Business Context and Reporting Period
STRATTEC Security Corporation designs and manufactures automotive access-control products, including locks, keys, latches, door handles, ignition components, and power-access systems. Products are sold primarily to North American automotive customers and globally through the VAST relationship with WITTE Automotive and ADAC Automotive. The company also owns interests in VAST LLC and NextLock LLC, the latter developing biometric security products.
This unaudited Form 10-Q covers the three months ended September 28, 2014, STRATTEC’s fiscal 2015 first quarter, compared with the three months ended September 29, 2013.
Key Financial Metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $122.2 million | $79.6 million | +53.6% |
| Gross profit | $28.1 million | $14.5 million | +93.3% |
| Gross margin | 23.0% | 18.2% | +480 basis points |
| Income from operations | $14.9 million | $5.0 million | +194.8% |
| Operating margin | 12.2% | 6.3% | +590 basis points |
| Net income attributable to STRATTEC | $9.3 million | $3.2 million | +189.8% |
| Diluted EPS | $2.55 | $0.91 | +$1.64 |
| Operating cash flow | $9.2 million | $(4.1) million | Improved $13.4 million |
| Capital expenditures | $7.0 million | $2.9 million | +$4.1 million |
Net income was $10.3 million, including $1.0 million attributable to non-controlling interests. The effective tax rate increased to 34.8% from 31.3%, primarily because a greater proportion of income was taxed in the United States and Mexico’s applicable statutory rate was higher than in the prior period.
Cash and cash equivalents increased to $22.5 million at September 28, 2014 from $19.8 million at June 29, 2014. Receivables increased to $79.3 million from $68.8 million, and inventories increased to $32.0 million from $30.5 million.
Total borrowings were $4.0 million, all under the ADAC-STRATTEC revolving facility, compared with $2.5 million at fiscal year-end. STRATTEC had no borrowings under its separate $25 million facility. Available borrowing capacity was not explicitly stated in the filing, although the facilities provide aggregate commitments of $30 million and expire August 1, 2016, subject to financial covenants.
Cash dividends declared increased to $0.12 per share from $0.11 per share. The company paid $0.4 million in shareholder dividends and $0.9 million in dividends to non-controlling interests during the quarter.
Material Changes Versus the Prior Comparable Period
- Sales increased principally because of $28.0 million of incremental GM service-parts sales related to a recall campaign, higher vehicle production volumes, increased product content on 2015 model-year vehicles, and a Hyundai/Kia new-model launch.
- GM sales rose to $44.9 million from $15.0 million; Chrysler sales rose to $32.0 million from $26.6 million; Hyundai/Kia sales rose to $7.4 million from $2.1 million. Ford sales were broadly flat at $11.8 million versus $11.4 million.
- Gross margin benefited from higher-margin recall-related service parts and better fixed-cost absorption. Benefits were partly offset by new-product launch costs, higher incentive-bonus accruals, and a $311,000 lump-sum payment under a new four-year Milwaukee labor contract.
- Engineering, selling and administrative expenses increased to $13.2 million from $9.5 million, primarily because of higher incentive-bonus accruals, but declined to 10.8% of sales from 11.9%.
- Other income increased to $788,000 from $279,000, mainly because of a $786,000 foreign-currency transaction gain versus $212,000 in the prior period.
- Equity earnings from joint ventures declined to $190,000 from $294,000. NextLock generated a $186,000 equity loss versus a $59,000 loss in the prior period because it remains in start-up activities.
- Operating cash flow improved to $9.2 million from negative $4.1 million, reflecting stronger earnings and more favorable working-capital movements. Accounts receivable used $10.6 million of cash, while accounts payable and accrued liabilities provided $10.3 million.
- Capital spending increased to $7.0 million, including $2.1 million for an additional Juarez, Mexico facility.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects fiscal 2015 capital expenditures of approximately $21 million for new product programs, equipment upgrades and replacements, and purchases of buildings in Michigan and Juarez, Mexico.
- Management expects the GM recall-related service-parts sales increase to decline during fiscal 2015’s second quarter and potentially return to more normal levels thereafter.
- Management expects domestic cash, operating cash flow, and existing liquidity to fund operations, dividends, capital expenditures, and other commitments for at least the next 12 months and the foreseeable future.
- Approximately $12.5 million of cash was held by Mexican subsidiaries and is intended for Mexican capital expenditures and plant expansion. Repatriation is not currently expected.
- Management anticipates modest or no share repurchases during the remainder of fiscal 2015 to conserve cash. No shares were repurchased during the quarter.
- NextLock expects to begin shipping biometric security products in the second quarter of fiscal 2015, but the venture incurred a $364,000 operating loss during the quarter.
- The company expects to make approximately $3.0 million of voluntary contributions to its qualified pension plan during the remainder of fiscal 2015. The planned pension termination remains subject to IRS approval, union bargaining, and completion of the termination process, expected to take 18 to 24 months after approval. The settlement date and financial impact have not been determined.
- The Milwaukee environmental reserve was $1.4 million. Monitoring continues because regulatory requirements for closure through natural attenuation have not yet been satisfied; management believes the reserve is adequate.
- Key risks include automotive demand and production levels, customer purchasing actions, recall-related volume normalization, foreign-currency movements, zinc and other raw-material prices, concentration of sourcing, interest rates, technological and competitive developments, and the ability to recover material-cost increases from customers.
- Management reported no material changes to the risk factors in the 2014 Form 10-K, no material legal proceedings, and effective disclosure controls as of quarter-end.
Investor Verification Items
- Verify the sustainability and timing of the $28.0 million GM recall-related service-parts sales and the expected reduction beginning in the second fiscal quarter.
- Assess whether the 23.0% gross margin is repeatable after recall-related sales normalize and launch, bonus, labor-contract, and material-cost effects are considered.
- Review receivable concentration, including balances of $22.2 million from Chrysler, $25.3 million from GM, and $5.7 million from Ford.
- Confirm the timing and funding of approximately $21 million of fiscal 2015 capital expenditures and the planned $3.0 million pension contribution.
- Monitor the $4.0 million ADAC-STRATTEC borrowing, covenant compliance, and liquidity available under the revolving facilities.
- Evaluate NextLock’s planned product launch, continuing start-up losses, and potential funding requirements.
- Track pension-plan termination approvals, required contributions, and any eventual settlement charge.
- Consider the impact of foreign-currency gains, commodity prices, Mexican operations, and customer-specific raw-material adjustment clauses on future results.