STRATTEC SECURITY CORPORATION Form 10-Q Summary
Business Context and Reporting Period
STRATTEC designs and manufactures automotive access-control products, including locks, keys, latches, door handles, ignition housings and power-access systems. It serves primarily North American automotive customers and participates in the VAST global alliance with WITTE Automotive and ADAC Automotive. The filing covers the three and six months ended December 31, 2017, compared with January 1, 2017. The financial statements are unaudited and reflect one reporting segment.
Financial Results and Key Metrics
| Metric | Three Months Ended Dec. 31, 2017 | Three Months Ended Jan. 1, 2017 | Six Months Ended Dec. 31, 2017 | Six Months Ended Jan. 1, 2017 |
|---|---|---|---|---|
| Net sales | $103.2 million | $98.9 million | $205.6 million | $199.2 million |
| Gross profit | $12.6 million | $13.7 million | $26.1 million | $28.5 million |
| Gross margin | 12.3% | 13.8% | 12.7% | 14.3% |
| Income from operations | $2.5 million | $2.5 million | $5.9 million | $6.0 million |
| Net income attributable to STRATTEC | $2.9 million | $0.4 million | $5.3 million | $1.9 million |
| Diluted EPS | $0.78 | $0.11 | $1.44 | $0.53 |
Six-month sales increased 3.2%, while gross profit declined 8.4% and operating income declined slightly. Six-month net income attributable to STRATTEC increased primarily because of higher equity earnings from joint ventures and a $545,000 discrete tax benefit related to the Tax Cuts and Jobs Act. Equity earnings of joint ventures increased to $2.5 million from $0.3 million, including $2.4 million from VAST and $60,000 from SAL LLC.
Cash and cash equivalents were $8.4 million at December 31, 2017, compared with $8.4 million at July 2, 2017. Six-month operating cash flow was $1.0 million, compared with $10.0 million in the prior-year period. Investing cash outflow was $14.2 million, including $14.3 million of capital expenditures. Financing cash inflow was $13.2 million, primarily from additional credit-facility borrowings.
Borrowings totaled $46.0 million at December 31, 2017, consisting of $23.0 million under the STRATTEC facility and $23.0 million under the ADAC-STRATTEC facility. The facilities expire August 1, 2020, and the company reported compliance with all financial covenants. The current ratio was approximately 2.2 based on $134.5 million of current assets and $62.2 million of current liabilities.
Material Changes Versus the Prior Comparable Period
- Sales increased primarily from higher Ford volumes and content and new programs with commercial and other OEM customers, including Honda. Lower sales to Fiat Chrysler, General Motors, Tier 1 customers and Hyundai/Kia partially offset the gains.
- Gross margin declined because of higher start-up, production and expediting costs related to new product launches and the new paint and door-handle assembly facility in Leon, Mexico.
- Mexican operating costs were adversely affected by the peso-to-dollar exchange rate; management estimated the unfavorable effect at approximately $1.2 million for the six-month comparison.
- Engineering, selling and administrative expense declined 10.4% for the six months, primarily because of lower third-party new-product development costs.
- Inventory increased to $42.3 million from $35.5 million at July 2, 2017, reflecting preparation for new customer program launches.
- Capital expenditures declined to $14.3 million from $16.3 million, although spending remained elevated for new programs and the Leon facility.
- No shares were repurchased during the six months. The company paid $0.28 per share in declared dividends for the period.
Guidance, Outlook, Risks and Unusual Items
- Management expects North American light-vehicle production in calendar 2018 to remain flat or slightly below calendar 2017 levels.
- Fiscal 2018 capital expenditures are expected to be approximately $27 million. The Leon facility was fully operational as of December 2017.
- ADAC-STRATTEC annual net sales are expected to increase from approximately $66 million to approximately $110 million within two years based on newly awarded business.
- VAST partners are expected to contribute approximately $750,000 to support the Brazil operation during the remainder of fiscal 2018; STRATTEC’s anticipated share is approximately $250,000.
- SAL LLC, a biometric-security joint venture, is being wound down. STRATTEC recognized $60,000 of equity earnings for the six months and expects minimal to no funding for SAL in fiscal 2018. STRATTEC has outstanding loans to SAL of approximately $2.6 million and a $250,000 guarantee-related liability.
- The Tax Cuts and Jobs Act generated a provisional $545,000 discrete tax benefit. Accounting for certain provisions, including GILTI, remained incomplete, and the final tax effects may change.
- Mexican peso forward contracts had a $9.0 million notional amount and a $42,000 fair value at December 31, 2017. The contracts mature through June 15, 2018 and are intended to reduce currency volatility, not for trading.
- The qualified pension plan termination remains subject to IRS and PBGC approvals. The company expects to distribute plan assets before the end of calendar 2018, subject to regulatory timing, and anticipates additional pension contributions of approximately $3 million during the remainder of fiscal 2018.
- Risks include automotive production and customer demand, customer concentration, raw-material prices, foreign exchange, product recalls and warranty claims, new-program execution, interest rates and potential environmental remediation costs. The company reported a $1.3 million environmental reserve and stated that existing warranty reserves are adequate.
Important Facts for Investors to Verify
- Whether elevated capital spending and Leon facility start-up costs convert into the anticipated sales growth and margin improvement.
- The sustainability of increased VAST joint-venture earnings and the financial requirements of the Brazil operation.
- The final accounting and cash-tax impact of the Tax Cuts and Jobs Act, including the unresolved GILTI treatment.
- Liquidity and covenant headroom as borrowings increased to $46.0 million while operating cash flow fell to $1.0 million.
- The timing and financial impact of the qualified pension plan termination and any required contributions.
- Potential exposure from Mexican peso movements, commodity prices, customer concentration, warranty claims and the SAL LLC wind-down.