STRATTEC SECURITY CORPORATION — Form 10-Q Summary
Business context and reporting period
STRATTEC designs and manufactures automotive access-control products, including locks, keys, latches, door handles, ignition housings, and power access systems. Products are primarily sold to North American automotive customers, with global sales supported through the VAST Automotive Group relationship. The filing covers the three months ended September 29, 2019, the company’s fiscal 2020 first quarter, compared with September 30, 2018.
Financial performance and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $120.0 million | $117.2 million | Up 2.4% |
| Gross profit | $15.9 million | $15.2 million | Up 4.6% |
| Gross margin | 13.2% | 13.0% | Up 0.2 percentage points |
| Income from operations | $2.9 million | $4.2 million | Down $1.2 million |
| Net income | $2.7 million | $4.4 million | Down 39.5% |
| Net income attributable to STRATTEC | $1.2 million | $3.5 million | Down 64.1% |
| Diluted EPS | $0.33 | $0.93 | Down $0.60 |
| Operating cash flow | $15.0 million | $7.8 million | Up $7.2 million |
| Capital expenditures | $4.3 million | $4.0 million | Up $0.3 million |
Engineering, selling and administrative expense increased to $13.0 million from $11.0 million, including $2.2 million of non-cash compensation expense related to the future transfer of excess qualified pension plan assets. The charge reduced diluted EPS by approximately $0.46. Excluding this unusual charge, operating performance would have been stronger than reported.
Cash and cash equivalents were $11.2 million at September 29, 2019, compared with $7.8 million at June 30, 2019. Total borrowings declined to $36.0 million from $42.0 million. The company had $40 million and ADAC-STRATTEC had $25 million of secured revolving credit capacity, with both facilities expiring August 1, 2022. The company was in compliance with all financial covenants.
Current assets were $155.7 million versus current liabilities of $82.2 million. The company paid $522,000 of dividends to shareholders and $980,000 of dividends to non-controlling interests during the quarter. The quarterly dividend remained $0.14 per share.
Material changes versus the prior comparable period
- Revenue increased $2.8 million, primarily from higher General Motors production and content, partly offset by lower Fiat Chrysler, Hyundai/Kia, and power-access volumes.
- General Motors sales increased to $33.8 million from $25.3 million, while Fiat Chrysler sales declined to $25.5 million from $30.3 million.
- The General Motors UAW strike reduced current-quarter sales by approximately $3 million and contributed to inventory buildup of GM components.
- Gross margin improved modestly due to better operations in Leon, Mexico and favorable peso translation, partly offset by pension-related compensation expense and higher Mexican labor costs.
- Equity earnings from VAST LLC declined to $487,000 from $915,000 because of higher development and new-plant costs in China; SAL LLC remained largely wound down and generated a $3,000 loss.
- Other expense improved to $97,000 from $245,000, but the prior-year period benefited from $397,000 of realized and unrealized peso-forward gains. No peso forward contracts were outstanding in the current quarter.
- Adoption of the new lease standard resulted in recognition of a $4.0 million operating lease right-of-use asset and corresponding lease obligation, without a material impact on earnings or cash flow.
Guidance, outlook, risks, contingencies, and unusual items
- Management’s third-party forecast indicated North American light-vehicle production would be flat to slightly lower in calendar 2020 compared with 2019.
- The General Motors strike could reduce fiscal 2020 sales by approximately $10 million to $12 million if lost orders are not replenished after the strike ends.
- Fiscal 2020 capital expenditures were expected to be approximately $15 million for new product programs and equipment upgrades or replacements.
- Management expected modest or no stock repurchase activity for the remainder of fiscal 2020 to preserve cash. No shares were repurchased during the quarter.
- STRATTEC anticipated contributing approximately $200,000 toward VAST Brazil funding through calendar 2020 and expected minimal to no additional funding for SAL LLC.
- The company recorded a $2.2 million non-cash compensation charge in the quarter related to the pension-plan asset transfer and expected an additional $2.1 million charge in the quarter ending December 29, 2019. The company also incurred a $31.9 million pension settlement charge and a $4.2 million related non-cash compensation charge during fiscal 2019.
- Key risks include automotive production and consumer demand, customer concentration, labor disruptions, tariffs and trade policy, foreign currency movements, material and labor costs, product recalls and warranty claims, competitive developments, and potential changes in customer purchasing patterns.
- The company reported a $1.3 million environmental remediation reserve related to its Milwaukee facility and stated that existing legal, warranty, and environmental reserves were adequate. It did not expect current legal proceedings to have a material adverse effect.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material changes were reported to the Form 10-K risk factors.
Important facts for investors to verify
- Whether the General Motors strike ends promptly and whether deferred production orders are replenished, limiting the projected $10 million to $12 million fiscal-year sales impact.
- The extent to which pension-related non-cash compensation charges continue to depress reported earnings through the expected December 2019 charge.
- VAST China’s development and new-plant costs, VAST Brazil’s expected funding needs, and the financial status of the largely wound-down SAL LLC business.
- Automotive production volumes, particularly for Fiat Chrysler minivans, General Motors programs, Hyundai/Kia minivans, and North American light trucks and utility vehicles.
- Cash conversion and inventory levels, including the GM-related inventory buildup, as well as progress toward the approximately $15 million fiscal 2020 capital expenditure plan.
- Availability under and compliance with the secured revolving credit facilities, including the minimum net worth and fixed-charge coverage covenants.
- The adequacy of warranty and environmental reserves and the potential need for active remediation at the Milwaukee site.