STRATTEC SECURITY CORPORATION — Fiscal 2020 Second-Quarter Form 10-Q
Reporting period: Three and six months ended December 27, 2020, compared with December 29, 2019; unaudited interim results. STRATTEC designs and manufactures automotive access-control products, including locks, keys, door handles, latches, power-access systems and related components. Operations primarily serve North American automotive OEMs, with international activities through the VAST Automotive Group and subsidiaries in Mexico.
Financial Highlights
| Metric | Three months ended Dec. 27, 2020 | Three months ended Dec. 29, 2019 | Six months ended Dec. 27, 2020 | Six months ended Dec. 29, 2019 |
|---|---|---|---|---|
| Net sales | $127.4 million | $106.3 million | $253.6 million | $226.2 million |
| Gross profit | $22.2 million | $10.3 million | $44.8 million | $26.2 million |
| Gross margin | 17.5% | 9.7% | 17.6% | 11.6% |
| Income from operations | $11.9 million | $(1.8) million | $23.1 million | $1.2 million |
| Net income attributable to STRATTEC | $7.1 million | $(1.3) million | $15.1 million | $(0.1) million |
| Diluted EPS | $1.85 | $(0.36) | $3.96 | $(0.03) |
- Six-month operating cash flow was $17.1 million, versus $20.6 million in the prior-year period. Capital expenditures were $4.6 million, and investing cash use was $4.7 million.
- Cash and cash equivalents were $10.4 million at December 27, 2020, including $5.2 million held in Mexico. Working capital was $89.2 million, compared with $77.3 million at June 28, 2020.
- Receivables were $85.8 million and inventories were $56.3 million at quarter-end. The increase in receivables was a significant use of operating cash during the six-month period.
- Borrowings under credit facilities totaled $22.0 million, down from $35.0 million at June 28, 2020. The facilities provide aggregate commitments of $65 million and expire August 1, 2022. The company was in compliance with all financial covenants.
- Equity earnings from joint ventures were $1.1 million for the quarter and $1.9 million for the six-month period, compared with $0.5 million and $1.0 million, respectively, in the prior-year periods.
- The effective tax rate was 17.2% for the quarter and 15.4% for the six-month period. The company recorded a $0.7 million tax benefit from eligibility for the GILTI high-tax exception.
Material Changes Versus Prior Comparable Period
- Quarterly sales increased approximately 19.8%; six-month sales increased approximately 12.1%. The recovery reflected customer vehicle-production restarts and dealer inventory replenishment following COVID-19-related shutdowns.
- Gross margin expanded by 7.8 percentage points for the quarter and 6.0 percentage points year to date. Management cited facility cost improvements, lower labor and overhead costs, and favorable Mexican peso exchange rates.
- Operating income improved substantially from a prior-year loss. The comparison benefited from lower operating expenses, a $1.5 million customer reimbursement of previously incurred engineering costs, workforce reductions and the absence of prior-year pension-related non-cash compensation charges.
- The prior-year periods were adversely affected by non-cash compensation charges associated with the transfer of excess qualified pension-plan assets and by the UAW strike, which reduced prior-year sales by an estimated $7.0 million in the quarter and $10.0 million for the six-month period.
- General Motors sales increased materially, while Fiat Chrysler sales declined because of lower minivan production and the July 2020 discontinuation of the Dodge Grand Caravan. Ford sales benefited from a new power-tailgate program on F-150 pickups; Hyundai/Kia sales benefited from the new Kia Sedona program.
- Cash declined $1.3 million during the six months despite profitability, primarily because of higher working-capital needs and debt repayments. The company repaid $13.0 million under its credit facilities.
Outlook, Commentary, Risks and Unusual Items
- Management described the near-term sales outlook as strong as OEM customers continue rebuilding dealer inventories, but stated that demand depends on the duration and severity of COVID-19 and its effects on the automotive industry.
- Mexican government requirements continued to limit operating capacity at Mexican facilities and could restrict the company’s ability to meet customer demand.
- Management expects approximately $12 million of fiscal 2021 capital expenditures, of which $4.6 million had been incurred through December 27, 2020.
- The company suspended its quarterly cash dividend during the prior fiscal year to preserve cash and declared no dividends to common shareholders during the current six-month period. Management expected modest or no stock repurchases for the remainder of fiscal 2021; no shares were repurchased during the period.
- VAST China incurred startup costs for a new Jingzhou plant and costs related to closing and consolidating the Fuzhou plant. VAST operations in India and Brazil continued to report losses. STRATTEC expected to contribute an additional $0.1 million to fund Brazil operations during the remainder of fiscal 2021, and future contributions to the India venture may be required.
- Other expense included $2.3 million of foreign-currency transaction losses for the six-month period, partially offset by $0.6 million of realized and unrealized peso-forward-contract gains. No peso forward contracts were outstanding at quarter-end.
- The company maintained a $1.3 million environmental remediation reserve for its Milwaukee facility and stated that the reserve was adequate. Warranty, product-defect, contract, intellectual-property and employment claims are considered unlikely to have a material adverse effect, although future warranty costs cannot be assured.
- Principal risks include automotive demand and production volatility, COVID-19 impacts, supply-chain disruption, customer concentration, labor interruptions, foreign-exchange movements, tariffs and trade policy, metals and operating-cost inflation, warranty and recall exposure, and liquidity or covenant pressure.
Investor Verification Points
- Verify whether the strong OEM production recovery and sales trajectory continued after December 27, 2020, particularly amid subsequent COVID-19 restrictions and supply-chain constraints.
- Assess the sustainability of the 17.5% quarterly gross margin after adjusting for favorable foreign-exchange effects, prior-year pension charges and the customer engineering-cost reimbursement.
- Monitor receivables, inventories and operating cash conversion, given the $43.6 million increase in receivables during the six-month period and the resulting reduction in operating cash flow.
- Confirm continued compliance with the secured credit facilities and track debt maturities, covenant requirements and available borrowing capacity through the August 2022 expiration.
- Evaluate potential additional funding requirements for VAST Brazil and India, as well as costs and execution risks associated with the VAST China facility consolidation.
- Review customer concentration and program changes, including General Motors, Ford, Fiat Chrysler and Hyundai/Kia volumes and the discontinuation of the Dodge Grand Caravan program.