OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis should be read in conjunction
with STRATTEC SECURITY CORPORATION's accompanying Condensed Consolidated
Financial Statements and Notes thereto and its 2020 Form 10-K, which was filed
with the Securities and Exchange Commission on September 3, 2020. Unless
otherwise indicated, all references to quarters and years refer to fiscal
quarters and fiscal years.
Outlook
Refer to discussion of Risks and Uncertainties included in the Notes to
Condensed Consolidated Financial Statements beginning on page 6 of this Form
10-Q.
During the fourth quarter of our fiscal year ended June 2020, we responded to
the COVID-19 pandemic and the temporary OEM customer plant shutdowns by
implementing a permanent reduction in our salaried workforce, instituting
temporary layoffs, reducing working hours, allowing (and in some cases
encouraging) remote working from home, temporarily suspending our quarterly cash
dividend, delaying capital expenditures and eliminating nonessential operating
costs, all to preserve cash flow. In addition, during the fourth quarter of the
prior fiscal year, we produced additional finished goods inventory in
anticipation of our OEM customers pipeline fill to their dealers once vehicle
production began starting up in June 2020.
During the first quarter ended September 2020, the Company experienced a strong
sales recovery as our customers ramped up vehicle production as they restarted
their assembly plant operations in order to replenish low inventory levels at
the dealers. Likewise, our manufacturing operations in Milwaukee, WI and in
Mexico ramped up production to meet this increased sales demand. However, these
actions were, and continue to be hampered by, requirements imposed by the
Mexican Government at our Mexican facilities that continue to limit operating
capacity in Mexico due to COVID-19 which may in the future impact our ability to
meet customer sales demand depending upon their order levels.
The sales outlook over the next few quarters appears strong as our customers
continue to restock dealer inventories. However, this sales demand going forward
is contingent on the impact and severity of the COVID-19 pandemic, including any
potential worsening thereof, on the North American and overall global economy.
Analysis of Results of Operations
Three months ended September 27, 2020 compared to the three months ended
September 29, 2019
Three Months Ended
September 27, September 29,
2020 2019
Net Sales (in millions) $ 126.2 $ 120.0
Net sales to each of our customers or customer groups in the current year
quarter and prior year quarter were as follows (in millions):
Three Months Ended
September 27, September 29,
2020 2019
General Motors Company $ 37.8 $ 33.8
Fiat Chrysler Automobiles 25.1 25.5
Ford Motor Company 15.8 15.8
Commercial and Other OEM Customers 21.4 21.4
Tier 1 Customers 17.5 17.8
Hyundai / Kia 8.6 5.7
$ 126.2 $ 120.0
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The increase in sales to General Motors Company in the current year quarter as
compared to the prior year quarter was attributed to higher production volumes
on models for which we supply components. The impact of the UAW strike reduced
net sales by an estimated $3.0 million in the prior year quarter. Sales to Fiat
Chrysler Automobiles decreased slightly in the current year quarter as compared
to the prior year quarter due to lower vehicle production volumes on the FCA
minivans for which we supply components. The Dodge Grand Caravan minivan went
out of production during July 2020. Sales to Ford Motor Company, Tier 1
Customers and Commercial and Other OEM Customers were flat in the current year
quarter compared to the prior year quarter. Sales to Tier 1 Customers,
Commercial and Other OEM Customers primarily represent purchasers of vehicle
access control products, such as latches, key fobs, driver controls, steering
column locks and door handles, that we have developed in recent years to
complement our historic core business of locks and keys. The increased sales to
Hyundai / Kia in the current year quarter as compared to the prior year quarter
were due to higher levels of production on their new, recently launched Kia
Sedona minivan for which we supply components.
Three Months Ended
September 27, September 29,
2020 2019
Cost of Goods Sold (in millions) $ 103.7 $ 104.1
Direct material costs are the most significant component of our cost of goods
sold and comprised $70.5 million or 68.0 percent of our cost of goods sold in
the current year quarter compared to $68.5 million or 65.8 percent of our cost
of goods sold in the prior year quarter. The increase in our direct material
costs between these quarters of $2.0 million or 2.9 percent was due to increased
sales volumes in the current year quarter as compared to the prior year quarter
and increased obsolescence costs in the current year quarter resulting from the
discontinuance of a customer program. The increase in our direct material costs
as a percentage of our cost of goods sold in the current year quarter as
compared to the prior year quarter was due to reduced labor and overhead costs
between periods as discussed below.
The remaining components of our cost of goods sold consist of labor and overhead
costs which decreased $2.4 million or 6.7 percent to $33.2 million in the
current year quarter from $35.6 million in the prior year quarter. The prior
year quarter costs included a $1.4 million non-cash compensation expense charge
related to the transfer of excess Qualified Pension Plan assets as described
under Pension and Postretirement Benefits within Notes to Condensed Consolidated
Financial Statement included herein. Additionally, labor and overhead costs in
the current year quarter were favorably impacted by cost improvements
implemented at our Milwaukee, WI and Mexico facilities, along with a favorable
Mexican peso to U.S. dollar exchange rate affecting our operations in Mexico,
which favorable impacts were partially offset by an increase in the variable
portion of our labor and overhead costs as a result of the increase in sales
volumes in the current year quarter as compared to the prior year quarter. The
U.S. dollar value of our Mexican operations was favorably impacted by
approximately $2.0 million in the current year quarter as compared to the prior
year quarter due to a favorable Mexican peso to U.S. dollar exchange rate
between these quarterly periods. The average U.S. dollar / Mexican peso exchange
rate increased to approximately 22.21 pesos to the dollar in the current year
quarter from approximately 19.61 pesos to the dollar in the prior year quarter.
Three Months Ended
September 27, September 29,
2020 2019
Gross Profit (in millions) $ 22.5 $ 15.9
Gross Profit as a percentage of net sales 17.8 % 13.2 %
Gross profit dollars increased in the current year quarter as compared to the
prior year quarter as a result of both an increase in sales and an increase in
cost of goods sold between periods, as discussed above. Gross profit as a
percentage of net sales increased between periods. The increase was due to the
prior year quarter non-cash compensation expense charge as well as cost
improvements implemented at our Milwaukee and Mexico production facilities in
the current year quarter as compared to the prior year quarter and a favorable
Mexican peso to U.S. dollar exchange rate affecting our operations in Mexico as
discussed above.
Engineering, selling and administrative expenses in the current year quarter and
prior year quarter were as follows:
Three Months Ended
September 27, September 29,
2020 2019
Expenses (in millions) $ 11.3 $ 13.0
Expenses as a percentage of net sales 9.0 % 10.8 %
The decrease in engineering, selling and administrative expenses in the current
year quarter decreased in comparison to the prior year quarter due to lower new
product development costs, a temporary reduction in salary work force wages,
permanent layoffs, and improved operating expense management in the current year
quarter as compared to the prior year quarter. Additionally, the prior year
quarter costs included an $862,000 non-cash compensation expense charge related
to the transfer of excess Qualified Pension
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Plan assets as described under Pension and Postretirement Benefits within Notes
to Condensed Consolidated Financial Statement included herein.
Income from operations was $11.2 million in the current year quarter compared to
$2.9 million in the prior year quarter due to an increase in gross profit margin
dollars and a decrease in engineering, selling and administrative expenses
between quarters, all as discussed above.
The equity earnings of joint ventures was $825,000 in the current year quarter
compared to $484,000 in the prior year quarter. Higher profitability from our
Vehicle Access Systems Technology LLC ("VAST LLC") joint ventures is due to
higher profitability in our VAST China operation between periods. Our VAST LLC
joint ventures in India and Brazil continue to report losses due to our limited
amount of business in both regions.
Included in Other Expense, net in the current year quarter and prior year
quarter were the following items (in thousands):
Three Months Ended
September 27, September 29,
2020 2019
Foreign Currency Transaction Loss $ (399 ) $ (85 )
Unrealized Gain on Peso Forward Contracts 335 -
Realized Loss on Peso Forward Contracts (59 ) -
Pension and Postretirement Plans Cost (105 ) (117 )
Rabbi Trust Loss (57 ) (2 )
Other 25 107
$ (260 ) $ (97 )
Foreign currency transaction losses during the current year quarter and prior
year quarter resulted from activity associated with foreign denominated assets
held by our Mexican subsidiaries. We entered into the Mexican peso currency
forward contracts to minimize earnings volatility resulting from changes in
exchange rates affecting the U.S. dollar cost of our Mexican operations.
Unrealized gains and losses on the peso forward contracts recognized as a result
of mark-to-market adjustments as of September 27, 2020 may or may not be
realized in future periods, depending on actual Mexican peso to U.S. dollar
exchange rates experienced during the balance of the contract period. Pension
and postretirement plan impacts include the components of net periodic benefit
cost other than the service cost component. Our Rabbi Trust assets fund our
amended and restated supplemental executive retirement plan. The investments
held in the Trust are considered trading securities.
Our effective tax rate was 13.5% and 10.0% for the three months ended September
27, 2020 and September 29, 2019, respectively. Effective July 20, 2020, the U.S
Treasury Department finalized and enacted previously proposed regulations
regarding the Global Intangible Low Taxed Income (GILTI) tax provisions of the
Tax Cuts and Jobs Act of 2017 (TCJA). Prior to this enactment, GILTI represented
a significant U.S. income tax on our foreign earnings during fiscal 2020. With
the enactment of these final regulations, we are now eligible for an exclusion
from GILTI since we meet the provisions for the GILTI High-Tax exception
included in the final regulations. In addition, the enactment of the new
regulations and our eligibility for the GILTI High-Tax exception are retroactive
to the original enactment of the GILTI tax provision, which includes our 2020
fiscal year. As a result of the newly enacted regulations, we recorded an income
tax benefit of $675,000 during the three month period ended September 27, 2020.
During the three month period ended September 29, 2019, our effective tax rate
was impacted by the discrete impact of the non-cash compensation expense, as
discussed under Pension and Postretirement Benefits below. Our effective tax
rate differs from the statutory tax rate due to the GILTI provisions, our
available R&D tax credit and the non-controlling interest portion of our pre-tax
income. The non-controlling interest impacts the effective tax rate as
ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entities are taxed as
partnerships for U.S. tax purposes.
Liquidity and Capital Resources
Working Capital (in millions)
September 27, June 28,
2020 2020
Current Assets $ 160.9 $ 125.4
Current Liabilities 76.3 48.1
Working Capital $ 84.6 $ 77.3
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Outstanding Receivable Balances from Major Customers
Our primary source of cash flow is from our major customers, which include Fiat
Chrysler Automobiles, General Motors Company and Ford Motor Company. As of the
date of filing this Form 10-Q with the Securities and Exchange Commission, all
of our major customers are making payments on their outstanding accounts
receivable in accordance with the payment terms included on their purchase
orders. A summary of our outstanding receivable balances from our major
customers as of September 27, 2020 was as follows (in millions):
General Motors Company $ 23.2
Fiat Chrysler Automobiles $ 16.2
Ford Motor Company $ 7.6
Cash Balances in Mexico
We earn a portion of our operating income in Mexico. As of September 27, 2020,
$4.2 million of our $12.0 million cash and cash equivalents balance was held in
Mexico. These funds are available for repatriation as deemed necessary.
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