STRATTEC SECURITY CORPORATION The following Management's Discussion and Analysis should be read in conjunction
with
Outlook
Refer to discussion of Risks and Uncertainties included in the Notes to Condensed Consolidated Financial Statements beginning on page 8 of this Form 10-Q.
Starting during the fourth quarter of our fiscal year ended
While supply chain shortages improved in the first half of fiscal year 2023
relative to the prior year period, they continued to constrain a full return to
demand-driven production levels mainly affecting the recovery of our aftermarket
product sales and, moreover, adverse inflationary pricing and wage conditions
have persisted in spite of improvements in the supply chain. The sales outlook
from our customers over the remainder of fiscal year 2023 projects a stable
sales environment with potential for modest growth. However, this sales outlook
is contingent on continued progress toward stability for supply chains post
COVID-19 pandemic, and minimal disruption of the North American and overall
global economy due to higher inflation and interest rates and the economic
implications from the conflict in the
From a gross profit margin perspective, we anticipate continued inflationary pressures from the cost of raw materials, purchased materials and labor for the remainder of fiscal year 2023. Seeking pricing recovery from our customers for such inflationary costs is an immediate and prime focus of ours, however, given the long-term nature of our supply agreements, such negotiations are not customary and therefore, have outcomes that are difficult to predict.
Analysis of Results of Operations
Three months endedJanuary 1, 2023 compared to the three months endedDecember 26, 2021 Three Months Ended January 1, December 26, 2023 2021 Net Sales (in millions)$ 113.2 $ 112.9
Net sales to each of our customers or customer groups in the current year quarter and prior year quarter were as follows (in millions):
Three Months Ended
January 1, December 26,
2023 2021
General Motors Company $ 35.5 $ 31.1
Ford Motor Company 22.2 21.1
Stellantis 17.0 23.1
Tier 1 Customers 16.1 15.6
Commercial and Other OEM Customers 13.1 16.1
Hyundai / Kia 9.3 5.9
$ 113.2 $ 112.9
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Overall net sales were stable for the current quarter relative to the prior year
quarter. The following items specifically impacted sales to the above noted
customer groups between quarters:
-
Sales to General Motors Company, Ford Motor Company and Hyundai/Kia were
positively impacted in the current year quarter due to higher vehicle production
volumes resulting from improved global semiconductor chip availability relative
to the prior year quarter. Sales growth to General Motors Company in the current
year quarter was attributed to higher production volumes of their GMC and
Chevrolet pickup trucks and certain SUVs for which we supply a wide range of
components. Sales to Hyundai / Kia increased quarter-over-quarter due to higher
levels of production of the Kia Carnival minivan in the current year quarter as
compared to the prior year quarter.
-
The decrease in sales to Stellantis between quarters resulted primarily from its
plant shutdowns in the current year quarter, which reduced production volumes
compared to the prior year quarter.
-
Sales to Commercial and Other OEM Customers, which are comprised of aftermarket
products and vehicle access control products, such as latches, fobs, driver
controls and door handles, declined in the current year quarter as compared to
the prior year quarter due to continued semiconductor chip availability issues,
primarily for aftermarket keys. The increases in availability of semiconductor
chips were allocated toward the production of components for production vehicles
ahead of aftermarket products and, therefore, sales to aftermarket customers
continued to be negatively impacted in the current year quarter due to these
issues.
Three Months Ended
January 1, 2023 December 26, 2021
Percent of Percent of
Millions of Cost of Millions of Cost of
Dollars Goods Sold Dollars Goods Sold
Direct Material Costs $ 69.1 65.3 % $ 64.3 65.6 %
Labor and Overhead Costs 36.7 34.7 % 33.7 34.4 %
Total Cost of Goods Sold $ 105.8 $ 98.0 Despite relatively stable sales for the quarter compared to the prior year
quarter, the total cost of goods sold increased by
Labor and overhead costs increased$3.0 million between quarters. Labor and overhead costs were impacted by the following: Cost Increases: -Mexico wages and benefits increased$1.9 million in the current year quarter as compared to the prior year quarter as a result of aJanuary 1, 2022 government mandated minimum wage increase. - TheU.S. dollar value of our Mexican operations was negatively impacted by approximately$1.1 million in the current year quarter as compared to the prior year quarter due to an unfavorable Mexican peso toU.S. dollar exchange rate between quarterly periods. The averageU.S. dollar / Mexican peso exchange rate decreased to approximately19.57 pesos to the dollar in the current year quarter from approximately20.89 pesos to the dollar in the prior year quarter. - Freight costs increased$800,000 between quarterly periods due to an increase in fuel costs and supply chain disruptions. Cost Decrease: - Royalty costs paid on sales of certain aftermarket products decreased$570,000 in the current year quarter as compared to the prior year quarter due to lower volumes in these aftermarket products stemming from the current semiconductor chip shortage. - Production efficiencies that controlled headcount at ourMexico facilities resulted in reduced labor and benefit costs between quarterly periods of approximately$500,000 . Three Months Ended January 1, December 26, 2023 2021 Gross Profit (in millions)$ 7.4 $ 14.9 Gross Profit as a percentage of net sales 6.5 % 13.2 %
Gross profit dollars in the current year quarter decreased
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Engineering, selling and administrative expenses in the current year quarter and prior year quarter were as follows:
Three Months Ended
January 1, December 26,
2023 2021
Expenses (in millions) $ 12.1 $ 11.3
Expenses as a percentage of net sales 10.7 % 10.0 %
Engineering, selling and administrative expenses in the current year quarter increased in comparison to the prior year quarter primarily due to increased salary and recruiting costs in the current year quarter and lower costs in the prior year quarter due to a customer reimbursement of engineering and design costs incurred on a new program.
Loss from operations was
The equity earnings of joint ventures was
Included in Other Income (Expense), net in the current year quarter and prior year quarter were the following items (in thousands):
Three Months Ended
January 1, December 26,
2023 2021
Foreign Currency Transaction (Loss) Gain $ (514 ) $ 104
Unrealized Gain (Loss) on Peso Forward Contracts 12 (126 )
Realized Gain (Loss) on Peso Forward Contracts, net 307 (4 )
Pension and Postretirement Plan Cost (131 ) (125 )
Rabbi Trust Gain 389 48
Other (11 ) 3
$ 52 $ (100 )
Set forth below is a discussion of the items comprising certain of the
components of our Other Income (Expense), net:
-
Foreign currency transaction losses and gains resulted from activity associated
with foreign denominated assets held by our Mexican subsidiaries.
-
The Rabbi Trust assets fund our amended and restated supplemental executive
retirement plan. The investments held in the Trust are considered trading
securities.
-
We entered into the Mexican peso currency forward contracts during fiscal 2023
and 2022 to minimize earnings volatility resulting from changes in exchange
rates affecting the U.S. dollar cost of our Mexican operations. Unrealized gains
and losses on the peso forward contracts recognized as a result of
mark-to-market adjustments as of January 1, 2023 may or may not be realized in
future periods, depending on actual Mexican peso to U.S. dollar exchange rates
experienced during the balance of the contract period.
-
Pension and postretirement plan costs include the components of net periodic
benefit cost other than the service cost component.
Our effective tax rate was 40.8% and 6.2% for the three months ended
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Six months endedJanuary 1, 2023 compared to the six months endedDecember 26, 2021 Six Months Ended January 1, December 26, 2023 2021 Net Sales (in millions)$ 233.5 $ 213.2
Net sales to each of our customers or customer groups in the current year period and prior year period were as follows (in millions):
Six Months Ended
January 1, December 26,
2023 2021
General Motors Company $ 73.7 $ 56.8
Ford Motor Company 46.7 38.8
Stellantis (Formerly Fiat Chrysler Automobiles) 34.2 39.6
Tier 1 Customers 33.4 27.6
Commercial and Other OEM Customers 27.9 33.5
Hyundai / Kia 17.6 16.9
$ 233.5 $ 213.2
Overall, the period-over-period sales increase was due to improved global
semiconductor chip availability in the current year period relative to the prior
year period. The following items specifically impacted sales to the above noted
customer groups between periods:
-
Sales to General Motors Company and Ford Motor Company were positively impacted
in the current year period due to higher vehicle production volumes resulting
from improved global semiconductor chip availability relative to the prior year
period. Specifically, sales growth to General Motors Company and Ford Motor
Company in the current year period was attributed to higher production volumes
of their GMC and Chevrolet pickup trucks and certain SUVs for which we supply a
wide range of components.
-
The decrease in net sales to at Stellantis was driven primarily by its plant
shutdowns which resulted in decreased production volumes in the current year
compared to the prior year especially as it related to the Chrysler Pacifica
minivan, the Jeep Compass and the Dodge Ram pickup truck.
-
Sales to Tier 1 Customers improved in the current year period compared to the
prior year period due to higher vehicle production volumes relating to the
semiconductor chip availability referenced above.
-
Sales to Commercial and Other OEM Customers, which are comprised of aftermarket
products and vehicle access control products, such as latches, fobs, driver
controls and door handles, declined in the current year period as compared to
the prior year period due to continued semiconductor chip availability issues,
primarily for aftermarket keys. The increases in availability of semiconductor
chips were allocated toward the production of components for production vehicles
ahead of aftermarket products and, therefore, sales to aftermarket customers
continued to be negatively impacted in the current year period due to these
issues.
Six Months Ended
January 1, 2023 December 26, 2021
Percent of Percent of
Millions of Cost of Millions of Cost of
Dollars Goods Sold Dollars Goods Sold
Direct Material Costs $ 141.6 66.3 % $ 120.5 64.9 %
Labor and Overhead Costs 72.1 33.7 % 65.3 35.1 %
Total Cost of Goods Sold $ 213.7 $ 185.8 The increase in direct material costs between periods was primarily due to the aforementioned increase in sales, higher costs for raw material and purchased components and a shift toward products with a higher proportion of material costs as a percent of their total cost of goods sold. The increase in the proportion of direct material costs as a percent of total cost of goods sold between periods was due to its higher rate of growth compared with that for labor and overhead, which benefited from improved overhead absorption associated with higher sales between the periods, albeit partially mitigated by a reduction in inventory during the current year period.
Labor and overhead costs increased
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Cost Increase: -Mexico wages and benefits increased$3.3 million in the current year period as compared to the prior year period as a result of aJanuary 1, 2022 government mandated minimum wage increase. - Freight costs increased$1.6 million between year-to-date periods due to an increase in fuel costs and supply chain disruptions. - TheU.S. dollar value of our Mexican operations was negatively impacted by approximately$960,000 in the current year period as compared to the prior year period due to an unfavorable Mexican peso toU.S. dollar exchange rate between year-to-date periods. The averageU.S. dollar / Mexican peso exchange rate decreased to approximately19.88 pesos to the dollar in the current year period from approximately20.44 pesos to the dollar in the prior year period. Cost Decreases: - Royalty costs paid on sales of certain aftermarket products decreased$1.0 million in the current year period as compared to the prior year period due to lower volumes in these aftermarket products stemming from the current semiconductor chip shortage. - Prior year period costs included lump sum bonuses totaling$100,000 paid to ourMilwaukee represented hourly workers upon the ratification of a new four-year labor contract, which contract is effective throughNovember 1, 2025 . Six Months Ended January 1, December 26, 2023 2021 Gross Profit (in millions)$ 19.9 $ 27.5 Gross Profit as a percentage of net sales 8.5 % 12.9 %
Gross profit dollars in the current year period decreased
Engineering, selling and administrative expenses in the current year period and prior year period were as follows:
Six Months Ended
January 1, December 26,
2023 2021
Expenses (in millions) $ 24.8 $ 23.4
Expenses as a percentage of net sales 10.6 % 11.0 %
Engineering, selling and administrative expenses in the current year period
increased in comparison to the prior year period due to higher outside
expenditures on new product development costs associated with utilizing third
party vendors for a portion of our development work, an increase in engineering
costs related to our
Loss from operations was
The equity earnings of joint ventures was
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Included in Other Income (Expense), net in the current year period and prior year period were the following items (in thousands):
Six Months Ended
January 1 , December 26,
2023 2021
Foreign Currency Transaction (Loss) Gain
(23 ) (224 )
Realized Gain on Peso Forward Contracts, net 545 135
Pension and Postretirement Plan Cost (260 ) (249 )
Rabbi Trust Gain 23 70
Other 59 51
$ (241 ) $ 26
Set forth below is a discussion of the items comprising certain of the
components of our Other Income (Expense), net:
-
Foreign currency transaction losses and gains resulted from activity associated
with foreign denominated assets held by our Mexican subsidiaries.
-
The Rabbi Trust assets fund our amended and restated supplemental executive
retirement plan. The investments held in the Trust are considered trading
securities.
-
We entered into the Mexican peso currency forward contracts during fiscal 2023
and 2022 to minimize earnings volatility resulting from changes in exchange
rates affecting the U.S. dollar cost of our Mexican operations. Unrealized gains
and losses on the peso forward contracts recognized as a result of
mark-to-market adjustments as of January 1, 2023 may or may not be realized in
future periods, depending on actual Mexican peso to U.S. dollar exchange rates
experienced during the balance of the contract period.
-
Pension and postretirement plan costs include the components of net periodic
benefit cost other than the service cost component.
Our effective tax rate was 40.7% and 6.7% for the six months ended
Liquidity and Capital Resources
Working Capital (in millions)
January 1, July 3,
2023 2022
Current Assets $ 189.3 $ 188.2
Current Liabilities 79.5 81.5
Working Capital $ 109.8 $ 106.7 Outstanding Receivable Balances from Major Customers
Our primary source of cash flow is from our major customers, which include
General Motors Company, Stellantis and Ford Motor Company. As of the date of
filing this Form 10-Q with the
General Motors Company$ 22.1 Stellantis$ 9.9 Ford Motor Company$ 12.8 28
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Cash Balances in
We earn a portion of our operating income in
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