 
Total Comprehensive Income
  
$
3,674
  
$
4,481
  
$
11,819
  
$
12,446
  
   
 
 
 
 
 
Stock Based Compensation
The Company accounts for its stock-based compensation plans using the intrinsic value method. Accordingly, no compensation cost related to these plans was charged against earnings during fiscal 2005 and 2004. Had compensation cost for these plans been determined using the fair value method rather than the intrinsic value method, the pro forma impact on earnings per share would have been as follows (in thousands, except per share amounts):

   
 Three Months Ended
 
Nine Months Ended
 
 
 
 
 
 
 
March 27,
 
March 28,
 
March 27,
 
March 28,
 
 
 
2005
 
2004
 
2005
 
2004
  
   
 
 
 
 
Net Income as Reported
  
$
3,731
  
$
4,447
  
$
11,782
  
$
12,648
  
Less Compensation Expense Determined
                          
Under Fair Value Method, net of tax
    
(227
)
  
(218
)
  
(721
)
  
(689
)
   
 
 
 
 
Pro Forma Net Income
  
$
3,504
  
$
4,229
  
$
11,061
  
$
11,959
  
   
 
 
 
 
Basic EPS as Reported
  
$
0.98
  
$
1.17
  
$
3.10
  
$
3.35
  
Pro Forma Basic EPS
  
$
0.92
  
$
1.11
  
$
2.91
  
$
3.17
  
                           
Diluted EPS as Reported
  
$
0.98
  
$
1.15
  
$
3.07
  
$
3.30
  
Pro Forma Diluted EPS
  
$
0.92
  
$
1.10
  
$
2.90
  
$
3.13
  
 
In December 2004, the Financial Accounting Standards Board (FASB) issued a revision to Statement of Financial Accounting Standards No. 123, “Share Based Payment,” which requires the recognition of compensation cost related to stock-based compensation plans in the financial statements using a fair value based method. The pro-forma impact as stated above will be recognized in the financial statements for reporting periods beginning in fiscal 2006.
 
Pension and Other Post-retirement Benefits

The Company has a noncontributory defined benefit pension plan covering substantially all U.S. associates. Benefits are based on years of service and final average compensation. The Company's policy is to fund at least the minimum actuarially computed annual contribution required under the Employee Retirement Income Security Act of 1974 (ERISA). Plan assets consist primarily of listed equity and fixed income securities. The Company has a noncontributory supplemental executive retirement plan (SERP), which is a nonqualified defined benefit plan pursuant to which the Company will pay supplemental pension benefits to certain key employees upon retirement based upon the employees’ years of service and compensation. The SERP is being funded through a rabbi trust with M&I Trust Company.

The Company also sponsors a post-retirement health care plan. The Company recognizes the expected cost of retiree health care benefits for substantially all U.S. associates during the years that the associates render service. Any new U.S. associates hired after June 1, 2001 are no longer eligible for post-retirement plan benefits. The postretirement health care plan is unfunded.
7
 
    The following table summarizes the net periodic benefit cost recognized for each of the periods indicated (in thousands):
 
   
Pension Benefits
  
Postretirement Benefits
  
   
Three Months Ended
  
Three Months Ended
  
   
March 27,
2005
  
March 28,
2004
  
March 27,
2005
  
March 28,
2004
  
COMPONENTS OF NET PERIODIC BENEFIT COST:
                  
Service cost
  
$
545
  
$
548
  
$
74
  
$
79
  
Interest cost
    
871
    
814
    
147
    
141
  
Expected return on plan assets
    
(1,049
)
  
(864
)
  
-
    
-
  
Amortization of prior service cost
    
2
    
2
    
4
    
4
  
Amortization of unrecognized net loss
    
49
    
46
    
61
    
58
  
Amortization of net transition asset
    
(12
)
  
(36
)
  
-
    
-
  
Net periodic benefit cost
  
$
406
  
$
510
  
$
286
  
$
282
  

   
Pension Benefits
  
Postretirement Benefits
  
   
Nine Months Ended
  
Nine Months Ended
  
   
March 27,
2005
  
March 28,
2004
  
March 27,
2005
  
March 28,
2004
  
COMPONENTS OF NET PERIODIC BENEFIT COST:
                  
Service cost
  
$
1,637
  
$
1,648
  
$
220
  
$
237
  
Interest cost
    
2,613
    
2,440
    
443
    
423
  
Expected return on plan assets
    
(3,147
)
  
(2,594
)
  
-
    
-
  
Amortization of prior service cost
    
6
    
6
    
8
    
8
  
Amortization of unrecognized net loss
    
145
    
140
    
187
    
176
  
Amortization of net transition asset
    
(36
)
  
(112
)
  
-
    
-
  
Net periodic benefit cost
  
$
1,218
  
$
1,528
  
$
858
  
$
844
  

During the nine months ended March 27, 2005 and March 28, 2004, the Company contributed $8 million and $5 million, respectively, to the qualified pension. No additional contributions are anticipated to be made during the remainder of fiscal 2005.

In May 2004, the FASB issued Financial Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the Act), to address the impact of the Act enacted in December 2003. The Act provides a prescription drug benefit for Medicare eligible employees starting in 2006. The impact of the Act on the Company is not expected to be material.

8

Item 2
STRATTEC SECURITY CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis should be read in conjunction with the Company’s accompanying Financial Statements and Notes thereto and the Company’s 2004 Annual Report. Unless otherwise indicated, all references to years refer to fiscal years.

Analysis of Results of Operations

Three months ended March 27, 2005 compared to the three months ended March 28, 2004

Net sales for the three months ended March 27, 2005, decreased $3.2 million to $46.1 million compared to net sales of $49.3 million for the three months ended March 28, 2004. Overall sales to the Company’s largest customers decreased in the current quarter compared to the prior year quarter levels. Sales to DaimlerChrysler Corporation increased significantly during the quarter to $13.1 million compared to $11.5 million due to additional product content. Sales to General Motors Corporation were $9.8 million compared to $11.9 million due to a combination of price reductions, discontinued models and lower levels of production on certain vehicles the Company supplies. Sales to Delphi Corporation were $6.8 million compared to $7.6 million due to pre-programmed price reductions and lower vehicle production volumes. Sales to Mitsubishi Motor Manufacturing of America, Inc. were $1.1 million in the current quarter compared to $1.6 million in the prior year quarter due to lower vehicle production volumes. Sales to Ford Motor Company were $8.3 million compared to $8.8 million due to pre-programmed price reductions and lower vehicle production volumes. Sales to Auto Alliance International, Ford Motor’s Company’s joint venture assembly plant with Mazda, were $667,000 in the current quarter and represents new lockset content related to the Ford Mustang. Reduced aftermarket and industrial sales represent the remaining decrease in the current quarter’s overall sales.

Gross profit as a percentage of net sales was 22.1 percent in the current quarter compared to 24.7 percent in the prior year quarter. The lower gross profit margins in the current year quarter were primarily the result of higher raw material costs for brass, zinc and magnesium, lower production volumes and a less favorable overall sales mix. The average zinc price per pound increased to $0.61 in the current quarter compared to $0.46 in the prior year quarter. The average brass price per pound increased to $1.92 in the current quarter from $1.80 in the prior year quarter. The Company uses an average of approximately 750,000 pounds of zinc per month and an average of approximately 200,000 pounds of brass per month. Increases in the cost of magnesium resulted in price increases in purchased housing components from vendors of approximately $165,000 during the current quarter.

Engineering, selling and administrative expenses were $4.8 million in the current quarter, compared to $5.1 million in the prior year quarter.

Income from operations was $5.4 million in the current quarter compared to $7.1 million in the prior year quarter. The decrease is primarily the result of the decreased sales and gross profit margin as discussed above.

The effective income tax rate for the current quarter was 34.1 percent compared to 37.5 percent in the prior year quarter. The current quarter income tax provision includes a state refund claim recovery. The claim recovery net of the federal income tax impact was $162,000. The overall effective tax rate differs from the federal statutory tax rate primarily due to the effects of state income taxes.
 
9

Nine months ended March 27, 2005 compared to the nine months ended March 28, 2004

Net sales for the nine months ended March 27, 2005, decreased $4.6 million to $139.1 million compared to net sales of $143.7 million for the nine months ended March 28, 2004. The overall reduction in sales is the result of lower customer vehicle production, discontinued models and pre-programmed price decreases. The negative factors were partially offset by new program sales and additional content changes on existing products. The change in sales to the Company’s largest customers in the current period compared to the prior year period include General Motors Corporation at $32.0 million compared to $38.5 million, Delphi Corporation at $21.6 million compared to $22.6 million, DaimlerChrysler Corporation at $36.8 million compared to $29.8 million, Ford Motor Company at $23.8 million compared to $25.2 million and Mitsubishi Motor Manufacturing of America, Inc. at $3.4 million compared to $5.5 million. Sales to Auto Alliance International, Ford Motor’s Company’s joint venture assembly plant with Mazda, were $1.4 million in the current year period and represents new lockset content related to the Ford Mustang.

Gross profit as a percentage of net sales was 23.3 percent in the current year period compared to 24.2 percent in the prior year period. Gross profit margins were favorably impacted by the Company’s ongoing cost reduction initiatives including lean manufacturing initiatives and the movement of certain assembly operations from Milwaukee to the Juarez, Mexico facilities. This was offset as a result of reduced sales as noted above, which resulted in lower production volumes, changes in customer product content with lower margins and higher purchased material costs for brass, zinc and magnesium. The average zinc price per pound increased to $0.54 in the current period compared to $0.45 in the prior year period. The average brass price per pound increased to $1.89 in the current period from $1.57 in the prior year period. The Company uses an average of approximately 750,000 pounds of zinc per month and an average of approximately 200,000 pounds of brass per month. Increases in the cost of magnesium resulted in price increases in purchased housing components from vendors of approximately $165,000 during the current year period.

Engineering, selling and administrative expenses were $14.8 million in the nine months ended March 27, 2005, compared to $15.0 million in the prior year period.

Income from operations was $17.6 million in the current period compared to $19.7 million in the prior year period. The decrease is primarily the result of the decreased sales and gross profit margin as discussed above.

The effective income tax rate for the current period was 36.1 percent compared to 37.5 percent in the prior year period. The current quarter income tax provision includes a state refund claim recovery. The claim recovery net of the federal income tax impact was $162,000. The overall effective tax rate differs from the federal statutory tax rate primarily due to the effects of state income taxes.

Liquidity and Capital Resources

The Company generated cash from operating activities of $6.0 million in the nine months ended March 27, 2005, compared to $16.3 million in the nine months ended March 28, 2004. The decreased generation of cash from operating activities is primarily due to a decrease in accounts payable and accrued liabilities of $11.5 million in the current period compared to $3.1 million in the prior year period, which primarily resulted from contributions to the Company’s qualified pension plan, the changes in accounts payable balances and the changes in accrued payroll and benefits balances. An $8 million contribution to the Company’s qualified pension plan was made during the current period compared to $5 million in the prior year period. There was a significant increase in the accounts payable balance in the prior year period as a result of lengthening payment terms with a significant supplier as well as the timing of payments in accordance with normal payment terms. Additionally, there was a reduction in the accounts payable balance in the current year which was based on normal payment terms with suppliers. Also, there was a larger reduction in accrued payroll and benefits in the current year period as compared to the prior year period primarily due to lower bonus amounts accrued to be paid to eligible associates.

10

Capital expenditures during the nine months ended March 27, 2005, were $3.5 million compared to $3.6 million during the nine months ended March 28, 2004. The Company anticipates that capital expenditures will be approximately $5.0 million in fiscal 2005, primarily in support of requirements for new product programs and the upgrade and replacement of existing equipment.

The Board of Directors of the Company has authorized a stock repurchase program to buy back up to 3,439,395 outstanding shares. Over the life of the repurchase program through March 27, 2005, a total of 3,085,392 shares have been repurchased at a cost of approximately $114.5 million. During the quarter ended March 27, 2005, 44,800 shares were repurchased at a cost of approximately $2.6 million. Additional repurchases may occur from time to time. Funding for the repurchases was provided by cash flow from operations.

The Company has a $50.0 million unsecured, line of credit (the “Line of Credit”), which expires October 31, 2005. There were no outstanding borrowings under the Line of Credit at March 27, 2005. Interest on borrowings under the Line of Credit are at varying rates based, at the Company’s option, on the London Interbank Offering Rate or the bank’s prime rate. The Line of Credit contains various restrictive non-financial covenants. The Company believes that the Line of Credit is adequate, along with cash flow from operations, to meet its anticipated capital expenditure, working capital and operating expenditure requirements.

The Company has not been significantly impacted by inflationary pressures over the last several years, except for rising health care costs which have increased the Company’s cost of employee medical coverage, fluctuations in the market price of zinc and brass, and inflation in Mexico, which impacts the U.S. dollar costs of the Mexican operations. The Company has entered into purchase commitments for a percentage of its zinc requirements through June 2005. These commitments will reduce the financial impact of future price fluctuations. The Company does not hedge the peso exposure.

Joint Ventures

On November 28, 2000, the Company signed certain alliance agreements with E. WITTE Verwaltungsgesellschaft GmbH, and its operating unit, WITTE-Velbert GmbH & Co. KG (“WITTE”). WITTE, of Velbert, Germany, is a privately held, QS 9000 and VDA 6.1 certified automotive supplier. WITTE designs, manufactures and markets components including locks and keys, hood latches, rear compartment latches, seat back latches, door handles and specialty fasteners. WITTE’s primary market for these products has been Europe. The WITTE-STRATTEC alliance provides a set of cross-licensing agreements for the manufacture, distribution and sale of WITTE products by the Company in North America, and the manufacture, distribution and sale of the Company’s products by WITTE in Europe. Additionally, a joint venture company (“WITTE-STRATTEC LLC”) - in which each company holds a 50 percent interest - has been established to seek opportunities to manufacture and sell both companies’ products in areas of the world outside of North America and Europe.

In November 2001, WITTE-STRATTEC do Brasil, a joint venture formed between WITTE-STRATTEC LLC and Ifer Estamparia e Ferramentaria Ltda. was formed to service customers in South America. On March 1, 2002, WITTE-STRATTEC China was formed and in April 2004, WITTE-STRATTEC Great Shanghai Co. was formed. WITTE-STRATTEC China and WITTE-STRATTEC Great Shanghai Co. are joint ventures between WITTE-STRATTEC LLC and a unit of Elitech Technology Co. Ltd. of Taiwan and are the base of operations to service the Company’s automotive customers in the Asian market.

The investments are accounted for using the equity method of accounting. The activities related to the joint ventures resulted in a loss of approximately $75,000 in the nine month period ended March 27, 2005 and a gain of approximately $94,000 in the prior year period.


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Critical Accounting Policies

The Company believes the following represents its critical accounting policies:

Pension and Post-Retirement Health Benefits - The determination of the obligation and expense for pension and post-retirement health benefits is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in the Notes to Financial Statements in the Company’s 2004 Annual Report and include, among others, the discount rate, expected long-term rate of return on plan assets and rates of increase in compensation and health care costs. In accordance with accounting principles generally accepted in the United States of America, actual results that differ from these assumptions are accumulated and amortized over future periods. While the Company believes that the assumptions used are appropriate, significant differences in the actual experience or significant changes in the assumptions may materially affect the pension and post-retirement health obligations and future expense.

Other Reserves - The Company has reserves such as an environmental reserve, an incurred but not reported claim reserve for self-insured health plans, a worker’s compensation reserve, and a repair and maintenance supply parts reserve. These reserves require the use of estimates and judgement with regard to risk exposure, ultimate liability and net realizable value. The Company believes such reserves are estimated using consistent and appropriate methods. However, changes to the assumptions could materially affect the recorded reserves.

Risk Factors

The Company understands it is subject to the following risk factors based on its operations and the nature of the automotive industry in which it operates:

Loss of Significant Customers, Vehicle Content and Market Share - Sales to General Motors Corporation, Ford Motor Company, DaimlerChrysler Corporation and Delphi Corporation represent approximately 81 percent of the Company’s annual sales. The contracts with these customers provide for supplying the customer’s requirements for a particular model. The contracts do not specify a specific quantity of parts. The contracts typically cover the life of a model, which averages approximately four to five years. Certain customer models may also be market tested annually. Therefore, the loss of any one of these customers, the loss of a contract for a specific vehicle model, reduction in vehicle content, technological changes or a significant reduction in demand for certain key models could have a material adverse effect on the Company’s existing and future revenues and net income.

The Company’s major customers also have significant underfunded legacy liabilities related to pension and post-retirement health care obligations. The future impact of these items along with a continuing decline in their North American automotive market share to the Foreign-Owned North American Automotive Manufacturers (primarily the Japanese Automotive Manufacturers) may have a significant impact on the Company’s future sales and collectibility risks.

Cost Reduction - There is continuing pressure from the Company’s major customers to reduce the prices the Company charges for its products. This requires the Company to generate cost reductions, including reductions in the cost of components purchased from outside suppliers. If the Company is unable to generate sufficient production cost savings in the future, to offset programmed price reductions, the Company’s gross margin and profitability will be adversely affected.

12
 
Cyclicality and Seasonality in the Automotive Market - The automotive market is highly cyclical and is dependent on consumer spending and to a certain extent on customer sales incentives. Economic factors adversely affecting consumer demand for automobiles and automotive production could adversely impact the Company’s revenues and net income. The Company typically experiences decreased revenue and operating income during the first fiscal quarter of each year due to the impact of scheduled customer plant shut-downs in July and new model changeovers.

Foreign Operations - As discussed under Joint Ventures, the Company has joint venture investments in both Brazil and China. These operations are currently not material. However, as these operations expand, their success will depend, in part, on the Company’s and its partners’ ability to anticipate and effectively manage certain risks inherent in international operations including: enforcing agreements and collecting receivables through certain foreign legal systems, payment cycles of foreign customers, compliance with foreign tax laws, general economic and political conditions in these countries, and compliance with foreign laws and regulations.

Currency Exchange Rate Fluctuations - The Company incurs a portion of its expenses in Mexican pesos. Exchange rate fluctuations between the U.S. dollar and the Mexican peso could have an adverse effect on financial results.

Sources of and Fluctuations in Market Prices of Raw Materials - The primary raw materials used by the Company are high-grade zinc, brass, magnesium, aluminum, steel and plastic resins. These materials are generally available from a number of suppliers, but the Company has chosen to concentrate its sourcing with one primary vendor for each commodity or purchased component. The Company believes its sources of raw materials are reliable and adequate for its needs. However, the development of future sourcing issues related to the availability of these materials as well as significant fluctuations in the market prices of these materials may have an adverse affect on the Company’s financial results.

Disruptions Due to Work Stoppages and Other Labor Matters - The Company’s major customers and many of their suppliers have unionized work forces. Work stoppages or slow-downs experienced by the Company’s customers or their suppliers could result in slow-downs or closures of assembly plants where the Company’s products are included in assembled vehicles. For example, strikes by the United Auto Workers led to a shut-down of most of General Motors Corporation’s North American assembly plants in June and July of 1998. A material work stoppage experienced by one or more of the Company’s customers could have an adverse effect on the Company’s business and its financial results. In addition, all production associates at the Company’s Milwaukee facility are unionized. A sixteen-day strike by these associates in June 2001 resulted in increased costs by the Company as all salaried associates worked with additional outside resources to produce the components necessary to meet customer requirements. The current contract with the unionized associates is effective through June 26, 2005. The Company may encounter further labor disruption after the expiration date of this contract and may also encounter unionization efforts in its other plants or other types of labor conflicts, any of which could have an adverse effect on the Company’s business and its financial results.

Environmental and Safety Regulations - The Company is subject to federal, state, local and foreign laws and other legal requirements related to the generation, storage, transport, treatment and disposal of materials as a result of its manufacturing and assembly operations. These laws include the Resource Conservation and Recovery Act (as amended), the Clean Air Act (as amended) and the Comprehensive Environmental Response, Compensation and Liability Act (as amended). The Company has an environmental management system that is ISO-14001 certified. The Company believes that its existing environmental management system is adequate and it has no current plans for substantial capital expenditures in the environmental area. An environmental reserve was established in 1995 for estimated costs to remediate a site at the Company’s Milwaukee facility that was contaminated by a former above-ground solvent storage tank, located on the east side of the facility. The contamination occurred in 1985. This is being monitored in accordance with federal, state and local requirements. The Company does not currently anticipate any material adverse impact on its results of operations, financial condition or competitive position as a result of compliance with federal, state, local and foreign environmental laws or other legal requirements. However, risk of environmental liability and changes associated with maintaining compliance with environmental laws is inherent in the nature of the Company’s business and there is no assurance that material liabilities or changes could not arise.
 

13
 
Highly Competitive Automotive Supply Industry - The automotive component supply industry is highly competitive. Some of the Company’s competitors are companies, or divisions or subsidiaries of companies, that are larger than the Company and have greater financial and technology capabilities. The Company’s products may not be able to compete successfully with the products of these other companies, which could result in loss of customers and, as a result, decreased revenues and profitability. In addition, the Company’s competitive position in the North American automotive component supply industry could be adversely affected in the event that it is unsuccessful in making strategic acquisitions, alliances or establishing joint ventures that would enable it to expand globally. The Company principally competes for new business at the beginning of the development of new models and upon the redesign of existing models by its major customers. New model development generally begins two to five years prior to the marketing of such new models to the public. The failure to obtain new business on new models or to retain or increase business on redesigned existing models could adversely affect the Company’s business and financial results. In addition, as a result of relatively long lead times for many of its components, it may be difficult in the short-term for the Company to obtain new sales to replace any unexpected decline in the sale of existing products. Finally, the Company may incur significant product development expense in preparing to meet anticipated customer requirements which may not be recovered.

Program Volume and Pricing Fluctuations - The Company incurs costs and makes capital expenditures for new program awards based upon certain estimates of production volumes over the anticipated program life for certain vehicles. While the Company attempts to establish the price of its products for variances in production volumes, if the actual production of certain vehicle models is significantly less than planned, the Company’s revenues and net income may be adversely affected. The Company cannot predict its customers’ demands for the products it supplies either in the aggregate or for particular reporting periods.
 
Investments in Customer Program Specific Assets - The Company makes investments in machinery and equipment used exclusively to manufacture products for specific customer programs. This machinery and equipment is capitalized and depreciated over the expected useful life of each respective asset. Therefore, the loss of any one of the Company’s major customers or specific vehicle models could result in impairment in the value of these assets and have a material adverse effect on the Company’s financial results.

Prospective Information

A number of the matters and subject areas discussed in this Form 10-Q contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as “anticipate,” “believe,” “would,” “expect,” “intend,” “may,” “planned,” “potential,” “should,” “will,” and “could.” These include expected future financial results, product offerings, global expansion, liquidity needs, financing ability, planned capital expenditures, management's or the Company's expectations and beliefs, and similar matters discussed in the Company’s Management's Discussion and Analysis of Financial Condition and Results of Operations. The discussions of such matters and subject areas are qualified by the inherent risks and uncertainties surrounding future expectations generally, and also may materially differ from the Company's actual future experience.

 
14
 
The Company's business, operations and financial performance are subject to certain risks and uncertainties, which could result in material differences in actual results from the Company's current expectations. These risks and uncertainties include, but are not limited to, general economic conditions, in particular relating to the automotive industry, customer demand for the Company’s and its customers’ products, competitive and technological developments, customer purchasing actions, foreign currency fluctuations, costs of operations and other matters described under “Risk Factors” above.
Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this Form 10-Q and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances occurring after the date of this Form 10-Q.

Item 3 Quantitative and Qualitative Disclosures About Market Risk

The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments which would expose the Company to significant market risk. The Company has not had outstanding borrowings since December 1997. The Company has been in an investment position since this time and expects to remain in an investment position for the foreseeable future. There is therefore no significant exposure to market risk for changes in interest rates.

The Company is subject to foreign currency exchange rate exposure related to the Mexican operations.

Item 4 Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic filings with the Securities and Exchange Commission. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company has designed its disclosure controls and procedures to reach a level of reasonable assurance of achieving the desired control objectives and, based on the evaluation described above, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at reaching that level of reasonable assurance.

There was no change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the Company's most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

15

Part II

Other Information

Item 1 Legal Proceedings -
 
    In the normal course of business, the Company may be involved in various legal proceedings from time to time. The Company does not believe it is currently involved in any claim or action the ultimate disposition of which would have a material adverse effect on the Company’s financial statements.

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds -

Issuer Purchases of Equity Securities  
 
Period
 
Total Number Of Shares Purchased
 
Average Price Paid Per Share
 
Total Number
Of Shares Purchased
As Part of Publicly
Announced Program
 
Maximum Number
Of Shares that May
Yet be Purchased
Under the Program
  
  
 
 
 
 
December 27, 2004-January 30, 2005
    
16,300
  
$
59.30
    
16,300
    
182,503
  
January 31, 2005-February 27, 2005
    
20,400
  
$
56.44
    
20,400
    
362,103
  
February 28, 2005-March 27, 2005
    
8,100
  
$
56.02
    
8,100
    
354,003
  
   
       
       
Total
    
44,800
  
$
57.41
    
44,800
    
354,003
  
 
The Company’s Board of Director’s authorized a stock repurchase program on October 16, 1996, and the program was publicly announced on October 17, 1996. The Board of Director’s has periodically increased the number of shares authorized under the program, most recently in February 2005 when an additional 200,000 shares was authorized for repurchase. The program currently authorizes the repurchase of up to 3,439,395 shares of the Company’s common stock from time to time, directly or through brokers or agents, and has no expiration date.

Item 3 Defaults Upon Senior Securities - None

Item 4 Submission of Matters to a Vote of Security Holders - None

Item 5 Other Information - None

Item 6 Exhibits

(a) Exhibits 
10.1 Employment Agreement between the Company and the identified executive officer
10.2 Change in Control Agreement between the Company and the identified executive officer
31.1 Rule 13a-14(a) Certification for Harold M. Stratton II, Chairman and Chief Executive Officer
31.2 Rule 13a-14(a) Certification for Patrick J. Hansen, Chief Financial Officer
32 (1) 18 U.S.C. Section 1350 Certifications
 
__________________________
(1)    This certification is not "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

STRATTEC SECURITY CORPORATION (Registrant)

Date: April 29, 2005                                             By /s/ Patrick J. Hansen                                                       
                                Patrick J. Hansen
                    Chief Financial Officer,
                                Treasurer and Secretary
                                (Principal Accounting and Financial Officer)
 
 
 
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