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 and keys, ignition housings, latches, power-access systems, door handles and related components. It serves primarily North American automotive customers and markets globally through the VAST relationship with WITTE Automotive and ADAC Automotive. The company operates in the United States and Mexico and has equity-method investments in joint ventures in China, Brazil and elsewhere.
This unaudited Form 10-Q covers the three and nine months ended April 1, 2012, compared with March 27, 2011. The current quarter included 13 customer shipping weeks versus 12 in the prior-year quarter. The filing was signed May 9, 2012.
Key Financial Metrics
| Metric | Three Months Ended April 1, 2012 | Three Months Ended March 27, 2011 | Nine Months Ended April 1, 2012 | Nine Months Ended March 27, 2011 |
|---|---|---|---|---|
| Net sales | $70.6 million | $65.7 million | $202.9 million | $186.7 million |
| Gross profit | $13.1 million | $9.1 million | $35.8 million | $29.2 million |
| Gross margin | 18.5% | 13.9% | 17.6% | 15.7% |
| Operating income | $4.3 million | $1.2 million | $10.9 million | $4.8 million |
| Net income attributable to STRATTEC | $2.7 million | $55 thousand | $5.6 million | $2.7 million |
| Diluted EPS | $0.82 | $0.02 | $1.67 | $0.82 |
| Operating cash flow | Not separately presented | Not separately presented | $9.9 million | $(0.3) million |
Approximate operating margins were 6.1% for the current quarter versus 1.8% in the prior-year quarter, and 5.4% for the current nine-month period versus 2.6% previously. The filing reports net income attributable to STRATTEC; consolidated net income was $3.7 million for the quarter and $8.0 million year to date.
At April 1, 2012, cash and cash equivalents were $15.7 million, total current assets were $97.7 million and total current liabilities were $53.2 million. The company had no borrowings under its $25 million secured revolving credit facility, which expires August 1, 2014. Related-party loans outstanding were $1.0 million, down from $1.85 million at July 3, 2011.
Capital expenditures were $9.6 million in the first nine months, compared with $5.7 million in the prior-year period. Cash dividends paid were $1.0 million, and the quarterly dividend was reinstated at $0.10 per share. The company held approximately $5.2 million of cash in Mexican subsidiaries and stated that it did not currently expect to repatriate those funds.
Material Changes Versus the Prior Comparable Period
- Quarterly sales increased 7.5%, and nine-month sales increased 8.7%, primarily due to higher customer vehicle production volumes and greater product content. The additional shipping week contributed approximately $2.7 million to quarterly sales.
- Gross margin expanded by 4.6 percentage points in the quarter and 1.9 percentage points year to date. Benefits included improved fixed-cost absorption and favorable Mexican peso exchange rates. The prior-year periods included a $650 thousand customer price-concession adjustment and $1.15 million of costs related to a specific customer warranty claim.
- Engineering, selling and administrative expense increased to $8.7 million from $8.0 million in the quarter and to $24.9 million from $24.4 million year to date, primarily because of higher accruals under the EVA incentive bonus plans.
- Operating income increased substantially, to $4.3 million from $1.2 million in the quarter and to $10.9 million from $4.8 million year to date.
- Equity results from joint ventures deteriorated to a $140 thousand loss in the quarter and a $452 thousand loss year to date, compared with earnings of $197 thousand and $1.0 million, respectively. VAST operations incurred relocation and new-product start-up costs.
- Operating cash flow improved to $9.9 million year to date from cash used of $0.3 million in the prior-year period, reflecting improved earnings and lower working-capital requirements.
- On March 30, 2012, a $1.5 million loan to VAST and $112 thousand of accrued interest were terminated and converted into additional capital contributions.
Outlook, Commentary, Risks and Unusual Items
- Management expected cash on hand, operating cash flow and available credit to fund operations, dividends and capital expenditures for at least the next 12 months and thereafter for the foreseeable future.
- Fiscal 2012 capital expenditures were expected to be approximately $11 million. VAST China capital expenditures were expected to be approximately $8 million to $9 million during calendar 2012, with STRATTEC’s potential additional capital contributions estimated at $1 million to $2 million during the remainder of the fiscal year.
- Management expected VAST China transition costs and related losses to continue through the remainder of calendar 2012.
- Other income included a $1.174 million unrealized gain on Mexican peso option contracts in the quarter, partly offset by a $698 thousand foreign-currency transaction loss and a $48 thousand realized option loss. Year-to-date other income included a $542 thousand unrealized option loss and a $236 thousand realized option loss.
- Mexican peso options are intended to reduce currency volatility but are not designated as hedges; changes in fair value flow through earnings. Approximately $297 thousand of mark-to-market losses remained potentially subject to future realization depending on exchange rates.
- Key risks include dependence on General Motors, Ford and Chrysler, automotive production cyclicality, customer pricing pressure, vehicle-model and market-share changes, raw-material costs for zinc and brass, Mexican peso fluctuations, foreign joint-venture losses, supply-chain disruptions, labor disruptions, warranty claims and environmental obligations.
- The environmental reserve was approximately $1.4 million at April 1, 2012 for remediation and monitoring of a former solvent-contamination site. Sampling had not yet satisfied requirements for closure through natural attenuation.
- The company was subject to a U.S. federal income-tax examination relating to fiscal 2009. Management reported no legal proceeding expected to have a material adverse effect on the financial statements.
- Management stated that disclosure controls were effective at a reasonable-assurance level and that no material change occurred in internal control over financial reporting during the quarter.
Investor Verification Priorities
- Verify whether sales and margin gains were sustained after adjusting for the extra shipping week and prior-year warranty and pricing adjustments.
- Monitor vehicle production volumes and customer concentration, particularly the financial condition and purchasing activity of GM, Ford and Chrysler.
- Assess the duration and magnitude of VAST China relocation and start-up losses, capital expenditures and required future contributions.
- Review the effect of Mexican peso movements and the mark-to-market treatment of outstanding currency options on future earnings and cash flow.
- Track zinc, brass and other raw-material prices and the company’s ability to recover increases through customer pricing clauses.
- Evaluate liquidity after planned capital expenditures, dividends, pension contributions and possible joint-venture funding, including the location and repatriation restrictions of foreign cash.
- Monitor warranty claims, the environmental reserve, the fiscal 2009 tax examination and pension and postretirement obligations.