Business Context and Reporting Period
STRATTEC Security Corporation designs and manufactures automotive access-control products, including locks, keys, ignition housings, latches, door handles and power-access systems. The company serves primarily North American automotive customers and has international operations and joint ventures in Mexico, China, Brazil and other markets. This Form 10-Q covers the three and six months ended January 1, 2012, compared with December 26, 2010. Results are unaudited and presented under U.S. GAAP.
The current quarter included 12 customer shipping weeks versus 13 in the prior-year quarter; the six-month period included 25 shipping weeks versus 26 previously.
Financial Highlights
| Metric | Three Months Ended January 1, 2012 | Three Months Ended December 26, 2010 | Six Months Ended January 1, 2012 | Six Months Ended December 26, 2010 |
|---|---|---|---|---|
| Net sales | $65.9 million | $61.2 million | $132.3 million | $121.1 million |
| Gross profit | $11.2 million | $10.0 million | $22.7 million | $20.1 million |
| Gross margin | 17.1% | 16.3% | 17.2% | 16.6% |
| Operating income | $3.3 million | $1.7 million | $6.6 million | $3.6 million |
| Net income attributable to STRATTEC | $1.5 million | $1.2 million | $2.8 million | $2.7 million |
| Diluted EPS | $0.47 | $0.37 | $0.85 | $0.80 |
| Cash flow from operations | Not separately provided | Not separately provided | $5.2 million | $2.3 million |
Six-month net sales increased approximately 9%, while operating income increased approximately 80%. Quarterly diluted EPS increased approximately 27%, and six-month diluted EPS increased approximately 6%.
Cash and cash equivalents totaled $14.8 million at January 1, 2012, compared with $17.3 million at July 3, 2011. Total current assets were $89.5 million and current liabilities were $47.1 million. The company had no borrowings under its $25 million secured revolving credit facility and no third-party debt facilities outstanding. Related-party loans totaled $1.0 million, down from $1.9 million at July 3, 2011.
Capital expenditures were $6.3 million for the six months, versus $3.5 million in the prior-year period. Dividends paid were $0.7 million. The company reported total shareholders’ equity of $91.5 million at January 1, 2012.
Material Changes Versus the Prior Comparable Period
- Sales increased despite one fewer customer shipping week; management attributed the improvement primarily to higher vehicle production volumes.
- Chrysler sales increased to $22.4 million from $17.6 million for the quarter, and Ford sales increased to $8.1 million from $6.1 million. General Motors sales declined to $14.4 million from $16.3 million.
- Gross margin improved because of better fixed-cost absorption and a favorable Mexican peso exchange rate, partly offset by product mix and higher zinc and brass costs.
- Engineering, selling and administrative expenses declined modestly to $8.0 million from $8.3 million for the quarter and to $16.2 million from $16.5 million for the six-month period.
- Equity earnings from joint ventures shifted to losses of $192,000 for the quarter and $312,000 for the six months, versus earnings of $381,000 and $803,000, respectively. China and Brazil joint ventures incurred relocation and product start-up costs.
- Other income was $503,000 for the quarter, versus $57,000 previously, but other expense was $365,000 for the six months, versus income of $256,000. Current-period results included mark-to-market effects from newly established Mexican peso options.
- Comprehensive income attributable to STRATTEC declined to $266,000 for the six months from $3.2 million, primarily because of a $2.6 million unfavorable cumulative foreign-currency translation adjustment.
Guidance, Outlook, Risks and Unusual Items
- Management expects existing domestic cash, operating cash flow and available credit capacity to fund operating needs, capital expenditures and regular dividends for at least the next 12 months and the foreseeable future.
- Fiscal 2012 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 be approximately $8 million to $9 million during calendar 2012. STRATTEC estimates additional contributions to VAST LLC of approximately $1 million to $2 million during the remainder of fiscal 2012.
- Management expects VAST China transition costs and related losses to continue through the remainder of fiscal 2012.
- The regular quarterly dividend was reinstated at $0.10 per share in August 2011. Management expects annual dividends of approximately $1.4 million. Minimal or no share repurchases are anticipated for the remainder of fiscal 2012.
- Mexican peso options had aggregate notional amounts of $33.8 million and net negative fair value of approximately $1.5 million at January 1, 2012. These instruments are not designated as hedges, so fair-value changes flow through earnings. Management stated that approximately $1.5 million of unrealized losses may or may not be realized depending on future exchange rates.
- Raw-material exposure remains significant. Average zinc and brass prices increased, and price-adjustment clauses cover only some customer contracts.
- The company has a $1.5 million environmental reserve for remediation of historical contamination at its Milwaukee facility and believes the reserve is adequate. Natural attenuation has not yet satisfied all regulatory closure requirements.
- A U.S. federal income-tax examination related to fiscal 2009 is ongoing; the filing does not provide a clear estimate of any potential exposure.
- Major customer concentration is substantial: General Motors, Ford and Chrysler represented approximately 66% of fiscal 2011 annual sales. Risks include vehicle production declines, model cancellations, pricing pressure, warranty claims, labor disruptions, supply shortages, customer financial distress, foreign-currency movements and competitive pressures.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting. No material legal proceedings were reported.
Investor Verification Points
- Verify whether automotive production volumes and customer mix support continued sales growth, particularly at Chrysler, Ford and General Motors.
- Monitor gross-margin sensitivity to zinc, brass and other raw-material prices, customer recovery clauses and Mexican peso movements.
- Assess the realized versus unrealized performance of Mexican peso options and their effect on future earnings and cash flow.
- Track VAST China and Brazil start-up costs, expected capital expenditures and STRATTEC’s required future contributions.
- Reconcile planned fiscal 2012 capital expenditures and dividend payments with operating cash flow and the reduced cash balance.
- Review potential exposure from the fiscal 2009 tax examination, environmental remediation, pension and postretirement obligations, warranty claims and customer concentration.