STRATTEC Security Corporation: Fiscal 2020 Form 10-K Summary
Reporting period: Fiscal year ended June 28, 2020, comprising 52 weeks. The source request references “2019 Q4,” but the provided filing is the fiscal 2020 annual report. STRATTEC designs and manufactures automotive access-control products, including locks, keys, latches, door handles, power-access systems and related electronic products. Its largest customers are General Motors, Fiat Chrysler Automobiles and Ford.
Financial Results and Key Metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $385.3 million | $487.0 million | Down 20.9% |
| Gross profit | $35.4 million | $57.8 million | Down 38.7% |
| Gross margin | 9.2% | 11.9% | Down 270 basis points |
| Operating income/(loss) | $(8.7) million | $10.6 million | Declined $19.3 million |
| Net loss attributable to STRATTEC | $(7.6) million | $(17.0) million | Improved $9.4 million |
| Loss per share | $(2.04) | $(4.63) | Improved |
| Cash flow from operations | $25.4 million | $29.9 million | Down $4.5 million |
| Capital expenditures | $12.4 million | $17.5 million | Down $5.1 million |
| Cash and cash equivalents | $11.8 million | $7.8 million | Up $4.0 million |
The reported FY2019 loss included a $31.9 million non-cash pension termination settlement charge and a $4.2 million non-cash compensation charge. FY2020 included an additional $4.8 million non-cash compensation charge related to the final transfer of excess pension assets.
Liquidity, Debt and Financial Position
- Working capital was $77.3 million at June 28, 2020, essentially unchanged from $77.4 million at June 30, 2019.
- Total borrowings under revolving credit facilities were $35.0 million, compared with $42.0 million at the prior year-end. STRATTEC had $18.0 million outstanding under its $40.0 million facility, and ADAC-STRATTEC had $17.0 million outstanding under its $25.0 million facility.
- Both facilities mature August 1, 2022 and contain financial covenants. The company reported compliance with all covenants at year-end.
- Fiscal 2020 financing cash flow included $15.0 million of repayments and $8.0 million of additional borrowings.
- The quarterly cash dividend was suspended beginning in May 2020. Approximately $1.6 million of shareholder dividends had been paid during the first nine months of the fiscal year.
- Management expected approximately $12 million of fiscal 2021 capital expenditures and anticipated using credit facilities to support working capital if customer payments declined.
Material Changes Versus the Prior Period
- Sales declined $101.7 million. Management attributed approximately $10 million of the reduction to the General Motors UAW strike in September and October 2019 and approximately $78 million to North American OEM plant shutdowns and production reductions related to COVID-19 during March through May 2020.
- All reported customer groups experienced lower sales. General Motors sales were $102.5 million, Fiat Chrysler sales were $85.0 million and Ford sales were $52.7 million. These three customers represented 62% of FY2020 sales, compared with 60% in FY2019.
- Power-access sales fell to $63.8 million from $92.7 million, and ADAC-STRATTEC sales fell to $98.2 million from $117.0 million. STRATTEC Power Access was unprofitable in FY2020.
- Gross margin contracted because lower volumes caused under-absorption of fixed manufacturing costs, although lower scrap, cost reductions and a favorable Mexican peso exchange rate partially offset the pressure.
- Engineering, selling and administrative expenses fell to $44.1 million from $47.2 million, but increased to 11.4% of sales from 9.7% because of the lower revenue base.
- Equity earnings from joint ventures declined to a $209,000 loss from $2.8 million of earnings. VAST LLC incurred lower China profitability, startup and development costs for a new Jingzhou facility, and a $2.0 million impairment charge at its Indian Minda-VAST venture. STRATTEC’s share of that impairment was $667,000.
- The STRATTEC Advanced Logic biometric-security venture was dissolved during the fourth quarter of FY2020; its equity earnings included a $342,000 dissolution gain.
- The qualified defined-benefit pension plan was fully terminated during FY2020, eliminating a significant pension-liability risk but leaving a $1.3 million SERP-related pension obligation and $701,000 of postretirement obligations at year-end.
Outlook, Management Commentary and Risks
- Management expected FY2020’s fourth quarter to be the trough and anticipated a continued production ramp-up in FY2021, while cautioning that the outlook remained highly dependent on the duration and severity of COVID-19.
- A third-party forecast cited by management projected North American light-vehicle production of 12.8 million units in 2020, 15.1 million in 2021 and 15.1 million in 2022, with modest increases thereafter through 2024. These estimates had been materially reduced because of COVID-19.
- As of June 28, 2020, Mexican facilities were operating with approximately 50% of the workforce permitted to return. Further government restrictions or renewed outbreaks could disrupt production and supply chains.
- Key risks include customer concentration, automotive cyclicality, production shutdowns, OEM pricing pressure, raw-material costs and availability, Mexican peso fluctuations, tariffs and cross-border trade, labor disruptions, warranty claims, joint-venture losses and funding needs, cybersecurity, tax matters and access to credit facilities.
- The company maintained an $8.5 million warranty reserve and a $1.3 million environmental reserve related to historical solvent contamination at its Milwaukee facility. Management considered both reserves adequate, but future costs could differ from estimates.
- Export sales were $114.4 million, or 30% of total sales, compared with $160.8 million, or 33%, in FY2019. Canada accounted for 12% of FY2020 sales.
Most Important Facts for Investors to Verify
- Whether North American vehicle production and STRATTEC customer releases recover as projected, particularly after COVID-19-related shutdowns.
- Whether gross margins recover from the 9.2% FY2020 level as volumes improve and fixed costs are absorbed.
- The company’s cash usage, borrowing levels and covenant compliance as working-capital requirements rise.
- The timing and conditions for reinstatement of the suspended quarterly dividend.
- Potential additional capital contributions required by VAST China, Brazil or Minda-VAST in India.
- Exposure to General Motors, Ford and Fiat Chrysler, which together represented 62% of FY2020 sales.
- Future warranty claims, customer price reductions, raw-material costs and Mexican peso movements.
- Management’s COVID-19 assumptions and the risk that renewed outbreaks, government restrictions or customer shutdowns could invalidate the FY2021 recovery outlook.