STRATTEC SECURITY CORPORATION—Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended September 29, 2013, the first quarter of fiscal 2014. STRATTEC designs and manufactures automotive access-control products, including locks, keys, latches, door handles, ignition components and power-access systems, primarily for North American automotive customers. It also participates in global sales through the VAST alliance and owns interests in several joint ventures.
Financial performance and position
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $79.6 million | $70.8 million | +12.4% |
| Gross profit | $14.5 million | $13.7 million | +5.8% |
| Gross margin | 18.2% | 19.4% | (120) basis points |
| Income from operations | $5.0 million | $4.6 million | +9.8% |
| Net income attributable to STRATTEC | $3.2 million | $2.7 million | +20.3% |
| Diluted EPS | $0.91 | $0.78 | +$0.13 |
| Operating cash flow | $(4.1) million | $1.7 million | Decrease of $5.8 million |
| Capital expenditures | $2.9 million | $2.7 million | +$0.2 million |
Revenue growth was driven primarily by higher Chrysler and Ford production volumes and increased product content, as well as growth among Tier 1, commercial and other OEM customers. General Motors and Hyundai/Kia sales declined. Engineering, selling and administrative expenses were $9.5 million, or 11.9% of sales versus 12.9% in the prior-year quarter.
The effective tax rate increased to 31.3% from 27.3%, primarily because a greater portion of earnings was subject to U.S. tax. Equity earnings from joint ventures improved to $294,000 from a $12,000 loss. Other income was $279,000 versus an $18,000 expense, aided by a $212,000 foreign-currency transaction gain; the prior-year period included $311,000 of unrealized Mexican-peso option gains and a $34,000 realized loss.
At September 29, 2013, cash and cash equivalents were $12.8 million, down from $20.3 million at June 30, 2013. Approximately $10.2 million of cash was held by Mexican subsidiaries and was expected to fund Mexican capital expenditures and expansion. Total current assets were $107.5 million compared with current liabilities of $52.3 million.
STRATTEC had no borrowings under its $25 million revolving credit facility. ADAC-STRATTEC had $3.0 million outstanding under its $5 million facility, compared with $2.25 million at June 30, 2013. The facilities are secured and subject to financial covenants. Total shareholders’ equity was $114.9 million.
Material changes versus the prior comparable period
- Sales increased 12.4%, but gross margin declined because of product mix, new-product launch costs and higher zinc prices.
- Zinc prices averaged $1.08 per pound versus $1.01, increasing costs by approximately $222,000 despite customer price-adjustment provisions covering some, but not all, exposure.
- Operating cash flow moved from a $1.7 million inflow to a $4.1 million outflow, primarily because of higher receivables, customer tooling assets and inventory, a $4.8 million bonus payment and a $750,000 pension contribution.
- Receivables increased approximately $4.5 million and inventories increased approximately $3.0 million from June 30, 2013; customer tooling assets increased approximately $2.9 million.
- VAST joint-venture results improved substantially, while the newly formed NextLock biometric-security venture recorded a $59,000 equity loss.
- No shares were repurchased during the quarter. Management anticipated modest or no repurchase activity for the remainder of fiscal 2014.
Guidance, outlook, risks and unusual items
Management expected capital expenditures of approximately $9 million to $10 million for fiscal 2014, primarily for new product programs, expansion of the Juarez facility and equipment upgrades. Management stated that domestic cash and expected operating cash flows should fund operating needs, dividends and capital expenditures for at least the next 12 months. Additional U.S. funding could require repatriation of foreign earnings or additional borrowing, potentially increasing taxes or interest expense.
STRATTEC acquired a 51% interest in NextLock LLC in April 2013. The venture is developing biometric security products, with shipments anticipated in the second half of fiscal 2014. The filing does not provide a quantified revenue or earnings forecast for this venture.
Key risks include automotive-industry conditions and customer production volumes, customer concentration, product mix, zinc and other raw-material prices, Mexican peso fluctuations, foreign operations, competitive and technological developments, and the ability to recover cost increases through customer pricing. The company’s Mexican peso option contracts expired June 28, 2013, and none were outstanding at quarter-end.
The environmental reserve related to the Milwaukee facility was $1.4 million. Monitoring continues, and active remediation could be required if natural attenuation does not satisfy regulatory requirements. Management believes the reserve is adequate. The company reported no material legal proceedings and no material changes to previously disclosed risk factors.
On October 8, 2013, the board approved amendments to the supplemental executive retirement plan effective December 31, 2013. Management did not expect the amendments to have a material financial-statement effect.
Important facts for investors to verify
- Whether automotive production volumes and customer product content support continued sales growth, particularly at Chrysler and Ford.
- Whether gross-margin pressure from zinc, launch costs and product mix persists and how much can be recovered through customer pricing clauses.
- Whether working-capital investments in receivables, inventory and customer tooling convert to operating cash flow.
- The location and availability of cash held by Mexican subsidiaries, including potential tax consequences of repatriation.
- Compliance with the secured credit-facility net-worth and fixed-charge-coverage covenants, and the August 2014 expiration of STRATTEC’s facility.
- Capital spending execution and the anticipated $9 million–$10 million fiscal 2014 investment program.
- NextLock’s commercialization progress and the financial impact of its biometric-security products.
- Future environmental remediation costs and developments affecting the $1.4 million reserve.