STRATTEC Security Corporation: Fiscal 2020 Second-Quarter Form 10-Q
Business Context and Reporting Period
STRATTEC designs and manufactures automotive access-control products, including locks, keys, latches, door handles, power-access systems and related components. It serves primarily North American automotive customers and participates in the VAST Automotive Group with WITTE Automotive and ADAC Automotive. The filing covers the three and six months ended December 29, 2019, compared with December 30, 2018. The interim financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended December 29, 2019 | Three Months Ended December 30, 2018 | Six Months Ended December 29, 2019 | Six Months Ended December 30, 2018 |
|---|---|---|---|---|
| Net sales | $106.3 million | $112.9 million | $226.2 million | $230.1 million |
| Gross profit | $10.3 million | $12.7 million | $26.2 million | $27.9 million |
| Gross margin | 9.7% | 11.3% | 11.6% | 12.1% |
| Operating income (loss) | $(1.8) million | $2.3 million | $1.2 million | $6.4 million |
| Net income (loss) attributable to STRATTEC | $(1.3) million | $(22.2) million | $(0.1) million | $(18.7) million |
| Basic loss per share | $(0.36) | $(6.03) | $(0.03) | $(5.10) |
| Cash flow from operating activities | Not separately provided for the quarter | $20.6 million | $19.7 million |
At December 29, 2019, cash and cash equivalents were $9.3 million, including $3.6 million held in Mexico. Borrowings under secured revolving credit facilities totaled $32.0 million, down from $42.0 million at June 30, 2019. The facilities provide aggregate commitments of $65.0 million and expire August 1, 2022. The company was in compliance with all financial covenants.
Six-month capital expenditures were $7.4 million, and management expects approximately $15 million of fiscal 2020 capital expenditures. Six-month dividends paid to STRATTEC shareholders were $1.0 million, and dividends declared were $0.28 per share.
Material Changes Versus the Prior Comparable Period
- Quarterly sales declined 5.9%, while six-month sales declined 1.7%. The quarterly decline reflected the General Motors UAW strike, lower Ford F-Series production, reduced Tier 1 driver-control volumes and lower Hyundai/Kia production. Management estimated the strike reduced quarterly sales by approximately $7 million and six-month sales by approximately $10 million.
- Quarterly gross margin fell to 9.7% from 11.3%; six-month gross margin fell to 11.6% from 12.1%. Pressure included non-cash pension-related compensation expense, higher Mexican minimum wages and an unfavorable peso exchange rate in the quarter.
- Engineering, selling and administrative expense increased to $12.1 million from $10.5 million for the quarter and to $25.0 million from $21.5 million for six months, partly because of pension-related compensation and higher external product-development spending.
- The company recorded a quarterly operating loss of $1.8 million versus operating income of $2.3 million in the prior year. Six-month operating income declined to $1.2 million from $6.4 million.
- Equity earnings from joint ventures declined to $0.5 million from $1.5 million for the quarter and to $1.0 million from $2.4 million for six months, primarily because of higher development and startup costs in VAST China and continued losses in Brazil.
- Operating cash flow increased to $20.6 million from $19.7 million for six months, supported by an $18.4 million reduction in receivables, partially offset by a $5.2 million inventory increase related to General Motors components.
Outlook, Commentary, Risks and Unusual Items
Management expects North American light-vehicle production in calendar 2020 to be flat or slightly below calendar 2019 levels. Management expects consumer demand to continue favoring light trucks and utility vehicles if gasoline prices remain flat or modestly higher. The General Motors strike may reduce fiscal 2020 sales by approximately $10 million if lost orders are not replenished.
The qualified defined-benefit pension plan was fully terminated during the quarter. The company recorded $4.5 million of non-cash compensation expense during the first six months of fiscal 2020, including $2.3 million in the current quarter, related to transferring and distributing excess pension assets. The prior-year period included a $32.4 million pension termination settlement charge, making year-over-year net losses not directly comparable.
The company adopted the new lease standard on July 1, 2019, recognizing a $4.1 million right-of-use asset and corresponding lease obligation without a material impact on operating results or cash flows. The company had no Mexican peso forward contracts outstanding during the current six-month period.
Key risks include automotive production and consumer demand, customer purchasing decisions, product recalls and warranty claims, labor disruptions, foreign-currency fluctuations, Mexican operating costs, tariffs and trade policy, raw-material prices, competitive and technological developments, and the financial performance of joint ventures. The filing reports no material changes to the risk factors in the 2019 Form 10-K and no legal proceedings expected to have a material adverse effect.
Important Facts for Investors to Verify
- Whether North American vehicle production and the mix toward trucks and utility vehicles support management’s sales expectations.
- Whether General Motors strike-related lost sales are replenished during fiscal 2020 and whether the inventory build-up normalizes.
- Whether gross-margin pressure from Mexican labor costs, foreign exchange and product-development spending improves.
- VAST China’s startup and development costs, Brazil’s expected $300,000 capital contribution requirement, and the company’s anticipated $100,000 share.
- Available borrowing capacity, covenant compliance and liquidity after planned capital expenditures and dividends.
- Progress toward approximately $15 million of fiscal 2020 capital expenditures and the impact on cash balances and debt.
- Warranty, environmental and other contingencies, including the $1.3 million Milwaukee environmental reserve.
- The effect of the completed pension termination and the distinction between recurring operating performance and non-cash pension-related charges.