# Strattec Security Corp: Form 10-Q for the period ended Mar 27, 2022

- Company: [Strattec Security Corp](/companies/strt.md) (CIK 933034)
- Form: 10-Q
- Filed: 2022-05-05
- Accepted by EDGAR: May 5, 2022, 06:02 ET
- Period: 2022-03-27
- Accession: 0001564590-22-017984
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/933034/000156459022017984/strt-10q_20220327.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/933034/000156459022017984/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-03-27.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-12-27 to 2022-03-27 | $115.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2021-06-28 to 2022-03-27 | $329.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2021-12-27 to 2022-03-27 | $101.3m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2021-06-28 to 2022-03-27 | $287.1m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2021-12-27 to 2022-03-27 | $14.6m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2021-06-28 to 2022-03-27 | $42.1m | us-gaap:GrossProfit |
| Operating income | 3 months, 2021-12-27 to 2022-03-27 | $3.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2021-06-28 to 2022-03-27 | $7.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2021-12-27 to 2022-03-27 | $54.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2021-06-28 to 2022-03-27 | $159.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2021-12-27 to 2022-03-27 | $50.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2021-06-28 to 2022-03-27 | $342.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2021-12-27 to 2022-03-27 | $3.1m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2021-06-28 to 2022-03-27 | $6.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-12-27 to 2022-03-27 | $0.80 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2021-06-28 to 2022-03-27 | $1.70 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2021-12-27 to 2022-03-27 | $0.81 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2021-06-28 to 2022-03-27 | $1.72 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2021-12-27 to 2022-03-27 | 3,916,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2021-06-28 to 2022-03-27 | 3,906,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2021-06-28 to 2022-03-27 | $11.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2021-06-28 to 2022-03-27 | $9.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2022-03-27 | $16.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-03-27 | $189.7m | us-gaap:AssetsCurrent |
| Total assets | at 2022-03-27 | $321.2m | us-gaap:Assets |
| Current liabilities | at 2022-03-27 | $80.0m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2022-03-27 | $189.8m | us-gaap:StockholdersEquity |
| Shares outstanding | at 2022-03-28 | 3,961,104 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 41,627 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 2021 Form 10-K, which was filed with the Securities and Exchange Commission on September 2, 2021. 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 6 of this Form 10-Q.

During the fourth quarter of our fiscal year ended June 2020, we responded to the COVID-19 pandemic and the temporary OEM customer plant shutdowns by implementing a permanent reduction in our salaried workforce, instituting temporary layoffs, reducing working hours, allowing (and in some cases encouraging) remote working from home, temporarily suspending our quarterly cash dividend, delaying capital expenditures and eliminating nonessential operating costs, all to preserve cash flow. In addition, during the fourth quarter of fiscal year 2020, we produced additional finished goods inventory in anticipation of our OEM customers pipeline fill to their dealers once vehicle production began starting up in June 2020.

During the nine month period ended March 28, 2021, the Company experienced a strong sales recovery as our customers ramped up vehicle production as they restarted their assembly plant operations following the temporary plant shutdowns from COVID in order to replenish low inventory levels at the dealers. However, during the fourth quarter of fiscal year 2021, we were impacted by supply chain shortages 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. These part shortages along with logistical constraints at the port of entry continued into our fiscal 2022 first, second and third quarters and as of the date of filing of this report, despite strong demand for vehicles, continue to impact customer production schedules and our ability to meet customer sales demand and ultimately continue to cause fluctuations in our and our customers’ production order levels.

Additionally, during the nine months ended March 27, 2022, certain of our customers temporarily closed several of their assembly plants or reduced their production schedules in North America due to these continuing global supply chain shortages of critical electronic component parts, including semiconductor chips, which could continue to disrupt customer production levels, higher supply chain costs and our sales volumes for several more quarters.

The sales outlook over the next few quarters may be strong as we expect our customers to seek to restock dealer inventories based on their consumers’ demand, which are in short supply. However, this expected strong sales demand going forward continues to be adversely impacted by the supply chain part shortages referenced above and by ongoing fluctuations in the severity of the COVID-19 pandemic, including any potential worsening thereof, on the North American and overall global economy and its continuing impact on the supply chain shortages of critical electronic component parts seen across the world.

### Analysis of Results of Operations

#### Three months ended March 27, 2022 compared to the three months ended March 28, 2021

|  | Three Months Ended March 27, 2022 | March 28, 2021 |
| --- | ---: | ---: |
| Net Sales (in millions) | $115.9 | $121.6 |

20

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 March 27, 2022 | March 28, 2021 |
| --- | ---: | ---: |
| General Motors Company | $34.7 | $34.5 |
| Stellantis (Formerly Fiat Chrysler Automobiles) | 23.0 | 21.7 |
| Ford Motor Company | 19.2 | 21.7 |
| Commercial and Other OEM Customers | 16.5 | 17.2 |
| Tier 1 Customers | 15.3 | 17.3 |
| Hyundai / Kia | 7.2 | 9.2 |
|  | $115.9 | $121.6 |

Current year quarter sales continued to be adversely impacted by the global semiconductor chip shortage that temporarily closed several of our customers’ assembly plants, caused production schedule reductions for all of our customers and generally reduced our net sales to all customer groups (other than General Motors Company and Stellantis as noted below) in the current year quarter as compared to the prior year quarter. The following items further impacted sales to the noted customer groups between quarters:

- Sales to General Motors Company in the current year quarter increased in comparison to the prior year quarter due to higher door handle product sales. The favorable impact of the door handle sales more than offset the volume reduction in the current year quarter resulting from the global semiconductor chip shortage.
- Sales to Stellantis in the current year quarter increased in comparison to the prior year quarter due to higher production volumes on Chrysler Pacifica power sliding doors and for several lockset product platforms. The favorable impact of this higher product content more than offset the volume reduction in the current year quarter resulting from the global semiconductor chip shortage.
- Ford Motor Company sales were negatively impacted in the current year quarter by lower production volumes on the F-150 pickup trucks.
- Commercial and Other OEM Customers, along with Tier 1 Customers, primarily represent purchasers of vehicle access control products, such as latches, key fobs, driver controls, steering column locks and door handles, that we have developed in recent years to complement our historic core business of locks and keys. Sales to Commercial and Other OEM Customers were negatively impacted in the current year quarter by a reduction in sales related to door handle products sold to Volkswagen. Sales to Tier 1 Customers in the current year quarter were negatively impacted in the current year quarter by lower volumes on our driver control steering column lock products.
- Hyundai / Kia sales were negatively impacted in the current year quarter due to lower levels of production on their Kia Carnival, formerly the Kia Sedona and Hyundai Starex minivans, for which we supply primarily power sliding door components.

|  | Three Months Ended March 27, 2022 Millions of Dollars | Percent of Cost of Goods Sold | March 28, 2021 Millions of Dollars | Percent of Cost of Goods Sold |
| --- | ---: | ---: | ---: | ---: |
| Direct Material Costs | $67.6 | 66.7% | $66.5 | 64.6% |
| Labor and Overhead Costs | 33.7 | 33.3% | 36.5 | 35.4% |
| Total Cost of Goods Sold | $101.3 |  | $103.0 |  |

The direct material cost increase between quarters was due to higher costs for raw material and purchased components in the current year quarter as compared to the prior year quarter. The impact of these higher costs was partially offset by reduced sales volumes between quarters, as discussed above. Overall, the raw material and purchased component cost increases caused an increase in material costs between quarters while our sales decreased between quarters, as discussed above. Our labor and overhead cost decrease between quarters, as discussed below, outpaced our reduced sales dollars between quarters. This resulted in an increase in our direct material costs as a percentage of cost of goods sold between quarters and a decrease in our labor and overhead costs as a percentage of cost of goods sold between quarters.

Labor and overhead costs decreased $2.8 million between quarters. Due to lower levels of production at our facilities in the current year quarter as compared to the prior year quarter, we experienced less favorable absorption of our fixed overhead costs in the current year quarter as compared to the prior year quarter. This impact was more than offset by a reduction in the variable portion of our labor and overhead costs resulting from the production volume reduction between quarters and production efficiencies at our Milwaukee and Mexico facilities, which reduced labor and overhead costs in the current year quarter as compared to the prior year quarter. Labor and overhead costs were further impacted by the following:

Cost Increase:

- Mexico wages and benefits increased $1.4 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.

Cost Decrease:

- Expense provisions under our incentive bonus plan impacting cost of goods sold decreased $1.2 million between periods.

|  | Three Months Ended March 27, 2022 | March 28, 2021 |
| --- | ---: | ---: |
| Gross Profit (in millions) | $14.6 | $18.7 |
| Gross Profit as a percentage of net sales | 12.6% | 15.3% |

Gross profit dollars decreased in the current year quarter as compared to the prior year quarter as a result of the reduction in sales between periods, which was partially offset by a decrease in cost of goods sold between periods, as discussed above. Gross profit as a percentage of net sales decreased between periods. The decrease was the result of the reduced sales, higher costs for direct materials and purchased parts, increases in Mexico wages resulting from a January 1, 2022 government mandated minimum wage increase and less favorable absorption of our fixed overhead costs, which unfavorable impacts were partially offset by a reduction in the variable portion of our labor and overhead costs, a reduction in provisions for incentive bonuses and production efficiencies at our Milwaukee and Mexico facilities, which reduced labor and overhead costs, all as discussed above.

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

|  | Three Months Ended March 27, 2022 | March 28, 2021 |
| --- | ---: | ---: |
| Expenses (in millions) | $11.3 | $11.9 |
| Expenses as a percentage of net sales | 9.7% | 9.8% |

Engineering, selling and administrative expenses in the current year quarter decreased in comparison to the prior year quarter due to the prior year quarter including approximately $690,000 in expense provisions for the accrual of bonuses under our incentive bonus plan. No provisions for the accrual of bonuses were made during the current year quarter.

Income from operations was $3.4 million in the current year quarter compared to $6.7 million in the prior year quarter due to a decrease in gross profit margin dollars, which was partially offset by a decrease in engineering, selling and administrative expenses between quarters, all as discussed above.

The equity earnings of joint ventures was $577,000 in the current year quarter compared to equity loss of joint ventures of $56,000 in the prior year quarter. Improved profitability from our VAST LLC joint venture resulted from increased net sales and increased profitability in VAST China’s operations between quarters. VAST China’s profitability in the prior year quarter was negatively impacted by supply chain issues and extended OEM customer plant shutdowns associated with the COVID-19 pandemic in the prior year quarter. Additionally, during the current quarter, VAST China experienced a fire at their Taicang plant. As a result, certain door handle and painting operations were subsequently transferred to their new Jingzhou facility and another supplier. The transfer of production negatively impacted VAST China’s profitability for the quarter ended March 27, 2022. 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 March 27, 2022 | March 28, 2021 |
| --- | ---: | ---: |
| Foreign Currency Transaction (Loss) Gain | $(319) | $386 |
| Unrealized Gain on Peso Forward Contracts | 724 | 32 |
| Realized Gain on Peso Forward Contracts, net | 65 | 11 |
| Pension and Postretirement Plans Cost | (120) | (106) |
| Rabbi Trust (Loss) Gain | (130) | 154 |
| Other | 65 | (22) |
|  | $285 | $455 |

Set forth below is a discussion of the items comprising certain of the components of our Other Income (Expense), net:

- Foreign currency transaction gains and losses 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 2022 and 2021 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 March 27, 2022 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 1.2% and 16.3% for the three months ended March 27, 2022 and March 28, 2021, respectively. The reduction in our effective tax rate in the current quarter as compared to the prior year quarter is due to adjustments we made to the amounts of our fiscal 2021 estimated foreign tax credits and estimated tax impacts associated with our investment in VAST LLC. These true-up adjustments resulted from the filing of our US income tax returns during the quarter ended March 27, 2022 and were attributable to actual results included in non-US income tax returns, which are filed on a calendar year basis, and which differ from estimates included in our fiscal 2021 tax provision. The adjustment amounts recorded during the three month period ended March 27, 2022 totaled $740,000. Our effective tax rate for the three month period ended March 27, 2022 excluding these adjustments was 18.9%. Additionally, effective July 20, 2020, the U.S Treasury Department finalized and enacted previously proposed regulations regarding the Global Intangible Low Taxed Income (GILTI) tax provisions of the Tax Cuts and Jobs Act of 2017 (TCJA). Prior to this enactment, GILTI represented a significant U.S. income tax on our foreign earnings during our fiscal 2020. With the enactment of these final regulations, we became eligible for an exclusion from GILTI since we met the provisions for the GILTI High-Tax exception included in the final regulations. In addition, the enactment of these new regulations and our eligibility for the GILTI High-Tax exception was retroactive to the original enactment of the GILTI tax provision, which included our 2020 fiscal year. As a result, our effective tax rate differs from the statutory tax rate due to the application of the GILTI provisions, our available R&D tax credit and the non-controlling interest portion of our pre-tax income. The non-controlling interest impacts the effective tax rate as ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entities are taxed as partnerships for U.S. tax purposes.

#### Nine months ended March 27, 2022 compared to the nine months ended March 28, 2021

|  | Nine Months Ended March 27, 2022 | March 28, 2021 |
| --- | ---: | ---: |
| Net Sales (in millions) | $329.2 | $375.2 |

23

Net sales to each of our customers or customer groups in the current year period and prior year period were as follows (in millions):

|  | Nine Months Ended March 27, 2022 | March 28, 2021 |
| --- | ---: | ---: |
| General Motors Company | $91.6 | $111.3 |
| Stellantis (Formerly Fiat Chrysler Automobiles) | 62.7 | 69.9 |
| Ford Motor Company | 57.9 | 54.4 |
| Commercial and Other OEM Customers | 50.1 | 58.3 |
| Tier 1 Customers | 42.9 | 53.4 |
| Hyundai / Kia | 24.0 | 27.9 |
|  | $329.2 | $375.2 |

Current year to date period sales continued to be adversely impacted by the global semiconductor chip shortage that temporarily closed several of our customers’ assembly plants, caused production schedule reductions for all of our customers and reduced our net sales to all customer groups (other than Ford Motor Company as noted below) in the current year period as compared to the prior year period. The following items further impacted sales to the noted customer groups between periods:

- Sales to Ford Motor Company were positively impacted in the current year period due to higher product content, and in particular for the new power tailgate program on the F-150 pickup trucks. The favorable impact of this higher product content more than offset the volume reduction in the current year period resulting from the global semiconductor chip shortage.
- Commercial and Other OEM Customers, along with Tier 1 Customers, primarily represent purchasers of vehicle access control products, such as latches, key fobs, driver controls, steering column locks and door handles, that we have developed in recent years to complement our historic core business of locks and keys. Sales to Commercial and Other OEM Customers were negatively impacted in the current year period by a reduction in sales related to door handle products sold to Volkswagen. Sales to Tier 1 Customers in the current year period were negatively impacted by lower volumes on our driver control steering column lock products.
- Hyundai / Kia sales were negatively impacted in the current year period due to lower levels of production on their Kia Carnival, formerly the Kia Sedona and Hyundai Starex minivans, for which we supply primarily power sliding door components.

|  | Nine Months Ended March 27, 2022 Millions of Dollars | Percent of Cost of Goods Sold | March 28, 2021 Millions of Dollars | Percent of Cost of Goods Sold |
| --- | ---: | ---: | ---: | ---: |
| Direct Material Costs | $188.0 | 65.5% | $208.4 | 66.8% |
| Labor and Overhead Costs | 99.1 | 34.5% | 103.4 | 33.2% |
| Total Cost of Goods Sold | $287.1 |  | $311.8 |  |

The direct material cost decrease between year to date periods was due to reduced sales volumes between periods, as discussed above, which more than offset an increase in direct material costs in the current year period as compared to the prior year period resulting from higher raw material and purchased component costs. In the current year period as compared to the prior year period, our direct material costs decreased as a percent of cost of goods sold while our labor and overhead costs increased as a percent of cost of goods sold. This shift was due to our material costs varying with the sales volume reduction between periods while our labor and overhead cost reduction, as discussed below, did not keep pace with the sales reduction between periods.

Labor and overhead costs decreased between year to date periods. The variable portion of our labor and overhead costs decreased due to lower levels of production at our facilities in the current year period as compared to the prior year period and production efficiencies at our Milwaukee and Mexico facilities, which reduced labor and overhead costs in the current year period as compared to the prior year period. This impact was partially offset by less favorable absorption of our fixed overhead costs in the current year period as compared to the prior year period resulting from the production volume reduction. Labor and overhead costs were further impacted by the following:

Cost Increases:

- Mexico wages and benefits increased $3.6 million in the current year period as compared to the prior year period as a result of January 1, 2021 and January 1, 2022 government mandated minimum wage increases.
- The U.S. dollar value of our Mexican operations was negatively impacted by approximately $1.7 million 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 these periods. The average U.S. dollar / Mexican peso exchange rate decreased to approximately 20.44 pesos to the dollar in the current year period from approximately 21.17 pesos to the dollar in the prior year period.
- Current 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.

Cost Decreases:

- Expense provisions under our incentive bonus plan impacting cost of goods sold decreased $3.1 million between periods.
- The prior year period included a loss on disposal of fixed assets of $1.4 million comparted to a current year quarter loss of $153,000.

|  | Nine Months Ended March 27, 2022 | March 28, 2021 |
| --- | ---: | ---: |
| Gross Profit (in millions) | $42.1 | $63.4 |
| Gross Profit as a percentage of net sales | 12.8% | 16.9% |

Gross profit dollars decreased in the current year period as compared to the prior year period as a result of the reduction in sales between periods, which was partially offset by a decrease in cost of goods sold between periods, as discussed above. Gross profit as a percentage of net sales decreased between periods. The decrease was the result of reduced sales levels, higher costs for direct materials and purchased parts, an unfavorable Mexican peso to U.S. dollar exchange rate affecting our operations in Mexico, increases in Mexico wages resulting from January 1, 2021 and January 1, 2022 government mandated minimum wage increases, and less favorable absorption of our fixed overhead costs, which unfavorable impacts were partially offset during the current year period by a reduction in the variable portion of our labor and overhead costs, a reduction in provisions for incentive bonuses, a prior year loss on disposal of fixed assets and production efficiencies at our Milwaukee and Mexico facilities, which reduced labor and overhead costs, all as discussed above.

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

|  | Nine Months Ended March 27, 2022 | March 28, 2021 |
| --- | ---: | ---: |
| Expenses (in millions) | $34.7 | $33.5 |
| Expenses as a percentage of net sales | 10.5% | 8.9% |

Engineering, selling and administrative expenses in the current year period increased in comparison to the prior year period due to reduced costs during the prior year period. The prior year period included customer reimbursement of engineering development costs previously incurred in prior periods of $1.5 million, which reimbursement was agreed to with the customer during the prior year period. The prior year period also included temporary wage reductions for our salaried workforce, which we implemented to address the impacts of the COVID-19 pandemic on our operations. The impact of these prior year period cost reductions was partially offset by a reduction in the provision for bonus accruals between the current year period and the prior year period. The prior year period included approximately $2.2 million in expense provisions for the accrual of bonuses under our incentive bonus plan. No provisions for the accrual of bonuses were made during the current year period.

Income from operations was $7.4 million in the current year period compared to $29.9 million in the prior year period due to a decrease in gross profit margin dollars and an increase in engineering, selling and administrative expenses between periods, all as discussed above.

The equity earnings of joint ventures was $941,000 in the current year period compared to $1.8 million in the prior year period. Lower profitability from our VAST LLC joint venture resulted from reduced net sales and reduced profitability in our VAST China operation between periods. The reduced profitability in our VAST China operation stemmed from the current global semiconductor chip shortage described above. VAST China’s profitability in the current year period was also partially offset with continued startup losses related to their new plant in Jingzhou, China. Additionally, during the current quarter, VAST China experienced a fire at their Taicang plant. As a result, certain door handle and painting operations were subsequently transferred to their new Jingzhou facility and another supplier. The transfer of production negatively impacted VAST China’s profitability for the quarter ended March 27, 2022. 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):

|  | Nine Months Ended March 27, 2022 | March 28, 2021 |
| --- | ---: | ---: |
| Foreign Currency Transaction Loss | $(76) | $(1,926) |
| Unrealized Gain on Peso Forward Contracts | 500 | 512 |
| Realized Gain on Peso Forward Contracts, net | 200 | 87 |
| Pension and Postretirement Plans Cost | (360) | (314) |
| Rabbi Trust (Loss) Gain | (60) | 472 |
| Other | 116 | (2) |
|  | $320 | $(1,171) |

Set forth below is a discussion of the items comprising certain of the components of our Other Income (Expense), net:

- Foreign currency transaction gains and losses 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 2022 and 2021 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 March 27, 2022 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 4.0% and 15.6% for the nine months ended March 27, 2022 and March 28, 2021, respectively. The reduction in our effective tax rate in the current nine month period as compared to the prior year period is due to adjustments we made to the amount of our fiscal 2021 estimated foreign tax credits and estimated tax impacts associated with our investment in VAST LLC. These true-up adjustments resulted from the filing of our US income tax returns during the quarter ended March 27, 2022 and were attributable to actual results included in non-US income tax returns, which are filed on a calendar year basis, and which differ from estimates included in our fiscal 2021 tax provision. The adjustment amounts recorded during the nine month period ended March 27, 2022 totaled $1.0 million. Our effective tax rate for the nine month period ended March 27, 2022 excluding these adjustments was 15.7%. Additionally, effective July 20, 2020, the U.S Treasury Department finalized and enacted previously proposed regulations regarding the Global Intangible Low Taxed Income (GILTI) tax provisions of the Tax Cuts and Jobs Act of 2017 (TCJA). Prior to this enactment, GILTI represented a significant U.S. income tax on our foreign earnings during our fiscal 2020. With the enactment of these final regulations, we became eligible for an exclusion from GILTI since we met the provisions for the GILTI High-Tax exception included in the final regulations. In addition, the enactment of these new regulations and our eligibility for the GILTI High-Tax exception was retroactive to the original enactment of the GILTI tax provision, which included our 2020 fiscal year. As a result, we recorded an income tax benefit of $675,000 during the prior year period. Our effective tax rate differs from the statutory tax rate due to application of the GILTI provisions, our available R&D tax credit and the non-controlling interest portion of our pre-tax income. The non-controlling interest 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)

|  | March 27, 2022 | June 27, 2021 |
| --- | ---: | ---: |
| Current Assets | $189.7 | $174.9 |
| Current Liabilities | 80.0 | 77.6 |
| Working Capital | $109.7 | $97.3 |

26

### 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 March 27, 2022 was as follows (in millions):

|  |  |
| --- | ---: |
| General Motors Company | $23.2 |
| Stellantis (Formerly Fiat Chrysler Automobiles) | $15.2 |
| Ford Motor Company | $11.2 |

### Cash Balances in Mexico

We earn a portion of our operating income in Mexico. As of March 27, 2022, $2.3 million of our $16.5 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): | Nine Months Ended March 27, 2022 | March 28, 2021 |
| --- | ---: | ---: |
| Operating Activities | $11.8 | $25.4 |
| Investing Activities | $(9.5) | $(6.5) |
| Financing Activities | $(0.3) | $(18.9) |

The decrease in cash provided by operating activities between periods was due to a reduction in net income between periods. Additionally, our net working capital requirements decreased $5.8 million between periods and were comprised of the following items (in millions):

|  | Increase (Decrease) in Working Capital Requirements Nine Months Ended March 27, 2022 | March 28, 2021 | Change |
| --- | ---: | ---: | ---: |
| Accounts Receivable | $6.6 | $39.2 | $(32.6) |
| Inventory | $2.5 | $3.9 | $(1.4) |
| Other Assets | $4.4 | $1.1 | $3.3 |
| Accounts Payable and Accrued Liabilities | $(2.3) | $(27.2) | $24.9 |

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

- The increase in accounts receivable balances during the current year to date period is the result of an increase in sales during the last two months of the quarter ended March 27, 2022 as compared to the last two months of the quarter ended June 27, 2021. The increase in accounts receivable balances during the prior year to date period reflected reduced sales levels from the end of March 2020 through June 2020, which reduction was primarily due to our OEM customers reducing production schedules and closing their assembly plants due to the COVID-19 outbreak.
- Changes in inventory balances remained relatively consistent between year to date periods.
- The change in other assets in both the current year to date period and the prior year to date period is the result of the change in customer tooling balances. 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.
- The change in accounts payable and accrued liability balances was the result of an increase in account payable balances during the current year to date period, which was mostly offset by the payment of fiscal 2021 accrued bonuses, and an increase in accounts payable balances during the prior year to date period. June 2021 bonus accruals at June 2021 paid in August 2021 totaled $6.6 million. The current year period increase in accounts payable balances reflected increased purchases as of the end of our March 2022 quarter in conjunction with the management of our inventory balances. The prior year period increase in accounts payable balances resulted from accounts payable balances being significantly reduced as of June 2020 due to the impact of COVID-19 and lower production levels stemming from that impact. Accounts payable balances increased during our fiscal 2021 first quarter as our business ramped-up to support increased OEM production schedules as customer plants reopened. Accounts payable balances for each period also 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 $9.4 million during the current year to date period and $6.4 million during the prior year to date period. Net cash used in investing activities also included an investment in our VAST LLC joint venture of $75,000 in the current year to date period and $100,000 in the prior year to date period. The investments were made for the purpose of funding general expenses for Sistema de Acesso Veicular Ltda, our Brazilian joint venture.

Net cash used in financing activities during the current year to date period of $316,000 included borrowings under our credit facilities of $11.0 million and $884,000 received for the exercise of stock options under our stock incentive plan and purchases under our employee stock purchase plan, partially offset by $11.0 million of repayments of borrowings under our credit facilities and $1.2 million of dividend payments to non-controlling interests in our subsidiaries. Net cash used in financing activities of $18.9 million during the prior year to date period included repayments of borrowings under credit facilities of $19.0 million and $490,000 of dividend payments to non-controlling interests in our subsidiaries, partially offset by $585,000 received for purchases under our employee stock purchase plan.

### VAST LLC Cash Requirements

We currently anticipate that VAST China has adequate debt facilities in place over the remainder of the 2022 fiscal year to cover the future operating and capital requirements of its business. During the nine months ended March 27, 2022, capital contributions totaling $225,000 were made to VAST LLC for purposes of funding operations in Brazil. STRATTEC’s portion of the capital contribution totaled $75,000. During the nine months ended March 28, 2021, capital contributions totaling $300,000 were made to VAST LLC for purposes of funding operations in Brazil. STRATTEC’s portion of the capital contribution totaled $100,000. Due to economic conditions in Brazil, we anticipate Sistema de Acesso Veicular Ltda may require an additional capital contribution of approximately $225,000 collectively by all VAST LLC partners to fund operations during our fiscal year 2022. STRATTEC’s portion of these capital contributions is anticipated to be $75,000. During the nine months ended March 27, 2022 and March 28, 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.

### Future Capital Expenditures

We anticipate capital expenditures will be approximately $12 million to $13 million in total in fiscal 2022, of which $9.4 million has been made through March 27, 2022, 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 March 27, 2022. A total of 3,655,322 shares have been repurchased over the life of the program through March 27, 2022, at a cost of approximately $136.4 million. No shares were repurchased during the nine month periods ended March 27, 2022 or March 28, 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 2022.

### 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 the STRATTEC Credit Facility through May 31, 2021 was at varying rates based, at our option, on the London Interbank Offering Rate (“LIBOR”) plus 1.0 percent or the bank’s prime rate. Interest on borrowings under the ADAC-STRATTEC Credit Facility through May 31, 2021 was at varying rates based, at our option, on LIBOR plus 1.25 percent or the bank’s prime rate. Effective June 1, 2021 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. As of March 27, 2022, we were in compliance with all financial covenants required by these credit facilities. There were no outstanding borrowings under the STRATTEC Credit Facility at March 27, 2022 and at June 27, 2021. The average outstanding borrowings and weighted average interest rate on the STRATTEC Credit Facility loans were approximately $421,000 and 1.9 percent, respectively, during the nine months ended March 27, 2022. Outstanding borrowings under the ADAC-STRATTEC Credit Facility totaled $12 million at both March 27, 2022 and June 27, 2021. The average outstanding borrowings and weighted average interest rate on the ADAC-STRATTEC Credit Facility loans were approximately $14.8 million and 1.4 percent, respectively, during the nine months ended March 27, 2022.

### Inflation and Other Changes in Prices

Over the past several years, we have been impacted by rising health care costs, which have increased our cost of associate medical coverage. A portion of these increases have been offset by plan design changes and associate wellness initiatives. We have also been impacted by increases in the market price of zinc, steel, brass, nickel silver, and aluminum as well as inflation and wage increases in Mexico, which impacts the U. S. dollar costs of our Mexican operations. We have negotiated raw material price adjustment clauses with certain, but not all, of our customers to offset some of the market price fluctuations in the cost of zinc. We own and operate manufacturing operations in Mexico. As a result, a portion of our manufacturing costs are incurred in Mexican pesos. We have from time to time entered into contracts with Bank of Montreal that provide for bi-weekly and monthly Mexican peso currency forward contracts for a portion of our estimated peso denominated operating costs to minimize our earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. Refer to discussion under Notes to Condensed Consolidated Financial Statements: Derivative Instruments included elsewhere herein.

### 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 2, 2021.

Filed May 5, 2022.
Source: SEC EDGAR, the filing index for accession 0001564590-22-017984. Last ingested by Listed: Nov 6, 2026, 02:27 ET. No prices; not investment advice.