STRATTEC Security Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 28, 2021, compared with the periods ended March 29, 2020. The filing was signed May 6, 2021. STRATTEC designs and manufactures automotive access-control products, including locks, keys, latches, door handles, power-access systems and related components, primarily for North American automotive customers. The company reports one operating segment.
Financial highlights
| Metric | Three months ended Mar. 28, 2021 | Three months ended Mar. 29, 2020 | Nine months ended Mar. 28, 2021 | Nine months ended Mar. 29, 2020 |
|---|---|---|---|---|
| Net sales | $121.6 million | $116.9 million | $375.2 million | $343.2 million |
| Gross profit | $18.7 million | $17.0 million | $63.4 million | $43.2 million |
| Gross margin | 15.3% | 14.5% | 16.9% | 12.6% |
| Income from operations | $6.7 million | $6.3 million | $29.9 million | $7.5 million |
| Net income attributable to STRATTEC | $4.5 million | $3.0 million | $19.6 million | $2.9 million |
| Diluted EPS | $1.15 | $0.79 | $5.11 | $0.77 |
| Cash flow from operations | Not separately provided | Not separately provided | $25.4 million | $29.9 million |
- Third-quarter operating margin was approximately 5.5%, compared with 5.4% in the prior-year quarter. Nine-month operating margin was approximately 8.0%, compared with 2.2%.
- Third-quarter net margin attributable to STRATTEC was approximately 3.7%, compared with 2.6%; nine-month net margin was approximately 5.2%, compared with 0.8%.
- At March 28, 2021, cash and cash equivalents were $11.3 million, compared with $11.8 million at June 28, 2020. Working capital increased to $93.5 million from $77.3 million.
- Receivables were $81.3 million, up from $42.0 million at fiscal year-end, primarily reflecting higher sales levels and timing. Inventories were $58.3 million, compared with $54.4 million.
- Total borrowings under revolving credit facilities were $16.0 million, down from $35.0 million. The company had $40 million of available capacity under its facility and ADAC-STRATTEC had a separate $25 million facility; both expire August 1, 2022. The company was in compliance with all financial covenants.
- Capital expenditures were $6.4 million year to date; management expects approximately $10 million for fiscal 2021.
Material changes versus the prior comparable periods
- Nine-month sales increased 9.3%, reflecting recovery in automotive production after COVID-19-related plant closures and reduced production in the prior-year period. Third-quarter sales increased 4.0%.
- Growth was strongest in power access, driver controls and door handles and exterior trim. Nine-month sales to General Motors increased to $111.3 million from $90.9 million, Ford increased to $54.4 million from $46.5 million, and Hyundai/Kia increased to $27.9 million from $14.1 million. Fiat Chrysler sales declined to $69.9 million from $78.7 million, partly reflecting the discontinuation of the Dodge Grand Caravan.
- Nine-month gross margin improved substantially due to higher volume, prior-year non-cash pension-related compensation charges, cost reductions and favorable foreign exchange effects. These benefits were partly offset by higher bonuses, Mexican wage increases and inventory obsolescence associated with a discontinued customer program.
- Nine-month engineering, selling and administrative expense declined to $33.5 million from $35.8 million, helped by cost controls, lower product-development spending, workforce reductions and a $1.5 million customer reimbursement of previously incurred engineering costs.
- Equity earnings from joint ventures increased to $1.8 million from $55,000 for the nine-month periods. The improvement primarily reflected better VAST China performance after prior-year COVID-19 shutdowns, partly offset by startup costs at a new Jingzhou plant and closure costs for the Fuzhou plant.
- Prior-year results were affected by COVID-19 shutdowns and a UAW strike, while current-year results included a $675,000 income-tax benefit related to the GILTI high-tax exception regulations.
- The company suspended its quarterly cash dividend in the prior-year period and declared no dividends to shareholders in the current nine-month period. It made no share repurchases during the current nine-month period.
Cash flow, liquidity and capital resources
- Operating cash flow was $25.4 million, compared with $29.9 million, despite significantly higher earnings. The decline primarily reflected a $39.2 million increase in receivables and a $3.9 million increase in inventory, partly offset by higher accounts payable and accrued liabilities.
- Investing cash outflow was $6.5 million, including $6.4 million of capital expenditures and a $100,000 contribution to VAST LLC.
- Financing cash outflow was $18.9 million, including $19.0 million of debt repayments and $490,000 of distributions to non-controlling interests, partly offset by $585,000 from stock-option exercises and employee stock purchases.
- Major-customer receivables at March 28, 2021 included General Motors $20.6 million, Fiat Chrysler $13.6 million and Ford $14.9 million. Management stated that major customers were paying according to agreed terms.
- Approximately $1.6 million of cash was held in Mexico and was available for repatriation as needed.
Outlook, risks and unusual items
- Management described the sales outlook for the next several quarters as strong because customers continue to replenish low dealer inventories. However, demand remains dependent on automotive production levels and the continuing effects of COVID-19.
- Critical electronic-component and raw-material shortages are currently affecting the industry and could limit STRATTEC’s ability to meet customer schedules. Mexican government operating restrictions had also limited production capacity earlier in fiscal 2021.
- Other principal risks include automotive-sector demand, customer purchasing decisions, labor disruptions, foreign-currency fluctuations, tariffs and trade policy, commodity and operating-cost inflation, warranty and recall exposure, product returns, and supply-chain disruption.
- The company expects VAST’s Brazilian operation may require approximately $300,000 of additional aggregate partner funding during the remainder of fiscal 2021, with STRATTEC’s expected share approximately $100,000. Future contributions may also be required for the loss-making India joint venture.
- The company maintained a $1.4 million environmental remediation reserve related to historical contamination at its Milwaukee facility. Management believes the reserve is adequate, but active remediation may be required because regulatory closure through natural attenuation has not yet been achieved.
- Outstanding Mexican-peso forward contracts had a $5.0 million notional amount and a $32,000 fair value at March 28, 2021. Foreign-currency and derivative gains or losses may fluctuate with exchange rates.
- Management stated that there were no material changes to previously disclosed risk factors, no material legal proceedings, and effective disclosure controls as of the period end.
Investor verification points
- Verify whether semiconductor, transponder and other component shortages constrained customer production or STRATTEC shipments after March 28, 2021.
- Assess the sustainability of the improved gross margins after excluding prior-year pension charges, COVID-related cost actions, foreign-exchange benefits and the tax benefit.
- Monitor receivables and inventory levels, particularly the working-capital effect of customer production shutdowns and supply-chain disruptions.
- Confirm fiscal 2021 capital expenditures, debt repayments, credit-facility availability and compliance with financial covenants.
- Track additional funding requirements for VAST Brazil and India and the performance of VAST China following the Jingzhou plant transition.
- Review the status and potential cost of the Milwaukee environmental remediation and any material warranty, recall or product-liability claims.