Business Overview and History

Strattec Security Corporation (STRT) is a leading global provider of advanced automotive access, security, and select user interface solutions. With a history spanning over 110 years, the company has established itself as a trusted partner to major automotive original equipment manufacturers (OEMs) in North America and around the world.

Strattec's origins date back to 1913 when it was founded as a manufacturer of mechanical locks and keys, primarily serving the automotive industry in North America. Over the decades, the company has consistently been at the forefront of innovation, transitioning from mechanical to integrated electro-mechanical systems. Today, Strattec's product portfolio includes a wide range of solutions, such as power access systems, door handles, engineered latches, key fobs, advanced security systems, steering wheel controls, and electronic shifters.

The company's largest customers are the three leading automotive OEMs in North America: General Motors (GM), Ford (F), and Stellantis (STLA), which together account for more than 65% of Strattec's sales. The company also provides products to other OEMs around the world, including Hyundai and Kia.

Throughout its history, Strattec has faced various challenges, including changes in customer purchasing actions, warranty provisions, and product recall policies. The cyclical nature of the automotive industry and volatility in production volumes by OEMs have presented ongoing challenges that Strattec has had to address. Despite these obstacles, the company has demonstrated resilience and a commitment to innovation, continuously investing in developing new products and technologies to meet the evolving needs of its automotive customers.

Strattec's engineering expertise, market-leading positions, and strong customer relationships have been key factors in its ability to navigate industry changes and maintain its position as a trusted supplier of advanced automotive access, security, and user interface solutions.

Financial Performance and Ratios

Strattec's financial performance has been solid, despite the challenges faced by the automotive industry in recent years. In the latest fiscal year for which financial statements are available (fiscal year 2024), the company reported annual revenue of $551.8 million and net income of $10.9 million.

In the most recent quarter (Q2 FY2025), Strattec reported revenue of $129.9 million, representing a 9.6% increase compared to the same quarter in the previous year. Net income for the quarter was $1.3 million. The company generated $9.4 million in operating cash flow and $8.5 million in free cash flow during this period.

Key financial ratios for Strattec include:

• Current Ratio: 2.60
• Quick Ratio: 1.77
• Debt-to-Equity Ratio: 0.06
• Return on Assets: 4.54%
• Return on Equity: 8.05%

These ratios suggest that Strattec maintains a strong financial position, with ample liquidity and a conservative capital structure.

Liquidity

Strattec's liquidity position remains strong, as evidenced by its healthy current and quick ratios. The company's ability to meet short-term obligations is solid, with current assets more than twice its current liabilities. This financial flexibility allows Strattec to navigate industry challenges and invest in growth opportunities as they arise.

As of the end of Q2 FY2025, Strattec had $42.6 million in cash on hand. The company also has access to a $40 million secured revolving credit facility and a $20 million secured revolving credit facility for its joint venture, both expiring in August 2026. At the end of Q2 FY2025, there were $13 million in outstanding borrowings under the joint venture facility.

Recent Developments and Outlook

In 2024, Strattec underwent a change in leadership, with Jennifer Slater taking over as President and CEO. Under Slater's guidance, the company has been focused on strengthening its profitability and delivering sustainable sales growth.

The company has implemented various initiatives to improve its cost structure, including streamlining operations and exploring the sale of its large manufacturing facility in Milwaukee. Strattec has also been actively managing its working capital, reducing pre-production tooling costs by nearly 50% since the start of fiscal 2025.

Despite the ongoing challenges in the automotive industry, such as supply chain disruptions, global inflation, and labor shortages, Strattec has continued to deliver solid financial results. In the second quarter of fiscal 2025, the company reported a 9.6% year-over-year increase in revenue, driven by new program launches and higher customer demand. Gross profit margin expanded to 13.2%, and the company generated $9.4 million in cash from operations during the quarter.

Strattec's transformation efforts have also included strengthening its commercial initiatives, with the company recently capturing approximately $8 million in annualized pricing gains across multiple product categories and OEM customers. These pricing improvements are expected to start contributing to the company's financial results in the third quarter of fiscal 2025.

The company's adjusted EBITDA margin expanded by 180 basis points to 6.1% in Q2 FY2025, driven by higher sales volume, favorable changes in foreign exchange rates, and cost management initiatives. Adjusted non-GAAP net income for the quarter was $2.6 million or $0.65 per diluted share, up 81% from the prior year second quarter.

Looking ahead, Strattec expects to recognize $8 million in new annualized pricing gains, which should begin to be realized in the third quarter of fiscal year 2025. However, this pricing is dependent on customer demand and the volume of related products being shipped. The company is also evaluating its capital expenditures for the year and expects to have a better understanding of its needs when it reports the third quarter results.

Product Segments and Performance

Strattec's product portfolio is divided into several key segments:

1. Power Access Solutions: This segment includes products such as power sliding doors, tailgates, lift gates, and power deck lid systems. In Q2 FY2025, power access solutions saw strong growth, with net sales increasing 27% year-over-year. This was driven by increased demand for power door products, particularly on the Kia Carnival platform, as well as new tailgate and power end gate content on Ford F-Series and Super Duty trucks.

2. Security and Authorization Products: This category includes mechanical and electronically enhanced locks, keys, fobs, passive entry passive start systems, and ignition lock housings. In Q2 FY2025, net sales of keys and locksets declined 11% compared to the prior year period, primarily due to reduced demand from Stellantis in response to dealer inventory levels.

3. User Interface Controls: This segment includes steering wheel controls and electronic shifters. Specific financial performance details for this segment were not provided in the recent financial reports.

4. Aftermarket and Service Parts: In Q2 FY2025, aftermarket OE service net sales were $9.7 million, up 8% year-over-year.

Risks and Challenges

As an automotive parts supplier, Strattec faces various risks and challenges, including:

1. Dependence on a few large customers: The company's top three customers account for a significant portion of its revenue, making it vulnerable to changes in production volumes or purchasing decisions by these OEMs.

2. Exposure to global supply chain disruptions: Strattec's manufacturing operations in Mexico and its reliance on a global supply chain expose the company to potential disruptions, which could impact its ability to meet customer demand.

3. Tariff and trade policy uncertainties: Changes in trade policies, such as the imposition of tariffs, could increase Strattec's cost of materials and impact its profitability.

4. Competitive market: The automotive parts industry is highly competitive, and Strattec must continue to innovate and provide value-added solutions to maintain its market position.

Despite these challenges, Strattec has demonstrated resilience and a commitment to transforming its business to drive long-term growth and profitability.

Conclusion

Strattec Security Corporation is a well-established automotive parts supplier with a strong track record of innovation and a diversified product portfolio. The company's recent leadership change and strategic initiatives aimed at improving profitability and cash flow generation are encouraging signs. While the automotive industry continues to face various headwinds, Strattec's financial position, customer relationships, and focus on operational excellence position it well to navigate these challenges and capitalize on future growth opportunities. The company's strong performance in power access solutions and its efforts to secure pricing gains demonstrate its ability to adapt to market conditions and drive growth in key product segments.