STRATTEC Security Corporation: Fiscal 2017 Second-Quarter Form 10-Q
Reporting period: Three and six months ended January 1, 2017, compared with December 27, 2015. The filing is the fiscal second quarter following the fiscal year ended July 3, 2016. STRATTEC designs and manufactures automotive access-control products, including locks, keys, latches, handles, ignition components and power-access systems, primarily for North American automotive customers.
Key Financial Metrics
| Metric | Three months ended Jan. 1, 2017 | Three months ended Dec. 27, 2015 | Six months ended Jan. 1, 2017 | Six months ended Dec. 27, 2015 |
|---|---|---|---|---|
| Net sales | $98.9 million | $102.5 million | $199.2 million | $199.0 million |
| Gross profit | $13.5 million | $18.6 million | $28.1 million | $35.1 million |
| Gross margin | 13.6% | 18.2% | 14.1% | 17.6% |
| Income from operations | $2.2 million | $7.4 million | $5.4 million | $13.3 million |
| Net income attributable to STRATTEC | $0.4 million | $3.4 million | $1.9 million | $6.7 million |
| Diluted EPS | $0.11 | $0.93 | $0.53 | $1.83 |
| Operating cash flow | Not separately provided | Not separately provided | $10.0 million | $3.2 million |
Engineering, selling and administrative expense was $11.3 million for the quarter and $22.7 million for the six-month period, equal to 11.4% of sales in both current periods versus 10.9% in the comparable periods.
At January 1, 2017, cash and cash equivalents were $8.2 million, total current assets were $121.6 million and total current liabilities were $61.2 million. Borrowings totaled $20.0 million, consisting of $9.0 million under STRATTEC’s facility and $11.0 million under the ADAC-STRATTEC facility. The company reported compliance with all credit-facility covenants.
Capital expenditures were $16.3 million during the first six months, compared with $8.1 million in the prior-year period. Net cash used in investing activities was $17.8 million. Financing activities provided $0.3 million, while cash decreased by $7.3 million to $8.2 million.
Material Changes Versus the Prior Comparable Period
- Quarterly sales declined 3.5%, while six-month sales were essentially flat.
- Fiat Chrysler sales declined to $22.8 million for the quarter from $31.8 million, primarily because of lower vehicle production, lower content, discontinuation of the Chrysler 200 and lower Chrysler Pacifica volume.
- Six-month Fiat Chrysler sales declined to $46.6 million from $60.3 million. This was largely offset by higher sales to General Motors, Ford, Tier 1 customers, commercial and other OEM customers, and Hyundai/Kia.
- Gross margin declined materially because of customer price reductions, unfavorable product mix, quality-related scrap and sorting costs, production and expediting costs, higher Mexican wages, and start-up costs for the Leon, Mexico facility.
- Operating income declined 71% for the quarter and 60% for the six-month period. Management attributed the decline primarily to lower gross profit and higher engineering, selling and administrative expense.
- Operating cash flow increased to $10.0 million from $3.2 million, principally because of lower working-capital requirements, including improved receivables and inventory movements.
- Comprehensive loss attributable to STRATTEC was $1.6 million for the quarter and $1.1 million for the six-month period, primarily reflecting foreign-currency translation losses.
Outlook, Risks and Unusual Items
Management expects North American light-vehicle production to remain broadly flat at calendar 2016 levels. The company expects elevated capital spending during the next six months as it completes the Leon, Mexico paint and assembly facility. Fiscal 2017 capital expenditures are expected to be approximately $30 million.
The Leon facility is expected to require approximately $22 million in total capital expenditures; $15.2 million had been incurred through January 1, 2017. Remaining spending is expected to be funded through cash, bank loans and operating cash flow. Management expects ADAC-STRATTEC sales to increase from approximately $60 million currently to approximately $120 million within two years based on newly awarded business.
STRATTEC repatriated $15 million from Mexico during the quarter and recorded a $424,000 deferred tax liability after changing its assertion that certain Mexican earnings were permanently reinvested. Approximately $1.9 million of the company’s $8.2 million cash balance was held in Mexico at quarter-end.
Foreign-exchange results included $2.5 million of foreign-currency transaction gains for the six-month period, offset by $2.4 million of realized and unrealized losses on Mexican peso forward contracts. The contracts are intended to reduce earnings volatility but are not designated as hedges.
STRATTEC continued to fund SAL LLC, a biometric-security joint venture, recognizing $741,000 of equity losses for the six-month period and providing $1.4 million of additional loans during the period. Management expects to provide approximately $1.0 million of additional SAL funding through fiscal 2017. The company also expects to contribute approximately $250,000 to VAST’s Brazilian operations during the remainder of fiscal 2017.
The company has a $1.3 million environmental remediation reserve and stated that existing warranty reserves are adequate, although future warranty costs could be material. The Qualified Pension Plan remains subject to IRS approval for termination, and the timing and financial impact of settlement have not been determined.
Principal risks include automotive production and customer demand, customer concentration, product mix and pricing, quality and warranty claims, raw-material costs, Mexican labor and operating costs, foreign-currency volatility, interest rates, joint-venture funding requirements, capital-project execution and potential regulatory or policy changes affecting the automotive industry. Management reported no material changes to the risk factors in the 2016 Form 10-K.
Important Facts for Investors to Verify
- Whether the lower gross margin is temporary or reflects sustained pricing, mix, quality and Mexican operating-cost pressures.
- Progress, remaining cost and financing for the Leon, Mexico facility, including whether the approximately $30 million fiscal 2017 capital-spending outlook changes.
- Automotive production and program changes at Fiat Chrysler, Ford and General Motors, particularly the discontinuation or reduction of affected vehicle programs.
- Cash generation and liquidity after capital expenditures, joint-venture funding, dividends and debt-service requirements.
- Future losses, loans and guarantees associated with SAL LLC and other joint ventures.
- Realized versus unrealized effects of Mexican peso forward contracts and the broader impact of peso movements on Mexican operations.
- Potential costs and timing associated with pension-plan termination, environmental remediation and warranty claims.
- Execution of management’s expectation that ADAC-STRATTEC sales will approximately double within two years.