STRATTEC SECURITY CORPORATION — Form 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended December 28, 2014, compared with the periods ended December 29, 2013. STRATTEC designs and manufactures automotive access-control products, including locks, keys, latches, door handles, ignition housings, and power-access systems. Operations primarily serve North American automotive customers, with additional global activity through the VAST relationship and equity-method joint ventures.
The company reports one operating segment. The interim financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Three months ended Dec. 28, 2014 | Three months ended Dec. 29, 2013 | Six months ended Dec. 28, 2014 | Six months ended Dec. 29, 2013 |
|---|---|---|---|---|
| Net sales | $102.0 million | $81.5 million | $224.2 million | $161.1 million |
| Gross profit | $18.5 million | $15.9 million | $46.5 million | $30.5 million |
| Gross margin | 18.1% | 19.6% | 20.7% | 18.9% |
| Income from operations | $8.0 million | $6.7 million | $22.8 million | $11.7 million |
| Net income attributable to STRATTEC | $5.8 million | $3.9 million | $15.1 million | $7.1 million |
| Diluted EPS | $1.58 | $1.09 | $4.13 | $2.00 |
| Operating cash flow | Not separately provided | Not separately provided | $17.7 million | $6.8 million |
- Six-month operating margin was approximately 10.2%, compared with approximately 7.3% in the prior-year period.
- Engineering, selling and administrative expense was $10.5 million for the quarter and $23.7 million year to date; as a percentage of sales, it declined to 10.3% and 10.6%, respectively, from 11.4% and 11.6%.
- Other income was $1.8 million for the quarter and $2.6 million year to date, primarily reflecting foreign-currency transaction gains of $1.6 million and $2.4 million, respectively.
- Cash and cash equivalents were $19.8 million at December 28, 2014, including $13.3 million held by Mexican subsidiaries.
- Outstanding credit-facility borrowings were $3.5 million, compared with $2.5 million at June 29, 2014. The company had $25 million of capacity under its facility and ADAC-STRATTEC had $5 million; both facilities expire August 1, 2016.
- Capital expenditures were $17.0 million year to date, compared with $6.5 million in the prior-year period. Fiscal 2015 capital expenditures are expected to be approximately $21 million.
- Cash dividends declared were $0.12 per share for the quarter and $0.24 per share year to date.
Material changes versus the prior comparable period
- Quarterly sales increased 25.2%, while six-month sales increased 39.2%. Growth reflected higher vehicle production and content, new model launches, increased Tier 1 sales, and Hyundai/Kia ramp-up activity.
- General Motors service-parts sales related to a recall campaign contributed approximately $6.0 million during the quarter and $34.0 million year to date. Management expects these sales to return to more normal levels during the second half of fiscal 2015.
- Six-month gross margin improved to 20.7% from 18.9%, benefiting from higher-margin recall-related service parts, production-volume absorption, and favorable Mexican peso exchange rates.
- Quarterly gross margin declined to 18.1% from 19.6%, primarily because of higher purchased-part content, new-product launch costs, and expedited customer timelines.
- Six-month net income attributable to STRATTEC more than doubled, increasing to $15.1 million from $7.1 million; diluted EPS increased to $4.13 from $2.00.
- Net cash provided by operations increased to $17.7 million from $6.8 million. The company invested $17.0 million in property, plant and equipment and made $384,000 of capital contributions and a $215,000 loan to VAST LLC.
- NextLock LLC generated an equity loss of $449,000 year to date, compared with a $151,000 loss, reflecting continued start-up costs for biometric security products.
Guidance, outlook, risks, contingencies and unusual items
- Chrysler announced a planned slowdown or shutdown at its Windsor, Canada assembly plant from February 16 through May 24, 2015. If implemented as announced, STRATTEC estimates lost power-access and lockset sales of approximately $15 million to $17 million.
- Management expects existing domestic cash, operating cash flow, and available revolving-credit capacity to fund operating needs, dividends, capital expenditures, and other commitments for at least the next 12 months. Repatriating Mexican cash or borrowing domestically could increase taxes, interest expense, or earnings dilution.
- The company anticipates biometric product shipments through NextLock during the second half of fiscal 2015.
- The Qualified Pension Plan is being terminated subject to IRS approval. Management expects the process to take 18 to 24 months after approval; the settlement date and financial impact have not been determined. The company anticipates voluntary pension contributions of $3.0 million during the remainder of fiscal 2015.
- An environmental reserve of $1.4 million remained for remediation and monitoring of contamination at the Milwaukee facility. Management believes the reserve is adequate, but natural attenuation has not yet satisfied regulatory closure requirements.
- Principal risks include automotive demand and production levels, customer purchasing actions, customer concentration, foreign-currency fluctuations, raw-material prices, commodity sourcing, interest rates, competitive and technological developments, and execution of new product programs.
- The company concentrates sourcing with one primary vendor for each commodity or purchased component and has not secured raw-material price adjustments from all customers.
- No material changes were reported to the risk factors in the fiscal 2014 Form 10-K. Management concluded that disclosure controls were effective at a reasonable-assurance level.
Most important facts for investors to verify
- Whether the Chrysler Windsor production shutdown occurred as planned and whether the estimated $15 million to $17 million sales impact was realized.
- The extent to which General Motors recall-related service-parts revenue declines from the $34.0 million six-month contribution.
- Whether elevated capital expenditures and inventory levels convert into expected production and cash-flow benefits.
- Progress, funding requirements, and commercial launch timing for NextLock biometric products.
- The timing and accounting impact of the Qualified Pension Plan termination and any required contributions.
- Foreign-exchange effects from the Mexican peso, raw-material price changes, and the company’s ability to recover those costs from customers.
- Concentration of receivables with Chrysler, General Motors, and Ford, which totaled $38.3 million at December 28, 2014.