Business Context and Reporting Period
STRATTEC Security Corporation designs and manufactures automotive access-control products, including locks, keys, latches, door handles, power-access systems and related components. The company serves primarily North American automotive customers and participates in the VAST Automotive Group relationship with WITTE Automotive and ADAC Automotive. This Form 10-Q covers the quarter and nine months ended March 31, 2019, compared with April 1, 2018. The request labels the period “2018 Q3,” but the filing reports fiscal 2019 third-quarter results.
Key Financial Metrics
| Metric | Three months ended March 31, 2019 | Prior comparable period | Nine months ended March 31, 2019 | Prior comparable period |
|---|---|---|---|---|
| Net sales | $128.2 million | $116.8 million | $358.3 million | $322.5 million |
| Gross profit | $15.7 million | $15.2 million | $43.6 million | $41.3 million |
| Gross margin | 12.2% | 13.0% | 12.2% | 12.8% |
| Income from operations | $4.0 million | $4.4 million | $10.4 million | $10.3 million |
| Net income attributable to STRATTEC | $1.7 million | $3.0 million | $(17.0) million | $8.3 million |
| Diluted EPS | $0.46 | $0.80 | $(4.62) | $2.24 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $24.7 million | $3.7 million |
- Quarterly operating margin was approximately 3.1%, versus 3.7% previously; nine-month operating margin was approximately 2.9%, versus 3.2%.
- March 31, 2019 cash and cash equivalents were $9.2 million, including $2.8 million held in Mexico.
- Borrowings under credit facilities totaled $44.0 million, down from $51.0 million at July 1, 2018. The company remained in compliance with all financial covenants.
- Total current assets were $159.5 million versus current liabilities of $78.8 million. Receivables were $87.8 million and inventories were $46.8 million.
- Capital expenditures were $13.6 million for the nine-month period. Operating cash flow less capital expenditures was approximately $11.0 million.
- Dividends declared were $0.14 per share for the quarter and $0.42 per share year to date.
Material Changes Versus Prior Comparable Period
- Quarterly sales increased 9.8%, driven primarily by higher General Motors sales, increased Tier 1 and commercial customer sales, and stronger Hyundai/Kia volumes. Fiat Chrysler and Ford sales declined.
- Nine-month sales increased 11.1%, supported by higher product content and production volumes for Fiat Chrysler and General Motors, new door-handle programs, and increased Hyundai/Kia production. Ford sales declined because of discontinued models and lower production volumes.
- Gross margin declined because of higher Mexican minimum wages, production inefficiencies at the Leon, Mexico facility, higher nonconforming costs, customer price reductions, expediting costs and competitive pricing on newer programs. Favorable product mix and currency effects partly offset these pressures.
- Engineering, selling and administrative expenses increased to $11.7 million in the quarter and $33.2 million year to date, primarily due to higher outside product-development and engineering costs.
- Equity earnings from joint ventures declined to $66,000 in the quarter from $619,000 and to $2.5 million year to date from $3.1 million, reflecting lower VAST profitability, development costs and start-up costs in China.
- The nine-month net loss was primarily caused by a $32.4 million non-cash pension termination settlement charge. Management expects an additional approximately $8 million non-cash compensation charge when the pension plan is fully terminated and excess assets are transferred and distributed.
- Operating cash flow improved substantially because of better operating results and lower working-capital requirements, including lower customer tooling balances and a smaller inventory-related cash use.
- The company adopted the new revenue-recognition standard effective July 2, 2018. The adoption resulted in a balance-sheet reclassification, with no cumulative retained-earnings adjustment.
Guidance, Outlook, Risks and Unusual Items
- Management expects North American light-vehicle production in calendar 2019 to be flat or slightly below 2018 levels, while continuing to anticipate stronger demand for light trucks and utility vehicles than for passenger cars.
- Fiscal 2019 capital expenditures are expected to be approximately $17.0 million.
- Management expects modest or no stock repurchases for the remainder of fiscal 2019 to preserve cash. No shares were repurchased during the nine months ended March 31, 2019.
- The ADAC-STRATTEC credit-facility borrowing limit is scheduled to decrease from $30 million to $25 million effective July 1, 2019. Both facilities expire August 1, 2021.
- VAST partners are expected to contribute approximately $450,000 collectively to fund Brazilian operations through calendar 2019; STRATTEC’s expected share is approximately $150,000.
- SAL LLC’s biometric-lock business has been wound down, and STRATTEC anticipates minimal to no further funding during fiscal 2019.
- Key risks include automotive production and customer demand, customer purchasing actions, competitive pricing, product launches, manufacturing quality and warranty claims, raw-material and Mexican labor costs, foreign-currency movements, tariffs and trade-policy changes, and liquidity or covenant constraints.
- The company has a $1.3 million environmental remediation reserve related to its Milwaukee facility and believes the reserve is adequate. Management does not expect current legal proceedings to have a material adverse effect.
Important Facts for Investors to Verify
- Whether the expected additional approximately $8 million pension-related charge is recorded and whether the plan termination is fully completed.
- Whether gross-margin pressure from Mexican operations, quality costs, customer pricing and new programs improves or persists.
- Actual North American vehicle production and customer volumes, particularly for General Motors, Fiat Chrysler and Ford.
- Availability under the credit facilities after the ADAC-STRATTEC borrowing limit declines to $25 million and continued covenant compliance.
- Progress and capital requirements of VAST operations in China, India and Brazil, and the extent of any remaining SAL LLC funding.
- Whether fiscal 2019 capital expenditures remain near the approximately $17 million outlook and whether cash generation supports dividends and potential repurchases.
- The adequacy of warranty and environmental reserves and exposure to tariffs, foreign exchange and material-cost changes.