STRATTEC SECURITY CORPORATION — Fiscal 2024 First-Quarter 10-Q
Business context and reporting period
STRATTEC designs and manufactures automotive access-control products, including locks, keys, fobs, passive-entry systems, latches, door handles, and power-access systems. The company serves primarily North American automotive OEMs and Tier 1 suppliers, with operations in the United States and Mexico. The filing covers the three months ended October 1, 2023, compared with October 2, 2022.
Financial performance and liquidity
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Net sales | $135.4 million | $120.4 million |
| Gross profit | $18.7 million | $12.5 million |
| Gross margin | 13.8% | 10.4% |
| Operating income (loss) | $6.1 million | $(0.2) million |
| Net income attributable to STRATTEC | $4.2 million | $0.1 million |
| Diluted EPS | $1.05 | $0.03 |
| Net cash from operating activities | $(3.9) million | $4.7 million |
- Operating margin improved to approximately 4.5% from negative 0.2%; net income attributable to STRATTEC represented approximately 3.1% of sales.
- Sales increased $15.0 million, or approximately 12.5%, primarily from $10.8 million of customer price increases, including $8.0 million of one-time retroactive adjustments and $2.8 million of ongoing program increases.
- Cost of goods sold was $116.7 million, or 86.2% of sales, compared with 89.6% in the prior-year quarter. Direct material costs were $74.9 million and labor and overhead costs were $41.8 million.
- Cash and cash equivalents were $15.7 million at October 1, 2023, down from $20.6 million at July 2, 2023. Working capital was $110.5 million versus $116.8 million at fiscal year-end.
- Operating cash flow was negatively affected by higher inventory, tooling balances, value-added tax recoverables, and lower accounts payable and accrued liabilities.
- Capital expenditures were $2.9 million during the quarter. Management expects approximately $14.0 million of fiscal 2024 capital expenditures.
- Outstanding debt was $13.0 million under the ADAC-STRATTEC facility; there were no borrowings under STRATTEC’s $40 million revolving facility at quarter-end. The company remained compliant with credit covenants.
Material changes versus the prior comparable period
- Gross profit increased $6.2 million, primarily due to customer pricing relief, improved production-volume absorption, and production efficiencies in Mexico.
- Pricing benefits were partly offset by $1.5 million of negotiated supplier material increases, a stronger Mexican peso, higher Mexican wages, increased freight, higher royalties, and $0.2 million of Mexican workforce severance costs.
- The average exchange rate moved to approximately 17.14 pesos per U.S. dollar from 20.19, adversely affecting the U.S. dollar value of Mexican operations by approximately $3.3 million year over year.
- Equity earnings from joint ventures changed from a $0.5 million gain to a $0.3 million loss. The current-period loss reflected professional fees associated with the VAST restructuring and adjusted the prior-year sale gain; management described the adjusted VAST sale result as a $0.2 million loss.
- Effective June 30, 2023, STRATTEC sold its one-third interest in VAST LLC to WITTE and acquired WITTE’s remaining 20% interest in STRATTEC Power Access LLC. SPA is now wholly owned, and VAST is no longer accounted for under the equity method.
- Value-added tax recoverables increased $7.1 million during the quarter because of a temporary Mexican VAT-certification issue, creating additional cash requirements.
- The prior-year financial statements were corrected for previously unrecorded postretirement death-benefit liabilities and an equity-earnings correction. Management stated the corrections were not material.
Guidance, outlook, risks, and unusual items
- Management expects the full-year sales impact of the 2023 UAW strike to be negligible, with most production shortfall expected to be recovered by the end of fiscal third quarter.
- Management continues to target $10 million to $15 million of annualized net price increases on current programs for fiscal 2024. It does not expect further material one-time retroactive pricing adjustments.
- A Mexican salaried workforce reduction is expected to reduce annualized costs by approximately $0.8 million. Management is also targeting $3.0 million of annualized overhead and material-cost reductions.
- Key cost risks include the strong Mexican peso, a possible January 2024 Mexican minimum-wage increase, inflation, freight and supply-chain disruption, semiconductor and component availability, tariffs and border delays, customer production changes, warranty claims, labor disputes, and automotive demand.
- The ADAC-STRATTEC $25 million credit facility expires August 1, 2024. Management expects to renew it during fiscal 2024 as the joint venture’s profitability improves.
- The company entered into a $12 million notional peso forward contract in October 2023 covering monthly settlements from January through June 2024. No peso forward contracts were outstanding at October 1, 2023.
- The Milwaukee environmental remediation reserve was $1.4 million. Management believes the reserve is adequate, although site monitoring continues and natural attenuation has not yet satisfied all closure requirements.
- No material changes were reported to previously disclosed risk factors, and management concluded disclosure controls were effective at a reasonable-assurance level.
Most important facts for investors to verify
- Whether the targeted $10 million to $15 million annualized pricing benefit is realized after supplier concessions and customer volume changes.
- Whether Mexican peso strength, wage increases, freight costs, and border delays continue to pressure margins.
- The timing and terms of renewal of the ADAC-STRATTEC credit facility before its August 2024 expiration.
- Whether the $7.1 million VAT recoverable increase normalizes and when the Mexican certification issue is resolved.
- Whether UAW-related production losses are recovered as management expects and whether automotive customer production remains stable.
- Progress toward the planned $14.0 million fiscal 2024 capital-expenditure program and the company’s ability to restore positive operating cash flow.