STRATTEC SECURITY CORPORATION — Fiscal 2013 First Quarter 10-Q Summary
Business context and reporting period
STRATTEC designs, manufactures and markets automotive access-control products, including locks, keys, latches, door handles, ignition components and power-access systems. The company serves primarily North American automotive customers and has international operations and joint ventures through its VAST relationship with WITTE Automotive and ADAC Automotive.
This unaudited Form 10-Q covers the three months ended September 30, 2012, compared with the three months ended October 2, 2011. STRATTEC reports one operating segment.
Financial performance and liquidity
| Metric | Q1 FY2013 | Prior comparable quarter |
|---|---|---|
| Net sales | $70.8 million | $66.4 million |
| Gross profit | $13.7 million | $11.5 million |
| Gross margin | 19.4% | 17.3% |
| Income from operations | $4.6 million | $3.3 million |
| Income before taxes | $4.6 million | $2.3 million |
| Net income | $3.3 million | $2.0 million |
| Net income attributable to STRATTEC | $2.7 million | $1.3 million |
| Diluted EPS | $0.78 | $0.39 |
| Operating cash flow | $1.7 million | $(0.2) million |
- Approximate operating margin was 6.5%, versus 5.0% in the prior comparable quarter. Net income attributable to STRATTEC represented approximately 3.8% of sales, versus approximately 1.9% previously.
- Cash and cash equivalents were $16.3 million at September 30, 2012, down from $17.5 million at July 1, 2012. Approximately $8.4 million was held by Mexican subsidiaries and was considered permanently reinvested.
- Total current assets were $103.9 million and total current liabilities were $57.8 million. Inventories increased to $25.5 million from $21.2 million at fiscal year-end.
- ADAC-STRATTEC had $1.5 million outstanding under its $5 million secured revolving facility. STRATTEC had no borrowings under its $25 million secured revolving facility. Both facilities are subject to financial covenants.
- Capital expenditures were $2.7 million. The company paid $1.1 million in dividends to non-controlling interests and $0.3 million in dividends to common shareholders.
Material changes versus the prior comparable period
- Sales increased approximately 6.7%, driven primarily by higher Chrysler and Ford production volumes and new product content at Ford. Sales to General Motors and Hyundai/Kia declined due mainly to lost model programs and lower customer production volumes.
- Gross margin expanded 210 basis points, reflecting higher production volumes and overhead absorption, favorable product mix, cost reductions and a favorable Mexican peso/U.S. dollar exchange rate. These benefits were partly offset by higher medical, pension and incentive-bonus costs.
- Engineering, selling and administrative expenses rose to $9.1 million from $8.2 million, primarily due to product-development, medical, pension and incentive-bonus costs.
- Other expense improved to $18,000 from $868,000. The prior period included a $2.3 million unrealized loss on Mexican peso options; the current period included a $0.3 million unrealized gain, partly offset by a $0.5 million foreign-currency transaction loss.
- Operating cash flow improved by approximately $1.9 million, although cash generation was constrained by inventory buildup for new model launches and a $5.2 million bonus payment in August 2012.
- The equity loss from joint ventures declined to $12,000 from $120,000, although VAST China continued to incur relocation and new-product start-up costs.
Guidance, outlook, risks and unusual items
- Management expects existing domestic cash, operating cash flow and available credit facilities to fund operating needs, capital expenditures, dividends and other commitments for at least the next 12 months and the foreseeable future.
- Fiscal 2013 capital expenditures are expected to be approximately $9 million, primarily for new product programs and equipment upgrades or replacements.
- VAST China capital expenditures are expected to total approximately $7 million in each of calendar years 2012 and 2013. STRATTEC estimates its additional fiscal 2013 capital contributions to VAST LLC could be $1 million to $2 million.
- Transition costs and related losses at VAST China are expected to continue through the remainder of fiscal 2013.
- Management anticipates modest or no share repurchases during the remainder of fiscal 2013, reflecting a preference to conserve cash. No shares were repurchased during the quarter.
- Mexican peso option contracts covering $15.2 million of notional amounts run through June 28, 2013. They are not designated as hedges, so fair-value changes flow through earnings. The contracts had a net fair value liability of $85,000 at September 30, 2012.
- Key risks include automotive industry conditions and customer demand, customer purchasing actions, model-program changes, competition and technology, foreign-currency movements, raw-material prices, Mexican inflation, healthcare and pension costs, and execution of new product programs.
- The company maintains a $1.4 million environmental reserve for remediation and monitoring at its Milwaukee facility. Natural attenuation has not yet satisfied all requirements for regulatory closure, and more active remediation could be required.
- Management reported no material changes to the risk factors in the fiscal 2012 Form 10-K, no material legal proceedings, and effective disclosure controls and procedures.
Important facts for investors to verify
- Whether automotive production volumes and customer model-program changes sustain the quarter’s sales and gross-margin improvement.
- The pace and cash impact of inventory buildup, the approximately $9 million fiscal 2013 capital-expenditure plan and expected VAST contributions.
- Future earnings effects from Mexican peso movements and mark-to-market changes in the outstanding currency options.
- Compliance with the minimum net-worth and fixed-charge-coverage covenants under the credit facilities.
- Whether VAST China transition costs and losses continue as expected and whether its planned capital expenditures remain on schedule.
- The adequacy and timing of the environmental reserve and the anticipated $2.25 million additional fiscal 2013 pension contribution.