STRATTEC SECURITY CORPORATION: Fiscal 2016 First-Quarter Summary
Business Context and Reporting Period
STRATTEC designs and manufactures automotive access-control products, including locks, keys, latches, handles, ignition housings, and power-access systems. The company serves primarily North American automotive customers and participates in global operations through VAST and other joint ventures. The filing covers the three months ended October 2, 2016, compared with September 27, 2015. Results are unaudited and presented under U.S. GAAP.
Key Financial Metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $100.2 million | $96.5 million | Up 3.9% |
| Gross profit | $14.6 million | $16.5 million | Down 11.5% |
| Gross margin | 14.6% | 17.1% | Down 2.5 percentage points |
| Income from operations | $3.2 million | $5.9 million | Down 45.4% |
| Net income | $2.4 million | $3.8 million | Down 37.3% |
| Net income attributable to STRATTEC | $1.5 million | $3.3 million | Down 52.9% |
| Diluted EPS | $0.42 | $0.90 | Down $0.48 |
| Operating cash flow | $5.0 million | $4.0 million | Up $1.0 million |
| Capital expenditures | $7.4 million | $3.9 million | Up $3.6 million |
Cash and cash equivalents totaled $17.1 million at October 2, 2016, compared with $15.5 million at July 3, 2016. Total borrowings under the company’s credit facilities were $24.0 million, consisting of $16.0 million under STRATTEC’s facility and $8.0 million under the ADAC-STRATTEC facility. Both facilities mature August 1, 2019, and the company was in compliance with its financial covenants.
Total current assets were $138.8 million and total current liabilities were $67.1 million at October 2, 2016. Shareholders’ equity was $156.9 million, including $17.1 million of non-controlling interest.
Material Changes Versus the Prior Comparable Period
- Sales increased primarily because of higher General Motors, Ford, Hyundai/Kia, commercial, and other OEM volumes and content, partly offset by lower Fiat Chrysler sales.
- Fiat Chrysler sales declined because of lower production and content for the Chrysler 200, which was scheduled for discontinuation in December 2016, and lower content on the Chrysler Pacifica.
- Gross profit and margin declined due to customer price reductions effective in calendar 2016 and higher-than-expected production and expediting costs. Favorable Mexican peso exchange rates and lower incentive-bonus provisions partially offset the pressure.
- Engineering, selling and administrative expenses increased to $11.4 million from $10.6 million, primarily due to higher new-product development costs.
- Equity earnings from VAST increased to $390,000 from $133,000, while SAL LLC generated a $328,000 equity loss. Overall equity earnings of joint ventures improved to $62,000 from a $293,000 loss.
- Operating cash flow improved despite lower operating profit, primarily because the prior-year period absorbed a larger inventory build and the current period benefited from changes in payables and accrued liabilities.
- Investing cash outflows increased because of higher capital expenditures, including $3.7 million for the new ADAC-STRATTEC facility and related equipment in Leon, Mexico.
- Financing cash flow was positive at $4.7 million, reflecting $8.0 million of additional borrowings and $2.9 million of non-controlling-interest contributions, partly offset by debt repayments and dividends.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that North American light-vehicle production was expected to remain approximately flat over the next calendar year.
- Ford production shutdowns involving the F-150, Focus, Fusion, and Escape, together with Fiat Chrysler’s planned discontinuation of the Dodge Dart and Chrysler 200, were expected to affect second-quarter and full-year sales.
- Management expected approximately $30 million of fiscal 2017 capital expenditures. The Leon, Mexico facility was expected to require approximately $22 million in total expenditures, of which $10.7 million had been incurred through October 2, 2016.
- Management expected existing domestic cash, operating cash flow, and credit-facility borrowings to fund operations, dividends, and capital expenditures for at least the next 12 months and thereafter for the foreseeable future.
- The company expected modest or no share repurchases for the remainder of fiscal 2017 while conserving cash for other uses. No shares were repurchased during the quarter.
- STRATTEC anticipated contributing approximately $250,000 to VAST-related operations in Brazil during the remainder of fiscal 2017 and expected to continue funding SAL LLC’s start-up costs. Loans to SAL LLC totaled $1.2 million at quarter-end.
- Mexican peso forward contracts produced a $1.1 million combined realized and unrealized loss during the quarter. The contracts had aggregate notional amounts of $27.0 million and are not designated as hedges.
- The company made a $3.0 million voluntary contribution to its qualified pension plan and anticipated additional contributions totaling $2.0 million during the remainder of fiscal 2017. The planned pension termination remained subject to IRS approval, and the timing and financial impact had not been determined.
- Warranty, environmental, product-defect, intellectual-property, employment, customer-demand, commodity-price, foreign-currency, and automotive-industry risks remain relevant. The environmental reserve was $1.4 million, which management believed was adequate.
- No material changes were reported to the risk factors in the company’s fiscal 2016 Form 10-K. Management stated that pending legal matters were not expected to have a material adverse effect.
Important Facts for Investors to Verify
- Whether customer production changes and vehicle-model discontinuations further pressure revenue in subsequent quarters.
- Whether customer price reductions, production inefficiencies, and expediting costs continue to compress gross margin.
- Progress, final cost, financing, and expected returns of the Leon, Mexico facility and the broader fiscal 2017 capital-expenditure program.
- Future borrowing levels, covenant compliance, interest costs, and liquidity after planned capital expenditures and joint-venture funding.
- Potential realized losses or gains from the Mexican peso forward contracts and the company’s underlying Mexican operating-cost exposure.
- The extent and timing of additional SAL LLC funding, VAST Brazil contributions, and obligations under guarantees.
- IRS approval and settlement costs associated with terminating the qualified pension plan.