UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 27, 2022
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-25150
STRATTEC SECURITY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Wisconsin
39-1804239
(State of Incorporation)
(I.R.S. Employer Identification No.)
3333 West Good Hope Road, Milwaukee, WI 53209
(Address of Principal Executive Offices)
(414) 247-3333
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of exchange on which registered
Common stock, $.01 par value
STRT
The Nasdaq Global Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer
Accelerated filer
Non-accelerated filer
Smaller Reporting Company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
Common stock, par value $0.01 per share: 3,961,104 shares outstanding as of March 28, 2022 (which number includes all restricted shares previously awarded that have not vested as of such date).
March 27, 2022
INDEX
Page
Part I - FINANCIAL INFORMATION
Item 1
Financial Statements
Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)
3
Condensed Consolidated Balance Sheets (Unaudited)
4
Condensed Consolidated Statements of Cash Flows (Unaudited)
5
Notes to Condensed Consolidated Financial Statements (Unaudited)
6-19
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
20-29
Item 3
Quantitative and Qualitative Disclosures About Market Risk
30
Item 4
Controls and Procedures
Part II - OTHER INFORMATION
Legal Proceedings
31
Item 1A
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5
Other Information
Item 6
Exhibits
32
PROSPECTIVE INFORMATION
A number of the matters and subject areas discussed in this Form 10-Q contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as “anticipate,” “believe,” “could,” “expect,” “intend,” “may,” “planned,” “potential,” “should,” “will,” and “would,” or the negative of these terms or words of similar meaning. These statements include expected future financial results, product offerings, global expansion, liquidity needs, financing ability, planned capital expenditures, management’s or the Company’s expectations and beliefs, and similar matters discussed in this Form 10-Q. The discussion of such matters and subject areas contained herein is qualified by the inherent risks and uncertainties surrounding future expectations generally, and also may materially differ from the Company’s actual future experience.
The Company’s business, operations and financial performance are subject to certain risks and uncertainties, which could result in material differences in actual results from the Company’s current expectations. These risks and uncertainties include, but are not limited to, general economic conditions, in particular relating to the automotive industry, consumer demand for the Company’s and its customers’ products, competitive and technological developments, customer purchasing actions, changes in warranty provisions and customers’ product recall policies, work stoppages at the Company or at the location of its key customers as a result of labor disputes, foreign currency fluctuations, uncertainties stemming from U.S. trade policies, tariffs and reactions to same from foreign countries, changes in the costs of operations, changes in the volume and scope of product returns, customer cost reimbursement actions, and warranty claims, adverse business and operational issues resulting from semiconductor chip supply shortages and the Coronavirus (COVID-19) pandemic, including matters adversely impacting the timing, availability and cost of material component parts and raw materials for the production of our products and the products of our customers, or the continuation or worsening thereof, and other matters described in the section titled “Risk Factors” in the Company’s Form 10-K report filed on September 2, 2021 with the Securities and Exchange Commission for the year ended June 27, 2021.
Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this Form 10-Q and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances occurring after the date of this Form 10-Q.
Item 1 Financial Statements
STRATTEC SECURITY CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income and Comprehensive Income
(In Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended
Nine Months Ended
March 27,
2022
March 28,
2021
Net sales
$
115,943
121,644
329,192
375,238
Cost of goods sold
101,305
102,990
287,072
311,832
Gross profit
14,638
18,654
42,120
63,406
Engineering, selling and administrative expenses
11,261
11,927
34,683
33,543
Income from operations
3,377
6,727
7,437
29,863
Equity earnings (loss) of joint ventures
577
(56
)
941
1,844
Interest expense
(54
(63
(159
(259
Other income (expense), net
285
455
320
(1,171
Income before provision for
income taxes and non-controlling interest
4,185
7,063
8,539
30,277
Provision for income taxes
50
1,153
342
4,721
Net income
4,135
5,910
8,197
25,556
Net income attributable to non-controlling
Interest
989
1,425
1,556
5,950
Net income attributable to STRATTEC
SECURITY CORPORATION
3,146
4,485
6,641
19,606
Comprehensive income:
Pension and postretirement plans, net of tax
79
69
238
208
Currency translation adjustments
685
(697
(571
5,419
Other comprehensive income (loss), net of tax
764
(628
(333
5,627
Comprehensive income
4,899
5,282
7,864
31,183
Comprehensive income attributable to
non-controlling interest
1,362
1,016
1,426
7,175
3,537
4,266
6,438
24,008
Earnings per share attributable to
STRATTEC SECURITY CORPORATION:
Basic
0.81
1.18
1.72
5.18
Diluted
0.80
1.15
1.70
5.11
Average shares outstanding:
3,871
3,797
3,856
3,783
3,916
3,886
3,906
3,839
Cash dividends declared per share
—
The accompanying notes are an integral part of these Condensed Consolidated Statements of Income and Comprehensive Income.
Condensed Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
June 27,
ASSETS
Current Assets:
Cash and cash equivalents
16,459
14,465
Receivables, net
76,526
69,902
Inventories:
Finished products
16,772
20,633
Work in process
17,650
14,707
Purchased materials
45,288
40,900
Excess and obsolete reserve
(6,400
(5,380
Inventories, net
73,310
70,860
Other current assets
23,422
19,677
Total current assets
189,717
174,904
Investment in joint ventures
28,405
27,224
Deferred Income Taxes
4,978
5,052
Other long-term assets
6,982
Property, plant and equipment
274,414
270,429
Less: accumulated depreciation
(182,991
(174,028
Net property, plant and equipment
91,423
96,401
321,164
310,563
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
43,513
36,727
Accrued Liabilities:
Payroll and benefits
16,797
22,483
Environmental
1,390
Warranty
8,119
8,425
Other
10,173
8,547
Total current liabilities
79,992
77,572
Borrowings under credit facilities
12,000
Accrued pension obligations
2,409
2,334
Accrued postretirement obligations
528
599
Other long-term liabilities
4,381
4,625
Shareholders’ Equity:
Common stock, authorized 18,000,000 shares, $.01 par value, 7,481,169
issued shares at March 27, 2022 and 7,411,717 issued shares at
June 27, 2021
75
74
Capital in excess of par value
101,244
99,512
Retained earnings
241,113
234,472
Accumulated other comprehensive loss
(17,000
(16,797
Less: treasury stock, at cost (3,605,165 shares at March 27, 2022 and
3,606,652 shares at June 27, 2021)
(135,591
(135,615
Total STRATTEC SECURITY CORPORATION shareholders’ equity
189,841
181,646
Non-controlling interest
32,013
31,787
Total shareholders’ equity
221,854
213,433
The accompanying notes are an integral part of these Condensed Consolidated Balance Sheets.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
14,724
14,730
Foreign currency transaction loss
76
1,926
Loss on disposal of property, plant and equipment
153
1,421
Unrealized gain on peso forward contracts
(500
(512
Stock based compensation expense
873
775
Equity earnings of joint ventures
(941
(1,844
Change in operating assets and liabilities:
Receivables
(6,637
(39,176
Inventories
(2,450
(3,930
Other assets
(4,370
(1,119
Accounts payable and accrued liabilities
2,297
27,213
Other, net
361
356
Net cash provided by operating activities
11,783
25,396
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in VAST LLC
(75
(100
Purchase of property, plant and equipment
(9,407
(6,401
Proceeds received on sale of property, plant and equipment
8
Net cash used in investing activities
(9,482
(6,493
CASH FLOWS FROM FINANCING ACTIVITIES:
11,000
Repayment of borrowings under credit facilities
(11,000
(19,000
Dividends paid to non-controlling interests of subsidiaries
(1,200
(490
Exercise of stock options and employee stock purchases
884
585
Net cash used in financing activities
(316
(18,905
Foreign currency impact on cash
9
(437
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1,994
(439
CASH AND CASH EQUIVALENTS
Beginning of period
11,774
End of period
11,335
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (recovered) during the period for:
Income taxes
(1,378
3,701
158
276
Non-cash investing activities:
Change in capital expenditures in accounts payable
824
(873
The accompanying notes are an integral part of these Condensed Consolidated Statements of Cash Flows.
Notes to Condensed Consolidated Financial Statements
Basis of Financial Statements
STRATTEC SECURITY CORPORATION designs, develops, manufactures and markets automotive access control products including mechanical locks and keys, electronically enhanced locks and keys, passive entry passive start systems (PEPS), steering column and instrument panel ignition lock housings, latches, power sliding door systems, power tailgate systems, power lift gate systems, power deck lid systems, door handles and related products for primarily North American automotive customers. We also supply global automotive manufacturers through a unique strategic relationship with WITTE Automotive (“WITTE”) of Velbert, Germany, and ADAC Automotive (“ADAC”) of Grand Rapids, Michigan. Under this relationship, STRATTEC, WITTE and ADAC market the products of each company to global customers under the “VAST Automotive Group” brand name (as more fully described herein). STRATTEC products are shipped to customer locations in the United States, Canada, Mexico, Europe, South America, Korea, China and India, and we, along with our VAST LLC partners, provide full service and aftermarket support for each VAST Automotive Group partner’s products.
The accompanying condensed consolidated financial statements reflect the consolidated results of STRATTEC SECURITY CORPORATION, its wholly owned Mexican subsidiary, STRATTEC de Mexico, and its majority owned subsidiaries, ADAC-STRATTEC, LLC and STRATTEC POWER ACCESS LLC. STRATTEC SECURITY CORPORATION is located in Milwaukee, Wisconsin. STRATTEC de Mexico is located in Juarez, Mexico. ADAC-STRATTEC, LLC and STRATTEC POWER ACCESS LLC have operations in El Paso, Texas and Juarez and Leon, Mexico. Equity investments in Vehicle Access Systems Technology LLC (“VAST LLC”), for which we exercise significant influence but do not control and are not variable interest entities of STRATTEC, are accounted for using the equity method. VAST LLC consists primarily of four wholly owned subsidiaries in China, one wholly owned subsidiary in Brazil and one joint venture entity in India. The results of the VAST LLC foreign subsidiaries and joint venture are reported on a one-month lag basis. We have only one reporting segment.
In the opinion of management, the accompanying condensed consolidated balance sheets as of March 27, 2022 and June 27, 2021, which have been derived from our audited financial statements, and the related unaudited interim condensed consolidated financial statements included herein contain all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and in accordance with Rule 10-01 of Regulation S-X. All significant intercompany transactions have been eliminated.
Interim financial results are not necessarily indicative of operating results for an entire year. The information included in this Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the STRATTEC SECURITY CORPORATION 2021 Form 10-K, which was filed with the Securities and Exchange Commission on September 2, 2021.
Risks and Uncertainties
In December 2019, a novel strain of coronavirus (COVID-19) was reported in Wuhan, China. The coronavirus has since spread, and infections have been found in multiple countries around the world, including the United States. In March 2020, the World Health Organization recognized the COVID-19 outbreak as a pandemic based on the global spread of the disease, the severity of illnesses it causes and its effects on society. In response to the COVID-19 outbreak, the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations, and in certain cases, advising or requiring individuals to limit or forego their time outside of their homes or from participating in large group gatherings. Accordingly, the COVID-19 outbreak has severely restricted the level of economic activity in many countries, and continues to adversely impact global economic activity, including with respect to customer purchasing actions and supply chain continuity and disruption, and in particular the supply of semiconductor chips, transponders and related components to the automotive industry.
STRATTEC’s operating performance is subject to global economic conditions, inflationary pressures and levels of consumer spending specifically within the automotive industry. During the period from late March 2020 through mid-June 2020, the majority of our OEM customer assembly plant operations were completely closed including most of the supply chain. Additionally, during most of this same period, STRATTEC’s Mexico facilities were closed as a result of the Mexican government’s shutdown of non-essential businesses. Re-opening of our OEM customer facilities and our Mexico facilities began in June 2020, and the automotive industry continued to ramp-up throughout our fiscal year ended June 27, 2021. Nonetheless, during the fourth quarter of our fiscal 2021, our net sales were negatively impacted by a global semiconductor chip shortage (especially as it relates to the automotive industry), which shortage continued into our current fiscal 2022 nine month period ended March 27, 2022 resulting in a decrease in our net sales for both the current year quarter and year to date period as compared to the same periods in our prior fiscal year. Additionally, inflationary pressures resulted in increased raw material and purchased part costs as well as increased wage rates in Mexico beginning in calendar
6
2021. Such increases negatively impacted our operating results in both the current year quarter and year to date period as compared to the same periods in our prior fiscal year.
The extent of the impact of the COVID-19 outbreak and continued inflationary pressures on our future operating results will depend on the duration, intensity and continued spread of the COVID-19 outbreak, regulatory and private sector responses, which may be precautionary and may include potential restrictive operating measures imposed by governmental authorities, the impact to our customers, workforce and suppliers, in particular related to the sourcing of semiconductor chips, transponders and other critical supply chain components needed by us and our customers to meet expected production schedules, and continued inflation impacting wages and the prices of raw materials and purchased parts, all of which are uncertain and cannot be predicted as to timing and cost impacts. These changing conditions may also affect the estimates and assumptions made by our management. Such estimates and assumptions affect, among other things, our long-lived asset valuations, equity investment valuation, assessment of our annual effective tax rate, valuation of deferred income taxes, assessment of excess and obsolete inventory reserves, and assessment of collectability of trade receivables.
New Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial instruments – Credit Losses. This update revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. Originally, the update was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. In November 2019, the FASB issued ASU 2019-10, Financial instruments – Credit Losses, Derivatives and Hedging Activities, and Leases. This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are planning to adopt this standard in the first quarter of our fiscal 2024. We are currently evaluating the potential effects of adopting the new guidance on our consolidated financial statements.
In December 2019, the FASB issued an update to accounting for income taxes. The update enhances and simplifies various aspects of income tax accounting including hybrid tax regimes, tax basis step-up in goodwill obtained in a transaction that is not a business combination, separate financial statements of entities not subject to tax, the intraperiod tax allocation exception to the incremental approach, investment ownership changes from a subsidiary to an equity method investment and vice versa, interim-period accounting for enacted changes in tax law, and the year-to-date loss limitation in interim-period tax accounting. This accounting update is effective for annual and interim periods beginning after December 15, 2020, with early adoption permitted. The adoption of this pronouncement did not have a material impact on our consolidated financial statements.
Derivative Instruments
We own and operate manufacturing operations in Mexico. As a result, a portion of our manufacturing costs are incurred in Mexican pesos, which causes our earnings and cash flows to fluctuate due to changes in the U.S. dollar/Mexican peso exchange rate. We have contracts with Bank of Montreal that provide for monthly Mexican peso currency forward contracts for a portion of our estimated peso denominated operating costs. Our objective in entering into currency forward contracts from time to time is to minimize our earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. The Mexican peso forward contracts are not used for speculative purposes and are not designated as hedges. As a result, all currency forward contracts are recognized in our accompanying condensed consolidated financial statements at fair value and changes in the fair value are reported in current earnings as part of Other Income (Expense), net.
The following table quantifies the outstanding Mexican peso forward contracts as of March 27, 2022 (thousands of dollars, except with respect to the average forward contractual exchange rate):
Effective Dates
Notional Amount
Average Forward Contractual Exchange Rate
Fair Value
Buy MXP/Sell USD
April 19, 2022 - June 14, 2022
5,250
20.80
168
July 19, 2022 – June 13, 2023
9,000
22.42
575
7
The fair market value of all outstanding Mexican peso forward contracts in the accompanying Condensed Consolidated Balance Sheets as of the dates specified was as follows (thousands of dollars):
Not Designated as Hedging Instruments:
Other Current Assets:
Mexican Peso Forward Contracts
743
243
The pre-tax effects of the Mexican peso forward contracts are included in Other Income (Expense), net on the accompanying Condensed Consolidated Statements of Income and Comprehensive Income and consisted of the following for the periods indicated below (thousands of dollars):
Realized Gain
83
11
267
87
Realized (Loss)
(18
(67
Unrealized Gain
724
500
512
Fair Value of Financial Instruments
The fair value of our cash and cash equivalents, accounts receivable, accounts payable and borrowings under our credit facilities approximated book value as of March 27, 2022 and June 27, 2021. Fair value is defined as the exchange price that would be received for an asset or paid for a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date.
The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of March 27, 2022 (in thousands):
Fair Value Inputs
Level 1 Assets:
Quoted Prices
In Active Markets
Level 2 Assets:
Observable
Inputs Other
Than Market
Prices
Level 3 Assets:
Unobservable
Inputs
Assets:
Rabbi Trust Assets:
Stock Index Funds:
Small Cap
169
Mid Cap
345
Large Cap
492
International
515
Fixed Income Funds
1,040
Cash and Cash Equivalents
962
Total Assets at Fair Value
2,561
1,705
The Rabbi Trust assets fund our Amended and Restated Supplemental Executive Retirement Plan and are included in Other Long-term Assets in the accompanying Condensed Consolidated Balance Sheets.
Investment in Joint Ventures and Majority Owned Subsidiaries
We participate in certain Alliance Agreements with WITTE Automotive (“WITTE”) and ADAC Automotive (“ADAC”). WITTE, of Velbert, Germany, is a privately held automotive supplier. WITTE designs, manufactures and markets automotive components, including locks and keys, hood latches, rear compartment latches, seat back latches, door handles and specialty fasteners. WITTE’s primary market for these products has been Europe. ADAC, of Grand Rapids, Michigan, is a privately held automotive supplier and manufactures engineered products, including door handles and other automotive trim parts, utilizing plastic injection molding, automated painting and various assembly processes.
The Alliance Agreements include a set of cross-licensing agreements for the manufacture, distribution and sale of WITTE products by STRATTEC and ADAC in North America, and the manufacture, distribution and sale of STRATTEC and ADAC products by WITTE in Europe. Additionally, a joint venture company, Vehicle Access Systems Technology LLC (“VAST LLC”), in which WITTE, STRATTEC and ADAC each hold a one-third interest, exists to seek opportunities to manufacture and sell each company’s products in areas of the world outside of North America and Europe. As a result of these relationships, the entities involved purchase products from each other on an as needed basis to use as components in end products assembled and sold in their respective home markets. STRATTEC currently purchases such component parts from WITTE. These purchases totaled $200,000 and $615,000 during the three and nine month periods ended March 27, 2022, respectively, and $286,000 and $606,000 during the three and nine month periods ended March 28, 2021.
VAST LLC has investments in Sistema de Acesso Veicular Ltda, VAST Fuzhou, VAST Great Shanghai, VAST Shanghai Co., VAST Jingzhou Co. Ltd., and Minda-VAST Access Systems. Sistema de Acesso Veicular Ltda is located in Brazil and services customers in South America. VAST Fuzhou, VAST Great Shanghai, VAST Shanghai Co., and VAST Jingzhou Co. Ltd. (collectively known as VAST China), provide a base of operations to service each VAST partner’s automotive customers in the Asian market. Minda-VAST Access Systems is based in Pune, India and is a 50:50 joint venture between VAST LLC and Minda Management Services Limited, an affiliate of both Minda Corporation Limited and Spark Minda, Ashok Minda Group of New Delhi, India (collectively “Minda”). Minda and its affiliates cater to the needs of all major car, motorcycle, commercial vehicle, tractor and off-road vehicle manufacturers in India. They are a leading manufacturer in the Indian marketplace of security & access products, handles, automotive safety, restraint systems, driver information and telematics systems for both OEMs and the aftermarket. VAST LLC also maintains branch offices in South Korea and Japan in support of customer sales and engineering requirements.
The VAST LLC investments are accounted for using the equity method of accounting and the results of the VAST LLC foreign subsidiaries and joint venture are reported on a one-month lag basis. The activities related to the VAST LLC foreign subsidiaries and joint venture resulted in equity earnings of joint ventures to STRATTEC of $941,000 during the nine month period ended March 27, 2022 and $1.8 million during the nine month period ended March 28, 2021. 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 contributions 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 contributions totaled $100,000.
ADAC-STRATTEC LLC, a Delaware limited liability company, was formed in fiscal year 2007 to support injection molding and door handle assembly operations in Mexico. ADAC-STRATTEC LLC was 51 percent owned by STRATTEC and 49 percent owned by ADAC for all periods presented in this report. An additional Mexican entity, ADAC-STRATTEC de Mexico, is wholly owned by ADAC-STRATTEC LLC. ADAC-STRATTEC LLC’s financial results are consolidated with the financial results of STRATTEC and resulted in increased net sales and increased net income to STRATTEC of approximately $81.2 million and $98,000, respectively, during the nine month period ended March 27, 2022 and increased net sales and increased net income to STRATTEC of approximately $98.7 million and $3.4 million, respectively, during the nine month period ended March 28, 2021. ADAC charges ADAC STRATTEC LLC an engineering, research and design fee as well as a sales fee. Such fees are calculated as a percentage of net sales, are included in the consolidated results of STRATTEC, and totaled $2.1 million and $5.7 million in the three and nine month periods ended March 27, 2022 and $2.1 million and $6.9 million in the three and nine month periods ended March 28, 2021. Additionally, ADAC-STRATTEC LLC sells production parts to ADAC. Sales to ADAC are included in the consolidated results of STRATTEC and totaled $2.9 million and $6.0 million in the three and nine month periods ended March 27, 2022 and $2.7 million and $9.1 million in the three and nine month periods ended March 28, 2021.
STRATTEC POWER ACCESS LLC (“SPA”) was originally formed in fiscal year 2009 to supply the North American portion of the power sliding door, lift gate, tail gate and deck lid system access control products some of which were acquired from Delphi Corporation in 2009. SPA was 80 percent owned by STRATTEC and 20 percent owned by WITTE for all periods presented in this report. An additional Mexican entity, STRATTEC POWER ACCESS de Mexico, is wholly owned by SPA. The financial results of SPA are consolidated with the financial results of STRATTEC and resulted in increased net sales and increased net income to STRATTEC of approximately $68.3 million and $3.8 million, respectively, during the nine month period ended March 27, 2022 and $72.0 million and $4.7 million, respectively, during the nine month period ended March 28, 2021.
Equity Earnings (Loss) of Joint Ventures
As discussed above under Investment in Joint Ventures and Majority Owned Subsidiaries, we hold a one-third interest in a joint venture company, VAST LLC. Our investment in VAST LLC, for which we exercise significant influence but do not control and is not a variable interest entity of STRATTEC, is accounted for using the equity method. The results of the VAST LLC foreign subsidiaries and joint venture are reported on a one-month lag basis. We assess the impairment of equity investments whenever events or changes in circumstances indicate that a decrease in value of the investment has occurred that is other than temporary.
During the quarter ended March 27, 2022, 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.
The following are summarized statements of operations for VAST LLC (in thousands):
Net Sales
55,281
51,748
153,454
160,511
Cost of Goods Sold
46,418
44,155
127,022
131,345
Gross Profit
8,863
7,593
26,432
29,166
Engineering, Selling and Administrative Expenses
7,575
7,684
24,075
22,936
Income (Loss) From Operations
1,288
(91
2,357
6,230
Other Income, net
692
327
1,085
1,363
Income before Provision for Income Taxes
1,980
236
3,442
Provision for Income Taxes
239
348
614
2,011
Net Income (Loss)
1,741
(112
2,828
5,582
STRATTEC's Share of VAST LLC Net Income (Loss)
581
(37
943
1,861
Intercompany Profit Elimination
(4
(19
(2
(17
STRATTEC’s Equity Earnings (Loss) of VAST LLC
We have sales of component parts to VAST LLC, purchases of component parts from VAST LLC, expenses charged to VAST LLC for engineering and accounting services and expenses charged to us from VAST LLC for general headquarters expenses. The following table summarizes these related party transactions with VAST LLC for the periods indicated below (in thousands):
Sales to VAST LLC
316
1,059
1,533
3,273
Purchases from VAST LLC
139
157
340
Expenses Charged to VAST LLC
134
265
1,361
Expenses Charged from VAST LLC
151
302
593
953
Leases
We have an operating lease for our El Paso, Texas finished goods and service parts distribution warehouse that has a current lease term through October 2023. This lease includes renewal terms that can extend the lease term for five additional years. For purposes of calculating operating lease obligations, we included the option to extend the lease as it is reasonably certain that we will exercise such option. The lease does not contain material residual value guarantees or restrictive covenants. Operating lease expense is recognized on a straight-line basis over the lease term.
As the lease does not provide an implicit rate, we used our incremental borrowing rate at lease commencement to determine the present value of our lease payments. The incremental borrowing rate is an entity-specific rate which represents the rate of interest we would pay to borrow over a similar term with similar payments.
The operating lease asset and obligation related to our El Paso warehouse lease included in the accompanying Condensed Consolidated Balance Sheets are presented below (in thousands):
Right-of Use Asset Under Operating Lease:
Other Long-Term Assets
3,118
Lease Obligation Under Operating Lease:
Current Liabilities: Accrued Liabilities: Other
389
Other Long-Term Liabilities
2,729
10
Future minimum lease payments, by our fiscal year, including options to extend that are reasonably certain to be exercised, under this non-cancelable lease are as follows as of March 27, 2022 (in thousands):
2022 (for the remaining three months)
122
2023
497
2024
509
2025
522
2026
535
Thereafter
1,299
Total Future Minimum Lease Payments
3,484
Less: Imputed Interest
(366
Total Lease Obligations
Cash flow information related to the operating lease is shown below (in thousands):
Operating Cash Flows:
Cash Paid Related to Operating Lease Obligation
362
354
The weighted average lease term and discount rate for the El Paso, Texas operating lease are shown below:
Weighted Average Remaining Lease Term (in years)
6.6
Weighted Average Discount Rate
3.3
%
Operating lease expense for the three and nine month periods ended March 27, 2022 totaled $122,000 and $362,000, respectively. Operating lease expense for the three and nine month periods ended March 28, 2021 totaled $119,000 and $354,000, respectively.
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. 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 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.
Outstanding borrowings under the credit facilities were as follows (in thousands):
STRATTEC Credit Facility
ADAC-STRATTEC Credit Facility
Average outstanding borrowings and the weighted average interest rate under each credit facility referenced above were as follows for each period presented (in thousands):
Average Outstanding Borrowings
Weighted Average Interest Rate
421
11,436
1.9
1.2
14,784
15,000
1.4
Commitments and Contingencies
We are from time to time subject to various legal actions and claims incidental to our business, including those arising out of alleged defects, alleged breaches of contracts, product warranties, intellectual property matters and employment related matters. It is our opinion that the outcome of such matters will not have a material adverse impact on our consolidated financial position, results of operations or cash flows. With respect to warranty matters, although we cannot ensure that future costs of warranty claims by customers will not be material, we believe our established reserves are adequate to cover potential warranty settlements.
In 1995, we recorded a provision for estimated costs to remediate an environmental contamination site at our Milwaukee facility. The facility was contaminated by a solvent spill, which occurred in 1985, from a former above ground solvent storage tank located on the east side of the facility. The reserve was originally established based on third party estimates to adequately cover the cost for active remediation of the contamination. Due to changing technology and related costs associated with active remediation of the contamination, in fiscal years 2010, 2016, and 2021, we obtained updated third party estimates of projected costs to adequately cover the cost for active remediation of this contamination and adjusted the reserve as needed. We monitor and evaluate the site with the use of these groundwater monitoring wells. An environmental consultant samples these wells one or two times a year to determine the status of the contamination and the potential for remediation of the contamination by natural attenuation, the dissipation of the contamination over time to concentrations below applicable standards. If such sampling evidences a sufficient degree of and trend toward natural attenuation of the contamination at the site, we may be able to obtain a closure letter from the regulatory authorities resolving the issue without the need for active remediation. If a sufficient degree and trend toward natural attenuation is not evidenced by sampling, a more active form of remediation beyond natural attenuation may be required. The sampling has not yet satisfied all of the requirements for closure by natural attenuation. As a result, sampling continues and the reserve remains at an amount to reflect our estimated cost of active remediation. The reserve is not measured on a discounted basis. We believe, based on findings-to-date and known environmental regulations, that the environmental reserve of $1.4 million at March 27, 2022 is adequate.
Shareholders’ Equity
A summary of activity impacting shareholders’ equity for the three and nine month periods ended March 27, 2022 and March 28, 2021 were as follows (in thousands):
Three Months Ended March 27, 2022
Total
Shareholders’
Equity
Common Stock
Capital in Excess of Par Value
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock
Non-Controlling Interest
Balance, December 26, 2021
217,071
100,768
237,967
(17,391
(135,599
31,251
Net Income
Dividend Declared – Non-
controlling Interests of
Subsidiaries
(600
Translation Adjustments
312
373
Stock Based Compensation
Pension and Postretirement
Adjustment, Net of
Tax
Stock Option Exercises
227
Employee Stock Purchases
18
Balance, March 27, 2022
12
Three Months Ended March 28, 2021
Balance, December 27, 2020
201,473
98,571
227,061
(17,492
(135,629
28,888
(288
(409
193
526
20
13
Balance, March 28, 2021
207,494
99,303
231,546
(17,711
(135,622
29,904
Nine Months Ended March 27, 2022
Balance, June 27, 2021
(441
(130
827
1
826
57
33
24
Nine Months Ended March 28, 2021
Balance, June 28, 2020
175,441
97,977
211,940
(22,113
(135,656
23,219
4,194
1,225
59
25
34
Revenue from Contracts with Customers
We generate revenue from the production of parts sold to automotive and light-truck Original Equipment Manufacturers (“OEMs”), or Tier 1 suppliers at the direction of the OEM, under long-term supply agreements supporting new vehicle production. Such agreements also require related production of service parts subsequent to the initial vehicle production periods. Additionally, we generate revenue from the production of parts sold in aftermarket service channels and to non-automotive commercial customers.
Contract Balances:
We have no material contract assets or contract liabilities as of March 27, 2022 or June 27, 2021.
Revenue by Product Group and Customer:
Revenue by product group for the periods presented was as follows (thousands of dollars):
Door Handles & Exterior Trim
29,313
29,790
81,211
98,694
Keys & Locksets
28,230
28,616
77,725
91,488
Power Access
23,675
26,209
68,344
72,039
Latches
12,760
13,125
34,782
41,303
Aftermarket & OE Service
11,421
10,969
34,731
34,077
Driver Controls
8,525
10,822
25,317
31,144
2,019
2,113
7,082
6,493
Revenue by customer or customer group for the periods presented was as follows (thousands of dollars):
General Motors Company
34,738
34,543
91,551
111,322
Stellantis (Formerly Fiat Chrysler
Automobiles)
23,047
21,685
62,657
69,919
Ford Motor Company
19,162
21,722
57,927
54,356
Commercial and Other OEM
Customers
16,518
17,241
50,120
58,272
Tier 1 Customers
15,279
17,289
42,861
53,444
Hyundai / Kia
7,199
9,164
24,076
27,925
Other Income (Expense), net
Net other income (expense) included in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income primarily included foreign currency transaction gains and losses, realized and unrealized gains or losses on our Mexican peso currency forward contracts, net periodic pension and postretirement benefit costs, other than the service cost component, related to our Supplemental Executive Retirement Plan (“SERP”) and postretirement plans and Rabbi Trust gains and losses. Foreign currency transaction gains and losses resulted from activity associated with foreign denominated assets held by our Mexican subsidiaries. We entered into the Mexican Peso currency forward contracts described above 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 the actual Mexican peso to U.S. dollar exchange rates experienced during the balance of the contract period. The Rabbi Trust assets fund our Amended and Restated Supplemental Executive Retirement Plan. The investments held in this Trust are considered trading securities.
14
The impact of these items for each of the periods presented was as follows (in thousands):
Foreign Currency Transaction (Loss) Gain
(319
386
(76
(1,926
Unrealized Gain on Peso Forward
Contracts
Realized Gain on Peso Forward
Contracts, net
65
200
Pension and Postretirement Plans Cost
(120
(106
(360
(314
Rabbi Trust (Loss) Gain
154
(60
472
(22
116
Income Taxes
Our effective tax rate was 1.2% and 16.3% for the three months ended March 27, 2022 and March 28, 2021, respectively. Our effective tax rate was 4.0% and 15.6% for the nine month periods ended March 27, 2022 and March 28, 2021, respectively. The reduction in our effective tax rate in the current three and nine months periods as compared to the respective prior year periods 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 and nine month periods ended March 27, 2022 totaled $740,000 and $1.0 million, respectively. Our effective tax rate for the three and nine month periods ended March 27, 2022 excluding these adjustments were 18.9% and 15.7%, respectively. 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 nine month period ended March 28, 2021. Our effective tax rate differs from the statutory tax rate due to 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.
Earnings Per Share
Basic earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding during the applicable period. Diluted earnings per share is computed on the basis of the weighted average number of shares of common stock plus the potential dilutive common shares outstanding during the applicable period using the treasury stock method. Potential dilutive common shares include outstanding stock options and unvested restricted stock awards.
A reconciliation of the components of the basic and diluted per-share computations follows (in thousands, except per share amounts):
Shares
Per-Share Amount
Basic Earnings Per Share
Stock Option and Restricted
Stock Awards
45
89
Diluted Earnings Per Share
15
56
The calculation of earnings per share excluded 9,010 share-based payment awards as of both March 27, 2022 and March 28, 2021 because their inclusion would have been anti-dilutive.
Stock-based Compensation
We maintain an omnibus stock incentive plan. This plan provides for the granting of stock options, shares of restricted stock and stock appreciation rights. As of March 27, 2022, the Board of Directors had designated 2 million shares of common stock available for the grant of awards under the plan. Remaining shares available to be granted under the plan as of March 27, 2022 were 177,959. Awards that expire or are canceled without delivery of shares become available for re-issuance under the plan. We issue new shares of common stock to satisfy stock option exercises.
Nonqualified and incentive stock options and shares of restricted stock have been granted to our officers, outside directors and specified associates under our stock incentive plan. Stock options granted under the plan may not be issued with an exercise price less than the fair market value of the common stock on the date the option is granted. Stock options become exercisable as determined at the date of grant by the Compensation Committee of the Board of Directors. The options expire 10 years after the grant date unless an earlier expiration date is set at the time of grant. The options vest 1 to 4 years after the date of grant as determined by the Compensation Committee of the Board of Directors. Shares of restricted stock granted under the plan are subject to vesting criteria determined by the Compensation Committee of the Board of Directors at the time the shares are granted and have a minimum vesting period of one year from the date of grant. Unvested restricted shares granted have voting rights, regardless of whether the shares are vested or unvested, but only have the right to receive cash dividends after such shares become vested. Restricted stock grants vest 1 to 5 years after the date of grant as determined by the Compensation Committee of the Board of Directors.
The fair value of each stock option grant was estimated as of the date of grant using the Black-Scholes pricing model. The fair value of each restricted stock grant was based on the market price of the underlying common stock as of the date of grant. The resulting compensation cost for fixed awards with graded vesting schedules is amortized on a straight-line basis over the vesting period for the entire award.
A summary of stock option activity under our stock incentive plan for the nine months ended March 27, 2022 follows:
Weighted
Average
Exercise Price
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
(in thousands)
Outstanding, June 27, 2021
72,624
37.65
Exercised
31,452
26.28
Outstanding, March 27, 2022
41,172
46.34
1.5
49
Exercisable, March 27, 2022
The intrinsic value of stock options exercised and the fair value of stock options that vested during the three and nine month periods presented below were as follows (in thousands):
Intrinsic Value of Options Exercised
120
555
451
Fair Value of Stock Options Vesting
No options were granted during the nine month periods ended March 27, 2022 or March 28, 2021.
16
A summary of restricted stock activity under our stock incentive plan for the nine months ended March 27, 2022 follows:
Grant Date
Nonvested Balance, June 27, 2021
81,975
23.31
Granted
43,875
42.50
Vested
(38,000
25.56
Forfeited
(2,750
32.70
Nonvested Balance, March 27, 2022
85,100
31.89
As of March 27, 2022, all compensation cost related to outstanding stock options granted under our omnibus stock incentive plan has been recognized. As of March 27, 2022, there was approximately $1.6 million of total unrecognized compensation cost related to unvested restricted stock grants outstanding under the plan. This cost is expected to be recognized over a remaining weighted average period of 1.1 years. Total unrecognized compensation cost will be adjusted for any future changes in estimated and actual forfeitures of awards granted under our omnibus stock incentive plan.
Pension and Postretirement Benefits
We have a noncontributory Supplemental Executive Retirement Plan (“SERP”), which is a nonqualified defined benefit plan. The SERP is funded through a Rabbi Trust with TMI Trust Company. Under the SERP, as amended December 31, 2013, participants received an accrued lump-sum benefit as of December 31, 2013, which was credited to each participant’s account. Subsequent to December 31, 2013, each eligible participant receives a supplemental retirement benefit equal to the foregoing lump sum benefit, plus an annual benefit accrual equal to 8 percent of the participant’s base salary and cash bonus, plus annual credited interest on the participant’s account balance. All then current participants as of December 31, 2013 are fully vested in their account balances with any new individuals participating in the SERP effective on or after January 1, 2014 being subject to a five year vesting period. The SERP, which is considered a nonqualified defined benefit plan under applicable rules and regulations of the Internal Revenue Code, will continue to be funded through use of a Rabbi Trust to hold investment assets to be used in part to fund any future required lump sum benefit payments to participants. The Rabbi Trust assets had a value of $3.5 million at March 27, 2022 and $3.6 million at June 27, 2021 and are included in Other Long-Term Assets in the accompanying Condensed Consolidated Balance Sheets.
We also sponsor a postretirement health care plan for all U.S. associates hired prior to June 1, 2001. The expected cost of retiree health care benefits is recognized during the years the associates who are covered under the plan render service. Effective January 1, 2010, an amendment to the postretirement health care plan limited the benefit for future eligible retirees to $4,000 per plan year and the benefit is further subject to a maximum five year coverage period based on the associate’s retirement date and age. The postretirement health care plan is unfunded.
The service cost component of the net periodic benefit costs under these plans is allocated between Cost of Goods Sold and Engineering, Selling and Administrative Expenses while the remaining components of the net periodic benefit costs are included in Other Income (Expense), net in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income.
The following tables summarize the net periodic benefit cost recognized for each of the periods indicated under these plans (in thousands):
SERP Benefits
Postretirement Benefits
Service Cost
Interest Cost
Amortization of Prior Service Credit
Amortization of Unrecognized Net Loss
82
91
Net Periodic Benefit Cost
29
96
17
46
47
40
(6
63
247
269
149
86
266
The following tables summarize the changes in accumulated other comprehensive loss (“AOCL”) for each period presented (in thousands):
Foreign
Currency
Translation
Adjustments
Retirement
and
Postretirement
Benefit Plans
15,438
1,953
17,391
Other Comprehensive Income Before Reclassifications
(1,291
Income Tax
606
Net Other Comprehensive Income Before
Reclassifications
(685
Reclassifications:
Unrecognized Net Loss (A)
(102
Total Reclassifications Before Tax
23
Net Reclassifications
(79
Other Comprehensive Income
(764
Other Comprehensive Income Attributable to Non-
Controlling Interest
(373
15,126
1,874
17,000
15,654
1,838
17,492
Other Comprehensive Loss Before Reclassifications
697
Net Other Comprehensive Loss Before
Prior Service Credits (A)
2
(94
(92
(69
Other Comprehensive Loss
628
Other Comprehensive Loss Attributable to Non-
409
15,942
1,769
17,711
14,685
2,112
(35
571
(310
72
(238
333
130
20,136
1,977
22,113
(5,419
(277
(271
(208
(5,627
(1,225
(A)
Amounts reclassified are included in the computation of net periodic benefit cost, which is included in Other Income (Expense), net in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income. See Pension and Postretirement Benefits note to these Notes to Condensed Consolidated Financial Statements above.
19
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
Net Sales (in millions)
115.9
121.6
Net sales to each of our customers or customer groups in the current year quarter and prior year quarter were as follows (in millions):
34.7
34.5
Stellantis (Formerly Fiat Chrysler Automobiles)
23.0
21.7
19.2
Commercial and Other OEM Customers
16.5
17.2
15.3
17.3
7.2
9.2
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.
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:
21
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.
Gross Profit (in millions)
14.6
18.7
Gross Profit as a percentage of net sales
12.6
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:
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.
22
Included in Other Income (Expense), net in the current year quarter and prior year quarter were the following items (in thousands):
Unrealized Gain on Peso Forward Contracts
Realized Gain on Peso Forward Contracts, net
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
329.2
375.2
Net sales to each of our customers or customer groups in the current year period and prior year period were as follows (in millions):
91.6
111.3
62.7
69.9
57.9
54.4
50.1
58.3
42.9
53.4
24.0
27.9
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.
188.0
65.5
208.4
66.8
99.1
103.4
33.2
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.
42.1
63.4
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:
33.5
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):
Foreign Currency Transaction Loss
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)
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):
23.2
15.2
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):
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
Change
Accounts Receivable
39.2
(32.6
Inventory
2.5
3.9
(1.4
Other Assets
4.4
1.1
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.
27
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.
28
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.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4 Controls and Procedures
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
Item 1 Legal Proceedings
In the normal course of business, we may be involved in various legal proceedings from time to time. We do not believe we are currently involved in any claim or action the ultimate disposition of which would have a material adverse effect on our financial statements.
Item 1A—Risk Factors
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.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds—
Our Board of Directors authorized a stock repurchase program on October 16, 1996, and the program was publicly announced on October 17, 1996. The Board of Directors has periodically increased the number of shares authorized for repurchase under the program, most recently in August 2008. The program currently authorizes the repurchase of up to 3,839,395 shares of our common stock from time to time, directly or through brokers or agents, and has no expiration date. Over the life of the repurchase program through March 27, 2022, a total of 3,655,322 shares have been repurchased at a cost of approximately $136.4 million. No shares were repurchased during the nine month period ended March 27, 2022.
Item 3 Defaults Upon Senior Securities—None
Item 4 Mine Safety Disclosures—None
Item 5 Other Information—None
Item 6 Exhibits
(a)
3.1
Amended and Restated Articles of Incorporation of the Company (Incorporated by reference from Exhibit 3.1 to the Form 10-K filed on September 7, 2017.)
3.2
Amendment to Amended and Restated Articles of Incorporation of the Company (Incorporated by reference from Exhibit 3.1 to the Form 10-Q report filed on November 7, 2019.)
Amendment to Amended and Restated Articles of Incorporation of the Company (Incorporated by reference from Exhibit 3.1 to the Form 8-K report filed on October 21, 2021.)
3.4
Amended By-laws of the Company (Incorporated by reference from Exhibit 99.3 to the Form 8-K filed on October 7, 2005.)
31.1
Rule 13a-14(a) Certification for Frank J. Krejci, President and Chief Executive Officer
31.2
Rule 13a-14(a) Certification for Patrick J. Hansen, Chief Financial Officer
32 (1)
18 U.S.C. Section 1350 Certifications
101
The following materials from STRATTEC SECURITY CORPORATION's Quarterly Report on Form 10-Q for the fiscal quarter ended March 27, 2022 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Condensed Consolidated Statements of Income and Comprehensive Income; (ii) Condensed Consolidated Balance Sheets; (iii) Condensed Consolidated Statements of Cash Flows; and (iv) Notes to Condensed Consolidated Financial Statements. XBRL Instance Document – the XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
104
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 27, 2022, formatted in Inline XBRL (included in Exhibit 101).
(1)
This certification is not "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
STRATTEC SECURITY CORPORATION (Registrant)
Date: May 5, 2022
By:
/s/ Patrick J. Hansen
Patrick J. Hansen
Senior Vice President,
Chief Financial Officer,
Treasurer and Secretary
(Principal Accounting and Financial Officer)