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 components and power-access systems. Its customers are primarily North American automotive manufacturers and suppliers, with additional global activity through the VAST relationship with WITTE Automotive and ADAC Automotive. The filing covers the three and six months ended December 30, 2012, compared with January 1, 2012. Results are unaudited and reported under U.S. GAAP.
Financial performance and position
| Metric | Three months ended Dec. 30, 2012 | Three months ended Jan. 1, 2012 | Six months ended Dec. 30, 2012 | Six months ended Jan. 1, 2012 |
|---|---|---|---|---|
| Net sales | $72.2 million | $65.9 million | $143.1 million | $132.3 million |
| Gross profit | $12.3 million | $11.2 million | $26.0 million | $22.7 million |
| Gross margin | 17.0% | 17.1% | 18.2% | 17.2% |
| Operating income | $3.8 million | $3.3 million | $8.4 million | $6.6 million |
| Net income attributable to STRATTEC | $2.4 million | $1.5 million | $5.1 million | $2.8 million |
| Diluted EPS | $0.70 | $0.47 | $1.48 | $0.85 |
| Operating cash flow | Not separately provided | Not separately provided | $6.0 million | $5.2 million |
Quarterly sales increased approximately 9.6% year over year, while six-month sales increased approximately 8.2%. Six-month operating income rose approximately 28%. Cash and cash equivalents were $18.6 million at December 30, 2012, including $9.3 million held by foreign subsidiaries in Mexico. Total current assets were $102.0 million versus $101.3 million at July 1, 2012.
Inventory increased to $26.5 million from $21.2 million at fiscal year-end, primarily to support new model launches and later customer production changes. STRATTEC had $2.25 million of borrowings under the ADAC-STRATTEC facility and no borrowings under its $25 million STRATTEC revolving facility. Total shareholders’ equity was $92.3 million, compared with $87.4 million at July 1, 2012.
Material changes versus the prior comparable period
- Sales growth was driven by higher production volumes at Chrysler and Ford, new Ford product content, and growth in Tier 1, commercial and other OEM customers.
- General Motors sales declined because of business lost to other suppliers, partly offset by higher production on continuing programs. Hyundai/Kia sales declined because of lower production and a discontinued vehicle model.
- Quarterly gross margin was broadly stable at 17.0% versus 17.1%; higher volume benefits were offset by product mix, unfavorable peso-to-dollar effects, and higher pension and incentive-bonus costs.
- Year-to-date gross margin improved to 18.2% from 17.2%, principally because higher production improved fixed-cost absorption.
- Other income was $187,000 in the quarter and $169,000 year to date, versus $503,000 and an expense of $365,000, respectively, in the prior periods. The comparison was affected by foreign-currency results and Mexican peso option contract mark-to-market changes.
- Equity losses from VAST joint ventures decreased to $99,000 for the quarter and $111,000 year to date, but VAST China continued to incur start-up costs and losses.
- Dividends declared increased to $0.30 per share for the quarter and $0.40 per share year to date, compared with $0.10 and $0.20 in the prior comparable periods.
Cash flow, outlook, risks and unusual items
- Six-month operating cash flow was $6.0 million. Investing cash use was $5.3 million, including $5.2 million of capital expenditures. Financing cash flow was $502,000, including $2.25 million of facility borrowings and $688,000 of dividends paid.
- Management expected fiscal 2013 capital expenditures of approximately $10 million, primarily for new product programs and equipment upgrades.
- Management stated that domestic cash, operating cash flow and available credit should fund operations, dividends, capital expenditures and working capital needs for at least the next 12 months and the foreseeable future.
- Management anticipated approximately $1 million to $3 million of additional STRATTEC capital contributions to VAST during calendar 2013. VAST China also expected approximately $7 million of capital expenditures during calendar 2013.
- Approximately $5.7 million of SERP benefits were expected to be cash-settled in the fiscal 2013 third quarter, primarily using Rabbi Trust assets and cash. Management estimated a related pre-tax operating charge of approximately $2.1 million; the charge was expected to have no net effect on equity because the actuarial losses were already recorded in accumulated other comprehensive loss.
- Additional qualified pension contributions of approximately $1.25 million were anticipated during the remainder of fiscal 2013.
- Management expected modest or no stock repurchases for the remainder of fiscal 2013. No shares were repurchased during the six months ended December 30, 2012.
- Key risks include automotive demand and customer production schedules, customer concentration, competition and lost business, raw-material prices, Mexican peso fluctuations, foreign operations, health-care and pension costs, and the ability to obtain customer price adjustments.
- Mexican peso options had a combined net liability fair value of approximately $47,000 at December 30, 2012 and expire June 28, 2013. They are not designated as hedges, so fair-value changes affect current earnings.
- The environmental remediation reserve was approximately $1.4 million. Monitoring continued, and active remediation could be required if natural attenuation does not support regulatory closure.
- The company reported no material changes to previously disclosed risk factors, no material legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Whether elevated inventory levels normalize after customer production schedules were reduced to address excess dealer inventory.
- The actual fiscal 2013 third-quarter SERP settlement charge and cash funding mix.
- The pace and profitability of VAST China’s new product launch, projected capital expenditures and required contributions.
- Customer concentration and the effect of lost General Motors business or further production changes at Chrysler, Ford and other OEMs.
- Exposure to Mexican peso movements, raw-material prices and the expiration or renewal of currency option contracts.
- Compliance with minimum-net-worth and fixed-charge-coverage covenants under the credit facilities.
- Progress toward resolution of the Milwaukee environmental matter and adequacy of the $1.4 million reserve.