STRATTEC Security Corporation: Fiscal 2019 Form 10-K Summary
Business context and reporting period
STRATTEC designs and manufactures automotive access-control products, including locks and keys, electronically enhanced security systems, latches, power-access systems, door handles and related components. The company serves primarily North American automotive OEMs and participates in the global VAST Automotive Group alliance with WITTE Automotive and ADAC Automotive.
The filing is a fiscal-year 2019 Form 10-K for the year ended June 30, 2019, with comparison to the year ended July 1, 2018. The requested “2018 Q4” period does not match the filing’s reporting period; selected quarterly data are included in the filing.
Financial performance and position
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $487.0 million | $439.2 million |
| Gross profit | $57.8 million | $54.4 million |
| Gross margin | 11.9% | 12.4% |
| Income from operations | $10.6 million | $13.3 million |
| Net income attributable to STRATTEC | $(17.0) million | $12.3 million |
| Diluted earnings per share | $(4.63) | $3.32 |
| Operating cash flow | $29.9 million | $6.9 million |
| Capital expenditures | $17.5 million | $24.1 million |
| Cash and cash equivalents | $7.8 million | $8.1 million |
| Credit-facility borrowings | $42.0 million | $51.0 million |
Sales increased 10.9%, primarily from higher volumes and product content at General Motors, Fiat Chrysler, Tier 1 customers, Hyundai/Kia and other OEMs. Ford sales declined because of discontinued models and lower production volumes. Direct OEM sales represented approximately 77% of fiscal 2019 sales.
Profitability weakened despite higher sales. Gross margin declined because of manufacturing quality costs, competitive pricing on new electrical, latch and lockset programs, higher Mexican labor costs, and higher-than-expected costs at the Leon, Mexico facility. Engineering, selling and administrative expenses increased to $47.2 million from $41.2 million, including higher product-development spending.
Liquidity improved through operating cash generation and lower debt. Net working capital was $77.4 million at June 30, 2019, compared with $82.3 million at July 1, 2018. Total assets were $312.7 million and STRATTEC shareholders’ equity was $163.4 million at fiscal year-end.
Material changes versus the prior comparable period
- Net sales increased by $47.8 million, or approximately 10.9%.
- Income from operations decreased by $2.7 million, and gross margin declined by 50 basis points.
- Fiscal 2019 included a $31.9 million non-cash pension termination settlement charge and $4.2 million of non-cash compensation expense related to transferring excess pension assets to a defined-contribution plan.
- The company expects an additional approximately $4.3 million of non-cash compensation expense during the first six months of fiscal 2020 related to the pension-asset transfer.
- Operating cash flow increased by $23.0 million, reflecting lower working-capital requirements and significant non-cash pension-related adjustments.
- Equity earnings from joint ventures declined to $2.8 million from $4.5 million, primarily because of lower VAST China sales and startup costs for the Jingzhou, China facility.
- Research and development spending increased to approximately $13.8 million from $4.8 million.
- The company paid $0.56 per share in dividends in each year and made no stock repurchases during fiscal 2019.
Guidance, outlook, commentary and risks
Management expects approximately $15 million of fiscal 2020 capital expenditures. It anticipates minimal or no fiscal 2020 share repurchases and expects STRATTEC’s contribution to VAST Brazil funding to be approximately $200,000. Management stated that the existing credit facilities and operating cash flow should cover anticipated capital expenditures, working capital, dividends and operating needs.
Third-party projections cited by management indicated generally steady to flat North American light-vehicle production, with estimated production of 16.7 million vehicles in 2019, 16.6 million in 2020, 16.3 million in 2021, 16.6 million in 2022 and 16.9 million in 2023. These projections are subject to changes in tariffs, consumer credit, fuel prices, vehicle preferences, recalls and broader economic conditions.
- Customer concentration is substantial: General Motors, Ford and Fiat Chrysler accounted for approximately 60% of fiscal 2019 sales and 50% of gross receivables at year-end.
- The automotive market is cyclical and seasonal, with the first fiscal quarter typically weakest because of summer shutdowns and model-year changeovers.
- Key risks include customer production reductions, loss of vehicle programs or market share, competitive pricing and required productivity savings.
- Raw-material prices, especially zinc, brass, nickel silver, steel and plastics, may pressure margins; price-adjustment clauses exist with some but not all customers.
- Mexican operations expose the company to peso exchange-rate movements, wage inflation, labor issues and cross-border trade or tariff changes.
- Warranty claims may exceed reserves if customer warranty programs expand or customers seek greater supplier cost recovery. The warranty reserve was $7.9 million at June 30, 2019.
- The company maintains a $1.3 million environmental reserve for historical solvent contamination at its Milwaukee facility and continues monitoring the site.
- VAST Brazil continued to incur losses and may require additional capital contributions. VAST China was profitable but faced lower sales and startup costs for a new facility.
Important facts for investors to verify
- Whether the fiscal 2019 loss is appropriately evaluated separately from the $31.9 million pension settlement charge and related non-cash compensation expense.
- Whether lower gross margins, quality costs and competitive pricing on new programs persist into fiscal 2020.
- Progress and economics of the Leon, Mexico and Jingzhou, China facilities.
- Production forecasts and program exposure at General Motors, Ford and Fiat Chrysler, which collectively represent approximately 60% of sales.
- Future warranty claims, environmental remediation costs and tax exposures, including $1.2 million of unrecognized tax benefits at year-end.
- Debt levels, covenant compliance and borrowing capacity under the secured revolving credit facilities, which expire August 1, 2021.
- Management’s expected $15 million fiscal 2020 capital expenditures and the anticipated additional $4.3 million pension-related non-cash compensation charge.