Business Context and Reporting Period
STRATTEC Security Corporation designs and manufactures automotive access-control products, including locks, keys, handles, latches, power-access systems and related components. The company serves primarily North American automotive OEMs and operates through relationships with WITTE Automotive and ADAC Automotive under the VAST Automotive Group. This Form 10-Q covers the three months ended September 26, 2021, the first quarter of fiscal 2022, compared with September 27, 2020. The financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $100.3 million | $126.2 million | Down 20.5% |
| Gross profit | $12.5 million | $22.5 million | Down 44.3% |
| Gross margin | 12.5% | 17.8% | Down 5.3 percentage points |
| Income from operations | $0.4 million | $11.2 million | Down 96.2% |
| Operating margin | 0.4% | 8.9% | Down 8.5 percentage points |
| Net income attributable to STRATTEC | $0.1 million | $8.0 million | Down 98.7% |
| Diluted earnings per share | $0.03 | $2.11 | Down $2.08 |
| Net cash from operating activities | $(9.6) million | $7.3 million | Decrease of $16.9 million |
| Capital expenditures | $2.8 million | $1.5 million | Increase of $1.3 million |
Balance Sheet and Liquidity
- Cash and cash equivalents were $7.0 million at September 26, 2021, down from $14.5 million at June 27, 2021. Approximately $1.9 million was held in Mexico and was available for repatriation.
- Working capital was $105.2 million, compared with $97.3 million at fiscal year-end.
- Borrowings under credit facilities increased to $17.0 million from $12.0 million, consisting of $1.0 million under the STRATTEC facility and $16.0 million under the ADAC-STRATTEC facility.
- The company had $40 million and $25 million secured revolving credit facilities, both expiring August 1, 2024. It was in compliance with all financial covenants.
- Inventories increased to $77.7 million from $70.9 million, primarily reflecting production and supply-chain disruptions.
Material Changes Versus the Prior Comparable Period
- Sales declined $25.9 million, primarily because semiconductor shortages and other component shortages caused customer plant shutdowns and reduced production schedules.
- Sales declined for General Motors, Stellantis, commercial and other OEM customers, and Tier 1 customers. Ford and Hyundai/Kia sales increased because of higher product content and production of certain vehicle programs, partially offsetting volume reductions.
- Gross margin contracted because of lower volume, an unfavorable Mexican peso exchange rate, higher Mexico wages and other cost pressures. These effects were partially offset by lower incentive-bonus provisions.
- Engineering, selling and administrative expense increased to $12.1 million from $11.3 million, partly because the prior-year period included temporary wage reductions implemented during the pandemic.
- Equity earnings from joint ventures changed to a $0.3 million loss from $0.8 million of earnings. VAST LLC sales fell to $42.6 million from $50.4 million, and its operating results were affected by semiconductor shortages and COVID-19-related conditions.
- Operating cash flow changed from $7.3 million provided to $9.6 million used. The decline reflected lower earnings, a $6.8 million inventory build, higher other assets and timing of accounts payable and accrued-liability payments, including $6.6 million of fiscal 2021 bonus payments.
- The prior-year period included a $0.7 million income-tax benefit related to retroactive eligibility for the GILTI high-tax exception. The current-quarter effective tax rate was 14.3%, compared with 13.5% in the prior-year quarter.
- Comprehensive income attributable to STRATTEC changed to a $0.4 million loss from $9.5 million of income, including a $0.7 million unfavorable currency-translation adjustment.
Guidance, Outlook, Risks and Unusual Items
- Management expects customer demand may remain strong as OEMs seek to replenish low dealer inventories, but the outlook depends on semiconductor and other supply-chain constraints, customer production schedules and the continuing effects of COVID-19.
- Management stated that supply-chain shortages could continue disrupting production levels, costs and volumes for several more quarters. The filing does not provide formal revenue or earnings guidance.
- Fiscal 2022 capital expenditures are expected to be approximately $13 million, of which $2.8 million had been incurred through September 26, 2021.
- Management anticipates modest or no stock repurchase activity for the remainder of fiscal 2022 to conserve cash. No shares were repurchased during the quarter.
- VAST LLC may require additional funding for its Brazil operations. Total partner contributions are estimated at approximately $0.3 million, including an expected STRATTEC share of approximately $0.1 million. Additional contributions may also be required for the loss-making Minda-VAST India joint venture.
- The company had $1.4 million reserved for environmental remediation at its Milwaukee facility. Sampling has not yet satisfied requirements for closure by natural attenuation; management believes the reserve is adequate.
- Management identified risks from automotive demand, customer purchasing actions, labor disruptions, foreign currency movements, tariffs, raw-material costs, warranty and recall claims, semiconductor shortages and COVID-19 effects on customers, suppliers and operations.
- On October 5, 2021, shareholders approved an increase in authorized common shares from 12 million to 18 million.
Investor Verification Points
- Verify whether semiconductor and other component shortages continue to constrain OEM production and STRATTEC sales.
- Monitor cash generation, inventory levels and additional borrowing needs given negative quarterly operating cash flow and $17.0 million of debt.
- Assess recovery in gross margin as production volumes normalize and as Mexican wage, currency and raw-material pressures develop.
- Review VAST LLC performance and any required capital contributions, particularly for Brazil and India.
- Evaluate the adequacy of the $1.4 million environmental reserve and the $8.4 million warranty accrual.
- Track the planned approximately $13 million fiscal 2022 capital-expenditure program and the company’s decision to limit share repurchases.
- Consider customer concentration: first-quarter sales to General Motors, Ford and Stellantis totaled approximately $59.9 million, or about 60% of consolidated sales.