STRATTEC SECURITY CORPORATION — Form 10-K Summary
Reporting period: Fiscal year ended July 2, 2023, comprising 52 weeks; comparable fiscal year ended July 3, 2022 comprised 53 weeks. The request metadata identifies “2022 Q4,” but the supplied filing is the fiscal 2023 annual report.
Business context
STRATTEC designs and manufactures automotive access-control products, including locks and keys, electronically enhanced access systems, latches, power sliding-door and liftgate systems, door handles, ignition lock housings and related components. Operations are concentrated in North America, with manufacturing in the United States and Mexico. General Motors, Ford and Stellantis represented approximately 66% of fiscal 2023 net sales, compared with 65% in fiscal 2022.
On June 30, 2023, STRATTEC sold its one-third interest in VAST LLC to WITTE Automotive, purchased WITTE’s remaining 20% interest in STRATTEC Power Access LLC, acquired VAST’s Korea branch net assets and entered into a cooperation framework agreement with WITTE.
Financial performance and key metrics
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Net sales | $492.9 million | $452.3 million | +$40.6 million |
| Gross profit | $42.2 million | $56.0 million | -$13.8 million |
| Gross margin | 8.6% | 12.4% | -3.8 percentage points |
| Operating income (loss) | $(6.1) million | $8.9 million | -$15.0 million |
| Net income (loss) attributable to STRATTEC | $(6.7) million | $7.0 million | -$13.7 million |
| Basic and diluted EPS | $(1.70) | $1.82 basic; $1.79 diluted | Declined |
| Cash flow from operating activities | $10.1 million | $10.4 million | -$0.3 million |
| Capital expenditures | $17.4 million | $14.2 million | +$3.2 million |
| Cash and cash equivalents | $20.6 million | $8.8 million | +$11.8 million |
| Working capital | $116.8 million | $106.7 million | +$10.1 million |
Sales growth primarily reflected improved semiconductor availability and higher production of GM and Ford pickups and SUVs. Cost of goods sold increased to $450.8 million from $396.2 million. Raw materials and purchased components, Mexican wages, freight, warranty costs and the stronger Mexican peso materially pressured profitability. Engineering, selling and administrative expense increased modestly to $48.2 million from $47.1 million.
At July 2, 2023, total borrowings were $13.0 million under the ADAC-STRATTEC facility; there were no borrowings under STRATTEC’s $40 million revolving facility. The facilities had aggregate commitments of $65 million and were subject to financial covenants. The company was in compliance at year-end.
Material changes versus the prior comparable period
- Net sales increased 9.0%, despite one fewer fiscal week, as semiconductor constraints eased.
- Gross margin fell substantially because cost inflation and currency effects outpaced customer price recovery.
- STRATTEC moved from attributable net income of $7.0 million to a loss of $6.7 million.
- Warranty expense increased by approximately $2.1 million; the year-end warranty reserve was $9.7 million versus $8.1 million.
- The Mexican peso strengthened, increasing the U.S.-dollar cost of Mexican operations by approximately $5.5 million year over year.
- Equity earnings from joint ventures increased to $1.6 million from $177,000, primarily due to improved VAST China results and the VAST restructuring transaction.
- Fiscal 2023 financial statements include corrections to previously reported postretirement liabilities and equity earnings. Management stated the corrections were not material to previously issued financial statements.
- No shareholder dividends or share repurchases occurred during fiscal 2023.
Guidance, outlook, risks and unusual items
Management expects relatively stable North American light-vehicle production with modest potential growth and modest fiscal 2024 sales growth from new programs. Management targets fiscal 2024 actions including $10 million to $15 million of current-program pricing improvement, $4 million to $6 million of retroactive price adjustments, approximately $2 million of annualized salaried-cost reductions, $3 million of annual operating and purchasing savings, and a $10 million year-end inventory reduction.
Management expects approximately $14 million of fiscal 2024 capital expenditures. It also expects to pay approximately $2.2 million of China non-resident capital-gain tax related to the VAST sale.
- Key risks include dependence on GM, Ford and Stellantis, automotive production cycles, customer pricing pressure, semiconductor and component availability, raw-material and freight inflation, Mexican labor costs, Mexican peso fluctuations, tariffs and geopolitical instability.
- The company has significant exposure to warranty claims; the warranty reserve is judgment-based and actual claims could differ materially. Product recall insurance applies above $2.5 million, subject to a $30 million limit.
- ADAC-STRATTEC generated losses in fiscal 2023 due to higher material and labor costs. The subsidiary’s credit facility includes a fixed-charge coverage covenant, and fee payments to ADAC were suspended as needed to comply with debt covenants.
- An environmental reserve of $1.4 million remains for historical solvent contamination at the Milwaukee facility. Monitoring continues because closure through natural attenuation has not yet been achieved.
- The company’s $40 million STRATTEC credit facility was renewed in August 2023 through August 2026. Renewal of ADAC-STRATTEC’s $25 million facility was still being pursued for fiscal 2024.
- The independent auditors issued unqualified opinions on the financial statements and internal controls. Warranty reserve estimation was identified as the critical audit matter.
Investor verification checklist
- Verify the timing, accounting treatment and cash proceeds of the VAST LLC sale and the purchase of full ownership of STRATTEC Power Access LLC.
- Assess whether targeted customer price recoveries and retroactive adjustments were achieved in fiscal 2024.
- Track gross-margin recovery against Mexican wages, peso exchange rates, raw-material prices and supplier costs.
- Review warranty claims, reserve adequacy and any customer recall or reimbursement developments.
- Confirm renewal and covenant compliance for the ADAC-STRATTEC credit facility.
- Monitor customer production volumes and concentration risk, particularly GM, Ford and Stellantis.
- Evaluate whether management’s proposed cost reductions, inventory reduction and capital-expenditure plans are realized.