Business Context and Reporting Period
STRATTEC Security Corporation designs and manufactures automotive access-control products, including locks, keys, latches, door handles, ignition housings and power-access systems. The company sells primarily to North American automotive customers and participates in the VAST and other joint ventures. The filing is an unaudited Form 10-Q for the quarter ended March 27, 2016, covering the three and nine months ended March 27, 2016, compared with March 29, 2015. The request metadata identifies “2015 Q3,” but the filing itself is for fiscal 2016 third quarter.
Financial Metrics
| Metric | Q3 FY2016 | Q3 FY2015 | 9M FY2016 | 9M FY2015 |
|---|---|---|---|---|
| Net sales | $94.0 million | $88.8 million | $293.1 million | $313.0 million |
| Gross profit | $14.5 million | $15.8 million | $49.6 million | $62.3 million |
| Gross margin | 15.4% | 17.7% | 16.9% | 19.9% |
| Income from operations | $3.8 million | $5.9 million | $17.2 million | $28.7 million |
| Net income attributable to STRATTEC | $1.9 million | $4.4 million | $8.6 million | $19.5 million |
| Diluted EPS | $0.52 | $1.20 | $2.35 | $5.33 |
| Operating cash flow | Not separately provided | Not separately provided | $8.4 million | $23.6 million |
Third-quarter sales increased approximately 5.9%, but nine-month sales declined approximately 6.4%. Nine-month operating income fell approximately 40.2%, while diluted EPS declined approximately 55.9%.
Engineering, selling and administrative expense was $10.7 million, or 11.4% of sales, in the quarter and $32.5 million, or 11.1% of sales, year to date. The effective tax rate was 15.2% for the quarter and 28.3% for the nine-month period.
At March 27, 2016, cash and cash equivalents were $23.2 million, including $12.7 million deemed permanently reinvested in Mexico. Total borrowings under the STRATTEC and ADAC-STRATTEC facilities were $18.0 million, compared with $10.0 million at June 28, 2015. The company reported compliance with all debt covenants. Current assets were $140.4 million versus current liabilities of $60.1 million.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue growth reflected higher sales to Ford, General Motors, Hyundai/Kia, commercial customers and other OEMs, partially offset by lower Tier 1 sales and temporary Fiat Chrysler plant shutdowns.
- Nine-month revenue was adversely affected by the absence of approximately $34 million of General Motors recall-related service-parts sales recorded in the prior-year period, lower Fiat Chrysler volumes and customer price reductions.
- Gross margins contracted because of customer price reductions, unfavorable product mix, lower fixed-cost absorption, higher depreciation, repair and maintenance costs, and product diversification costs. Favorable Mexican peso exchange rates partly offset these pressures.
- Engineering, selling and administrative expense increased in the quarter because of third-party development costs, while nine-month expense decreased due principally to lower incentive bonus accruals.
- Other income declined to $0.2 million in the quarter and $0.6 million year to date from $0.7 million and $3.3 million, respectively, in the prior periods. Current-year results included realized and unrealized losses on new Mexican peso forward contracts.
- Operating cash flow declined to $8.4 million from $23.6 million, reflecting lower operating profit and higher working-capital requirements. Capital expenditures were $14.3 million versus $21.7 million.
- The company made a $3.0 million pension contribution, a $1.5 million payment under a guarantee of the SAL LLC credit facility, and a $6.0 million payment related to accrued customer price concessions and warranty matters.
Outlook, Risks and Unusual Items
Management expects demand for components used in light trucks and sport- and car-based utility vehicles to remain stronger than demand for passenger-car components if low gasoline prices continue. No formal earnings guidance was provided.
- Fiscal 2016 capital expenditures are expected to be approximately $19 million to $20 million. A new ADAC-STRATTEC facility in Leon, Mexico is expected to require approximately $22 million for land, construction, painting and assembly equipment. Management expects the joint venture’s sales to increase from approximately $60 million to approximately $120 million within two years.
- The ADAC-STRATTEC credit facility was amended after quarter end, effective April 27, 2016, increasing availability from $10 million to $20 million and extending its expiration to August 1, 2019. STRATTEC and ADAC must contribute $6 million collectively by September 30, 2016; STRATTEC’s share is $3.06 million.
- SAL LLC remains a material cash drain. STRATTEC owns 51%, recognizes 100% of SAL’s losses because it provides all funding, recorded a $1.2 million nine-month equity loss, and continues to fund startup costs through fiscal 2016. A $250,000 liability remains for guaranteed Westinghouse license payments.
- Warranty reserves were reduced by approximately $2.05 million following settlement of a previously accrued customer warranty issue. Management believes existing reserves are adequate, but future warranty claims could be material.
- Foreign-exchange exposure arises from Mexican peso operating costs. Outstanding peso forwards had total notional amounts of $28.5 million and a $0.6 million liability at March 27, 2016; they are not designated as hedges.
- The company expects to terminate its qualified pension plan, subject to IRS approval. The timing and financial impact of settlement have not yet been determined.
- Key risks include automotive production and customer demand, customer pricing and purchasing actions, product recalls and warranty claims, commodity prices, Mexican peso volatility, joint-venture funding needs, interest rates and reliance on major customers.
Investor Verification Points
- Verify the sustainability of recent sales growth after the prior-year General Motors recall-related sales benefit and amid customer price reductions.
- Monitor gross-margin recovery, product mix, fixed-cost absorption and the effect of Mexican peso movements.
- Reconcile expected fiscal 2016 capital expenditures and the $22 million Mexico facility investment with available cash, partner contributions and debt capacity.
- Assess ongoing funding, guarantee and loss exposure related to SAL LLC and the required ADAC-STRATTEC capital contribution.
- Review covenant headroom and liquidity after the increase in borrowings and planned capital spending.
- Evaluate potential cash requirements and accounting effects from pension-plan termination, environmental remediation and future warranty claims.