STRATTEC Security Corporation Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2013, compared with the three and nine months ended April 1, 2012. The filing was signed May 9, 2013. STRATTEC designs and manufactures automotive access-control products, including locks, keys, latches, door handles, ignition components and power-access systems, primarily for North American automotive customers.
Financial Results and Position
| Metric | Q3 FY2013 | Q3 FY2012 | 9M FY2013 | 9M FY2012 |
|---|---|---|---|---|
| Net sales | $74.7 million | $70.6 million | $217.7 million | $202.9 million |
| Gross profit | $13.2 million | $13.1 million | $39.2 million | $35.8 million |
| Gross margin | 17.7% | 18.5% | 18.0% | 17.6% |
| Income from operations | $3.1 million | $4.3 million | $11.5 million | $10.9 million |
| Net income attributable to STRATTEC | $1.1 million | $2.7 million | $6.2 million | $5.6 million |
| Diluted EPS | $0.32 | $0.82 | $1.80 | $1.67 |
| Operating cash flow | Not separately provided | Not separately provided | $7.9 million | $9.9 million |
Q3 sales increased approximately 5.7% year over year, while nine-month sales increased approximately 7.3%. Q3 operating margin declined to approximately 4.1% from 6.1%, primarily because of a $2.1 million pretax settlement charge related to cash settlement of supplemental executive retirement plan benefits. Nine-month operating margin was approximately 5.3%, compared with 5.4% in the prior-year period.
Q3 attributable earnings declined despite higher sales because of the pension settlement charge, unfavorable foreign-currency effects and a less favorable product mix. Nine-month attributable earnings increased because of higher sales, improved gross margin and lower engineering, selling and administrative expenses as a percentage of sales.
- Balance sheet: Cash and cash equivalents were $16.3 million at March 31, 2013, compared with $17.5 million at July 1, 2012. Receivables were $50.0 million and inventories were $25.8 million, up from $44.5 million and $21.2 million, respectively.
- Liquidity: Total current assets were $105.2 million versus current liabilities of $52.6 million. STRATTEC had no borrowings under its $25 million revolving facility and $1.5 million outstanding under the $5 million ADAC-STRATTEC facility.
- Capital spending: Nine-month capital expenditures were $7.8 million, compared with $9.6 million in the prior-year period.
- Equity and dividends: Total shareholders’ equity was $98.8 million, compared with $87.4 million at fiscal year-end. Dividends declared during the nine months totaled $1.35 million for STRATTEC shareholders, or $0.40 per share.
Material Changes Versus Prior Comparable Period
- Sales increased due primarily to higher Ford production and new product content, market growth among Tier 1 and other OEM customers, and increased contributions from latches, fobs and driver controls.
- Sales declined to General Motors because of business lost to other suppliers and to Hyundai/Kia because of lower production and discontinuation of a supplied vehicle model. Q3 Chrysler sales also declined because of lower production volumes on supplied models.
- Q3 gross margin fell 80 basis points because of product mix, an unfavorable Mexican peso exchange rate and higher pension expense. Nine-month gross margin improved 40 basis points because of better fixed-cost absorption from higher production volumes.
- Engineering, selling and administrative expense declined to 10.7% of sales in Q3 from 12.3%, and to 11.8% from 12.3% for the nine-month period, mainly due to lower incentive-bonus provisions.
- Other expense was $0.8 million in Q3 versus $0.7 million of other income in the prior-year quarter. Nine-month other expense was $0.6 million versus $0.3 million of other income, driven largely by foreign-currency transaction losses.
- Operating cash flow declined by $1.9 million for the nine-month period. Higher receivables and inventories, bonus payments, pension contributions and the SERP settlement increased working-capital and cash requirements.
Outlook, Risks and Unusual Items
- Management expected cash, operating cash flow and available credit facilities to fund operating needs, dividends and capital expenditures for at least the next 12 months.
- Fiscal 2013 capital expenditures were expected to be approximately $11 million, primarily for new product programs, Juarez facility expansion and equipment upgrades.
- Management anticipated further inventory reductions in the fourth quarter as the company approached the July model-year changeover.
- VAST China start-up costs and related losses were expected to continue through the remainder of fiscal 2013. VAST China capital expenditures were expected to total approximately $7 million during calendar 2013, with STRATTEC’s additional contribution estimated at $1 million to $3 million.
- The company anticipated modest or no share repurchases for the remainder of fiscal 2013. No shares were repurchased during the nine months ended March 31, 2013.
- Approximately $5.8 million of SERP benefits were cash settled during Q3, primarily using Rabbi Trust assets and current cash. The related $2.1 million settlement charge reduced reported operating income but did not reduce aggregate equity.
- The company maintained Mexican peso option contracts through June 28, 2013 to mitigate currency exposure. These contracts were not designated as hedges, and changes in fair value flowed through earnings.
- Key risks include automotive industry conditions and customer production volumes, customer concentration, competition and product losses, raw-material prices, Mexican peso fluctuations, interest rates, health-care and pension costs, joint-venture losses, and environmental remediation obligations.
- The Milwaukee environmental reserve was approximately $1.4 million. Sampling had not yet satisfied all requirements for closure through natural attenuation, and active remediation could ultimately be required.
- Management reported no material change in previously disclosed risk factors, no material legal proceedings, and effective disclosure controls as of March 31, 2013.
Important Facts for Investors to Verify
- Confirm the sustainability of sales growth and the extent to which it depends on Ford, Chrysler, Tier 1 customers, new product launches and vehicle production schedules.
- Assess whether inventory and receivables normalize as projected and whether operating cash flow improves after the model-year changeover.
- Separate recurring operating performance from the $2.1 million SERP settlement charge and other volatile foreign-currency and derivative gains or losses.
- Monitor VAST China start-up losses, planned capital spending and potential additional STRATTEC contributions of $1 million to $3 million.
- Review exposure to General Motors and other major customers, including the effect of lost business and customer production reductions.
- Verify compliance with minimum-net-worth and fixed-charge-coverage covenants under the credit facilities.
- Track Mexican peso movements, raw-material costs and the expiration or renewal of the company’s currency-option arrangements.
- Evaluate the adequacy and potential future use of the environmental reserve and the company’s pension and postretirement funding requirements.