The following Management's Discussion and Analysis should be read in conjunction with STRATTEC SECURITY CORPORATION's accompanying Condensed Consolidated Financial Statements and Notes thereto and its 2009 Annual Report which was filed with the Securities and Exchange Commission as an exhibit to our Form 10-K on August 28, 2009. Unless otherwise indicated, all references to years refer to fiscal years.

Purchase of Delphi Power Products Business

Effective November 30, 2008, STRATTEC in combination with WITTE Automotive of Velbert, Germany, completed the acquisition of certain assets, primarily equipment and inventory, and assumption of certain employee liabilities of Delphi Corporation's Power Products business for approximately $7.3 million. For purposes of owning and operating the North American portion of this acquired business, STRATTEC established a new subsidiary, STRATTEC POWER ACCESS LLC (SPA), which is 80 percent owned by STRATTEC and 20 percent owned by WITTE. The purchase price of the North American portion of the business totaled approximately $4.4 million, of which STRATTEC paid approximately $3.5 million. WITTE acquired the European portion of the business for approximately $2.4 million. Effective February 12, 2009, SPA acquired the Asian portion of the business for approximately $500,000.

The acquisition of the North American and Asian portions of this business by SPA was not material to STRATTEC's consolidated financial statements. Amortizable intangible assets acquired totaled $890,000 and are subject to amortization over a period of nine years. In addition, goodwill of approximately $223,000 was recorded as part of the transaction. The amortizable intangibles and goodwill are included in other long-term assets in the Condensed Consolidated Balance Sheets. All goodwill and other intangible assets resulting from the purchase are expected to be deductible for tax purposes.

The financial results of SPA are consolidated with the financial results of STRATTEC and resulted in reduced net income to STRATTEC of approximately $140,000 for the three months ended September 27, 2009.

SPA designs, develops, tests, manufacturers, markets and sells power systems to operate vehicle sliding side doors and rear compartment access points such as liftgates and truck lids. In addition, the product line includes power cinching latches and cinching strikers used in these systems. Current customers for these products supplied from North America are Chrysler Group LLC, Hyundai Kia Automotive Group, General Motors Company and Ford Motor Company.

Analysis of Results of Operations

Three months ended September 27, 2009 compared to the three months ended September 28, 2008

Net sales for the three months ended September 27, 2009 were $41.2 million compared to net sales of $34.7 million for the three months ended September 28, 2008. Sales to our largest customers overall increased in the current quarter compared to the prior year quarter levels. Sales to Chrysler Group LLC were $12.8 million in the current quarter compared to $7.1 million in the prior year quarter. Included in the current quarter were sales generated by SPA, offset by a combination of lower vehicle production volumes and reduced component content in the other security products we supply. Sales to General Motors Company were $9.9 million in the current quarter compared to $12.3 million in the prior year quarter. The reduction was primarily due to lower vehicle production volumes. Sales to Ford Motor Company increased to $3.7 million in the current quarter compared to $2.3 million in the prior year quarter largely due to higher Ford vehicle production volumes. Also, in the current quarter, sales generated by SPA to Hyundai Kia were $3.0 million.

Gross profit as a percentage of net sales was 16.5 percent in the current quarter compared to 15.6 percent in the prior year quarter. The increase in the gross profit margin was impacted by a favorable Mexican Peso to U.S. Dollar exchange rate affecting our operations in Mexico, partially offset by higher expediting and overtime costs incurred during September 2009 to meet significantly increased production requirements from our customers as they rebuilt retail inventories following the U.S. Government's "Cash for Clunkers" program that ended in August 2009. The inflation rate in Mexico for the twelve months ended September 27, 2009 was approximately 4.8 percent and increased our operating costs by approximately $185,000 in the current quarter over the prior year quarter. The average U.S. dollar/Mexican peso exchange rate increased to approximately 13.30 pesos to the dollar in the current quarter from approximately 10.25 pesos to the dollar in the prior year quarter. This resulted in decreased costs related to our Mexican operations of approximately $1.2 million in the current quarter over the prior year quarter.

Engineering, selling and administrative expenses were $6.2 million in the current quarter compared to $6.0 million in the prior year quarter. The current quarter includes expenses for SPA engineering and administrative personnel that were hired as of the acquisition date. These additional costs were partially offset by reduced salary costs due to the majority of U.S. associates taking unpaid time off in July 2009 and a January 2009 reduction in our salaried workforce.

The current quarter results include a $220,000 recovery of allowance for doubtful accounts. In our third quarter ended March 29, 2009, we recorded a $500,000 provision for doubtful accounts in connection with Chrysler LLC's filing for Chapter 11 bankruptcy protection for certain of their U.S. legal entities on April 30, 2009. As of September 27, 2009, all uncollectible amounts related to the bankruptcy filings were written off against the reserve.

The income from operations in the current quarter was $819,000 compared to loss from operations of $528,000 in the prior year quarter. This change was primarily the result of the increase in sales and gross profit margin as discussed above.

Net other income was $428,000 in the current quarter compared to $223,000 in the prior year quarter. The increase was primarily due to gains on the Rabbi Trust in the current quarter, partially offset by a reduction in favorable transaction gains resulting from foreign currency transactions entered into by our Mexican subsidiaries in the current quarter compared to the prior year quarter. The Rabbi Trust funds our supplemental executive retirement plan. Gains related to the Rabbi Trust totaled $283,000 in the current quarter compared to losses of $69,000 in the prior year quarter. The investments held in the Trust are considered trading securities. Foreign currency transaction gains totaled $65,000 in the current quarter compared to $238,000 in the prior year quarter.

The income tax provision (benefit) for the three month periods ended September 27, 2009 and September 28, 2008 is impacted by a lower effective tax rate for income subject to tax in Mexico as compared to the effective tax rate for income subject to tax in the U.S.

Liquidity and Capital Resources
    Our primary source of cash flow is from our major customers, which include
General Motors Company, Ford Motor Company, and Chrysler Group LLC. As of the
date of filing this Form 10-Q with the Securities and Exchange Commission, all
of our customers are making payments on their outstanding accounts receivable in
accordance with the payment terms included on their purchase orders. A summary
of our outstanding receivable balances from our major customers as of September
27, 2009 is as follows (in thousands of dollars):

                  U.S.       Canada      Mexico       Total
General Motors   $ 6,888     $   700     $   789     $  8,377
Ford               1,862          55         203        2,120
Chrysler           3,501       6,182       1,061       10,744

On April 30, 2009, Chrysler LLC filed for Chapter 11 bankruptcy protection for certain of their U.S. legal entities. During the quarter ended March 29, 2009, we increased our provision for bad debts by $500,000 to cover the portion of the pre-bankruptcy receivable balances which we believed could be uncollectible. As of September 27, 2009, all uncollectible amounts related to the bankruptcy filings were written off against the reserve. During the current quarter, $220,000 of the $500,000 provision was recorded as a recovery of allowance for doubtful accounts.

Cash flow provided by operating activities was $1.2 million during the three months ended September 27, 2009 compared to $683,000 during the three months ended September 28, 2008. Current period operating cash flow was negatively impacted by planned assembly plant downtime experienced by both General Motors and Chrysler during the months of May through July. Pension contributions to our qualified plan totaled $1 million during the current year quarter. No pension contributions were made during the prior year quarter.

Capital expenditures during the three months ended September 27, 2009, were $1.8 million. Capital expenditures during the three months ended September 28, 2008, were $5.3 million, which included approximately $3.2 million for the construction of a new facility in Mexico. The construction of the new facility was completed in fiscal 2009. We anticipate that capital expenditures will be approximately $5 million to $6 million in fiscal 2010, primarily relating to expenditures in support of requirements for new product programs and the upgrade and replacement of existing equipment.

Our Board of Directors has authorized a stock repurchase program to buy back outstanding shares of our common stock. Shares authorized for buy back under the program totaled 3,839,395 at September 27, 2009. A total of 3,655,322 shares have been repurchased as of September 27, 2009, at a cost of approximately $136.4 million. No shares were repurchased during the three months ended September 27, 2009. Additional repurchases may occur from time to time and are expected to continue to be funded by cash flow from operations and current cash balances. Based on the current economic environment and our preference to conserve cash, we anticipate minimal or no stock repurchase activity in fiscal year 2010.

We have a $20.0 million unsecured line of credit (the "Line of Credit") with M&I Marshall & Ilsley Bank, which expires October 30, 2010. This unsecured line of credit replaced a $50.0 million unsecured line of credit with M&I Marshall & Ilsley Bank which terminated on October 31, 2009. There were no outstanding borrowings under the Line of Credit at September 27, 2009 or September 28, 2008. Interest on borrowings under our line of credit is at varying rates based on the London Interbank Offering Rate with a minimum annual rate of 4 percent. We believe that the Line of Credit is adequate, along with existing cash balances and cash flow from operations, to meet our anticipated capital expenditure, working capital and operating expenditure requirements. The Line of Credit is not subject to any covenants.

Over the past several years, we have been impacted by rising health care costs, which have increased our cost of employee medical coverage. A portion of these increases have been offset by plan design changes and employee wellness initiatives. We have also been impacted by increases in the market price of zinc and brass and inflation in Mexico, which impacts the U. S. dollar costs of our Mexican operations. We have negotiated raw material price adjustments clauses with certain customers to offset some of the market price fluctuations. We do not hedge against our Mexican peso exposure.

Joint Ventures

We participate in certain Alliance Agreements with WITTE Automotive ("WITTE") and ADAC Automotive ("ADAC"). WITTE, of Velbert, Germany, is a privately held 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. ADAC, of Grand Rapids, Michigan, is a privately held automotive supplier and manufactures engineered products, including door handles and other automotive trim parts, utilizing plastic injection molding, automated painting and various assembly processes.

VAST LLC participates in joint ventures in Brazil and China. VAST do Brasil, a joint venture between VAST LLC and Ifer do Brasil Ltda., was formed to service customers in South America. VAST Fuzhou and VAST Great Shanghai, joint ventures between VAST LLC, Fortitude Corporation and a unit of Elitech Technology Co. Ltd. of Taiwan, are the base of operations to service our automotive customers in the Asian market. On October 29, 2009, VAST LLC entered into an agreement to purchase the non-controlling interest of its two Chinese joint ventures, VAST Fuzhou and VAST Great Shanghai, for $9.6 million. STRATTEC's share of the purchase price will total $3.2 million. The transaction is expected to be completed during STRATTEC's second quarter of fiscal 2010 and is pending customary government approval in China. Upon completion of the transaction, VAST LLC will own 100% of the Chinese joint ventures. VAST LLC also maintains branch offices in South Korea and Japan in support of customer sales and engineering requirements.

The VAST LLC investments are accounted for using the equity method of accounting. The activities related to the VAST LLC joint ventures resulted in equity earnings of joint ventures of approximately $96,000 during the three months ended September 27, 2009 and $41,000 during the three months ended September 28, 2008. No capital contributions were made to VAST LLC during the current quarter. During the quarter ended September 28, 2008, the VAST partners made capital contributions to VAST LLC totaling $375,000 in support of general operating expenses. STRATTEC's portion of the capital contributions totaled $125,000.

In fiscal year 2007, we entered into a joint venture with ADAC, in which STRATTEC holds a 50.1 percent interest and ADAC holds a 49.9 percent interest. The joint venture was created to establish injection molding and door handle assembly operations in Mexico. ADAC-STRATTEC LLC, a Delaware limited liability company, was formed on October 27, 2006. An additional Mexican entity, ADAC-STRATTEC de Mexico, which is wholly owned by ADAC-STRATTEC LLC, was formed on February 21, 2007. ADAC-STRATTEC de Mexico production activities began in July 2007. ADAC-STRATTEC LLC's financial results are consolidated with the financial results of STRATTEC and resulted in an increase in net income to STRATTEC of $28,000 during the three months ended September 27, 2009 and increased net income to STRATTEC of $186,000 during the three months ended September 28, 2008.

Effective November 30, 2008, STRATTEC and WITTE established a new entity, STRATTEC POWER ACCESS LLC (SPA), which is 80 percent owned by STRATTEC and 20 percent owned by WITTE. SPA operates the North American portion of the Power Products business which was acquired from Delphi Corporation. SPA's financial results are consolidated with the financial results of STRATTEC. For the three months ended September 27, 2009, the operating results of SPA resulted in decreased net income to STRATTEC of approximately $140,000.

Recently Issued Accounting Standards

On December 30, 2008, the FASB issued a new accounting standard which significantly expands the disclosures required by employers for postretirement plan assets. The new standard requires plan sponsors to provide extensive new disclosures about assets in defined benefit postretirement benefit plans as well as any concentrations of associated risks. The new standard is effective for periods ending after December 15, 2009. The disclosure requirements are annual and do not apply to interim financial statements. We are required to provide the expanded pension plan asset disclosure in our annual financial statements for the year ending June 27, 2010.

Critical Accounting Policies
The Company believes the following represents its critical accounting policies:

Pension and Postretirement Health Benefits - Pension and postretirement health obligations and costs are developed from actuarial valuations. The determination of the obligation and expense for pension and postretirement 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 our 2009 Annual Report and include, among others, the discount rate, expected long-term rate of return on plan assets, retirement age and rates of increase in compensation and health care costs. We evaluate and update all of the assumptions annually on June 30, the measurement date. Actual results that differ from these assumptions are deferred and, under certain circumstances, amortized over future periods. While we believe that the assumptions used are appropriate, significant differences in the actual experience or significant changes in the assumptions may materially affect our pension and postretirement health obligations and future expense. Refer to the discussion of Critical Accounting Policies included in the Management's Discussion and Analysis and Retirement Plans and Postretirement Costs included in the Notes to Financial Statements in our 2009 Annual Report filed with the Securities and Exchange Commission as an exhibit to our Form 10-K on August 28, 2009.

Other Reserves - We have reserves such as an environmental reserve, an incurred but not reported claim reserve for self-insured health plans, a workers' compensation reserve, an allowance for doubtful accounts related to trade accounts receivable and a repair and maintenance supply parts reserve. These reserves require the use of estimates and judgment with regard to risk exposure, ultimate liability and net realizable value.

Environmental Reserve - We have a liability recorded related to the estimated costs to remediate a site at our Milwaukee facility, which was contaminated by a solvent spill from a former above ground solvent storage tank occurring in 1985. The recorded environmental liability balance involves judgment and estimates. Our reserve estimate is based on a third party assessment of the costs to adequately cover the cost of active remediation of the contamination at this site. Actual costs might vary from this estimate for a variety of reasons including changes in laws and changes in the assessment of the level of remediation actually required at this site. Therefore, future changes in laws or the assessment of the level of remediation required could result in changes in our estimate of the required liability. Refer to the discussion of Commitments and Contingencies included in the Notes to Financial Statements in our 2009 Annual Report filed with the Securities and Exchange Commission as an exhibit to our Form 10-K on August 28, 2009.

Incurred But Not Reported Claim Reserve for Self-Insured Health Plans and Workers' Compensation Reserve - We have self-insured medical and dental plans covering all eligible U.S. associates. We also maintain an insured workers' compensation program covering all U.S. associates. The insurance is renewed annually and may be covered under a loss sensitive plan. Under a loss sensitive plan, the ultimate cost is dependent upon losses incurred during the policy period. The incurred loss amount for loss sensitive policies will continue to change as claims develop and are settled in future periods. The expected ultimate cost of claims incurred under these plans is subject to judgment and estimation. We estimate the ultimate expected cost of claims incurred under these plans based upon the aggregate liability for reported claims and an estimated additional liability for claims incurred but not reported. Our estimate of claims incurred but not reported is based on an analysis of historical data, current trends related to claims and health care costs and information available from the insurance carrier. Actual ultimate costs may vary from estimates due to variations in actual claims experience from past trends and large unexpected claims being filed. Therefore, changes in claims experience and large unexpected claims could result in changes to our estimate of the claims incurred but not reported liabilities. Refer to the discussion of Self Insurance and Loss Sensitive Plans under Organization and Summary of Significant Accounting Policies included in Notes to Financial Statements in our 2009 Annual Report filed with the Securities and Exchange Commission as an exhibit to our Form 10-K on August 28, 2009.

Allowance for Doubtful Accounts Related to Trade Accounts Receivable - Our trade accounts receivable consist primarily of receivables due from Original Equipment Manufacturers in the automotive industry and locksmith distributors relating to our service and aftermarket business. Our evaluation of the collectibility of our trade accounts receivable involves judgment and estimates and includes a review of past due items, general economic conditions and the economic climate of the industry as a whole. The estimate of the required reserve involves uncertainty as to future collectibility of receivable balances. This uncertainty is magnified by the financial difficulty currently experienced by our customers as discussed under Risk-Factors-Loss of Significant Customers, Vehicle Content, Vehicle Models and Market Share included in the Management's Discussion and Analysis in our 2009 Annual Report filed with the Securities and Exchange Commission as an exhibit to our Form 10-K on August 28, 2009. Also, refer to the discussion of Receivables under Organization and Summary of Significant Accounting Policies included in Notes to Financial Statements in our 2009 Annual Report filed with the Securities and Exchange Commission as an exhibit to our Form 10-K on August 28, 2009. We increased our allowance for uncollectible trade accounts receivable by $500,000 during 2009 in connection with Chrysler LLC's filing for Chapter 11 bankruptcy protection for certain of their U.S. legal entities on April 30, 2009. General Motors filed for Chapter 11 bankruptcy protection for their U.S. legal entities on June 1, 2009. The bankruptcy filings did not significantly impact the collection of pre-bankruptcy receivable balances as both Companies were able to continue to make payments to suppliers for parts they had purchased prior to their bankruptcy filings. As of September 27, 2009, all uncollectible amounts related to the bankruptcy filings were written off against the $500,000 reserve and $220,000 of the $500,000 provision was recorded as a recovery of allowance for doubtful accounts.

Repair and Maintenance Supply Parts Reserve - We maintain an inventory of repair and maintenance parts in support of operations. The inventory includes critical repair parts for all production equipment as well as general maintenance items. The inventory of critical repair parts is required to avoid disruptions in our customers' just-in-time production schedules due to lack of spare parts when equipment break-downs occur. Depending on maintenance requirements during the life of the equipment, excess quantities of repair parts arise. A repair and maintenance supply parts reserve is maintained to recognize the normal adjustment of inventory for obsolete and slow-moving repair and maintenance supply parts. Our evaluation of the reserve level involves judgment and estimates, which are based on a review of historical obsolescence and current inventory levels. Actual obsolescence may differ from estimates due to actual maintenance requirements differing from historical levels. This could result in changes to our estimated required reserve. Refer to the discussion of Repair and Maintenance Supply Parts under Organization and Summary of Significant Accounting Policies included in the Notes to Financial Statements in our 2009 Annual Report filed with the Securities and Exchange Commission as an exhibit to our Form 10-K on August 28, 2009.

We believe the reserves discussed above are estimated using consistent and appropriate methods. However, changes to the assumptions could materially affect the recorded reserves.

Stock-Based Compensation - Share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating future volatility of our stock, the amount of share-based awards that are expected to be forfeited and the expected term of awards granted. We estimate the fair value of stock options granted using the Black-Scholes option valuation model. We amortize the fair value of all awards on a straight-line basis over the vesting periods. The expected term of awards granted represents the period of time they are expected to be outstanding. We determine the expected term based on historical experience with similar awards, giving consideration to the contractual terms and vesting schedules. We estimate the expected volatility of our common stock at the date of grant based on the historical volatility of our common stock. The volatility factor used in the Black-Scholes option valuation model is based on our historical stock prices over the most recent period commensurate with the estimated expected term of the award. We base the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term commensurate with the expected term of the award. We use historical data to estimate pre-vesting option forfeitures. We record stock-based compensation only for those awards that are expected to vest. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

Risk Factors
We recognize we are subject to the following risk factors based on our operations and the nature of the automotive industry in which we operate:

Loss of Significant Customers, Vehicle Content, Vehicle Models and Market Share - Sales to General Motors Company, Ford Motor Company, Chrysler Group LLC and Delphi Corporation represent approximately 71 percent of our annual net sales (based on fiscal 2009 results) and, accordingly, these customers account for a significant percentage of our outstanding accounts receivable. 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. Components for 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, early cancellation of a specific vehicle model, technological changes or a significant reduction in demand for certain key models could occur, and if so, could have a material adverse effect on our existing and future revenues and net income.

On April 27, 2009, General Motors announced certain aspects of its . . .