STRATTEC SECURITY CORPORATION — Form 10-Q Summary
Business context and reporting period
STRATTEC designs and manufactures automotive access-control products, including locks, keys, latches, door handles, power-access systems and related components. Products are sold primarily to North American automotive customers, with international activity through the VAST Automotive Group relationship. The filing covers the three and nine months ended March 27, 2022, compared with March 28, 2021. The company has one reporting segment.
The filing metadata references “2021 Q3,” but the reported period is STRATTEC’s fiscal third quarter of 2022.
Key financial metrics
| Metric | Three months ended Mar. 27, 2022 | Three months ended Mar. 28, 2021 | Nine months ended Mar. 27, 2022 | Nine months ended Mar. 28, 2021 |
|---|---|---|---|---|
| Net sales | $115.9 million | $121.6 million | $329.2 million | $375.2 million |
| Gross profit | $14.6 million | $18.7 million | $42.1 million | $63.4 million |
| Gross margin | 12.6% | 15.3% | 12.8% | 16.9% |
| Income from operations | $3.4 million | $6.7 million | $7.4 million | $29.9 million |
| Net income attributable to STRATTEC | $3.1 million | $4.5 million | $6.6 million | $19.6 million |
| Diluted EPS | $0.80 | $1.15 | $1.70 | $5.11 |
| Operating cash flow | Not separately provided | Not separately provided | $11.8 million | $25.4 million |
At March 27, 2022, cash and equivalents were $16.5 million, working capital was $109.7 million, and total current assets and current liabilities were $189.7 million and $80.0 million, respectively. Total debt was $12.0 million, all under the ADAC-STRATTEC secured revolving facility; no borrowings were outstanding under STRATTEC’s separate $40 million facility. Both facilities expire August 1, 2024, and the company was in compliance with its covenants.
Capital expenditures were $9.4 million year to date, compared with $6.4 million in the prior-year period. Fiscal 2022 capital expenditures are expected to total approximately $12 million to $13 million. No common-stock repurchases occurred during the nine-month period, and no cash dividends were declared to STRATTEC shareholders.
Material changes versus the prior comparable period
- Third-quarter sales declined 4.7% year over year; nine-month sales declined 12.3%, primarily because semiconductor shortages and related supply-chain constraints reduced customer vehicle production.
- Third-quarter gross margin fell 270 basis points to 12.6%; nine-month gross margin fell 410 basis points to 12.8%. Pressure came from lower volumes, higher raw-material and purchased-part costs, Mexico wage increases, unfavorable fixed-cost absorption and foreign-exchange effects.
- Third-quarter operating income decreased approximately 50% to $3.4 million. Nine-month operating income decreased approximately 75% to $7.4 million.
- Nine-month SG&A increased to $34.7 million from $33.5 million, partly because the prior-year period included $1.5 million of customer reimbursement and temporary salaried-wage reductions. Current-year bonus provisions were lower.
- Equity earnings from VAST LLC improved to $0.6 million in the quarter from a $0.1 million loss, but declined to $0.9 million year to date from $1.8 million. VAST China experienced a fire at its Taicang plant and transferred certain production to Jingzhou and another supplier.
- The effective tax rate decreased to 1.2% for the quarter and 4.0% year to date, versus 16.3% and 15.6%, respectively. Fiscal 2021 tax true-ups reduced current-period tax expense by approximately $0.7 million in the quarter and $1.0 million year to date. Excluding these adjustments, the effective rates were 18.9% and 15.7%.
- Operating cash flow decreased by $13.6 million year over year to $11.8 million, while investing outflows increased to $9.5 million. Financing cash use was $0.3 million, versus $18.9 million in the prior-year period.
Guidance, outlook, risks and unusual items
Management expects vehicle demand and potential dealer restocking to support strong sales over the next several quarters, but customer production and STRATTEC sales remain constrained by semiconductor and other component shortages, logistical disruptions and COVID-19-related uncertainty. The filing does not provide formal revenue or earnings guidance.
- Inflation, higher raw-material and purchased-part costs, Mexico wage increases and currency movements may continue to pressure margins. The company has price-adjustment clauses with some, but not all, customers.
- STRATTEC uses Mexican-peso forward contracts to reduce currency volatility. The contracts generated a $0.7 million unrealized gain in the quarter and a $0.5 million gain year to date; these mark-to-market gains may not be realized.
- VAST China’s plant fire, production transfers and Jingzhou startup costs may affect future joint-venture earnings. Management expects VAST China to have adequate debt facilities for the remainder of fiscal 2022.
- VAST’s Brazil operation may require approximately $225,000 of additional total partner contributions during fiscal 2022, of which STRATTEC’s expected share is approximately $75,000.
- The company maintains a $1.4 million environmental remediation reserve for historical contamination at its Milwaukee facility. Natural attenuation has not yet satisfied all regulatory closure requirements.
- Management stated that routine legal proceedings are not expected to materially affect consolidated results and that warranty reserves are adequate, although future warranty costs could be material.
- Management’s disclosure controls were effective at a reasonable-assurance level, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether semiconductor availability, customer production schedules and logistics constraints improve or continue to suppress volumes.
- Whether raw-material, purchased-component and Mexico labor inflation can be recovered through customer pricing or offset by productivity.
- The sustainability of reported earnings excluding the unusually low tax rate and the $0.7 million quarterly unrealized peso-forward-contract gain.
- The operational and financial consequences of the VAST China plant fire and Jingzhou production transition.
- Liquidity requirements for capital expenditures, the $12.0 million ADAC-STRATTEC borrowing, Brazil joint-venture funding and potential stock repurchases.
- Progress toward regulatory closure of the Milwaukee environmental site and the adequacy of the $1.4 million reserve.