STRATTEC Security Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 30, 2014, compared with March 31, 2013. The request identifies “2013 Q3,” but the filing is for fiscal 2014 Q3. The interim financial statements are unaudited.
Business Context
STRATTEC designs, manufactures and markets automotive access-control products, including mechanical and electronic locks and keys, ignition lock housings, latches, door handles, power sliding-door and lift-gate systems, and related products. Its customers are primarily North American automotive manufacturers and Tier 1 suppliers. Operations include the United States and Mexico, with international sales and joint-venture activities through the VAST relationship.
The company reports one operating segment. In April 2013, STRATTEC acquired a 51% interest in NextLock LLC, a biometric-security joint venture, with initial product shipments expected in the first quarter of fiscal 2015.
Financial Highlights
| Metric | Three months ended Mar. 30, 2014 | Three months ended Mar. 31, 2013 | Nine months ended Mar. 30, 2014 | Nine months ended Mar. 31, 2013 |
|---|---|---|---|---|
| Net sales | $85.3 million | $74.7 million | $246.4 million | $217.7 million |
| Gross profit | $14.9 million | $13.2 million | $45.4 million | $39.2 million |
| Gross margin | 17.5% | 17.7% | 18.4% | 18.0% |
| Income from operations | $5.1 million | $3.1 million | $16.9 million | $11.5 million |
| Net income attributable to STRATTEC | $3.6 million | $1.1 million | $10.7 million | $6.2 million |
| Diluted EPS | $1.00 | $0.32 | $3.00 | $1.80 |
Third-quarter sales increased approximately 14%, while nine-month sales increased approximately 13%. Third-quarter diluted EPS increased to $1.00 from $0.32; the prior-year quarter included a $2.1 million pretax pension settlement charge. Nine-month diluted EPS increased to $3.00 from $1.80.
Third-quarter gross margin declined modestly because of higher manufacturing start-up costs, increased royalties and favorable warranty adjustments in the prior-year period. Nine-month gross margin improved due to higher production volumes, better fixed-cost absorption, lower pension expense and favorable Mexican peso translation, partly offset by start-up costs, royalties and higher incentive-bonus accruals.
Engineering, selling and administrative expense increased to $9.8 million from $8.0 million in the quarter and to $28.5 million from $25.6 million year to date. Increases reflected engineering for new programs, healthcare and bonus costs, and consulting and temporary-help costs related to an enterprise-resource-planning system upgrade.
Cash Flow, Liquidity and Debt
- Cash provided by operating activities was $9.3 million for the nine months, versus $7.9 million in the prior-year period.
- Capital expenditures were $9.4 million, compared with $7.8 million, and total investing cash use was $9.6 million. Management expected approximately $11 million of fiscal 2014 capital expenditures, primarily for new programs, Juarez facility expansion and equipment upgrades.
- Cash and cash equivalents were $20.5 million at March 30, 2014, compared with $20.3 million at June 30, 2013. Approximately $12.1 million was held by Mexican subsidiaries and was intended for Mexican capital expenditures and expansion.
- Borrowings were $2.5 million under the ADAC-STRATTEC facility; no borrowings were outstanding under STRATTEC’s $25 million facility. The facilities expire August 1, 2016 and contain minimum-net-worth covenants; the ADAC-STRATTEC facility also has a fixed-charge-coverage covenant.
- Management stated that domestic cash and operating cash flow were expected to fund operations, dividends and capital expenditures for at least the next 12 months and the foreseeable future.
- Regular dividends paid during the nine months totaled $1.2 million, and dividends to non-controlling interests totaled $984,000. No shares were repurchased during the quarter or nine-month period.
Material Changes Versus Prior Comparable Period
- Sales growth was driven primarily by higher vehicle production and product content at Chrysler and General Motors, as well as growth in Tier 1, commercial and other OEM customers. Ford and Hyundai/Kia sales declined in the quarter due to lower production volumes on supplied models.
- Joint-venture results improved from a $291,000 loss to $267,000 of earnings in the quarter and from a $402,000 loss to $858,000 of earnings for the nine months, principally reflecting improved VAST China results after prior-year relocation and product start-up costs.
- The prior-year pension settlement charge did not recur. The company also reported favorable foreign-currency transaction results in the current year versus losses in the prior year.
- NextLock generated a $249,000 equity loss for the nine months and remained in development ahead of planned fiscal 2015 shipments.
- The ADAC-STRATTEC credit facility was amended effective January 22, 2014, reducing the applicable LIBOR spread from 1.75% to 1.0%.
Outlook, Risks and Unusual Items
- Management expected approximately $11 million of fiscal 2014 capital expenditures and modest or no stock repurchases for the remainder of the year to conserve cash.
- The Board approved termination of the frozen qualified pension plan on April 2, 2014, subject to IRS qualification and union-notice and bargaining requirements. The company expected to make additional contributions to ensure sufficient plan assets for benefits.
- An environmental reserve of approximately $1.4 million remained for contamination at the Milwaukee facility. Monitoring continues, and active remediation could be required if natural attenuation does not support regulatory closure.
- Mexican peso option contracts expired June 28, 2013; no such contracts were outstanding during fiscal 2014. The company remains exposed to peso fluctuations because of Mexican manufacturing costs.
- Key risks include automotive production and customer demand, customer concentration, raw-material prices including zinc and brass, limited pass-through of commodity costs, foreign exchange, competitive and technological developments, product-launch execution, healthcare and pension costs, and customer purchasing actions.
- The company stated that no material legal proceedings were pending and that there were no material changes to the risk factors disclosed in its fiscal 2013 Form 10-K.
Investor Verification Items
- Verify the sustainability of sales growth tied to Chrysler, General Motors and higher product content, including the effects of future vehicle-production volumes.
- Assess whether manufacturing start-up costs, ERP implementation costs, royalties and commodity inflation could continue to pressure margins.
- Review the funding requirements, timing and accounting effects of the proposed pension-plan termination and anticipated additional contributions.
- Monitor the concentration of cash in Mexico, the availability and covenant requirements of the revolving facilities, and working-capital growth in receivables, inventories and customer tooling.
- Evaluate NextLock’s development progress and planned fiscal 2015 biometric-product launch, as well as continuing earnings contributions from VAST and consolidated joint ventures.