STRATTEC Security Corporation — Fiscal 2014 Second-Quarter Form 10-Q
Business context and reporting period
STRATTEC designs and manufactures automotive access-control products, including mechanical and electronic locks and keys, latches, door handles, ignition housings, and power-access systems. The company serves primarily North American automotive customers and also sells globally through the VAST relationship with WITTE Automotive and ADAC Automotive.
The filing covers the three and six months ended December 29, 2013, compared with the periods ended December 30, 2012. Interim financial statements are unaudited. STRATTEC reports one operating segment.
Key financial metrics
| Metric | Three months ended Dec. 29, 2013 | Three months ended Dec. 30, 2012 | Six months ended Dec. 29, 2013 | Six months ended Dec. 30, 2012 |
|---|---|---|---|---|
| Net sales | $81.5 million | $72.2 million | $161.1 million | $143.1 million |
| Gross profit | $15.9 million | $12.3 million | $30.5 million | $26.0 million |
| Gross margin | 19.6% | 17.0% | 18.9% | 18.2% |
| Income from operations | $6.7 million | $3.8 million | $11.7 million | $8.4 million |
| Operating margin | 8.2% | 5.3% | 7.3% | 5.9% |
| Net income attributable to STRATTEC | $3.9 million | $2.4 million | $7.1 million | $5.1 million |
| Diluted EPS | $1.09 | $0.70 | $2.00 | $1.48 |
Quarterly sales increased approximately 12.8% and six-month sales increased approximately 12.6%. Quarterly net income attributable to STRATTEC increased approximately 62%, while six-month net income increased approximately 40%. The effective tax rate was 32.6% for the quarter and 32.0% year to date, compared with 27.4% in both prior-year comparable periods.
Six-month operating cash flow was $6.8 million, compared with $6.0 million in the prior-year period. Capital expenditures were $6.5 million, compared with $5.2 million, producing negative free cash flow before financing of approximately $0.3 million. Cash and cash equivalents were $20.4 million at December 29, 2013, versus $20.3 million at June 30, 2013.
Total debt consisted of $3.0 million borrowed under the ADAC-STRATTEC revolving facility, compared with $2.25 million at June 30, 2013. No borrowings were outstanding under STRATTEC’s $25 million revolving facility. The company reported $109.6 million of current assets and $52.1 million of current liabilities.
Material changes versus the prior comparable period
- Higher vehicle production volumes and increased product content drove sales growth to Chrysler, General Motors, and Ford. Sales also increased to Tier 1, commercial, and other OEM customers, while Hyundai/Kia sales declined.
- Gross margin improved because of better fixed-cost absorption and lower pension expense. These benefits were partly offset by higher zinc costs, new-product launch costs, less favorable product mix, and higher incentive-bonus accruals.
- Engineering, selling, and administrative expenses increased in dollars but declined as a percentage of sales to 11.4% in the quarter from 11.7%, and to 11.6% year to date from 12.3%.
- Equity earnings from joint ventures improved substantially. VAST generated earnings, compared with losses in the prior-year period when Chinese relocation and product-startup costs were incurred. NextLock generated a $151,000 equity loss year to date.
- Other income declined in the quarter because of a $174,000 foreign-currency transaction loss and the absence of prior-year Mexican peso option gains. The currency options expired June 28, 2013, and none were outstanding at period end.
- Cash increased only modestly as operating cash flow was largely offset by capital expenditures, dividends, and other financing uses. Inventories increased to $30.0 million from $24.3 million at June 30, 2013.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects fiscal 2014 capital expenditures of approximately $10 million to $11 million, primarily for new product programs, Juarez facility expansion, and equipment upgrades.
- Management expects domestic cash, cash flows from operations, and available borrowing capacity to fund operating needs, dividends, capital expenditures, and other commitments for at least the next 12 months. Approximately $12.0 million of the $20.4 million cash balance was held by Mexican subsidiaries and was expected to remain invested abroad.
- Management anticipated modest or no share repurchases during the remainder of fiscal 2014. No shares were repurchased during the quarter or first six months.
- STRATTEC acquired a 51% interest in NextLock in April 2013. The joint venture is developing biometric security products, with shipments anticipated to begin in the fourth quarter of fiscal 2014.
- Raw-material exposure includes zinc, brass, nickel silver, aluminum, steel, and plastic resins. Customer price-adjustment clauses offset some, but not all, zinc-price changes. Zinc costs increased approximately $200,000 in the quarter and $427,000 year to date versus the prior comparable periods.
- Foreign-exchange exposure arises from Mexican peso manufacturing costs. The prior hedging option program has expired, leaving earnings and cash flow exposed to peso fluctuations.
- The Milwaukee facility environmental reserve was $1.4 million at December 29, 2013. Natural-attenuation monitoring has not yet satisfied all regulatory closure requirements; management believes the reserve is adequate.
- The company has a $25 million STRATTEC revolving facility and a $5 million ADAC-STRATTEC facility, both expiring August 1, 2016. The facilities contain minimum-net-worth covenants, and the ADAC-STRATTEC facility also contains a fixed-charge-coverage covenant.
- Management reported no material changes to previously disclosed risk factors, no material legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Whether automotive production volumes and customer concentration, particularly Chrysler, GM, and Ford, remain supportive of sales.
- Whether improved gross margins persist after considering zinc prices, product mix, new-product launch costs, and incentive compensation.
- The pace and funding of the planned $10 million to $11 million fiscal 2014 capital-expenditure program.
- Cash availability in the United States versus funds held by Mexican subsidiaries, including any tax or financing consequences of repatriation.
- ADAC-STRATTEC borrowing levels and compliance with minimum-net-worth and fixed-charge-coverage covenants.
- Progress toward commercial shipments and profitability of the NextLock biometric-security venture.
- Resolution of the Milwaukee environmental matter and adequacy of the $1.4 million reserve.
- Ongoing exposure to Mexican peso movements and the absence of outstanding currency-option protection.