# Strattec Security Corp: Form 10-Q for the period ended Jan 1, 2023

- Company: [Strattec Security Corp](/companies/strt.md) (CIK 933034)
- Form: 10-Q
- Filed: 2023-02-09
- Accepted by EDGAR: Feb 9, 2023, 06:01 ET
- Period: 2023-01-01
- Accession: 0000950170-23-002234
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/933034/000095017023002234/strt-20230101.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/933034/000095017023002234/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-01-01.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-10-03 to 2023-01-01 | $113.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2022-07-04 to 2023-01-01 | $233.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-10-03 to 2023-01-01 | $105.8m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2022-07-04 to 2023-01-01 | $213.7m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-10-03 to 2023-01-01 | $7.4m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2022-07-04 to 2023-01-01 | $19.9m | us-gaap:GrossProfit |
| Operating income | 3 months, 2022-10-03 to 2023-01-01 | −$4.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2022-07-04 to 2023-01-01 | −$4.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-10-03 to 2023-01-01 | $196.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2022-07-04 to 2023-01-01 | $325.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-10-03 to 2023-01-01 | −$1.7m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2022-07-04 to 2023-01-01 | −$1.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-10-03 to 2023-01-01 | −$1.8m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2022-07-04 to 2023-01-01 | −$1.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-10-03 to 2023-01-01 | −$0.47 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2022-07-04 to 2023-01-01 | −$0.44 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-10-03 to 2023-01-01 | −$0.47 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2022-07-04 to 2023-01-01 | −$0.44 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-10-03 to 2023-01-01 | 3,927,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2022-07-04 to 2023-01-01 | 3,913,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2022-07-04 to 2023-01-01 | $8.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2022-07-04 to 2023-01-01 | $9.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-01-01 | $13.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-01-01 | $189.3m | us-gaap:AssetsCurrent |
| Total assets | at 2023-01-01 | $320.8m | us-gaap:Assets |
| Current liabilities | at 2023-01-01 | $79.5m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2023-01-01 | $187.1m | us-gaap:StockholdersEquity |
| Shares outstanding | at 2023-01-02 | 4,015,133 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 34,533 characters.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis should be read in conjunction with STRATTEC SECURITY CORPORATION’s accompanying Condensed Consolidated Financial Statements and Notes thereto and its 2022 Form 10-K, which was filed with the Securities and Exchange Commission on September 8, 2022. Also, refer to discussion of prior period corrections under Basis of Financial Statements included in the Notes to Condensed Consolidated Financial Statements in this Form 10-Q. Unless otherwise indicated, all references to quarters and years refer to fiscal quarters and fiscal years.

### 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 June 2020, the automotive industry has experienced significant volatility due to the COVID-19 pandemic which resulted in periods of shutdowns as well as a subsequent demand-led production recovery. During the fourth quarter of fiscal year 2021, we were impacted by supply chain shortages in the automotive supply chain of critical electronic component parts, primarily semiconductor chips, and certain raw materials which impacted the production schedules for our customers and, therefore, our production levels and have, in turn, adversely impacted pricing for raw materials and purchased components. These shortages continued throughout our fiscal 2022, which resulted in some of our customers temporarily closing several of their assembly plants or reducing their production schedules in North America.

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 Ukraine and other international political unrest.

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 ended January 1, 2023 compared to the three months ended December 26, 2021

|  | Three Months Ended January 1, 2023 | December 26, 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, 2023 | December 26, 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 |

23

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 Millions of Dollars | Percent of Cost of Goods Sold | December 26, 2021 Millions of Dollars | Percent of Cost of 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 $7.8 million between the two periods. Both direct material costs and labor and overhead costs increased proportionately with the total cost of goods sold increase quarter-to-quarter, resulting in only minor changes in their respective percentage of cost of goods sold between quarters. The increase in direct material costs of $4.8 million between quarters was due to the continued trend of higher costs for raw material and purchased components in the current year quarter as compared to the prior year quarter.

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 a January 1, 2022 government mandated minimum wage increase.
- The U.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 to U.S. dollar exchange rate between quarterly periods. The average U.S. dollar / Mexican peso exchange rate decreased to approximately 19.57 pesos to the dollar in the current year quarter from approximately 20.89 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 our Mexico facilities resulted in reduced labor and benefit costs between quarterly periods of approximately $500,000.

|  | Three Months Ended January 1, 2023 | December 26, 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 $7.5 million as compared to the prior year quarter driven by the aforementioned inflationary pressures on direct material and labor and overhead costs as well as by the strengthening of the Mexican peso against the U.S. dollar. The resulting decrease in gross profit as a percentage of net sales was 6.7 percentage points from the prior year quarter to the current year quarter.

Engineering, selling and administrative expenses in the current year quarter and prior year quarter were as follows:

|  | Three Months Ended January 1, 2023 | December 26, 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 $4.7 million in the current year quarter compared to income from operations of $3.6 million in the prior year quarter due a reduction in gross profit margin dollars and higher engineering, selling and administrative expenses between quarters, all as discussed above.

The equity earnings of joint ventures was $588,000 in the current year quarter compared to $615,000 in the prior year quarter. The slightly lower equity earnings between quarters was primarily due to higher engineering spending in China associated with future programs. We currently believe a presence in the China market is a key component of our global strategy. We anticipate that it will contribute to our overall long-term market and financial strength as the China market continues to expand and as it seeks to rebound from the ongoing impacts of the COVID-19 pandemic and resulting supply chain shortages of critical electronic component parts. Due to our limited amount of business in both India and Brazil as well as the impact of COVID-19 and the global semiconductor chip shortage described above, our VAST LLC joint venture in India continues to have break-even operating results and our VAST LLC joint venture in Brazil continues to report losses.

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, 2023 | December 26, 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 January 1, 2023 and December 26, 2021, respectively. The increased effective tax rate in the current year period was due to the impact of available R&D and foreign tax credits on projected pre-tax book losses for the fiscal year. The prior year period effective tax rate was reduced due to an increase in our foreign tax credits in the prior year period as compared to the current year period. Our effective tax rate differs from the statutory tax rate due to the application of the Global Intangible Low Taxed Income (GILTI) tax provisions, our available R&D tax credit and the non-controlling interest portion of our pre-tax income. The non-controlling interest portion impacts the effective tax rate as ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entities are taxed as partnerships for U.S. tax purposes.

#### Six months ended January 1, 2023 compared to the six months ended December 26, 2021

|  | Six Months Ended January 1, 2023 | December 26, 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, 2023 | December 26, 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 Millions of Dollars | Percent of Cost of Goods Sold | December 26, 2021 Millions of Dollars | Percent of Cost of 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 $6.8 million between periods. The variable portion of labor and overhead costs increased in the current year period commensurate with the production volume increase required to support the increased sales volumes compared to prior year period. However, this impact was partially offset by production efficiencies stemming from controlled headcount and overtime costs at our Milwaukee and Mexico facilities in the current year period. Labor and overhead costs were further impacted by the following:

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 a January 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.
- The U.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 to U.S. dollar exchange rate between year-to-date periods. The average U.S. dollar / Mexican peso exchange rate decreased to approximately 19.88 pesos to the dollar in the current year period from approximately 20.44 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 our Milwaukee represented hourly workers upon the ratification of a new four-year labor contract, which contract is effective through November 1, 2025.

|  | Six Months Ended January 1, 2023 | December 26, 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 $7.6 million as compared to the prior year period driven by the aforementioned inflationary pressures on direct material and labor and overhead costs as well as by the strengthening of the Mexican peso against the U.S. dollar. The resulting decrease in gross profit as a percentage of net sales was 4.4 percentage points from the prior year period to the current year period.

Engineering, selling and administrative expenses in the current year period and prior year period were as follows:

|  | Six Months Ended January 1, 2023 | December 26, 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 ADAC-STRATTEC LLC door handle and exterior trim products, and increased salary and recruiting costs. These expenses decreased as a percentage of net sales due to the increase in sales between periods as previously discussed.

Loss from operations was $4.9 million in the current year period compared to income from operations of $4.1 million in the prior year period due to the aforementioned reduction in gross profit margin dollars and an increase in engineering, selling and administrative expenses between periods.

The equity earnings of joint ventures was $1.1 million in the current year period compared to $364,000 in the prior year period. Improved profitability from our VAST LLC joint venture resulted from increased net sales and increased profitability in VAST China’s operations between periods. VAST China’s sales and profitability improvement in the current year period reflected an improved semiconductor chip availability environment compared with that of the prior year period. We currently believe a presence in the China market is a key component of our global strategy. We anticipate that it will contribute to our overall long-term market and financial strength as the China market continues to expand and as it seeks to rebound from the ongoing impacts of the COVID-19 pandemic and resulting supply chain shortages of critical electronic component parts. Due to our limited amount of business in both India and Brazil as well as the impact of COVID-19 and the global semiconductor chip shortage described above, our VAST LLC joint venture in India continues to have break-even operating results and our VAST LLC joint venture in Brazil continues to report losses.

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, 2023 | December 26, 2021 |
| --- | ---: | ---: |
| Foreign Currency Transaction (Loss) Gain | $(585) | $243 |
| Unrealized Loss on Peso Forward Contracts | (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 January 1, 2023 and December 26, 2021, respectively. The increased effective tax rate in the current year period was due to the impact of available R&D and foreign tax credits on projected pre-tax book losses for the fiscal year. The prior year period effective tax rate was reduced due to an increase in our foreign tax credits in the prior year period as compared to the current year period. Our effective tax rate differs from the statutory tax rate due to the application of the Global Intangible Low Taxed Income (GILTI) tax provisions, our available R&D tax credit and the non-controlling interest portion of our pre-tax income. The non-controlling interest portion impacts the effective tax rate as ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entities are taxed as partnerships for U.S. tax purposes.

### Liquidity and Capital Resources

### Working Capital (in millions)

|  | January 1, 2023 | July 3, 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 Securities and Exchange Commission, all of our major customers are making payments on their outstanding accounts receivable in accordance with the payment terms included on their purchase orders. A summary of our outstanding receivable balances from our major customers as of January 1, 2023 was as follows (in millions):

|  |  |
| --- | ---: |
| General Motors Company | $22.1 |
| Stellantis | $9.9 |
| Ford Motor Company | $12.8 |

28

### Cash Balances in Mexico

We earn a portion of our operating income in Mexico. As of January 1, 2023, $1.8 million of our $13.6 million cash and cash equivalents balance was held in Mexico. These funds are available for repatriation as deemed necessary.

### Cash Flow Analysis (in millions)

| Cash Flows from (in millions): | Six Months Ended January 1, 2023 | December 26, 2021 |
| --- | ---: | ---: |
| Operating Activities | $8.7 | $— |
| Investing Activities | $(9.6) | $(5.4) |
| Financing Activities | $5.5 | $5.0 |

The improvement in cash provided by operating activities between periods was due changes in our working capital requirements between periods, which impact was partially offset by reduced profitability in the current year period as compared to the prior year period. Working capital changes between periods were comprised of the following items (in millions):

|  | Increase (Decrease) in Working Capital Requirements Six Months Ended January 1, 2023 | December 26, 2021 | Change |
| --- | ---: | ---: | ---: |
| Accounts Receivable | $(2.7) | $2.6 | $(5.3) |
| Inventory | $(12.6) | $2.4 | $(15.0) |
| Other Assets | $11.2 | $(1.4) | $12.6 |
| Accounts Payable and Accrued Liabilities | $2.3 | $10.9 | $(8.6) |

Set forth below is a summary of the items impacting the change in our working capital requirements between year to date periods:

- Accounts receivable balances decreased in the current year period and increased in the prior year period. The current year period decrease was due to reduced sales during December 2022. The prior year period increase was the result of an increase in outstanding billings for customer owned tooling at December 2021.
- The change in inventory levels reflected a decrease in inventory balances during the current year period and an increase in inventory balances during the prior year period. The current year period decrease was due to a reduction in inventory balances to align with historical customer production patterns. The prior year period increase was due to an inventory build-up while our OEM customers experienced reduced production schedules due to certain part shortages, including semiconductor chips.
- The change in other assets includes an increase in balances during the current year period and a decrease in balances during the prior year period. The current year period increase is due to an increase in customer tooling balances and an increase in value added tax recoverable balances related to our operations in Mexico. Customer tooling balance changes result from the timing of tooling development spending required to meet customer production requirements and the timing of related customer billings for tooling cost reimbursement. Value added tax returns are filed and are pending settlement. The prior year decrease in other asset balances was the result of the receipt of a $3.2 million Federal tax refund.
- The change working capital requirements due to accounts payable and accrued liability balances was the result of a decrease in accounts payable and accrued liability balances in the prior year period. The prior year period decrease resulted from the payment of fiscal 2021 accrued bonuses during August 2021, which payment totaled $6.6 million, and a decrease in accounts payable balances during the prior year period. The prior year period decrease in accounts payable balances reflected decreased purchases as of the end of December 2021 in conjunction with the management of our inventory balances. Accounts payable balances for each quarter reflected the timing of purchases and payments with our vendors based on normal, established payment terms.

Net cash used in investing activities included capital expenditures made in support of requirements for new product programs and the upgrade and replacement of existing equipment of $9.5 million during the current year period and $5.4 million during the prior year period. Net cash used in investing activities in the current year period also included an investment in our VAST LLC joint venture of $104,000. The investment was made for the purpose of funding general expenses for Sistema Accesso Veicular Ltda, our Brazilian joint venture.

Net cash provided by financing activities during the current year period of $5.5 million included increased borrowings under our credit facilities of $9.0 million and $146,000 received for the exercise of stock options under our stock incentive plan and purchases under our employee stock purchase plan, partially offset by $3.0 million of repayments of borrowings under our credit facilities and $600,000 of dividend payments to non-controlling interests in our subsidiaries. Net cash provided by financing activities during the prior year period of $5.0 million included increased borrowings under our credit facilities of $8.0 million and $639,000 received for the exercise of stock options under our stock incentive plan and purchases under our employee stock purchase plan, partially offset by $3.0 million of repayments of borrowings under our credit facilities and $600,000 of dividend payments to non-controlling interests in our subsidiaries.

### VAST LLC Cash Requirements

We currently anticipate that VAST China has adequate debt facilities in place over the remainder of our 2023 fiscal year to cover the future operating and capital requirements of its business. During the six-month period ended January 1, 2023, capital contributions totaling $312,000 were made to VAST LLC for purposes of funding operations in Brazil for the remainder of 2023 fiscal year. STRATTEC's portion of the capital contributions totaled $104,000. During the six month period ended December 26, 2021, no capital contributions were made to VAST LLC by any of the members. During the six months ended January 1, 2023 and December 26, 2021, VAST LLC made no capital contributions to Minda-VAST Access Systems. We currently anticipate no required future capital contributions to Minda-VAST Access Systems over the remainder of our 2023 fiscal year.

### Future Capital Expenditures

We anticipate total capital expenditures will be approximately $15.0 million to $17.0 million in fiscal 2023, of which $9.5 million has been made through January 1, 2023, in support of requirements for new product programs and the upgrade and replacement of existing equipment.

### Stock Repurchase Program

Our Board of Directors has authorized a stock repurchase program to buy back outstanding shares of our common stock. Shares authorized for buy back under the program totaled 3,839,395 at January 1, 2023. A total of 3,655,322 shares have been repurchased over the life of the program through January 1, 2023, at a cost of approximately $136.4 million. No shares were repurchased during the six month periods ended January 1, 2023 or December 26, 2021. Additional repurchases may occur from time to time and are expected to continue to be funded by cash flow from operations and current cash balances. Based on the current economic environment and our preference to conserve cash for other uses, we anticipate modest or no stock repurchase activity for the remainder of fiscal year 2023.

### Credit Facilities

STRATTEC has a $40 million secured revolving credit facility (the “STRATTEC Credit Facility”) with BMO Harris Bank N.A. ADAC-STRATTEC LLC has a $25 million secured revolving credit facility (the “ADAC-STRATTEC Credit Facility”) with BMO Harris Bank N.A., which is guaranteed by STRATTEC. The credit facilities both expire August 1, 2024. Borrowings under either credit facility are secured by our U.S. cash balances, accounts receivable, inventory, and fixed assets located in the U.S. Interest on borrowings under both credit facilities were at varying rates based, at our option, on the LIBOR plus 1.25 percent or the bank’s prime rate. Both credit facilities contain a restrictive financial covenant that requires the applicable borrower to maintain a minimum net worth level. The ADAC-STRATTEC Credit Facility includes an additional restrictive financial covenant that requires the maintenance of a minimum fixed charge coverage ratio. Subsequent to January 1, 2023, a waiver was received from BMO Harris Bank N.A. related to non-compliance with the ADAC-STRATTEC Credit Facility fixed charge coverage ratio as of January 1, 2023. Furthermore, subsequent to January 1, 2023, the ADAC-STRATTEC Credit Facility was amended to modify the calculation of the fixed charge coverage ratio and the minimum level of net worth for all future periods such that it is probable ADAC-STRATTEC will comply with the amended covenant in future periods. As of January 1, 2023, we were in compliance with all other financial covenants required by these credit facilities. Outstanding borrowings under the STRATTEC Credit Facility totaled $4 million at January 1, 2023. There were no outstanding borrowings under the STRATTEC Credit Facility at July 3, 2022. The average outstanding borrowings and weighted average interest rate on the STRATTEC Credit Facility loans were approximately $3.1 million and 4.4 percent, respectively, during the six months ended January 1, 2023. Outstanding borrowings under the ADAC-STRATTEC Credit Facility totaled $13 million at January 1, 2023 and $11 million at July 3, 2022. The average outstanding borrowings and weighted average interest rate on the ADAC-STRATTEC Credit Facility loans were approximately $11.9 million and 4.3 percent, respectively, during the six months ended January 1, 2023.

### Joint Ventures and Majority Owned Subsidiaries

Refer to the discussion of Investment in Joint Ventures and Majority Owned Subsidiaries and discussion of Equity Earnings (Loss) of Joint Ventures included elsewhere in Notes to Condensed Consolidated Financial Statements within this Form 10-Q.

## Controls and procedures

As filed, 2,199 characters.

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act, are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act are accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures were effective at reaching a level of reasonable assurance. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures. We have designed our disclosure controls and procedures to reach a level of reasonable assurance of achieving the desired control objectives.

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II

Other Information

## Risk factors

As filed, 157 characters.

There have been no material changes to the risk factors disclosed in our Form 10-K as filed with the Securities and Exchange Commission on September 8, 2022.

Filed Feb 9, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-002234. Last ingested by Listed: Nov 6, 2026, 02:27 ET. No prices; not investment advice.