STRATTEC SECURITY CORPORATION — Form 10-Q Summary
Reporting period: Three months ended October 2, 2022, the first quarter of fiscal 2023, compared with the three months ended September 26, 2021. The filing was submitted November 10, 2022. STRATTEC designs and manufactures automotive access-control products, including locks, keys, latches, door handles, power-access systems and related components, primarily for North American automotive customers.
Financial performance and liquidity
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $120.4 million | $100.3 million |
| Gross profit | $12.5 million | $12.5 million |
| Gross margin | 10.4% | 12.5% |
| Operating income (loss) | $(0.2) million | $0.4 million |
| Net income (loss) | $(0.1) million | $0.2 million |
| Net income attributable to STRATTEC | $0.1 million | $0.1 million |
| Diluted earnings per share | $0.03 | $0.03 |
| Cash flow from operating activities | $4.7 million | $(9.6) million |
| Capital expenditures | $4.7 million | $2.8 million |
- Direct material costs increased to $72.5 million from $56.2 million and represented 67.2% of cost of goods sold versus 64.0%.
- Engineering, selling and administrative expenses increased to $12.7 million from $12.1 million, primarily due to higher outside product-development and engineering costs.
- Equity earnings from joint ventures were $0.5 million versus a $0.3 million loss, reflecting improved VAST LLC performance.
- Other expense was $0.3 million versus $0.1 million of other income, largely reflecting foreign-currency effects and a $0.4 million Rabbi Trust loss.
- Cash and cash equivalents were $10.3 million at October 2, 2022, compared with $8.8 million at July 3, 2022. Working capital was $109.5 million versus $106.7 million.
- Total borrowings were $13.0 million, consisting of $1.0 million under STRATTEC’s facility and $12.0 million under the ADAC-STRATTEC facility, compared with $11.0 million at fiscal year-end.
- The company had $65 million of secured revolving credit capacity, with both facilities expiring August 1, 2024. STRATTEC reported compliance with all financial covenants.
- No dividends were declared for STRATTEC shareholders. Subsidiaries paid $0.6 million in dividends to non-controlling interests.
Material changes versus the prior comparable period
- Sales increased 20.0%, principally due to improved semiconductor availability and higher production of vehicles such as the GMC Sierra, Chevrolet Silverado and Ford F-150.
- Sales increased for General Motors to $38.2 million from $25.7 million, Ford to $24.6 million from $17.7 million, and Tier 1 customers to $17.3 million from $12.0 million.
- Commercial and other OEM sales declined to $14.8 million from $17.4 million, and Hyundai/Kia sales declined to $8.3 million from $11.0 million.
- Gross profit dollars were essentially unchanged despite higher sales because of higher raw-material and purchased-component costs, unfavorable product mix, and increased Mexico wages. Gross margin declined 210 basis points.
- Operating results moved from income to a loss as higher SG&A combined with flat gross profit.
- Operating cash flow improved by $14.3 million, primarily because of working-capital changes, including inventory reductions and more favorable accounts-payable and accrued-liability movements.
- Foreign-currency translation adjustments produced a $0.7 million other comprehensive loss, contributing to a $0.5 million comprehensive loss attributable to STRATTEC.
Guidance, outlook, risks and unusual items
- Management expects customer sales to grow over the next several quarters as automakers seek to rebuild low dealer inventories. This outlook depends on continued improvement in semiconductor and other supply-chain shortages.
- Management expects approximately $13.0 million of fiscal 2023 capital expenditures, of which $4.7 million had been incurred through October 2, 2022.
- Management anticipates modest or no stock repurchases for the remainder of fiscal 2023 to conserve cash. No shares were repurchased during the quarter.
- The company expects its portion of a potential VAST Brazil capital contribution to be approximately $0.1 million during fiscal 2023.
- Key risks include automotive demand and production volatility, semiconductor and component shortages, logistics disruptions, inflation in materials and wages, higher interest rates, foreign-currency movements, the Ukraine conflict, COVID-19 effects, tariffs, labor disruptions, warranty claims and customer recalls.
- Subsequent to quarter-end, STRATTEC received notice of a product-performance issue. Additional warranty costs are probable, but the company could not reasonably estimate the amount or its responsibility as of the filing date and may record additional provisions.
- The company maintains a $1.4 million environmental reserve related to historical contamination at its Milwaukee facility. Sampling continues because regulatory closure through natural attenuation has not yet been achieved.
- A new credit-loss accounting standard is expected to be adopted in the first quarter of fiscal 2024; management does not expect a material impact.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material changes were reported to the risk factors in the 2022 Form 10-K.
Investor verification priorities
- Verify whether semiconductor availability and vehicle production volumes continue to support the projected sales recovery.
- Monitor gross-margin recovery, particularly raw-material, purchased-part and Mexico labor costs.
- Assess liquidity, borrowing levels, interest rates and compliance with the minimum-net-worth and fixed-charge-coverage covenants.
- Follow the unresolved product-performance matter and any resulting warranty provisions or customer cost-reimbursement claims.
- Review VAST LLC performance, especially the continuing loss exposure in Brazil and the expected capital contribution.
- Compare actual fiscal 2023 capital expenditures and stock-repurchase activity with management’s stated plans.
- Evaluate customer concentration: General Motors, Ford and Stellantis represented approximately 66% of quarterly sales combined.