STRATTEC Security Corporation — Fiscal 2024 Second-Quarter Form 10-Q Summary
Business context and reporting period
STRATTEC designs and manufactures automotive access-control products, including locks, keys, fobs, passive-entry systems, latches, door handles, power-access systems and related components. Products are sold primarily to North American automotive OEMs and Tier 1 suppliers, with additional international and aftermarket activity. The filing covers the three and six months ended December 31, 2023, compared with January 1, 2023. STRATTEC reports one operating segment.
Effective June 30, 2023, STRATTEC sold its one-third interest in VAST LLC to WITTE Automotive and acquired WITTE’s remaining 20% interest in STRATTEC POWER ACCESS LLC, making SPA wholly owned. STRATTEC received the final $2.0 million VAST sale proceeds in July 2023.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2023 | Three months ended Jan. 1, 2023 | Six months ended Dec. 31, 2023 | Six months ended Jan. 1, 2023 |
|---|---|---|---|---|
| Net sales | $118.5 million | $113.2 million | $253.9 million | $233.5 million |
| Gross profit | $13.5 million | $7.4 million | $32.2 million | $19.9 million |
| Gross margin | 11.4% | 6.5% | 12.7% | 8.5% |
| Income (loss) from operations | $0.1 million | $(4.7) million | $6.2 million | $(4.9) million |
| Net income (loss) attributable to STRATTEC | $1.0 million | $(1.8) million | $5.2 million | $(1.7) million |
| Diluted earnings (loss) per share | $0.26 | $(0.47) | $1.30 | $(0.44) |
Six-month operating cash flow was $(6.9) million versus $8.7 million in the prior-year period. The decline primarily reflected working-capital usage, including an $11.8 million inventory increase, a $12.4 million increase in other assets and a $16.0 million reduction in accounts payable and accrued liabilities, partly offset by lower receivables.
Capital expenditures were $4.4 million in the first six months, compared with $9.5 million in the prior-year period. Investing cash outflow was $2.4 million, including the $2.0 million VAST proceeds. Cash and cash equivalents were $11.6 million at December 31, 2023, down from $20.6 million at July 2, 2023. Working capital was $116.0 million, compared with $116.8 million at fiscal year-end.
Total borrowings were $13.0 million, all under the ADAC-STRATTEC secured revolving facility. STRATTEC had no borrowings under its $40 million secured facility. The ADAC-STRATTEC facility provides $25 million of capacity and expires August 1, 2024; management expects to renew it during fiscal 2024. The company was in compliance with all credit-facility covenants at December 31, 2023.
Material changes versus the prior comparable period
- Sales increased 4.7% in the quarter and 8.7% year to date. Management attributed the six-month increase principally to $18.8 million of customer pricing increases, including $9.5 million of one-time retroactive increases and $9.3 million of ongoing increases.
- Gross margin improved substantially, supported by customer pricing, lower zinc costs, favorable production absorption and operating efficiencies. These benefits were partly offset by supplier price increases, Mexican peso appreciation, higher Mexican wages and higher freight costs.
- Income from operations improved to near break-even in the quarter and $6.2 million year to date, versus operating losses in the prior-year periods.
- Engineering, selling and administrative expense increased $1.3 million year to date, including approximately $0.9 million of one-time CEO transition costs and higher third-party product-development spending.
- Equity earnings from VAST LLC ceased following the June 2023 sale. The current six-month period includes a $0.3 million equity loss related to additional professional fees, compared with $1.1 million of equity earnings in the prior-year period.
- Customer mix shifted: GM and Ford sales increased, while Stellantis sales declined in the quarter because of lower vehicle production, program endings and plant closures. New Ford Super Duty content, Aston Martin business and higher Hyundai/Kia production supported sales.
- Inventory increased $8 million during the second quarter because of delayed launches, lower-than-expected December sales and materials purchased for upcoming programs. Customer tooling in progress increased to $25.0 million from $20.8 million at fiscal year-end.
Guidance, outlook, risks and unusual items
- Management expects fiscal 2024 ongoing customer pricing, net of supplier increases, to be at the high end of its original $10 million to $15 million target. No further material one-time retroactive pricing adjustments are expected for the remainder of the fiscal year.
- Modest sales growth is expected in the second half from new customer-program launches. Customer tooling balances are expected to normalize later in the fiscal year as programs begin production.
- Fiscal 2024 capital expenditures are now expected to be $9 million to $12 million, reduced from the previous $14 million estimate.
- Management continues to target approximately $3 million of full-year savings in non-employee cost of sales and expects an approximately $0.8 million annualized benefit from Mexican salaried-staff reductions.
- A Mexican government-mandated 20% minimum-wage increase beginning January 2024 is expected to increase second-half wages and benefits by a similar amount to the approximately $2.8 million impact from the January 2023 increase. Management also identified the strong Mexican peso as a significant cost headwind.
- Mexican VAT recoverable balances increased approximately $10.0 million during the six-month period because of a temporary VAT-certification issue. The issue was resolved, but related periods remain open to audit and balances are expected to remain elevated until the audits close.
- Other income included a $0.8 million gain from Mexican peso forward contracts in the quarter and year to date. Part of the gain reflects mark-to-market valuation and may not be realized depending on future exchange rates.
- The company maintains a $1.4 million environmental remediation reserve for contamination at its Milwaukee facility. Natural-attenuation sampling has not yet met all regulatory closure requirements, so the reserve remains for potential active remediation.
- Management reported no material changes to previously disclosed risk factors and no legal proceedings expected to have a material adverse effect. Principal risks include automotive demand and production volumes, customer concentration, pricing and supplier negotiations, Mexican labor and currency exposure, inflation, tariffs and trade policy, supply-chain disruptions, warranty claims, recalls and customer reimbursement actions.
Most important facts for investors to verify
- Whether ongoing customer pricing offsets Mexican labor, currency, freight and supplier-cost inflation after the one-time retroactive pricing benefits roll off.
- Progress on launching the programs associated with the elevated $25.0 million customer-tooling balance and reducing the recent inventory build.
- Renewal terms and covenant compliance for the $25 million ADAC-STRATTEC credit facility before its August 1, 2024 expiration.
- Conversion and collectability of the elevated Mexican VAT receivable and the outcome of the related tax audits.
- Second-half sales realization from new programs and whether fiscal 2024 capital expenditures remain within the revised $9 million–$12 million range.
- Exposure to Mexican peso movements, the January 2024 minimum-wage increase, freight costs and automotive customer production changes.
- Underlying profitability excluding one-time retroactive customer pricing, CEO-transition costs, VAST-related items and unrealized derivative gains.