Business Context and Reporting Period
STRATTEC Security Corporation designs and manufactures automotive access-control products, including locks, keys, fobs, passive-entry systems, latches, door handles, and power-access systems. Its principal customers are North American automotive manufacturers and Tier 1 suppliers, with operations in the United States, Mexico, and other markets.
This unaudited Form 10-Q covers the three and nine months ended March 31, 2024, compared with April 2, 2023. The request metadata identifies “2023 Q3,” but the filing is for fiscal 2024 third quarter.
Financial Highlights
| Metric | Three Months Ended March 31, 2024 | Prior Comparable Period | Nine Months Ended March 31, 2024 | Prior Comparable Period |
|---|---|---|---|---|
| Net sales | $140.8 million | $127.2 million | $394.7 million | $360.7 million |
| Gross profit | $14.7 million | $10.0 million | $46.9 million | $29.9 million |
| Gross margin | 10.4% | 7.9% | 11.9% | 8.3% |
| Income (loss) from operations | $2.0 million | $(2.5) million | $8.1 million | $(7.4) million |
| Net income (loss) attributable to STRATTEC | $1.5 million | $(2.3) million | $6.7 million | $(4.0) million |
| Diluted earnings (loss) per share | $0.37 | $(0.57) | $1.67 | $(1.01) |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $(7.2) million | $7.5 million |
Quarterly sales increased approximately 10.7%, while nine-month sales increased approximately 9.4%. Management attributed sales growth to customer pricing increases, new product launches, favorable product mix, and higher production volumes at certain customers.
Engineering, selling and administrative expense was $12.7 million in the quarter and $38.8 million year to date, compared with $12.5 million and $37.3 million, respectively. The year-to-date period included approximately $1.0 million of costs related to the CEO transition and $817,000 of incentive bonus provisions.
Liquidity, Balance Sheet, and Debt
- Cash and cash equivalents were $9.6 million at March 31, 2024, down from $20.6 million at July 2, 2023.
- Working capital was $120.1 million, compared with $116.8 million at July 2, 2023.
- Total borrowings were $13.0 million, all under the ADAC-STRATTEC secured revolving facility; no borrowings were outstanding under STRATTEC’s $40 million facility.
- The ADAC-STRATTEC facility has a $25 million commitment and expires August 1, 2024. Management expects to renew it during the fourth quarter of fiscal 2024.
- The company was in compliance with all credit-facility covenants at March 31, 2024.
- Nine-month capital expenditures were $6.1 million. Fiscal 2024 capital expenditures are expected to be approximately $9 million to $12 million.
- Of the $9.6 million cash balance, approximately $1.7 million was held in Mexico and was available for repatriation.
Material Changes Versus the Prior Comparable Period
- Customer pricing increases contributed $25.8 million to nine-month sales, including $15.9 million of ongoing pricing and $9.9 million of one-time retroactive pricing. Management reported $21.3 million of gross-margin improvement after $4.5 million of supplier price increases.
- Gross margin improved primarily because of customer pricing, lower zinc and warranty costs, higher sales, and production efficiencies.
- Cost pressures remained significant: year-to-date Mexican peso strength increased costs by approximately $7.9 million, Mexican wage increases by $4.6 million, and higher freight by $3.1 million.
- Operating cash flow declined to an outflow of $7.2 million from $7.5 million of inflow, primarily because of higher working-capital requirements, including receivables, customer tooling, VAT recoverables, and inventory.
- Inventory declined by approximately $10.8 million during the third quarter as management reversed an earlier build associated with delayed product launches and lower-than-expected sales.
- Effective June 30, 2023, STRATTEC sold its one-third interest in VAST LLC to WITTE and purchased WITTE’s 20% non-controlling interest in SPA, making SPA wholly owned. The nine-month period therefore included a $269,000 equity loss related to VAST transaction costs, compared with $1.9 million of equity earnings in the prior period.
- Revenue from door handles and exterior trim, power access, latches, and user-interface controls increased year to date, while keys and locksets and aftermarket and OE service revenue declined.
Guidance, Outlook, Risks, and Unusual Items
- Management expects ongoing annualized customer pricing, net of supplier increases, to exceed the previously targeted $10 million to $15 million range for fiscal 2024.
- No further material one-time retroactive pricing adjustments are expected for the remainder of fiscal 2024.
- Management expects sales growth from new product programs to continue into the fourth quarter and fiscal 2025.
- Non-employee cost reductions are expected to generate $4 million to $5 million of fiscal 2024 savings, excluding higher shipping costs. A Mexico salaried-staff reduction is expected to reduce annualized costs by approximately $800,000.
- Customer tooling balances are expected to decline significantly in the fourth quarter and first half of fiscal 2025. Mexican VAT balances are expected to return toward historical levels in the first half of fiscal 2025 as tax audits close.
- Subsequent to quarter-end, a customer approved reimbursement of $3.1 million of previously expensed engineering-development costs. The reimbursement will reduce engineering, selling and administrative expense in the fiscal 2024 fourth quarter.
- Key risks include automotive demand and production volatility, customer concentration, Mexican peso fluctuations, Mexican wage inflation, tariffs and trade policy, supply-chain and logistics disruptions, product warranty and recall exposure, labor disruptions, customer pricing responses, and delays in new-product launches.
- The company maintains reserves of $8.9 million for warranty exposure and $1.4 million for environmental remediation at its Milwaukee facility. Management believes these reserves are adequate, but actual costs could differ.
- The filing reports no material changes to the risk factors disclosed in the fiscal 2023 Form 10-K and no legal proceedings expected to have a material adverse effect.
Most Important Facts to Verify
- Whether the ADAC-STRATTEC credit facility is renewed before its August 1, 2024 expiration and on what terms.
- Whether customer pricing remains sufficient to offset Mexican peso strength, wage increases, supplier pricing, and freight costs.
- The timing and collectability of $19.3 million of Mexican VAT recoverable and $25.5 million of customer tooling in progress.
- Whether operating cash flow returns to positive levels as tooling, VAT, and inventory balances normalize.
- Recognition and cash collection of the $3.1 million engineering-cost reimbursement in the fiscal fourth quarter.
- Progress, profitability, and execution risks associated with new product launches expected to support fiscal 2025 growth.
- Customer concentration and production trends, particularly with General Motors, Ford, and Stellantis.