STRATTEC Security Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 29, 2020, compared with March 31, 2019. The supplied metadata identifies “2019 Q3,” but the filing is for fiscal 2020 third quarter. 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.
Financial Highlights
| Metric | Three months ended Mar. 29, 2020 | Three months ended Mar. 31, 2019 | Nine months ended Mar. 29, 2020 | Nine months ended Mar. 31, 2019 |
|---|---|---|---|---|
| Net sales | $116.9 million | $128.2 million | $343.2 million | $358.3 million |
| Gross profit | $17.0 million | $15.7 million | $43.2 million | $43.6 million |
| Gross margin | 14.5% | 12.2% | 12.6% | 12.2% |
| Income from operations | $6.3 million | $4.0 million | $7.5 million | $10.4 million |
| Net income attributable to STRATTEC | $3.0 million | $1.7 million | $2.9 million | $(17.0) million |
| Diluted earnings per share | $0.79 | $0.46 | $0.77 | $(4.62) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $29.9 million | $24.7 million |
Third-quarter operating margin was approximately 5.4%, compared with 3.1% in the prior-year quarter. Nine-month operating margin was approximately 2.2%, compared with 2.9% in the prior-year period. The nine-month 2019 comparison included a $32.4 million pension termination settlement charge and related effects.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $10.2 million at March 29, 2020, up from $7.8 million at June 30, 2019. Approximately $2.6 million was held in Mexico and was available for repatriation if needed.
- Working capital was $80.4 million, compared with $77.3 million at June 30, 2019.
- Borrowings under secured revolving credit facilities totaled $27.0 million, down from $42.0 million at June 30, 2019. The facilities provide aggregate capacity of $65 million and expire August 1, 2022.
- The company was in compliance with all credit-facility covenants at March 29, 2020.
- Nine-month capital expenditures were $10.3 million. Fiscal 2020 capital expenditures were expected to total approximately $14 million to $15 million before the COVID-19-related reductions in spending.
- Cash dividends declared were $0.14 per share for the quarter and $0.42 per share for the nine-month period.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined $11.3 million, or approximately 8.8%, primarily due to lower vehicle production and approximately $6.7 million of reductions associated with OEM plant shutdowns and production cuts late in March.
- Nine-month sales declined $15.1 million, or approximately 4.2%. The period included an estimated $10 million sales impact from the General Motors UAW strike and approximately $6.7 million from COVID-19-related shutdowns.
- Third-quarter gross profit increased $1.3 million despite lower sales, and gross margin improved to 14.5% from 12.2%, reflecting manufacturing efficiencies, lower scrap costs and favorable Mexican peso exchange rates.
- Nine-month operating income declined $2.9 million because higher engineering, selling and administrative expenses more than offset the relatively stable gross profit. These expenses included approximately $4.4 million of non-cash compensation related to the transfer of excess pension-plan assets.
- Equity earnings from joint ventures declined to a $0.9 million loss in the third quarter from $0.1 million of earnings, and declined to $0.1 million for nine months from $2.5 million. VAST results were affected by COVID-19 shutdowns, new-program development costs and startup costs for a new China plant.
- Other income increased to $1.0 million in the third quarter from $0.2 million, largely due to a $2.5 million foreign-currency transaction gain, partially offset by a $1.0 million unrealized loss on peso forward contracts and a $0.6 million Rabbi Trust loss.
Cash Flow, Risks and Outlook
- Operating cash flow improved to $29.9 million from $24.7 million for the comparable nine-month period. Investing cash use was $10.3 million, and financing cash use was $17.0 million, including $15.0 million of debt repayments.
- COVID-19 had not significantly affected reported third-quarter results through March 29, 2020, but most OEM customer assembly plants and the majority of the supply chain were closed during April. STRATTEC’s Mexico facilities were also closed under government shutdown measures.
- Management estimated that fourth-quarter fiscal 2020 net sales could decline 50% or more versus the March 29, 2020 quarter, with a more severe decline possible if customer reopenings were delayed beyond May 2020.
- Management expected the fourth fiscal quarter to be the trough and anticipated a production restart and ramp-up during fiscal 2021, but emphasized that timing was uncertain.
- The company expected reduced customer payments and increased working-capital needs to pressure liquidity at the beginning of fiscal 2021 and anticipated using its credit facilities for funding.
- Management implemented temporary and permanent layoffs, officer pay reductions, reduced working hours, a smaller U.S. salaried workforce and lower capital spending. U.S. salaried cost reductions were expected to save approximately $4.0 million annually before tax, partially offset by an estimated $250,000 severance and outplacement charge in the fourth quarter.
- Key risks include automotive demand, OEM production schedules, COVID-19 disruptions, supplier interruptions, foreign exchange, tariffs and trade policy, product recalls and warranty claims, labor stoppages, joint-venture losses, and compliance with credit-facility covenants.
- The company maintained approximately $1.3 million in an environmental remediation reserve for its Milwaukee facility and stated that established warranty reserves were adequate.
Important Facts for Investors to Verify
- Actual fourth-quarter sales, profitability, cash flow and liquidity effects of COVID-19 shutdowns versus management’s estimate of a 50% or greater sales decline.
- Customer plant reopening dates, production ramp rates and resulting accounts receivable collections and working-capital requirements.
- Availability under the $40 million STRATTEC facility and $25 million ADAC-STRATTEC facility, including covenant compliance during the downturn.
- Whether projected fiscal 2020 capital expenditures of $14 million to $15 million were reduced as planned.
- Performance and future funding requirements of VAST China, VAST’s Brazil and India operations, and the wound-down SAL LLC venture.
- Realization of foreign-exchange gains and losses, including the $1.0 million unrealized loss on outstanding Mexican peso forward contracts.
- Potential additional severance, restructuring, inventory, receivable-collectability or impairment charges arising from the pandemic.