STRATTEC SECURITY CORPORATION — Fiscal 2023 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended April 2, 2023, compared with March 27, 2022; balance sheet compared with July 3, 2022. STRATTEC designs and manufactures automotive access-control products, including locks, keys, electronic access systems, latches, door handles and power-access products. It operates primarily in North America and participates in the VAST Automotive Group alliance.
Key Financial Metrics
| Metric | Three months ended April 2, 2023 | Three months ended March 27, 2022 | Nine months ended April 2, 2023 | Nine months ended March 27, 2022 |
|---|---|---|---|---|
| Net sales | $127.2 million | $115.9 million | $360.7 million | $329.2 million |
| Gross profit | $10.0 million | $14.6 million | $29.9 million | $42.1 million |
| Gross margin | 7.9% | 12.6% | 8.3% | 12.8% |
| Operating income (loss) | $(2.5) million | $3.4 million | $(7.4) million | $7.4 million |
| Net income (loss) attributable to STRATTEC | $(2.3) million | $3.1 million | $(4.0) million | $6.6 million |
| Diluted earnings (loss) per share | $(0.57) | $0.80 | $(1.01) | $1.70 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $7.5 million | $11.8 million |
- Quarterly sales increased approximately 9.7%; nine-month sales increased approximately 9.6%, primarily because semiconductor availability improved vehicle production volumes.
- Gross profit declined despite higher sales, as material, labor, freight and warranty costs increased and the Mexican peso strengthened against the U.S. dollar.
- Engineering, selling and administrative expense was $12.5 million for the quarter and $37.3 million year to date, compared with $11.3 million and $34.7 million, respectively, in the prior-year periods.
- Equity earnings from joint ventures increased to $819,000 for the quarter and $1.9 million year to date, compared with $577,000 and $941,000, respectively.
- Capital expenditures were $13.7 million year to date, compared with $9.4 million in the prior-year period.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $12.1 million at April 2, 2023, up from $8.8 million at July 3, 2022; approximately $1.7 million was held in Mexico.
- Working capital was $111.4 million, compared with $106.7 million at fiscal year-end.
- Borrowings were $21.0 million, consisting of $8.0 million under STRATTEC’s $40 million revolving facility and $13.0 million under ADAC-STRATTEC’s $25 million facility. Borrowings were $11.0 million at July 3, 2022.
- The facilities mature August 1, 2024, are secured by specified U.S. assets, and bear interest based on SOFR plus 1.35% or the bank’s prime rate. Management reported compliance with applicable financial covenants at April 2, 2023.
- Nine-month cash flows included $7.5 million from operations, $(13.9) million from investing activities and $9.6 million from financing activities. The financing inflow primarily reflected additional revolving-credit borrowings used in part to fund customer tooling.
Material Changes and Unusual Items
- Cost pressure reduced gross margin by 4.7 percentage points in the quarter and 4.5 percentage points year to date. Key drivers included higher purchased-component costs, Mexico wage increases, unfavorable currency translation, freight inflation and supply-chain disruption.
- A $1.3 million warranty provision was recorded in the quarter for a customer-specific claim. The company also reported another product matter for which additional costs may be incurred, but the amount could not yet be reasonably estimated.
- Other expense was $1.2 million in the quarter and $1.5 million year to date, including foreign-currency transaction losses of $1.5 million and $2.1 million, respectively.
- A $217,000 pension settlement charge was recorded after $863,000 of supplemental executive retirement plan benefits were cash settled.
- Management identified and corrected immaterial prior-period errors involving joint-venture earnings, postretirement obligations and related accounts. Comparative amounts were revised.
- On April 4, 2023, a lease amendment increased the El Paso warehouse right-of-use asset and lease liability by $1.8 million.
Guidance, Outlook and Risks
- Customer sales expectations for the remainder of fiscal 2023 were described as stable, subject to continued supply-chain improvement and limited disruption from inflation, interest rates, geopolitical events and trade policies.
- Management expects unfavorable Mexican peso exchange rates and inflationary pressure on purchased materials and labor to continue through the remainder of fiscal 2023 and into fiscal 2024.
- The company is seeking customer price recovery for inflationary costs, but noted that long-term supply agreements may make negotiations difficult and outcomes uncertain.
- Fiscal 2023 capital expenditures are expected to be approximately $16 million to $18 million; $13.7 million had been spent through April 2, 2023.
- Management anticipated modest or no share repurchases for the remainder of fiscal 2023 to conserve cash. No shares were repurchased during the nine-month period.
- Principal risks include automotive production volatility, semiconductor and component shortages, raw-material and wage inflation, foreign-exchange exposure, customer concentration, warranty claims, labor disruptions, tariffs and geopolitical developments. The company also highlighted covenant and refinancing risk because its revolving facilities expire in August 2024.
Investor Verification Checklist
- Verify the sustainability of sales growth as semiconductor availability improves, particularly across General Motors, Ford and Hyundai/Kia.
- Monitor whether customer pricing actions offset material, labor, freight and foreign-exchange cost inflation.
- Assess the ultimate cost of the disclosed warranty matters and the adequacy of the $8.9 million warranty accrual at April 2, 2023.
- Review borrowing levels, interest costs, covenant compliance and the planned refinancing or extension of the facilities before August 1, 2024.
- Compare planned fiscal 2023 capital expenditures with customer tooling reimbursements and operating cash generation.
- Track performance and funding requirements of VAST LLC, including continued losses in Brazil and near-break-even results in India.