STRATTEC SECURITY CORPORATION — Form 10-K Summary
Reporting period: Fiscal year ended July 3, 2022, comprising 53 weeks, compared with the 52-week fiscal year ended June 27, 2021. Although the request metadata references “2021 Q4,” the supplied filing is the fiscal 2022 annual Form 10-K, not a quarterly filing.
Business Context
STRATTEC designs and manufactures automotive access-control products, including locks and keys, electronic and passive-entry systems, latches, power access systems, door handles and related components. Its principal markets are North American automotive OEMs, service channels, aftermarket customers and Tier 1 suppliers. The company also participates in global programs through the VAST Automotive Group alliance with WITTE Automotive and ADAC Automotive.
- General Motors, Stellantis and Ford represented approximately 65% of fiscal 2022 sales, compared with 62% in fiscal 2021.
- Direct OEM sales represented approximately 79% of total sales in both fiscal years.
- The company had approximately 3,373 associates worldwide at July 3, 2022.
Key Financial Metrics
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Net sales | $452.3 million | $485.3 million | Down 6.8% |
| Gross profit | $56.0 million | $78.7 million | Down 28.8% |
| Gross margin | 12.4% | 16.2% | Down 380 basis points |
| Income from operations | $8.9 million | $33.9 million | Down 73.8% |
| Net income | $8.9 million | $29.9 million | Down 70.4% |
| Net income attributable to STRATTEC | $7.0 million | $22.5 million | Down 68.8% |
| Diluted earnings per share | $1.80 | $5.85 | Down 69.2% |
| Cash flow from operating activities | $10.4 million | $35.2 million | Down 70.3% |
| Capital expenditures | $14.2 million | $8.9 million | Higher |
| Cash and cash equivalents | $8.8 million | $14.5 million | Down $5.7 million |
Liquidity, Debt and Financial Position
- Working capital increased to $106.7 million from $97.3 million.
- Current assets were $188.2 million and current liabilities were $81.5 million at July 3, 2022.
- Total debt outstanding was $11.0 million, all under the ADAC-STRATTEC revolving credit facility; there were no borrowings under STRATTEC’s $40 million facility.
- STRATTEC and ADAC-STRATTEC had secured revolving credit facilities of $40 million and $25 million, respectively, both expiring August 1, 2024. The company was in compliance with applicable covenants.
- Cash flow used in financing activities was $1.9 million, including $14.0 million of debt repayments, $13.0 million of new borrowings and $1.8 million of dividends to non-controlling interests.
- No dividends were paid to common shareholders in fiscal 2022 or 2021. The dividend was suspended in May 2020 to preserve cash.
Material Changes Versus Fiscal 2021
- Sales declined primarily because semiconductor shortages reduced OEM production schedules and temporarily closed customer assembly plants. The additional week in fiscal 2022 contributed approximately $7.4 million of sales and partially offset the decline.
- Ford sales increased to $79.7 million from $67.7 million, supported by higher content, particularly the new power tailgate program for F-150 trucks.
- General Motors sales declined to $130.2 million from $146.5 million. Stellantis sales declined modestly to $83.3 million from $85.6 million.
- Gross margin deteriorated because of lower production and fixed-cost absorption, higher material and purchased-component costs, Mexican wage increases and unfavorable foreign-exchange effects. The company was unable to recover all increased costs through customer pricing.
- Engineering, selling and administrative expense increased to $47.1 million from $44.7 million, or 10.4% of sales versus 9.2%.
- Equity earnings from joint ventures fell to $181,000 from $2.6 million. VAST China was affected by semiconductor shortages, COVID-related shutdowns, startup losses at its Jingzhou plant and a fire at its Taicang facility.
- ADAC-STRATTEC was near break-even in fiscal 2022 because rising material costs could not be fully passed to customers; it was profitable in fiscal 2021.
- The effective tax rate declined to 4.5% from 14.6%, primarily due to fiscal 2021 foreign-tax-credit and VAST-related true-up adjustments recorded in fiscal 2022. Excluding those adjustments, management stated the fiscal 2022 effective rate was 15.6%.
Outlook, Risks and Unusual Items
- Management expected semiconductor shortages and related supply-chain disruptions to continue into fiscal 2023, affecting customer production, orders, materials availability and costs.
- Third-party forecasts cited by management projected North American light-vehicle production of 13.4 million units in 2022, 15.8 million in 2023, 16.8 million in 2024, 16.8 million in 2025 and 16.5 million in 2026. These are external industry forecasts, not company guidance.
- Management anticipated approximately $13.0 million of fiscal 2023 capital expenditures.
- VAST partners collectively were expected to contribute approximately $300,000 to Brazilian operations in fiscal 2023, with STRATTEC’s expected share of approximately $100,000. No fiscal 2023 contribution to Minda-VAST was anticipated.
- Key risks include customer concentration, automotive cyclicality, semiconductor and component shortages, inflation in raw materials and wages, inability to recover costs through pricing, Mexican peso fluctuations, tariffs and cross-border trade issues, customer production cuts, labor disruptions, cybersecurity incidents and warranty claims.
- The warranty reserve was $8.1 million at July 3, 2022. Warranty estimation was identified as the filing’s critical audit matter, and future customer claims or negotiations could require material additional provisions.
- The company maintained a $1.4 million environmental reserve for historical solvent contamination at its Milwaukee facility. Management believed the reserve was adequate and did not expect a material adverse impact, but active remediation could become necessary.
- Legal proceedings were described as ordinary-course matters with no currently known claim expected to have a material adverse effect.
Investor Verification Checklist
- Verify whether semiconductor availability, OEM production and vehicle volumes improved as projected for fiscal 2023 and subsequent periods.
- Assess recovery of zinc, steel, aluminum, plastic-resin, electronics, freight and Mexican labor-cost increases through customer pricing or productivity savings.
- Monitor sales concentration and production exposure to General Motors, Stellantis and Ford, including model-specific awards and vehicle-content changes.
- Review warranty claims, customer recovery demands and changes in the $8.1 million warranty reserve.
- Track VAST China’s post-fire production transfers, Jingzhou startup performance and continued funding needs in Brazil and other joint ventures.
- Confirm liquidity, covenant compliance, debt maturity and availability under the revolving credit facilities expiring August 1, 2024.
- Evaluate the effect of suspended common dividends and the limited expected fiscal 2023 share-repurchase activity on shareholder returns.
- Review the Milwaukee environmental reserve and any developments affecting remediation or regulatory closure.