STRATTEC Security Corporation — Form 10-Q Summary
Reporting period: Unaudited third quarter and nine months ended March 29, 2015; comparative periods ended March 30, 2014. The filing was dated May 7, 2015. STRATTEC designs and manufactures automotive access-control products, including locks, keys, latches, handles, ignition housings and power-access systems, primarily for North American automotive customers.
Financial performance and position
| Metric | Q3 FY2015 | Q3 FY2014 | 9M FY2015 | 9M FY2014 |
|---|---|---|---|---|
| Net sales | $88.8 million | $85.3 million | $313.0 million | $246.4 million |
| Gross profit | $15.8 million | $14.9 million | $62.3 million | $45.4 million |
| Gross margin | 17.7% | 17.5% | 19.9% | 18.4% |
| Operating income | $5.9 million | $5.1 million | $28.7 million | $16.9 million |
| Net income attributable to STRATTEC | $4.4 million | $3.6 million | $19.5 million | $10.7 million |
| Diluted EPS | $1.20 | $1.00 | $5.33 | $3.00 |
- Quarterly sales increased approximately 4%; nine-month sales increased approximately 27%.
- Quarterly operating margin was approximately 6.6%, versus 6.0% in the prior-year quarter. Nine-month operating margin was approximately 9.2%, versus 6.8%.
- Quarterly net income attributable to STRATTEC rose approximately 22%; nine-month net income rose approximately 82%.
- Engineering, selling and administrative expense was $9.8 million in the quarter and $33.5 million year to date, with year-to-date expense increasing but declining as a percentage of sales to 10.7% from 11.6%.
- Other income included foreign-currency transaction gains of $0.6 million for the quarter and $3.0 million year to date. The nine-month tax provision included a $0.9 million reduction in liabilities for unrecognized tax benefits and related interest.
- Cash and cash equivalents were $28.0 million at March 29, 2015, including $16.9 million held by Mexican subsidiaries and considered permanently reinvested.
- Current assets were $140.6 million versus current liabilities of $60.4 million. Borrowings under STRATTEC and ADAC-STRATTEC credit facilities totaled $11.0 million.
- Nine-month operating cash flow was $23.6 million, compared with $9.3 million in the prior-year period. Capital expenditures were $21.7 million, compared with $9.4 million, resulting in investing cash outflow of $22.3 million.
- Shareholders’ equity increased to $153.7 million from $134.9 million at June 29, 2014. Quarterly and year-to-date dividends declared were $0.12 and $0.36 per share, respectively.
Material changes versus the prior comparable periods
- Revenue growth was driven by higher vehicle production and product content, increased Tier 1 customer sales, and ramp-up of the Kia Sedona program.
- Nine-month sales benefited from approximately $34.0 million of incremental General Motors service-parts revenue related to a recall campaign. Management stated that these sales returned to more normal levels during the current quarter and are expected to remain at normal levels.
- Quarterly General Motors sales were reduced by a $3.3 million sales concession. Chrysler sales were affected by the Windsor, Canada plant shutdown, while Ford sales declined because of lower production volumes, particularly for F-150-related components.
- Improved margins reflected favorable fixed-cost absorption, the Mexican peso exchange rate and service-parts mix, partly offset by higher purchased-part content, new-product launch costs, expedited customer requirements, bonuses and the General Motors concession.
- Equity earnings from VAST LLC declined to $0.8 million year to date from $1.1 million. STRATTEC Advanced Logic generated a $1.0 million year-to-date equity loss, including a $0.4 million loss related to a credit-facility guarantee.
- Capital expenditures increased substantially to support new product programs, equipment upgrades and the purchase of facilities in Juarez, Mexico, and Auburn Hills, Michigan.
Guidance, outlook, risks and unusual items
- Management expects fiscal 2015 capital expenditures of approximately $24 million to $25 million.
- The Windsor plant shutdown was scheduled through May 24, 2015. If it continued as planned, management estimated fourth-quarter lost power-access and lockset sales of approximately $8 million to $9 million.
- Management expects domestic cash, operating cash flow and available revolving credit to fund operations, 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 dilution.
- STRATTEC Advanced Logic had $0.75 million outstanding under a $1.5 million facility, fully guaranteed by STRATTEC. STRATTEC recorded a $0.75 million guarantee liability and a $0.4 million loss because the joint-venture partner did not guarantee its proportional share.
- The company’s secured revolving facilities mature August 1, 2016; management reported compliance with all financial covenants. The company also had an environmental reserve of approximately $1.4 million for the Milwaukee facility contamination site.
- Management anticipated a voluntary $3.0 million pension contribution during the fourth quarter. The planned termination of the qualified pension plan remained subject to IRS approval, and the timing and financial impact of settlement had not been determined.
- Effective April 30, 2015, after the reporting date, VAST LLC agreed to acquire a 50% interest in an Indian joint venture for approximately $12 million. STRATTEC’s share of the purchase price was $4 million; the venture was expected to generate annual sales exceeding approximately $40 million.
- Principal risks include automotive production and customer demand, customer concentration, foreign-exchange movements, raw-material prices, warranty and product-return exposure, competitive and technological changes, joint-venture performance, pension obligations and environmental remediation.
- No material changes were reported to the risk factors in the company’s 2014 Form 10-K. Management concluded that disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether the Windsor shutdown caused the projected $8 million to $9 million fourth-quarter sales impact and how quickly Chrysler production normalized.
- The sustainability of results after the approximately $34 million General Motors recall-related service-parts benefit largely rolled off.
- The recurring versus nonrecurring components of foreign-currency gains, tax-benefit reductions, customer concessions and joint-venture guarantee losses.
- Actual fiscal 2015 capital expenditures, pension contributions and resulting free cash flow.
- Exposure to the $0.75 million STRATTEC Advanced Logic guarantee and the venture’s continuing operating losses.
- Progress, cost and accounting impact of the VAST/Minda India investment and any additional funding requirements.
- Mexican cash repatriation restrictions, customer concentration and sensitivity to raw-material prices, foreign exchange and automotive production volumes.