STRATTEC SECURITY CORPORATION — Fiscal 2023 Second-Quarter Form 10-Q
Reporting period: Three and six months ended January 1, 2023, compared with December 26, 2021. STRATTEC designs and manufactures automotive access-control products, including locks, keys, latches, door handles, power-access systems and related components. The company operates primarily in North America and participates in the VAST Automotive Group with WITTE Automotive and ADAC Automotive.
Financial Results and Key Metrics
| Metric | Three months ended Jan. 1, 2023 | Three months ended Dec. 26, 2021 | Six months ended Jan. 1, 2023 | Six months ended Dec. 26, 2021 |
|---|---|---|---|---|
| Net sales | $113.2 million | $112.9 million | $233.5 million | $213.2 million |
| Gross profit | $7.4 million | $14.9 million | $19.9 million | $27.5 million |
| Gross margin | 6.5% | 13.2% | 8.5% | 12.9% |
| Operating income (loss) | $(4.7) million | $3.6 million | $(4.9) million | $4.1 million |
| Net income (loss) attributable to STRATTEC | $(1.8) million | $3.4 million | $(1.7) million | $3.5 million |
| Diluted earnings per share | $(0.47) | $0.87 | $(0.44) | $0.89 |
| Cash flow from operating activities | Not provided for quarter | Not provided for quarter | $8.7 million | $18 thousand |
Balance sheet and liquidity at January 1, 2023: Cash and cash equivalents were $13.6 million, compared with $8.8 million at July 3, 2022. Working capital was $109.8 million, compared with $106.7 million at fiscal year-end. Total current assets were $189.3 million and current liabilities were $79.5 million.
Debt: Borrowings under credit facilities totaled $17.0 million, consisting of $4.0 million under STRATTEC’s $40 million secured revolving facility and $13.0 million under ADAC-STRATTEC’s $25 million secured revolving facility. Both facilities expire August 1, 2024. Average borrowing rates for the six-month period were 4.4% for STRATTEC and 4.3% for ADAC-STRATTEC.
Capital expenditures: Six-month capital expenditures were $9.5 million. Management expects fiscal 2023 capital expenditures of approximately $15 million to $17 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales were essentially flat, while six-month sales increased 9.5%, primarily due to improved semiconductor availability and higher production volumes at General Motors and Ford.
- Gross profit declined $7.5 million in the quarter and $7.6 million year to date. Margins fell 670 basis points in the quarter and 440 basis points year to date.
- Cost pressure reflected higher raw material and purchased-component costs, Mexico wage increases, freight and fuel costs, and the unfavorable effect of a stronger Mexican peso. These pressures more than offset production efficiencies and lower aftermarket royalties.
- Engineering, selling and administrative expenses increased to $12.1 million in the quarter from $11.3 million and to $24.8 million year to date from $23.4 million, driven by salary, recruiting, product-development and engineering costs.
- Equity earnings from joint ventures increased to $1.1 million year to date from $364 thousand, largely due to improved VAST China results, although quarterly equity earnings were slightly lower.
- Aftermarket and service sales declined to $20.1 million year to date from $23.3 million, as available semiconductor chips were prioritized for production-vehicle components rather than aftermarket keys.
- Cash flow from operations improved to $8.7 million from essentially breakeven, primarily from inventory reductions and other working-capital changes, despite lower profitability.
Guidance, Outlook, Risks and Unusual Items
- Management expects a stable sales environment with potential modest growth for the remainder of fiscal 2023, subject to supply-chain stability, inflation, interest rates and geopolitical developments.
- Management expects continued inflation in raw materials, purchased parts and labor. Customer pricing recovery is a key focus, but outcomes are uncertain because of long-term supply agreements.
- Management received a subsequent waiver for ADAC-STRATTEC’s noncompliance with its fixed-charge coverage covenant as of January 1, 2023. The facility was amended to modify the covenant calculation and minimum-net-worth requirement; management believes future compliance is probable. The company was in compliance with all other stated financial covenants at January 1, 2023.
- During the quarter, the company identified a product-performance issue that is likely to result in warranty costs, but the amount could not yet be reasonably estimated. Additional warranty provisions may be required.
- Management recognized a previously unrecorded postretirement death-benefit liability under ASC 715 and corrected immaterial prior-period errors relating to equity earnings, the joint-venture investment and related accounts.
- Key risks include automotive demand and customer production schedules, semiconductor and component availability, inflation, wage and freight costs, foreign-exchange volatility, tariffs and trade policies, the Ukraine conflict, COVID-19 effects, customer warranty or recall actions, labor disruptions and supply-chain interruptions.
- The environmental remediation reserve for the Milwaukee facility was $1.4 million at January 1, 2023. Management believes the reserve is adequate, although active remediation may still be required.
- No shares were repurchased during the six months. Management expects modest or no repurchase activity for the remainder of fiscal 2023 to conserve cash.
Important Facts for Investors to Verify
- Whether customer pricing actions recover the continuing increases in materials, labor, freight and other manufacturing costs.
- Whether semiconductor availability improves sufficiently to restore aftermarket sales and customer production volumes.
- The details and continuing effect of the ADAC-STRATTEC covenant waiver and amended credit agreement.
- The eventual financial exposure from the newly identified warranty matter.
- Whether projected fiscal 2023 capital expenditures remain within the $15 million to $17 million range and can be funded without materially increasing debt.
- The sustainability of operating cash flow while the company remains unprofitable on an operating and net-income basis.
- The effect of Mexican peso movements, VAST China performance, and continuing losses or break-even results in VAST Brazil and India.