STRATTEC SECURITY CORPORATION — Fiscal 2022 Second-Quarter Form 10-Q
Reporting period: Three and six months ended December 26, 2021, compared with December 27, 2020. The filing was dated February 4, 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 OEMs and Tier 1 suppliers. The company reports one operating segment.
Key Financial Metrics
| Metric | Three Months Ended Dec. 26, 2021 | Three Months Ended Dec. 27, 2020 | Six Months Ended Dec. 26, 2021 | Six Months Ended Dec. 27, 2020 |
|---|---|---|---|---|
| Net sales | $112.9 million | $127.4 million | $213.2 million | $253.6 million |
| Gross profit | $14.9 million | $22.2 million | $27.5 million | $44.8 million |
| Gross margin | 13.2% | 17.5% | 12.9% | 17.6% |
| Income from operations | $3.6 million | $11.9 million | $4.1 million | $23.1 million |
| Net income attributable to STRATTEC | $3.4 million | $7.1 million | $3.5 million | $15.1 million |
| Diluted EPS | $0.87 | $1.85 | $0.90 | $3.96 |
| Cash flow from operations | Not separately provided | Not separately provided | $18 thousand | $17.1 million |
| Capital expenditures | Not separately provided | Not separately provided | $5.4 million | $4.6 million |
Balance sheet and liquidity: Cash and equivalents were $14.1 million at December 26, 2021, versus $14.5 million at June 27, 2021. Working capital increased to $111.1 million from $97.3 million. Borrowings were $17.0 million, all under the ADAC-STRATTEC revolving facility, versus $12.0 million at fiscal year-end; no borrowings were outstanding under STRATTEC’s $40 million facility. The company also has access to the $25 million ADAC-STRATTEC facility; both facilities expire August 1, 2024. The company was in compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales declined 11.4%, and six-month sales declined 15.9%, primarily because semiconductor shortages reduced OEM production schedules and temporarily closed customer assembly plants.
- Gross margin declined 430 basis points in the quarter and 470 basis points year to date. Pressure came from lower production volumes and fixed-cost underabsorption, higher raw-material and purchased-component costs, Mexico wage increases and unfavorable peso translation effects.
- Operating income declined 69.6% in the quarter and 82.5% year to date. Engineering, selling and administrative expense increased to $11.3 million in the quarter and $23.4 million year to date, partly because the prior-year periods benefited from customer engineering-cost reimbursement and temporary salary reductions.
- Net income attributable to STRATTEC declined 52.3% in the quarter and 76.9% year to date. The current periods benefited from lower income-tax rates of 6.2% and 6.7%, respectively, compared with 17.2% and 15.4% in the prior periods.
- Equity earnings from VAST LLC declined to $0.6 million in the quarter and $0.4 million year to date, from $1.1 million and $1.9 million, respectively, due to lower VAST China sales and profitability, including startup losses at its Jingzhou facility.
- Operating cash flow fell to approximately break-even year to date, primarily reflecting lower earnings and changes in accounts payable and accrued liabilities. Financing activities provided $5.0 million, including net additional borrowings, compared with $13.5 million of cash used in the prior-year period.
Outlook, Risks and Unusual Items
- Management expects customer demand could remain strong as OEMs rebuild low dealer inventories, but the outlook depends on semiconductor and other supply-chain availability, customer production schedules and the continuing effects of COVID-19.
- Management expects fiscal 2022 capital expenditures of approximately $12 million to $13 million; $5.4 million had been spent through December 26, 2021.
- Management expects modest or no stock repurchases for the remainder of fiscal 2022 to preserve cash. No shares were repurchased during the six-month period.
- VAST China experienced a fire on January 28, 2022, affecting a paint line at its Taicang facility. Production was being evaluated for relocation to Jingzhou and partner facilities; any inability to resupply could reduce future VAST earnings and STRATTEC’s equity earnings. Insurance and equipment impairment impacts remained under evaluation.
- VAST’s Brazil operation may require approximately $400 thousand of collective partner funding during fiscal 2022, with STRATTEC’s anticipated share approximately $133 thousand. Additional contributions may also be required by the Minda-VAST India venture.
- The company maintains a $1.4 million environmental remediation reserve related to historical contamination at its Milwaukee facility. Sampling has not yet supported regulatory closure through natural attenuation, so further remediation could be required.
- Outstanding Mexican peso forward contracts had total notional amounts of $13.5 million at December 26, 2021. Changes in their fair value may affect earnings and are not designated as hedges.
- The filing states there were no material changes to previously disclosed risk factors and no legal proceedings expected to have a material adverse effect.
Important Facts for Investors to Verify
- Whether semiconductor shortages, raw-material inflation and OEM production interruptions continue to suppress revenue and gross-margin recovery.
- Whether operating cash flow returns to positive levels after the near-zero result for the first six months.
- The ability to manage the increased $17.0 million borrowing balance while funding planned capital expenditures and potential joint-venture contributions.
- The operational and insurance consequences of the January 2022 VAST China fire, including any impairment charges or reduction in equity earnings.
- Whether the expected OEM restocking cycle materializes and offsets lower production volumes.
- The adequacy of the $1.4 million environmental reserve and the company’s warranty reserves.
- Actual fiscal 2022 capital expenditures, stock repurchases and future cash requirements under the company’s credit facilities.