STRATTEC Security Corporation — Q1 FY2016 Form 10-Q Summary
Business context and reporting period
STRATTEC designs and manufactures automotive access-control products, including mechanical and electronic locks and keys, ignition lock housings, latches, power-access systems, door handles and related products. Its primary customers are North American automotive manufacturers, and it also sells globally through the VAST relationship with WITTE Automotive and ADAC Automotive.
The filing covers the three months ended September 27, 2015, compared with the three months ended September 28, 2014. The company operates as one reporting segment. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $96.5 million | $122.2 million | Down 21.0% |
| Gross profit | $16.5 million | $28.1 million | Down 41.2% |
| Gross margin | 17.1% | 23.0% | Down 5.9 percentage points |
| Income from operations | $5.9 million | $14.9 million | Down 60.1% |
| Net income | $3.8 million | $10.3 million | Down 62.9% |
| Net income attributable to STRATTEC | $3.3 million | $9.3 million | Down 64.8% |
| Diluted EPS | $0.90 | $2.55 | Down 64.7% |
| Operating cash flow | $4.0 million | $9.2 million | Down 56.6% |
| Capital expenditures | $3.9 million | $7.0 million | Down 44.5% |
Operating margin was approximately 6.1%, compared with 12.2% in the prior-year quarter. Net income attributable to STRATTEC represented approximately 3.4% of sales, compared with 7.6% previously. The company declared a quarterly dividend of $0.13 per share, compared with $0.12.
At September 27, 2015, cash and cash equivalents were $20.0 million, including $10.2 million in Mexico deemed permanently reinvested. Total borrowings under STRATTEC and ADAC-STRATTEC credit facilities were $6.5 million, down from $10.0 million at June 28, 2015. Available revolving facilities totaled $40 million, subject to covenants and borrowing conditions. STRATTEC was in compliance with its financial covenants.
Total current assets were $137.1 million and current liabilities were $67.2 million. Inventories increased to $42.0 million from $34.8 million at fiscal year-end, while accounts payable increased to $34.1 million from $27.8 million.
Material changes versus the prior comparable period
- Sales declined primarily because the prior-year quarter included approximately $28 million of General Motors service-part sales supporting a recall campaign. Fiat Chrysler sales also declined because of lower production of Dodge and Chrysler minivans.
- Ford sales increased due to higher product content on locksets and latches, particularly for the new F-150 pickup truck.
- Lower service-part sales and reduced customer production volumes produced an unfavorable product mix and lower fixed-cost absorption, reducing gross margin to 17.1% from 23.0%.
- Cost of goods sold declined to $80.0 million from $94.2 million. Benefits included lower variable labor and overhead, lower incentive-bonus accruals, and the favorable dollar value of Mexican operating costs. These benefits were partly offset by the less favorable sales mix.
- Engineering, selling and administrative expenses declined to $10.6 million from $13.2 million, principally because of lower incentive-bonus accruals.
- Equity loss from joint ventures was $293,000, compared with equity earnings of $190,000. VAST LLC contributed $133,000 of earnings, while STRATTEC Advanced Logic LLC generated a $426,000 loss, including a $150,000 loan valuation reserve and a $27,000 guarantee-related loss.
- Other expense was $32,000, compared with other income of $788,000. Current-quarter items included a $896,000 unrealized loss on newly established Mexican peso forwards, partly offset by a $957,000 foreign-currency transaction gain.
- Operating cash flow fell to $4.0 million, while financing cash flow was negative $5.1 million because of $4.5 million of debt repayments, $466,000 of shareholder dividends and $1.6 million of dividends to non-controlling interests.
Guidance, outlook, risks and unusual items
- Management reported stronger demand for components used in light trucks and sport and car-based utility vehicles, likely influenced by lower gasoline prices. If low gasoline prices persist, management expects this trend to continue through the next six to nine months.
- Fiscal 2016 capital expenditures are expected to be approximately $15 million; $3.9 million had been incurred through the first quarter.
- VAST do Brasil is expected to require approximately $1 million of aggregate partner funding during the remainder of fiscal 2016, of which STRATTEC expects to fund approximately $333,000.
- STRATTEC expects to fund 100% of the start-up costs of SAL LLC through fiscal 2016. SAL had $1.05 million of borrowings under a facility maturing February 16, 2016, fully guaranteed by STRATTEC. STRATTEC also guaranteed $250,000 of future Westinghouse license payments.
- The company has $13.5 million of Mexican peso forward-contract notional exposure, with settlement dates from October 2015 through June 2016. The contracts are not designated as hedges, so fair-value changes flow through earnings.
- Primary risks include automotive demand and production volumes, customer purchasing decisions, product recalls and warranty claims, foreign-currency movements, raw-material prices, customer concentration, joint-venture funding needs and competitive or technological developments.
- STRATTEC maintains an environmental reserve of approximately $1.4 million for contamination at its Milwaukee facility. Management believes the reserve is adequate, although active remediation could be required if natural attenuation does not support regulatory closure.
- The company expects to make approximately $3.0 million of voluntary contributions to its qualified pension plan during the remainder of fiscal 2016. The timing and financial impact of terminating the plan remain undetermined.
- No material changes were reported to the risk factors in the 2015 Form 10-K. Management concluded that disclosure controls were effective at a reasonable-assurance level, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the prior-year GM recall-related service sales create a difficult comparison and whether underlying production demand supports a recovery in revenue.
- Progress toward restoring gross margin and the impact of product mix, fixed-cost absorption, incentive compensation and Mexican operating costs.
- SAL LLC’s operating losses, funding requirements, February 2016 credit-facility maturity and STRATTEC’s guarantee exposure.
- VAST do Brasil’s funding needs and the performance of VAST China and the Minda-VAST India joint venture.
- Cash availability after planned $15 million of fiscal 2016 capital expenditures, dividends, joint-venture funding and pension contributions.
- The earnings impact of peso-forward-contract fair-value changes and broader Mexican peso exposure.
- Warranty reserves, the Milwaukee environmental reserve and the eventual cost and timing of the qualified pension-plan termination.
- Customer concentration and production trends at Fiat Chrysler, General Motors and Ford, which together represented approximately $61.0 million of current-quarter sales.