STRATTEC SECURITY CORPORATION — Form 10-K Summary
Reporting period: Fiscal year ended June 27, 2021, compared with fiscal year ended June 28, 2020. The supplied filing is an annual fiscal 2021 Form 10-K, not a standalone 2020 fourth-quarter filing; fourth-quarter data are included where disclosed.
Business Context
STRATTEC designs and manufactures automotive access-control products, including locks and keys, electronic access systems, latches, power access devices, door handles and related components. Its principal markets are North American automotive OEMs, service channels, aftermarket customers and Tier 1 suppliers. The company also participates in the VAST Automotive Group with WITTE Automotive and ADAC Automotive.
- General Motors, Fiat Chrysler Automobiles and Ford represented approximately 62% of fiscal 2021 sales, unchanged from fiscal 2020.
- Direct OEM sales represented approximately 79% of fiscal 2021 sales versus 77% in fiscal 2020.
- The company had approximately 3,752 associates worldwide at June 27, 2021.
Financial Performance and Liquidity
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Net sales | $485.3 million | $385.3 million | 26.0% increase |
| Gross profit | $78.7 million | $35.4 million | Increase |
| Gross margin | 16.2% | 9.2% | 700 basis-point increase |
| Income from operations | $33.9 million | $(8.7) million | Improved |
| Net income attributable to STRATTEC | $22.5 million | $(7.6) million | Returned to profit |
| Diluted earnings per share | $5.85 | $(2.04) | Improved |
| Cash flow from operating activities | $35.2 million | $25.4 million | Increase |
| Capital expenditures | $8.9 million | $12.4 million | Decrease |
| Cash and cash equivalents | $14.5 million | $11.8 million | Increase |
| Working capital | $97.3 million | $77.3 million | Increase |
| Borrowings at period end | $12.0 million | $35.0 million | Decrease |
- Fiscal 2021 net income included $7.4 million attributable to non-controlling interests; consolidated net income was $29.9 million.
- Engineering, selling and administrative expense was $44.7 million, or 9.2% of sales, compared with $44.1 million, or 11.4% of sales, in fiscal 2020.
- Effective income tax rate was 14.6% in fiscal 2021 versus 27.9% in fiscal 2020.
- Net cash used in financing activities was $22.9 million, principally reflecting $23.0 million of debt repayments. No shareholder dividends were paid in fiscal 2021.
- At June 27, 2021, the company had $14.5 million of cash, including $2.3 million held in Mexico, and $12.0 million of outstanding borrowings under the ADAC-STRATTEC facility. No borrowings were outstanding under the STRATTEC facility.
- The company has a $40 million STRATTEC revolving facility and a $25 million ADAC-STRATTEC revolving facility. Both expire August 1, 2024, and the company was in compliance with all covenants at year-end.
Material Changes Versus Prior Period
- Sales recovered from the fiscal 2020 COVID-19 disruption, when customer plant closures reduced sales by approximately $78.0 million. Fiscal 2020 sales were also reduced by approximately $10 million from a General Motors labor strike.
- Fiscal 2021 results were adversely affected, particularly in the fourth quarter, by the global semiconductor shortage and related customer production reductions.
- Higher production volumes improved fixed-cost absorption and gross margins. Management also cited cost improvements at Milwaukee and Mexico facilities.
- Raw material and purchased-component costs increased, including zinc, brass and nickel silver costs, which increased fiscal 2021 material costs by approximately $1.3 million. The company could not pass all cost increases to customers.
- Power access sales increased to $95.2 million from $63.8 million, and door-handle and exterior-trim sales increased to $126.2 million from $98.2 million.
- Equity earnings from joint ventures improved to $2.6 million from a $209,000 loss, reflecting improved VAST profitability and the absence of the prior-year impairment charge related to the Indian Minda-VAST venture.
- The quarterly dividend remained suspended after the May 2020 decision to conserve cash. Management anticipated minimal or no share repurchases in fiscal 2022.
Guidance, Outlook, Risks and Unusual Items
- Management cited third-party projections for North American light-vehicle production of approximately 14.7 million units in 2021, 17.1 million in 2022, 17.0 million in 2023, 16.6 million in 2024 and 16.8 million in 2025. These are industry forecasts, not company guidance.
- Management expected semiconductor shortages and related supply-chain disruptions to continue into fiscal 2022, with possible effects on customer production, sales, profitability and cash flow.
- Fiscal 2022 capital expenditures were expected to be approximately $13 million.
- Management expected a collective additional VAST Brazil capital contribution of approximately $300,000 in fiscal 2022, with STRATTEC’s anticipated share of approximately $100,000. Further contributions to Minda-VAST could also be required.
- Key risks include dependence on three major customers, automotive cyclicality, semiconductor and raw-material shortages, customer pricing pressure, tariffs and cross-border trade, Mexican peso exposure, competition, labor disruptions, warranty claims, cybersecurity, environmental obligations and the financial condition of joint-venture partners.
- The warranty reserve was $8.4 million at June 27, 2021 and was identified as the critical audit matter. Actual warranty claims, customer negotiations or expanded OEM warranty programs could require additional charges.
- The company maintains a $1.4 million environmental reserve for historical solvent contamination at its Milwaukee facility. Monitoring continues because regulatory closure through natural attenuation has not yet been achieved.
- Fiscal 2021 included a $2.4 million foreign-currency transaction loss, partially offset by $887,000 of realized and unrealized gains on Mexican peso forward contracts. The company had $15 million of peso forward-contract notional exposure outstanding at year-end.
- The company received unqualified audit opinions on its financial statements and internal control over financial reporting.
Investor Verification Priorities
- Verify the duration and operational impact of semiconductor shortages and customer production schedules in fiscal 2022.
- Assess whether raw-material, freight and labor inflation can be recovered through customer pricing mechanisms.
- Monitor sales concentration and vehicle-program exposure at General Motors, Ford and Fiat Chrysler.
- Review warranty claims, reserve adequacy and any changes in OEM recall or warranty cost-sharing demands.
- Confirm liquidity, covenant compliance, borrowing availability and the timing of planned capital expenditures.
- Evaluate VAST China, Brazil and India performance, funding requirements and potential additional capital contributions.
- Track the timing of any dividend reinstatement or stock repurchase activity.