Business Context and Reporting Period
STRATTEC Security Corporation designs and manufactures automotive access-control products, including locks, keys, latches, door handles, ignition housings, and power-access systems. The company serves primarily North American automotive customers and participates in the VAST Automotive Group alliance with WITTE Automotive and ADAC Automotive.
This Form 10-Q covers the three and nine months ended April 1, 2018, corresponding to fiscal 2018 third quarter and year-to-date periods. The filing is unaudited. STRATTEC reports one operating segment.
Key Financial Metrics
| Metric | Three Months Ended April 1, 2018 | Prior Comparable Period | Nine Months Ended April 1, 2018 | Prior Comparable Period |
|---|---|---|---|---|
| Net sales | $116.8 million | $109.7 million | $322.5 million | $308.9 million |
| Gross profit | $15.2 million | $17.6 million | $41.3 million | $46.1 million |
| Gross margin | 13.0% | 16.0% | 12.8% | 14.9% |
| Income from operations | $4.4 million | $5.8 million | $10.3 million | $11.8 million |
| Net income attributable to STRATTEC | $3.0 million | $3.5 million | $8.3 million | $5.4 million |
| Diluted EPS | $0.80 | $0.95 | $2.24 | $1.48 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $3.7 million | $12.2 million |
| Capital expenditures | Not separately provided | Not separately provided | $19.4 million | $26.6 million |
At April 1, 2018, cash and cash equivalents were $7.0 million, total debt under the credit facilities was $48.0 million, and total shareholders’ equity was $183.2 million. The company declared dividends of $0.14 per share for the quarter and $0.42 per share year to date. Approximate attributable net margins were 2.5% for the quarter and 2.6% year to date.
Material Changes Versus Prior Comparable Period
- Quarterly sales increased 6.5% and year-to-date sales increased 4.4%, driven primarily by higher volumes and content at Fiat Chrysler, Ford, General Motors, and new programs with Honda and Volkswagen.
- Gross profit declined 13.7% in the quarter and 10.4% year to date. Gross margin fell 300 basis points in the quarter and 210 basis points year to date.
- Margin pressure reflected higher start-up, production, and expediting costs for new product launches, particularly the Leon, Mexico, door-handle paint and assembly facility, and unfavorable Mexican peso exchange rates.
- Engineering, selling, and administrative expenses declined to $10.8 million from $11.8 million in the quarter and to $31.0 million from $34.3 million year to date, partly because of lower third-party product-development costs.
- Equity earnings from joint ventures increased to $3.1 million year to date from $0.1 million, primarily because of improved VAST China performance and lower losses from SAL LLC.
- Operating cash flow declined substantially because of increased working-capital requirements, including inventory build-up for new program launches and higher customer tooling balances.
- Borrowings increased to $48.0 million from $30.0 million at fiscal year-end, primarily to fund capital expenditures and working capital.
Guidance, Outlook, Risks, and Unusual Items
- Management expects North American light-vehicle production during the remainder of calendar 2018 to be flat or slightly below calendar 2017 levels.
- Fiscal 2018 capital expenditures are expected to be approximately $27 million. The Leon facility was operational as of March 2018, and total related capital expenditures were approximately $22.5 million through April 1, 2018.
- Management expects ADAC-STRATTEC annual net sales to increase from approximately $75 million to approximately $110 million within the next fiscal year based on newly awarded customer business.
- The company expects modest or no share repurchases for the remainder of fiscal 2018 in order to conserve cash.
- The Tax Cuts and Jobs Act produced a provisional discrete net tax benefit of $0.3 million in the quarter and $0.9 million year to date. Accounting for certain provisions, including GILTI, remained incomplete.
- SAL LLC, a 51%-owned biometric-security joint venture, is being wound down. STRATTEC recognized a $24,000 equity loss from SAL LLC year to date and expects minimal to no additional funding during fiscal 2018.
- STRATTEC is subject to a U.S. federal income-tax examination for fiscal 2016. The filing does not indicate a probable material adverse outcome.
- The company maintains $30 million revolving facilities for STRATTEC and ADAC-STRATTEC. Both facilities mature August 1, 2020; the ADAC-STRATTEC borrowing limit decreases to $25 million effective July 1, 2019. The company was in compliance with all financial covenants at April 1, 2018.
- Material risks include automotive production and customer demand, new-program execution, commodity prices, Mexican peso volatility, customer concentration, warranty and recall exposure, foreign operations, and the ability to recover raw-material cost increases.
- The environmental reserve for the Milwaukee facility was $1.3 million. A $250,000 liability was recorded for the SAL LLC Westinghouse license guarantee.
- The Qualified Pension Plan termination remained subject to IRS and PBGC approvals. The timing and financial impact of the eventual settlement had not been determined.
Important Facts for Investors to Verify
- Whether Leon, Mexico, start-up and expediting costs decline as production stabilizes and whether gross margins recover.
- Actual fiscal 2018 capital expenditures, related borrowing needs, and liquidity relative to the $27 million forecast.
- Progress toward the expected increase in ADAC-STRATTEC sales and the profitability of new customer programs.
- Working-capital trends, particularly inventory, customer tooling balances, and operating cash conversion.
- Final tax accounting under the Tax Cuts and Jobs Act, including the transition tax, GILTI treatment, and deferred-tax adjustments.
- Completion and cost of the SAL LLC wind-down, including any further funding or guarantee obligations.
- IRS and PBGC approvals, required funding, and settlement effects associated with the Qualified Pension Plan termination.
- Exposure to Mexican peso movements, zinc and other commodity prices, customer production changes, warranty claims, and potential recalls.