STRATTEC SECURITY CORPORATION (NASDAQ:STRT) is a leading designer, developer, manufacturer, and marketer of automotive access control products, including mechanical locks and keys, electronically enhanced locks and keys, fobs, passive entry passive start systems (PEPS), steering column and instrument panel ignition lock housings, latches, power sliding door systems, power tailgate systems, power lift gate systems, power deck lid systems, door handles, and related products. The company serves primarily North American automotive customers and also supplies global automotive manufacturers through a strategic relationship with WITTE Automotive and ADAC Automotive.

Business Overview

In fiscal year 2023, STRATTEC faced significant inflationary pressures that negatively impacted its raw material, purchased materials, and wage costs in Mexico, resulting in increased costs throughout the year. While the company has seen some relief in raw material costs in fiscal 2024, inflationary pressures on purchased materials and wages in Mexico persist, continuing to weigh on its operating results.

Financials

For the nine-month period ended March 31, 2024, STRATTEC reported net sales of $394.7 million, up from $360.7 million in the prior year period. This 9.4% increase was driven by $25.8 million in customer pricing increases, of which $15.9 million was attributed to ongoing price increases and $9.9 million related to one-time retroactive price adjustments. Excluding the impact of these pricing actions, the company still saw a 5.2% increase in sales, primarily driven by the launch of new product programs.

Gross profit margin improved to 11.9% in the nine-month period, up from 8.3% in the prior year, largely due to the pricing increases achieved. However, the company continued to face headwinds from an unfavorable U.S. dollar to Mexican peso exchange rate, higher wages in Mexico, and increased freight costs, which partially offset the gross margin improvement.

Engineering, selling, and administrative expenses increased to $38.8 million in the nine-month period, up from $37.3 million in the prior year, primarily due to one-time charges associated with the transition of the company's Chief Executive Officer and higher incentive compensation accruals.

Net income for the nine-month period was $6.4 million, compared to a net loss of $5.9 million in the prior year period. The improvement was driven by the increase in gross profit, partially offset by the higher operating expenses.

Outlook

Looking ahead, STRATTEC expects the ongoing customer pricing increases, net of higher costs paid to suppliers, to exceed the higher end of its original targeted range of $10.0 million to $15.0 million for the full fiscal year 2024. The company does not anticipate any further material one-time retroactive pricing adjustments for the remainder of the fiscal year.

Risks and Challenges

STRATTEC continues to face cost pressures in its Mexican operations due to the strength of the Mexican peso relative to the U.S. dollar and higher wages in Mexico driven by government-mandated minimum wage increases. The company estimates these factors have increased its manufacturing costs by $7.9 million and $4.6 million, respectively, fiscal year-to-date. To help offset these increased costs, STRATTEC implemented a salaried staffing reduction in its Mexican operations in the first quarter of fiscal 2024, which is projected to reduce costs by an annualized amount of approximately $800,000.

Additionally, the company expects to see between $4 million and $5 million in savings in the full fiscal year, excluding higher shipping costs, driven by improved cost of raw materials and production efficiencies.

Balance Sheet Expectations

Regarding the balance sheet, STRATTEC anticipates the balance of reimbursable customer tooling will begin to decrease significantly in the fourth quarter and continue decreasing in the first half of fiscal 2025 as the company normalizes to near historical levels by the end of calendar year 2024. The company also expects the Mexican VAT balance to return to historical levels in the first half of fiscal 2025 as the periods under audit are closed.

For fiscal 2024 capital expenditures, STRATTEC continues to anticipate spending between $9 million and $12 million, with $6.1 million spent through the third quarter.

Recent Developments

In June 2023, STRATTEC completed the sale of its one-third ownership interest in the VAST LLC joint venture to WITTE Automotive. This transaction, along with the purchase of WITTE's 20% non-controlling interest in STRATTEC's POWER ACCESS LLC subsidiary, positions the company to redeploy assets, both financial and technical, to create greater focus on STRATTEC-specific strategic growth opportunities in North America and around the world.

Liquidity

STRATTEC's liquidity position remains strong, with $9.6 million in cash and cash equivalents as of March 31, 2024. The company has $13.0 million in outstanding borrowings under its ADAC-STRATTEC credit facility, which expires in August 2024. STRATTEC is working with its lender to renew this facility in the fourth quarter of fiscal 2024.

Geographic and Product Diversification

Geographically, STRATTEC's sales are primarily concentrated in North America, with the United States and Canada accounting for the majority of its revenue. The company also has operations and sales in Mexico, Europe, South America, Korea, China, and India.

From a product perspective, STRATTEC's revenue is diversified across several key categories, including door handles and exterior trim (25.0% of Q3 2024 revenue), power access (23.7%), keys and locksets (20.5%), latches (12.4%), user interface controls (8.8%), and aftermarket and OE service (7.4%). The company has seen growth across most of these product categories, with particularly strong performance in power access and user interface controls, which have benefited from increased content on new vehicle programs.

Conclusion

In summary, STRATTEC SECURITY CORPORATION is navigating the current inflationary environment through a combination of pricing actions, cost reduction initiatives, and strategic portfolio adjustments. The company's focus on new product launches, diversification, and operational efficiency positions it well for continued growth and improved profitability in the years ahead.