STRATTEC Security Corporation — Form 10-Q Summary
Business Context and Reporting Period
STRATTEC designs and manufactures automotive access-control products, including locks, keys, latches, door handles, ignition housings, and power access systems. It serves primarily North American automotive customers and participates in the global VAST alliance with WITTE Automotive and ADAC Automotive. The filing covers the three months ended October 1, 2017, compared with October 2, 2016.
Financial Performance and Liquidity
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $102.5 million | $100.2 million | 2.2% increase |
| Gross profit | $13.5 million | $14.8 million | 9.0% decrease |
| Gross margin | 13.1% | 14.8% | 170 basis-point decrease |
| Income from operations | $3.4 million | $3.5 million | 2.8% decrease |
| Net income attributable to STRATTEC | $2.5 million | $1.5 million | 59.3% increase |
| Diluted EPS | $0.67 | $0.42 | Increase |
| Operating cash flow | $0.4 million | $5.0 million | Decrease |
| Capital expenditures | $7.6 million | $7.4 million | Increase |
Net income benefited from $1.0 million of equity earnings from joint ventures, primarily VAST LLC, versus $62,000 in the prior-year quarter. The effective tax rate decreased to 24.6% from 27.2%, principally because of a larger anticipated federal research and development tax credit.
Cash and cash equivalents were $8.5 million at October 1, 2017, compared with $8.4 million at July 2, 2017. Total borrowings were $40.0 million, consisting of $20.0 million under the STRATTEC facility and $20.0 million under the ADAC-STRATTEC facility, versus $30.0 million total at fiscal year-end. Both facilities expire in August 2020, and the company was in compliance with all financial covenants.
Operating cash flow was reduced by increased working-capital requirements, including a $3.9 million inventory increase related to new program launches and higher customer tooling balances. Financing activities provided $7.5 million, primarily from net additional borrowings. The quarterly shareholder dividend remained $0.14 per share.
Material Changes Versus the Prior Comparable Period
- Sales increased modestly, with higher commercial and other OEM sales and Hyundai/Kia sales partly offset by lower General Motors and Tier 1 customer sales.
- Gross margin declined because of higher production and expediting costs associated with new product launches, particularly the Leon, Mexico paint and assembly facility, and an unfavorable Mexican peso exchange rate.
- Engineering, selling and administrative expenses declined to $10.0 million from $11.3 million because of lower third-party new-product development costs.
- VAST LLC equity earnings increased to $1.035 million from $390,000. SAL LLC losses decreased to $9,000 from $328,000 as the business is being wound down.
- Operating cash flow fell substantially because of working-capital investment, while borrowings increased to fund capital spending and operations.
- Capital spending for the Leon facility and related equipment totaled approximately $20.8 million cumulatively as of October 1, 2017.
Guidance, Outlook, Risks, and Unusual Items
Management expects North American light-vehicle production over the next calendar year to remain flat or slightly below 2017 levels. Capital spending is expected to remain elevated, with approximately $27 million planned for fiscal 2018. The Leon, Mexico facility was expected to become fully operational during the December 2017 fiscal quarter. Management anticipates ADAC-STRATTEC annual sales could increase from approximately $60 million to approximately $110 million within two years based on newly awarded customer business.
- Key risks include automotive production and consumer demand, customer purchasing decisions, competition, product launches, warranty and recall exposure, foreign currency movements, raw-material prices, and operating costs in Mexico.
- Mexican peso forward contracts had a $9.0 million notional amount and $862,000 fair value at October 1, 2017. They generated a $458,000 realized gain and a $258,000 unrealized loss during the quarter.
- STRATTEC expects approximately $250,000 of additional VAST-related capital contributions for operations in Brazil during the remainder of fiscal 2018.
- SAL LLC is being wound down. STRATTEC had a $2.6 million loan outstanding to SAL LLC and a $250,000 liability related to a Westinghouse license guarantee.
- The company intends to terminate its qualified pension plan, subject to IRS and PBGC approvals. The timing and financial impact of the settlement had not yet been determined; additional contributions of approximately $3 million were anticipated during the remainder of fiscal 2018.
- An environmental reserve of $1.3 million remained for contamination at the Milwaukee facility. Management considered the reserve adequate, although active remediation could ultimately be required.
- The company expected modest or no stock repurchases during the remainder of fiscal 2018 to conserve cash. No shares were repurchased during the quarter.
Important Facts for Investors to Verify
- Whether the Leon, Mexico facility reached full operational status and whether launch-related costs normalize.
- Whether flat or lower North American vehicle production affects sales, margins, and customer concentration.
- The pace of inventory and customer-tooling investment and its effect on operating cash flow.
- Future borrowing needs, covenant headroom, interest-rate exposure, and liquidity relative to the planned $27 million fiscal 2018 capital program.
- The financial impact and timing of the qualified pension plan termination and required funding.
- Progress in winding down SAL LLC and the potential for further funding or guarantee obligations.
- Exposure to Mexican peso movements, zinc and brass prices, warranty claims, product recalls, and environmental remediation.