STRATTEC SECURITY CORPORATION — Form 10-Q Summary
Business context and reporting period
STRATTEC designs and manufactures automotive access-control products, including mechanical and electronic locks, ignition housings, latches, power-access systems, door handles and related components. The company serves primarily North American automotive customers and has operations or investments in Mexico, China, Brazil and other international markets through its VAST relationship and joint ventures.
This unaudited report covers the three months ended October 2, 2011, compared with the three months ended September 26, 2010. STRATTEC reports one operating segment.
Financial performance and liquidity
| Metric | Q1 FY2012 | Prior comparable quarter | Change |
|---|---|---|---|
| Net sales | $66.4 million | $59.8 million | Up 10.9% |
| Gross profit | $11.5 million | $10.2 million | Up 13.3% |
| Gross margin | 17.3% | 17.0% | Up 0.3 percentage points |
| Income from operations | $3.3 million | $2.0 million | Up 65.8% |
| Operating margin | 5.0% | 3.3% | Improved |
| Net income attributable to STRATTEC | $1.3 million | $1.4 million | Down 9.6% |
| Diluted EPS | $0.39 | $0.43 | Down $0.04 |
| Operating cash flow | $(0.2) million | $(2.3) million | Improved by $2.1 million |
Sales benefited from higher customer vehicle production. Current-quarter sales included $19.8 million to Chrysler, $16.1 million to General Motors, $8.3 million to Ford and $3.8 million to Hyundai/Kia.
Cash and cash equivalents were $13.2 million at October 2, 2011, compared with $17.3 million at July 3, 2011. Total current assets were $93.9 million and current liabilities were $51.2 million. Receivables were $41.2 million and inventories were $24.3 million.
Capital expenditures were $3.5 million in the quarter, compared with $1.8 million in the prior-year quarter. Management expected approximately $8 million of fiscal 2012 capital expenditures, primarily for new product programs and equipment upgrades.
There were no borrowings under the $25 million secured revolving credit facility, which expires August 1, 2014. The facility includes a minimum-net-worth covenant. Related-party loans totaled $1.45 million at quarter-end.
Material changes versus the prior comparable period
- Higher production volumes increased sales and improved fixed-cost absorption.
- Gross margin improved modestly despite higher zinc and brass costs and an unfavorable Mexican peso exchange rate. Zinc and brass costs increased by approximately $275,000 and $160,000, respectively, year over year; Mexican operating costs increased by approximately $335,000 due to currency movements.
- Engineering, selling and administrative expenses were essentially flat at $8.2 million.
- Equity earnings from joint ventures changed to a $120,000 loss from $422,000 of earnings, primarily because of relocation and new-product start-up costs in China and Brazil.
- Other expense was $868,000 versus $199,000 of other income, primarily reflecting a $2.3 million unrealized loss on Mexican peso option contracts and a $241,000 Rabbi Trust loss. These effects were partially offset by a $1.7 million foreign-currency transaction gain.
- Net income attributable to STRATTEC declined despite improved operating income because of joint-venture losses and foreign-currency-related items. Comprehensive loss attributable to STRATTEC was $1.6 million, compared with comprehensive income of $1.6 million, primarily because of a $2.9 million cumulative translation loss.
- The company reinstated its regular quarterly dividend at $0.10 per share, paid September 30, 2011. The quarter’s dividend totaled approximately $335,000 and management expected annual dividends of approximately $1.4 million.
Outlook, risks, contingencies and unusual items
Management described the business outlook as generally positive but remained cautious because of uncertainty surrounding North American economic recovery and the restructuring and financial condition of major automotive customers. No specific revenue or earnings guidance was provided.
Management anticipated that joint-venture transition costs would continue through most of the remaining fiscal year. Mexican peso option contracts extend through June 28, 2013 and are intended to reduce currency volatility, but they are not designated as hedges; changes in fair value flow through current earnings. The quarter-end balance-sheet liability for these contracts totaled $2.1 million, including $1.3 million of current liabilities and $0.8 million of long-term liabilities.
The environmental reserve was approximately $1.5 million for remediation and monitoring of a historical solvent spill at the Milwaukee facility. Management believed the reserve was adequate, although active remediation could still be required. A U.S. federal income-tax examination related to fiscal 2009 was ongoing.
Key risks include concentration among General Motors, Ford and Chrysler, automotive production cyclicality, customer model and content changes, raw-material prices, Mexican peso volatility, supply-chain disruptions, warranty claims, labor interruptions, foreign operations, environmental obligations and competitive pricing pressure. The three major customers represented approximately 66% of fiscal 2011 annual sales. Management reported no material legal proceedings and no material changes to previously disclosed risk factors.
Management stated that existing cash, operating cash flow and the revolving facility were adequate for anticipated working capital, capital expenditures, dividends and operating needs. Voluntary pension contributions of approximately $2.0 million were anticipated during the remainder of fiscal 2012.
Important facts for investors to verify
- Whether higher automotive production volumes persist and support the improved operating margin.
- The realized versus unrealized effects of the Mexican peso option contracts and future peso exchange-rate exposure.
- The duration and magnitude of China and Brazil joint-venture relocation and start-up costs.
- Customer concentration, production schedules and financial condition at General Motors, Ford and Chrysler.
- Whether zinc, brass, health-care and Mexican operating-cost increases can be recovered through pricing or productivity actions.
- Cash generation after planned capital expenditures, the reinstated dividend and anticipated pension contributions.
- The outcome of the fiscal 2009 U.S. tax examination and any changes to the $1.5 million environmental reserve.
- Potential warranty claims, inventory obsolescence, receivable collectibility and customer-specific asset impairment.