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 driver controls. The company serves primarily North American automotive OEMs and Tier 1 suppliers and participates in the VAST Automotive Group relationship with WITTE Automotive and ADAC Automotive.
This unaudited Form 10-Q covers the fiscal quarter ended September 27, 2020, compared with the quarter ended September 29, 2019. The quarter reflected a recovery in automotive production following COVID-19-related customer and Mexican facility shutdowns during the prior quarter.
Financial Results and Key Metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $126.2 million | $120.0 million | +5.2% |
| Gross profit | $22.5 million | $15.9 million | +41.7% |
| Gross margin | 17.8% | 13.2% | +460 bps |
| Income from operations | $11.2 million | $2.9 million | +282% |
| Operating margin | 8.9% | 2.4% | +650 bps |
| Net income attributable to STRATTEC | $8.0 million | $1.2 million | +544% |
| Diluted EPS | $2.11 | $0.33 | +$1.78 |
| Net cash provided by operating activities | $7.3 million | $15.0 million | -51% |
| Capital expenditures | $1.5 million | $4.3 million | -65% |
Net income was $10.1 million, including $2.1 million attributable to non-controlling interests. The effective tax rate was 13.5%, compared with 10.0% in the prior-year quarter, and included a $675,000 tax benefit related to the GILTI high-tax exception.
Cash and cash equivalents were $12.0 million at September 27, 2020, including $4.2 million held in Mexico. Working capital was $84.6 million, compared with $77.3 million at June 28, 2020. Outstanding credit-facility borrowings were $30.0 million, down from $35.0 million at June 28, 2020. The company reported compliance with all credit-facility covenants.
Material Changes Versus the Prior Comparable Period
- Sales increased 5.2%, primarily reflecting the ramp-up of customer vehicle production after COVID-19 shutdowns. General Motors sales increased to $37.8 million from $33.8 million, while Hyundai/Kia sales increased to $8.6 million from $5.7 million.
- Gross margin improved substantially due to cost improvements, favorable Mexican peso exchange rates and the absence of a $1.4 million prior-year non-cash pension-related compensation charge in cost of goods sold.
- Engineering, selling and administrative expense declined to $11.3 million from $13.0 million, reflecting lower product-development costs, workforce reductions and tighter expense management. The prior-year period included an $862,000 pension-related non-cash compensation charge.
- Equity earnings from VAST LLC increased to $825,000 from $484,000, primarily due to improved profitability in VAST China. VAST operations in India and Brazil continued to report losses.
- Operating cash flow declined despite higher earnings because receivables increased by $37.8 million as sales recovered and working capital normalized after the COVID-19 disruption.
- No quarterly cash dividend was declared or paid to STRATTEC shareholders, compared with $522,000 paid in the prior-year quarter. The company continued to prioritize cash preservation.
Guidance, Outlook, Risks and Unusual Items
- Management stated that sales demand appeared strong over the next several quarters as OEM customers replenished dealer inventories, but the outlook remained contingent on the duration and severity of the COVID-19 pandemic.
- Mexican government operating restrictions continued to limit capacity at the company’s Mexican facilities and could impair its ability to meet customer demand.
- Management anticipates approximately $12 million of fiscal 2021 capital expenditures, of which $1.5 million had been incurred through September 27, 2020.
- The company expects modest or no stock repurchases for the remainder of fiscal 2021. No shares were repurchased during the quarter.
- VAST LLC may require capital contributions related to its Brazil operations; STRATTEC expects its share to be approximately $100,000 during fiscal 2021. Additional contributions may be required for the loss-making India joint venture.
- Key risks include automotive demand and production levels, COVID-19 impacts, customer concentration, supply-chain disruptions, labor stoppages, foreign-currency volatility, tariffs and trade policy, warranty and recall costs, material prices and Mexican operating restrictions.
- The company maintains a $1.3 million environmental reserve for contamination at its Milwaukee facility. Monitoring continues because regulatory requirements for closure through natural attenuation have not yet been satisfied.
- Net other expense was $260,000, including foreign-currency transaction losses, a $335,000 unrealized gain and $59,000 realized loss on Mexican peso forward contracts, and pension and postretirement costs.
- The company reported no material changes to the risk factors in its most recent Form 10-K and no legal proceedings expected to have a material adverse effect.
Important Facts for Investors to Verify
- Whether the post-shutdown recovery in OEM production persists after dealer inventory restocking and whether COVID-19 restrictions cause renewed customer or facility closures.
- Whether the improved gross margin is sustainable after excluding favorable exchange-rate effects and prior-year pension-related charges.
- The collectability and timing of the significant increase in receivables, including balances of $23.2 million from General Motors, $16.2 million from Fiat Chrysler Automobiles and $7.6 million from Ford.
- Available liquidity under the $40 million STRATTEC facility and $25 million ADAC-STRATTEC facility, both scheduled to expire August 1, 2022, and continued covenant compliance.
- The effect of Mexican capacity restrictions, peso movements and forward-contract settlements on future earnings and cash flow.
- Potential capital requirements for VAST LLC’s Brazil and India operations.
- The outcome of Wisconsin state income-tax examinations covering fiscal years 2015 through 2018.