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STRATTEC SECURITY CORP - Quarter Report: 2021 September (Form 10-Q)

Y

 

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 September 26, 2021 

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: 3,953,647 shares outstanding as of September 27, 2021 (which number includes all restricted shares previously awarded that have not vested as of such date).

 

 

 

 

 


 

STRATTEC SECURITY CORPORATION

FORM 10-Q

September 26, 2021

INDEX

 

 

 

Page

Part I - FINANCIAL INFORMATION

 

Item 1

Financial Statements

 

 

Condensed Consolidated Statements of Income and Comprehensive (Loss) Income (Unaudited)

3

 

Condensed Consolidated Balance Sheets (Unaudited)

4

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

5

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

6-17

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18-23

Item 3

Quantitative and Qualitative Disclosures About Market Risk

24

Item 4

Controls and Procedures

24

 

 

 

Part II - OTHER INFORMATION

 

Item 1

Legal Proceedings

25

Item 1A  

Risk Factors

25

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

25

Item 3

Defaults Upon Senior Securities

25

Item 4

Mine Safety Disclosures

25

Item 5

Other Information

25

Item 6

Exhibits

26

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,” “would,” “expect,” “intend,” “may,” “planned,” “potential,” “should,” “will,” and “could,” 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 and warranty claims, adverse business and operational issues resulting from semiconductor chip supply shortages and 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 (Loss) Income

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

September 26,

2021

 

 

September 27,

2020

 

Net sales

 

$

100,341

 

 

$

126,234

 

Cost of goods sold

 

 

87,792

 

 

 

103,723

 

Gross profit

 

 

12,549

 

 

 

22,511

 

Engineering, selling and administrative expenses

 

 

12,121

 

 

 

11,314

 

Income from operations

 

 

428

 

 

 

11,197

 

Equity (loss) earnings of joint ventures

 

 

(251

)

 

 

825

 

Interest expense

 

 

(48

)

 

 

(112

)

Other income (expense), net

 

 

130

 

 

 

(260

)

Income before provision for

      income taxes and non-controlling interest

 

 

259

 

 

 

11,650

 

Provision for income taxes

 

 

37

 

 

 

1,577

 

Net income

 

 

222

 

 

 

10,073

 

Net income attributable to non-controlling

      Interest

 

 

121

 

 

 

2,065

 

Net income attributable to STRATTEC

      SECURITY CORPORATION

 

$

101

 

 

$

8,008

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income:

 

 

 

 

 

 

 

 

Net income

 

$

222

 

 

$

10,073

 

Pension and postretirement plans, net of tax

 

 

81

 

 

 

70

 

Currency translation adjustments

 

 

(712

)

 

 

1,699

 

Other comprehensive (loss) income, net of tax

 

 

(631

)

 

 

1,769

 

Comprehensive (loss) income

 

 

(409

)

 

 

11,842

 

Comprehensive (loss) income attributable to

       non-controlling interest

 

 

(29

)

 

 

2,386

 

Comprehensive (loss) income attributable to

      STRATTEC SECURITY CORPORATION

 

$

(380

)

 

$

9,456

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to

      STRATTEC SECURITY CORPORATION:

 

 

 

 

 

 

 

 

Basic

 

$

0.03

 

 

$

2.13

 

Diluted

 

$

0.03

 

 

$

2.11

 

 

 

 

 

 

 

 

 

 

Average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

3,830

 

 

 

3,765

 

Diluted

 

 

3,893

 

 

 

3,788

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

 

$

 

 

$

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Statements of Income and Comprehensive (Loss) Income.

3


 

STRATTEC SECURITY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In Thousands, Except Share Amounts)

(Unaudited)

 

 

 

September 26,

2021

 

 

June 27,

2021

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,024

 

 

$

14,465

 

Receivables, net

 

 

66,614

 

 

 

69,902

 

Inventories:

 

 

 

 

 

 

 

 

Finished products

 

 

22,942

 

 

 

20,633

 

Work in process

 

 

15,014

 

 

 

14,707

 

Purchased materials

 

 

45,126

 

 

 

40,900

 

Excess and obsolete reserve

 

 

(5,375

)

 

 

(5,380

)

Inventories, net

 

 

77,707

 

 

 

70,860

 

Other current assets

 

 

24,295

 

 

 

19,677

 

Total current assets

 

 

175,640

 

 

 

174,904

 

Investment in joint ventures

 

 

26,617

 

 

 

27,224

 

Deferred Income Taxes

 

 

4,961

 

 

 

5,052

 

Other long-term assets

 

 

6,913

 

 

 

6,982

 

Property, plant and equipment

 

 

271,792

 

 

 

270,429

 

Less: accumulated depreciation

 

 

(177,579

)

 

 

(174,028

)

Net property, plant and equipment

 

 

94,213

 

 

 

96,401

 

 

 

$

308,344

 

 

$

310,563

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

34,533

 

 

$

36,727

 

Accrued Liabilities:

 

 

 

 

 

 

 

 

Payroll and benefits

 

 

16,381

 

 

 

22,483

 

Environmental

 

 

1,390

 

 

 

1,390

 

Warranty

 

 

8,440

 

 

 

8,425

 

Other

 

 

9,690

 

 

 

8,547

 

Total current liabilities

 

 

70,434

 

 

 

77,572

 

Borrowings under credit facilities

 

 

17,000

 

 

 

12,000

 

Accrued pension obligations

 

 

2,359

 

 

 

2,334

 

Accrued postretirement obligations

 

 

564

 

 

 

599

 

Other long-term liabilities

 

 

4,548

 

 

 

4,625

 

Shareholders’ Equity:

 

 

 

 

 

 

 

 

Common stock, authorized 12,000,000 shares, $.01 par value, 7,469,527

   issued shares at September 26, 2021 and 7,411,717 issued shares at

   June 27, 2021

 

 

75

 

 

 

74

 

Capital in excess of par value

 

 

100,519

 

 

 

99,512

 

Retained earnings

 

 

234,573

 

 

 

234,472

 

Accumulated other comprehensive loss

 

 

(17,278

)

 

 

(16,797

)

Less: treasury stock, at cost (3,606,180 shares at September 26, 2021 and

   3,606,652 shares at June 27, 2021)

 

 

(135,608

)

 

 

(135,615

)

Total STRATTEC SECURITY CORPORATION shareholders’ equity

 

 

182,281

 

 

 

181,646

 

Non-controlling interest

 

 

31,158

 

 

 

31,787

 

Total shareholders’ equity

 

 

213,439

 

 

 

213,433

 

 

 

$

308,344

 

 

$

310,563

 

 

The accompanying notes are an integral part of these Condensed Consolidated Balance Sheets.

 


4


 

 

STRATTEC SECURITY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

September 26,

2021

 

 

September 27,

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

222

 

 

$

10,073

 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

5,057

 

 

 

4,885

 

Foreign currency transaction (gain) loss

 

 

(139

)

 

 

399

 

Loss on disposal of property, plant and equipment

 

 

8

 

 

 

223

 

Unrealized loss (gain) on peso forward contracts

 

 

98

 

 

 

(335

)

Stock based compensation expense

 

 

396

 

 

 

208

 

Equity loss (earnings) of joint ventures

 

 

251

 

 

 

(825

)

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

3,279

 

 

 

(37,796

)

Inventories

 

 

(6,847

)

 

 

2,727

 

Other assets

 

 

(4,652

)

 

 

(288

)

Accounts payable and accrued liabilities

 

 

(7,439

)

 

 

27,914

 

Other, net

 

 

119

 

 

 

115

 

Net cash (used in) provided by operating activities

 

 

(9,647

)

 

 

7,300

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(2,789

)

 

 

(1,514

)

Proceeds received on sale of property, plant and equipment

 

 

 

 

 

3

 

Net cash used in investing activities

 

 

(2,789

)

 

 

(1,511

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Borrowings under credit facilities

 

 

7,000

 

 

 

 

Repayment of borrowings under credit facilities

 

 

(2,000

)

 

 

(5,000

)

Dividends paid to non-controlling interests of subsidiaries

 

 

(600

)

 

 

(490

)

Exercise of stock options and employee stock purchases

 

 

619

 

 

 

19

 

Net cash provided by (used in) financing activities

 

 

5,019

 

 

 

(5,471

)

Foreign currency impact on cash

 

 

(24

)

 

 

(109

)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

 

(7,441

)

 

 

209

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS

 

 

 

 

 

 

 

 

Beginning of period

 

 

14,465

 

 

 

11,774

 

End of period

 

$

7,024

 

 

$

11,983

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Income taxes

 

$

595

 

 

$

(213

)

Interest

 

$

44

 

 

$

118

 

Non-cash investing activities:

 

 

 

 

 

 

 

 

Change in capital expenditures in accounts payable

 

$

398

 

 

$

318

 

 

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Statements of Cash Flows.


5


 

 

STRATTEC SECURITY CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 September 26, 2021 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 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 first quarter resulting in a decrease in our net sales for this current quarter as compared to our prior year quarter.

 

6


 

 

The extent of the impact of the COVID-19 outbreak on our future operating results will depend on the duration, intensity and continued spread of the outbreak, regulatory and private sector responses, which may be precautionary and may include potential restrictive operating measures imposed by governmental authorities, and the impact to our customers, workforce and suppliers, in particular related to the sourcing of semiconductor chips, transponders and other critical supply chain components by us and our customers to meet expected production schedules, 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.

 

 

Subsequent Event

On October 5, 2021, our shareholders voted to increase the number of authorized shares of our common stock, $0.01 par value per share, from 12,000,000 shares to 18,000,000 shares.

 

 

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 September 26, 2021 (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

 

October 19, 2021 - June 14, 2022

 

$

12,750

 

 

 

20.72

 

 

$

145

 

 

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):

 

 

 

September 26,

2021

 

 

June 27,

2021

 

Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

Other Current Assets:

 

 

 

 

 

 

 

 

Mexican Peso Forward Contracts

 

$

145

 

 

$

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 (Loss) Income and consisted of the following for the periods indicated below (thousands of dollars):

 

 

Three Months Ended

 

 

 

September 26,

2021

 

 

September 27,

2020

 

Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

Realized Gain (Loss)

 

$

139

 

 

$

(59

)

Unrealized (Loss) Gain

 

$

(98

)

 

$

335

 

 

 

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 September 26, 2021 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 September 26, 2021 (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

 

$

380

 

 

$

 

 

$

 

Mid Cap

 

 

388

 

 

 

 

 

 

 

Large Cap

 

 

790

 

 

 

 

 

 

 

International

 

 

1,084

 

 

 

 

 

 

 

Fixed Income Funds

 

 

961

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

 

 

 

 

1

 

 

 

 

Mexican Peso Forward Contracts

 

 

 

 

 

145

 

 

 

 

Total Assets at Fair Value

 

$

3,603

 

 

$

146

 

 

$

 

 

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.  

8


 

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 $187,000 during the three month period ended September 26, 2021 and $83,000 and during the three month period ended September 27, 2020.

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 loss of joint ventures to STRATTEC of $251,000 during the three month period ended September 26, 2021 and equity earnings of joint ventures to STRATTEC of $825,000 during the three month period ended September 27, 2020. During the three months ended September 26, 2021 and September 27, 2020, no capital contributions were made to VAST LLC by any of the members.

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 decreased net income to STRATTEC of approximately $23.5 million and $318,000, respectively, during the three month period ended September 26, 2021 and increased net sales and increased net income to STRATTEC of approximately $34.1 million and $1.4 million, respectively, during the three month period ended September 27, 2020. 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 $1.6 million in the three month period ended September 26, 2021 and $2.4 million in the three month periods ended September 27, 2020. Additionally, ADAC-STRATTEC LLC sells production parts to ADAC. Sales to ADAC are included in the consolidated results of STRATTEC and totaled $1.2 million in the three month period ended September 26, 2021 and $3.1 million in the three month period ended September 27, 2020.

STRATTEC POWER ACCESS LLC (“SPA”) was formed in fiscal year 2009 to supply the North American portion of the power sliding door, lift gate and deck lid system access control products which were acquired from Delphi Corporation. 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 $21.1 million and $1.2 million, respectively, during the three month period ended September 26, 2021 and $20.6 million and $685,000, respectively, during the three month period ended September 27, 2020.

 

Equity (Loss) Earnings 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.

9


 

The following are summarized statements of operations for VAST LLC (in thousands):  

 

 

 

Three Months Ended

 

 

 

September 26,

2021

 

 

September 27,

2020

 

Net Sales

 

$

42,617

 

 

$

50,411

 

Cost of Goods Sold

 

 

34,892

 

 

 

40,591

 

Gross Profit

 

 

7,725

 

 

 

9,820

 

Engineering, Selling and Administrative Expenses

 

 

8,551

 

 

 

6,603

 

(Loss) Income From Operations

 

 

(826

)

 

 

3,217

 

Other Income (Expense), net

 

 

89

 

 

 

(149

)

(Loss) Income before Provision for Income Taxes

 

 

(737

)

 

 

3,068

 

Provision for Income Taxes

 

 

21

 

 

 

592

 

Net (Loss) Income

 

$

(758

)

 

$

2,476

 

STRATTEC's Share of VAST LLC Net (Loss) Income

 

 

(253

)

 

 

825

 

Intercompany Profit Elimination

 

 

2

 

 

 

 

STRATTEC’s Equity (Loss) Earnings of VAST LLC

 

$

(251

)

 

$

825

 

 

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):

 

 

 

Three Months Ended

 

 

 

 

September 26,

2021

 

 

September 27,

2020

 

 

Sales to VAST LLC

 

$

515

 

 

$

1,216

 

 

Purchases from VAST LLC

 

$

132

 

 

$

187

 

 

Expenses Charged to VAST LLC

 

$

174

 

 

$

507

 

 

Expenses Charged from VAST LLC

 

$

253

 

 

$

292

 

 

 

 

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):

 

 

 

September 26,

2021

 

Right-of Use Asset Under Operating Lease:

 

 

 

 

Other Long-Term Assets

 

$

3,308

 

Lease Obligation Under Operating Lease:

 

 

 

 

Current Liabilities: Accrued Liabilities: Other

 

$

378

 

Other Long-Term Liabilities

 

 

2,930

 

 

 

$

3,308

 

 

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 September 26, 2021 (in thousands):

 

2022 (for the remaining nine months)

 

$

365

 

2023

 

 

497

 

2024

 

 

509

 

2025

 

 

522

 

2026

 

 

535

 

Thereafter

 

 

1,299

 

Total Future Minimum Lease Payments

 

 

3,727

 

Less: Imputed Interest

 

 

(419

)

Total Lease Obligations

 

$

3,308

 

 

Cash flow information related to the operating lease is shown below (in thousands):

 

 

 

Three Months Ended

 

 

 

September 26,

2021

 

 

September 27,

2020

 

Operating Cash Flows:

 

 

 

 

 

 

 

 

Cash Paid Related to Operating Lease Obligation

 

$

119

 

 

$

116

 

 

The weighted average lease term and discount rate for the El Paso, Texas operating lease are shown below:

 

 

 

September 26,

2021

 

Weighted Average Remaining Lease Term (in years)

 

 

7.1

 

Weighted Average Discount Rate

 

 

3.3

%

 

Operating lease expense for the three month periods ended September 26, 2021 and September 27, 2020 totaled $119,000 and $116,000, 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 the London Interbank Offering Rate (“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 September 26, 2021, we were in compliance with all financial covenants required by these credit facilities.

Outstanding borrowings under the credit facilities were as follows (in thousands): 

 

 

 

September 26,

2021

 

 

June 27,

2021

 

STRATTEC Credit Facility

 

$

1,000

 

 

$

 

ADAC-STRATTEC Credit Facility

 

 

16,000

 

 

 

12,000

 

 

 

$

17,000

 

 

$

12,000

 

 

11


 

 

Average outstanding borrowings and the weighted average interest rate under each credit facility referenced above were as follows for each period presented (in thousands): 

 

 

Three Months Ended

 

 

 

Average Outstanding Borrowings

 

 

Weighted Average Interest Rate

 

 

 

September 26,

2021

 

 

September 27,

2020

 

 

September 26,

2021

 

 

September 27,

2020

 

STRATTEC Credit Facility

 

$

330

 

 

$

17,231

 

 

 

2.9

%

 

 

1.2

%

ADAC-STRATTEC Credit Facility

 

$

13,319

 

 

$

17,000

 

 

 

1.4

%

 

 

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 September 26, 2021 is adequate.

 

Shareholders’ Equity

A summary of activity impacting shareholders’ equity for the three month periods ended September 26, 2021 and September 27, 2020 were as follows (in thousands):

 

 

 

Three Months Ended September 26, 2021

 

 

 

Total

Shareholders’

Equity

 

 

Common Stock

 

 

Capital in Excess of Par Value

 

 

Retained Earnings

 

 

Accumulated Other Comprehensive Loss

 

 

Treasury Stock

 

 

Non-Controlling Interest

 

Balance, June 27, 2021

 

$

213,433

 

 

$

74

 

 

$

99,512

 

 

$

234,472

 

 

$

(16,797

)

 

$

(135,615

)

 

$

31,787

 

Net Income

 

 

222

 

 

 

 

 

 

 

 

 

101

 

 

 

 

 

 

 

 

 

121

 

Dividend Declared - Non-

    Controlling Interests of

    Subsidiaries

 

 

(600

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(600

)

Translation Adjustments

 

 

(712

)

 

 

 

 

 

 

 

 

 

 

 

(562

)

 

 

 

 

 

(150

)

Stock Based Compensation

 

 

396

 

 

 

 

 

 

396

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and Postretirement

   Adjustment, Net of

   Tax

 

 

81

 

 

 

 

 

 

 

 

 

 

 

 

81

 

 

 

 

 

 

 

Stock Option Exercises

 

 

600

 

 

 

1

 

 

 

599

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee Stock Purchases

 

 

19

 

 

 

 

 

 

12

 

 

 

 

 

 

 

 

 

7

 

 

 

 

Balance, September 26, 2021

 

$

213,439

 

 

$

75

 

 

$

100,519

 

 

$

234,573

 

 

$

(17,278

)

 

$

(135,608

)

 

$

31,158

 

 

12


 

 

 

 

Three Months Ended September 27, 2020

 

 

 

Total

Shareholders’

Equity

 

 

Common Stock

 

 

Capital in Excess of Par Value

 

 

Retained Earnings

 

 

Accumulated Other Comprehensive Loss

 

 

Treasury Stock

 

 

Non-Controlling Interest

 

Balance, June 28, 2020

 

$

175,441

 

 

$

74

 

 

$

97,977

 

 

$

211,940

 

 

$

(22,113

)

 

$

(135,656

)

 

$

23,219

 

Net Income

 

 

10,073

 

 

 

 

 

 

 

 

 

8,008

 

 

 

 

 

 

 

 

 

2,065

 

Dividend Declared - Non-

    Controlling Interests of

    Subsidiaries

 

 

(490

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(490

)

Translation Adjustments

 

 

1,699

 

 

 

 

 

 

 

 

 

 

 

 

1,378

 

 

 

 

 

 

321

 

Stock Based Compensation

 

 

208

 

 

 

 

 

 

208

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and Postretirement

    Adjustment, Net of

    Tax

 

 

70

 

 

 

 

 

 

 

 

 

 

 

 

70

 

 

 

 

 

 

 

Employee Stock Purchases

 

 

19

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

16

 

 

 

 

Balance, September 27, 2020

 

$

187,020

 

 

$

74

 

 

$

98,188

 

 

$

219,948

 

 

$

(20,665

)

 

$

(135,640

)

 

$

25,115

 

 

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 September 26, 2021 or September 27, 2020.

 

Revenue by Product Group and Customer:  

Revenue by product group for the periods presented was as follows (thousands of dollars):

 

 

 

Three Months Ended

 

 

 

 

September 26,

2021

 

 

September 27,

2020

 

 

Door Handles & Exterior Trim

 

$

23,540

 

 

$

34,091

 

 

Keys & Locksets

 

 

22,841

 

 

 

32,736

 

 

Power Access

 

 

21,140

 

 

 

20,620

 

 

Latches

 

 

10,107

 

 

 

13,835

 

 

Aftermarket & OE Service

 

 

11,896

 

 

 

13,137

 

 

Driver Controls

 

 

8,017

 

 

 

9,787

 

 

Other

 

 

2,800

 

 

 

2,028

 

 

 

 

$

100,341

 

 

$

126,234

 

 

 

Revenue by customer or customer group for the periods presented was as follows (thousands of dollars):

 

 

 

Three Months Ended

 

 

 

 

September 26,

2021

 

 

September 27,

2020

 

 

General Motors Company

 

$

25,684

 

 

$

37,756

 

 

Ford Motor Company

 

 

17,695

 

 

 

15,846

 

 

Commercial and Other OEM

    Customers

 

 

17,412

 

 

 

21,434

 

 

Stellantis (Formerly Fiat Chrysler

    Automobiles)

 

 

16,560

 

 

 

25,083

 

 

Tier 1 Customers

 

 

11,975

 

 

 

17,495

 

 

Hyundai / Kia

 

 

11,015

 

 

 

8,620

 

 

 

 

$

100,341

 

 

$

126,234

 

 

 

13


 

 

Other Income (Expense), net

Net other income (expense) included in the accompanying Condensed Consolidated Statements of Income and Comprehensive (Loss) Income primarily included foreign currency transaction gains and losses, realized and unrealized gains 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 September 26, 2021 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.

The impact of these items for each of the periods presented was as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

 

September 26,

2021

 

 

September 27,

2020

 

 

Foreign Currency Transaction Gain (loss)

 

$

139

 

 

$

(399

)

 

Unrealized (Loss) Gain on Peso Forward

   Contracts

 

 

(98

)

 

 

335

 

 

Realized Gain (Loss) on Peso Forward Contracts

 

 

139

 

 

 

(59

)

 

Pension and Postretirement Plans Cost

 

 

(120

)

 

 

(105

)

 

Rabbi Trust Gain (Loss)

 

 

22

 

 

 

(57

)

 

Other

 

 

48

 

 

 

25

 

 

 

 

$

130

 

 

$

(260

)

 

 

Income Taxes

Our effective tax rate was 14.3% and 13.5% for the three months ended September 26, 2021 and September 27, 2020, 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 the 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 three month period ended September 27, 2020. 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):  

 

 

Three Months Ended

 

 

 

 

September 26,

2021

 

 

September 27,

2020

 

 

 

 

Net Income

 

 

Shares

 

 

Per-Share Amount

 

 

Net Income

 

 

Shares

 

 

Per-Share Amount

 

 

Basic Earnings Per Share

 

$

101

 

 

 

3,830

 

 

$

0.03

 

 

$

8,008

 

 

 

3,765

 

 

$

2.13

 

 

Stock Option and Restricted

   Stock Awards

 

 

 

 

 

63

 

 

 

 

 

 

 

 

 

 

23

 

 

 

 

 

 

Diluted Earnings Per Share

 

$

101

 

 

 

3,893

 

 

$

0.03

 

 

$

8,008

 

 

 

3,788

 

 

$

2.11

 

 

14


 

 

 

The calculation of earnings per share excluded 9,010 and 90,860 share-based payment awards as of September 26, 2021 and September 27, 2020, respectively, 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 September 26, 2021, 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 September 26, 2021 were 175,559. 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 three months ended September 26, 2021 follows:

 

 

 

Shares

 

 

Weighted

Average

Exercise Price

 

 

Weighted

Average

Remaining

Contractual

Term (years)

 

 

Aggregate

Intrinsic

Value

(in thousands)

 

Outstanding, June 27, 2021

 

 

72,624

 

 

$

37.65

 

 

 

 

 

 

 

 

 

Exercised

 

 

22,610

 

 

$

26.53

 

 

 

 

 

 

 

 

 

Outstanding, September 26, 2021

 

 

50,014

 

 

$

42.68

 

 

 

1.8

 

 

$

164

 

Exercisable, September 26, 2021

 

 

50,014

 

 

$

42.68

 

 

 

1.8

 

 

$

164

 

 

The intrinsic value of stock options exercised and the fair value of stock options that vested during the three month periods presented below were as follows (in thousands):

 

 

Three Months Ended

 

 

 

 

September 26,

2021

 

 

September 27,

2020

 

 

Intrinsic Value of Options Exercised

 

$

331

 

 

$

 

 

Fair Value of Stock Options Vesting

 

$

 

 

$

 

 

 

No options were granted during the three month periods ended September 26, 2021 or September 27, 2020.    

 

A summary of restricted stock activity under our stock incentive plan for the three months ended September 26, 2021 follows:

 

 

Shares

 

 

Weighted

Average

Grant Date

Fair Value

 

Nonvested Balance, June 27, 2021

 

 

81,975

 

 

$

23.31

 

Granted

 

 

43,875

 

 

$

42.50

 

Vested

 

 

(35,200

)

 

$

25.91

 

Forfeited

 

 

(350

)

 

$

21.37

 

Nonvested Balance, September 26, 2021

 

 

90,300

 

 

$

10.98

 

15


 

 

 

As of September 26, 2021, all compensation cost related to outstanding stock options granted under our omnibus stock incentive plan has been recognized. As of September 26, 2021, there was approximately $2.1 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 1.3 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 $3.6 million at both September 26, 2021 and 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 (Loss) Income.

The following table summarizes the net periodic benefit cost recognized for each of the periods indicated under these plans (in thousands):

 

 

 

SERP Benefits

 

 

Postretirement Benefits

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

September 26,

2021

 

 

September 27,

2020

 

 

September 26,

2021

 

 

September 27,

2020

 

Service Cost

 

$

16

 

 

$

16

 

 

$

3

 

 

$

3

 

Interest Cost

 

 

13

 

 

 

10

 

 

 

3

 

 

 

4

 

Amortization of Prior Service Credit

 

 

 

 

 

 

 

 

 

 

 

(2

)

Amortization of Unrecognized Net Loss

 

 

22

 

 

 

3

 

 

84

 

 

 

89

 

Net Periodic Benefit Cost

 

$

51

 

 

$

29

 

 

$

90

 

 

$

94

 

 

16


 

 

Accumulated Other Comprehensive Loss

The following tables summarize the changes in accumulated other comprehensive loss (“AOCL”) for each period presented (in thousands):

 

 

 

Three Months Ended September 26, 2021

 

 

 

Foreign

Currency

Translation

Adjustments

 

 

Retirement

and

Postretirement

Benefit Plans

 

 

Total

 

Balance, June 27, 2021

 

$

14,685

 

 

$

2,112

 

 

$

16,797

 

Other Comprehensive Loss Before Reclassifications

 

 

712

 

 

 

 

 

 

712

 

Net Other Comprehensive Loss Before

      Reclassifications

 

 

712

 

 

 

 

 

 

712

 

Reclassifications:

 

 

 

 

 

 

 

 

 

 

 

 

Unrecognized Net Loss (A)

 

 

 

 

 

(106

)

 

 

(106

)

Total Reclassifications Before Tax

 

 

 

 

 

(106

)

 

 

(106

)

Income Tax

 

 

 

 

 

25

 

 

 

25

 

Net Reclassifications

 

 

 

 

 

(81

)

 

 

(81

)

Other Comprehensive Loss

 

 

712

 

 

 

(81

)

 

 

631

 

Other Comprehensive Loss Attributable to Non-

   Controlling Interest

 

 

150

 

 

 

 

 

 

150

 

Balance, September 26, 2021

 

$

15,247

 

 

$

2,031

 

 

$

17,278

 

 

 

 

 

Three Months Ended September 27, 2020

 

 

 

Foreign

Currency

Translation

Adjustments

 

 

Retirement

and

Postretirement

Benefit Plans

 

 

Total

 

Balance, June 28, 2020

 

$

20,136

 

 

$

1,977

 

 

$

22,113

 

Other Comprehensive Loss Before Reclassifications

 

 

(1,699

)

 

 

 

 

 

(1,699

)

Net Other Comprehensive Loss Before

      Reclassifications

 

 

(1,699

)

 

 

 

 

 

(1,699

)

Reclassifications:

 

 

 

 

 

 

 

 

 

 

 

 

Prior Service Credits (A)

 

 

 

 

 

2

 

 

 

2

 

Unrecognized Net Loss (A)

 

 

 

 

 

(92

)

 

 

(92

)

Total Reclassifications Before Tax

 

 

 

 

 

(90

)

 

 

(90

)

Income Tax

 

 

 

 

 

20

 

 

 

20

 

Net Reclassifications

 

 

 

 

 

(70

)

 

 

(70

)

Other Comprehensive Loss

 

 

(1,699

)

 

 

(70

)

 

 

(1,769

)

Other Comprehensive Loss Attributable to Non-

   Controlling Interest

 

 

(321

)

 

 

 

 

 

(321

)

Balance, September 27, 2020

 

$

18,758

 

 

$

1,907

 

 

$

20,665

 

 

(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 (Loss) Income. See Pension and Postretirement Benefits note to these Notes to Condensed Consolidated Financial Statements above.

 

 

 

17


 

 

Item 2

STRATTEC SECURITY CORPORATION AND SUBSIDIARIES

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 in order to replenish low inventory levels at the dealers. 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 shortages continued into our fiscal 2022 first quarter and continue to impact customer production schedules and our ability to meet customer sales demand depending upon fluctuations in our customers’ production order levels.

 

Additionally, during the first quarter of fiscal year 2022, certain of our customers temporarily closed several of their assembly plants in North America due to these continuing global supply chain shortages of critical electronic component parts, including the semiconductor chips, which could continue to disrupt production levels, supply chain costs and 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 strong sales demand going forward is contingent on the impact of the supply chain part shortages referenced above and on the ongoing severity of the COVID-19 pandemic, including any potential worsening thereof, on the North American and overall global economy and its impact on the supply chain shortages of critical electronic component parts seen across the world.

 

 

Analysis of Results of Operations

Three months ended September 26, 2021 compared to the three months ended September 27, 2020

 

 

 

Three Months Ended

 

 

 

September 26,

2021

 

 

September 27,

2020

 

Net Sales (in millions)

 

$

100.3

 

 

$

126.2

 

 

18


 

 

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

 

 

Three Months Ended

 

 

 

September 26,

2021

 

 

September 27,

2020

 

General Motors Company

 

$

25.7

 

 

$

37.8

 

Ford Motor Company

 

 

17.7

 

 

 

15.8

 

Commercial and Other OEM Customers

 

 

17.4

 

 

 

21.4

 

Stellantis (Formerly Fiat Chrysler Automobiles)

 

 

16.5

 

 

 

25.1

 

Tier 1 Customers

 

 

12.0

 

 

 

17.5

 

Hyundai / Kia

 

 

11.0

 

 

 

8.6

 

 

 

$

100.3

 

 

$

126.2

 

 

Current year quarter sales were adversely impacted by the global semiconductor chip shortage that temporarily closed several of our customers’ assembly plants in North America and caused production schedule reductions and which reduced our net sales to all customer groups 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 Ford Motor Company were positively impacted in the current quarter 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 resulting from the global semiconductor chip shortage.

 

-

Hyundai / Kia sales were positively impacted in the current quarter due to higher levels of production on their recently launched Kia Carnival, formerly the Kia Sedona, and Hyundai Starex minivans for which we supply primarily power sliding door components. These higher production levels more than offset the volume reduction 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.

 

 

 

Three Months Ended

 

 

 

September 26, 2021

 

 

September 27, 2020

 

 

 

Millions of

Dollars

 

 

Percent of

Cost of

Goods Sold

 

 

Millions of

Dollars

 

 

Percent of

Cost of

Goods Sold

 

Direct Material Costs

 

$

56.2

 

 

 

64.0

%

 

$

70.5

 

 

 

68.0

%

Labor and Overhead Costs

 

 

31.6

 

 

 

36.0

%

 

 

33.2

 

 

 

32.0

%

   Total Cost of Goods Sold

 

$

87.8

 

 

 

 

 

 

$

103.7

 

 

 

 

 

 

The direct material cost decrease was due to reduced sales volumes between quarters, as discussed above, which more than offset an increase in direct material costs in the current year quarter as compared to the prior year quarter resulting from higher costs for both raw materials and purchased components. Overall, our direct material cost decrease between quarters was in line with our reduced sales dollars between quarters, as discussed above. Our labor and overhead cost decrease between quarters, as discussed below, did not match the pace of our reduced sales dollars between quarters. This resulted in a reduction in our direct material costs as a percentage of cost of goods sold between quarters and an increase in our labor and overhead costs as a percentage of cost of goods sold between quarters.

 

Labor and overhead costs decreased between quarters. The variable portion of our labor and overhead cost decreased as a result of the reduction in sales volumes between quarters, which was driven by the global semiconductor chip shortage as previously discussed. Labor and overhead costs were further impacted by the following:

Cost Increases:

 

-

The U.S. dollar value of our Mexican operations was negatively impacted by approximately $1.7 million in the current year quarter as compared to the prior year quarter due to an unfavorable Mexican peso to U.S. dollar exchange rate between these periods. The average U.S. dollar / Mexican peso exchange rate increased to approximately 20.00 pesos to the dollar in the current quarter from approximately 22.21 pesos to the dollar in the prior year quarter.

 

-

Mexico wages and benefits increased $900,000 as a result of a January 1, 2021 minimum wage increase.

 

-

Current year quarter 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 $970,000 between periods.

19


 

 

 

 

 

Three Months Ended

 

 

 

September 26,

2021

 

 

September 27,

2020

 

Gross Profit (in millions)

 

$

12.5

 

 

$

22.5

 

Gross Profit as a percentage of net sales

 

 

12.5

%

 

 

17.8

%

 

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, an unfavorable Mexican peso to U.S. dollar exchange rate affecting our operations in Mexico, and increases in Mexico wages resulting from a January 1, 2021 minimum wage increase, all of which were partially offset by a decrease in expense provisions for the accrual of bonuses under our incentive bonus plan, all as discussed above.

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

 

 

 

Three Months Ended

 

 

 

September 26,

2021

 

 

September 27,

2020

 

Expenses (in millions)

 

$

12.1

 

 

$

11.3

 

Expenses as a percentage of net sales

 

 

12.1

%

 

 

9.0

%

 

Engineering, selling and administrative expenses in the current year quarter increased in comparison to the prior year quarter due to higher costs for our salaried workforce as the prior year quarter included temporary wage reductions that we implemented to address the impact of the COVID-19 pandemic on our operations. These increased costs were partially offset by a decrease of approximately $700,000 in expense provisions for the accrual of bonuses under our incentive bonus plan between quarters.

Income from operations was $428,000 in the current year quarter compared to $11.2 million in the prior year quarter due to a decrease in gross profit margin dollars and an increase in engineering, selling and administrative expenses between quarters, all as discussed above.

The equity loss of joint ventures was $251,000 in the current year quarter compared to equity earnings of joint ventures of $825,000 in the prior year quarter. Lower profitability from our VAST LLC joint venture resulted from reduced net sales and reduced profitability in our VAST China operation between quarters. The reduced profitability in our VAST China operation stemmed from the current global semiconductor chip shortage described above. VAST LLC, including VAST China, is a crucial part of our global strategy and 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. Our VAST LLC joint ventures in India and Brazil continue to report losses due to our limited amount of business in both regions as well as the impact of COVID-19 and the global semiconductor chip shortage described above.

Included in Other Income (Expense), net in the current year quarter and prior year quarter were the following items (in thousands): 

 

 

Three Months Ended

 

 

 

September 26,

2021

 

 

September 27,

2020

 

Foreign Currency Transaction Gain (Loss)

 

$

139

 

 

$

(399

)

Unrealized (Loss) Gain on Peso Forward Contracts

 

 

(98

)

 

 

335

 

Realized Gain (Loss) on Peso Forward Contracts

 

 

139

 

 

 

(59

)

Pension and Postretirement Plans Cost

 

 

(120

)

 

 

(105

)

Rabbi Trust Gain (Loss)

 

 

22

 

 

 

(57

)

Other

 

 

48

 

 

 

25

 

 

 

$

130

 

 

$

(260

)

 

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

 

-

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 September 26,

20


 

 

2021 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 14.3% and 13.5% for the three months ended September 26, 2021 and September 27, 2020, 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 the 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 three month period ended September 27, 2020. 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.

 

Liquidity and Capital Resources

Working Capital (in millions)

 

 

September 26,

2021

 

 

June 27,

2021

 

 

 

 

 

 

 

 

 

 

Current Assets

 

$

175.6

 

 

$

174.9

 

Current Liabilities

 

 

70.4

 

 

 

77.6

 

Working Capital

 

$

105.2

 

 

$

97.3

 

 

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 September 26, 2021 was as follows (in millions):

 

General Motors Company

 

$

18.5

 

Stellantis (Formerly Fiat Chrysler Automobiles)

 

$

10.8

 

Ford Motor Company

 

$

11.7

 

 

Cash Balances in Mexico

We earn a portion of our operating income in Mexico. As of September 26, 2021, $1.9 million of our $7.0 million cash and cash equivalents balance was held in Mexico. These funds are available for repatriation as deemed necessary.

Cash Flow Analysis (in millions) 

 

 

Three Months Ended

 

 

 

September 26,

2021

 

 

September 27,

2020

 

Cash Flows from (in millions):

 

 

 

 

 

 

 

 

Operating Activities

 

$

(9.6

)

 

$

7.3

 

Investing Activities

 

$

(2.8

)

 

$

(1.5

)

Financing Activities

 

$

5.0

 

 

$

(5.5

)

 

The decrease in cash provided by operating activities between periods is due to a reduction in net income between periods along with a net increase in our working capital requirements between periods of approximately $8.2 million. The net increase in our working capital requirements between periods was made up of the following working capital changes (in millions):

 

21


 

 

 

 

Increase (Decrease) in Working Capital Requirements

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 26,

2021

 

 

September 27,

2020

 

 

Change

 

Accounts Receivable

 

$

(3.3

)

 

$

37.8

 

 

$

(41.1

)

Inventory

 

$

6.8

 

 

$

(2.7

)

 

$

9.5

 

Other Assets

 

$

4.7

 

 

$

0.3

 

 

$

4.4

 

Accounts Payable and Accrued Liabilities

 

$

7.4

 

 

$

(27.9

)

 

$

35.3

 

 

Set forth below is a summary of the items impacting the change in our working capital requirements between quarters:

 

-

The change in the accounts receivable balances is the result of the amount and timing of sales during each year. The decrease in accounts receivable balances during the current year quarter is the result of reduced sales in the quarter stemming from the global semiconductor chip shortage. The increase in accounts receivable balances during the prior year quarter 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.

 

-

The change in inventory levels reflected an increase in inventory balances during the current year quarter and a decrease in inventory balances during the prior year quarter. The current year period increase was due to an inventory build-up during our fiscal 2022 first quarter while our OEM customers experienced assembly plant shut-downs and reduced production schedules due to certain part shortages, including semiconductor chips. The prior year quarter decrease was due to an inventory build-up from the end of March 2020 through June 2020 as a result of our OEM customers reducing production schedules and closing their assembly plants due to COVID-19 during this time. Inventory balances then decreased during the fiscal 2021 first quarter as inventory was shipped to meet increased OEM production schedules as customer plants reopened.

 

-

The change in other assets was the result of an increase in our customer tooling balances in the current quarter. Customer tooling balances during each quarter consisted of costs incurred for the development of tooling that will be directly reimbursed by our customer whose parts are produced from the tool. The current year quarter change in customer tooling balances was the result of 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 primarily the result of the payment of fiscal 2021 accrued bonuses during the current year quarter and an increase in accounts payable balances during the prior year quarter. Bonus accruals at June 2021, which were paid during the current year quarter, totaled $6.6 million. The prior year quarter accounts payable balance increase 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 quarter reflected the timing of purchases and payments with our vendors based on normal, established payment terms.

Net cash used by investing activities of $2.8 million during the current year quarter and $1.5 million during the prior year quarter were the result of capital expenditures made in support of requirements for new product programs and the upgrade and replacement of existing equipment.

Net cash provided by financing activities during the current year quarter of $5.0 million included increased borrowings under our credit facilities of $7.0 million and $619,000 received for the exercise of stock options under our stock incentive plan and purchases under our employee stock purchase plan, partially offset by $2.0 million of repayments of borrowings under our credit facilities and $600,000 of dividend payments to non-controlling interests in our subsidiaries. Net cash used in financing activities of $5.5 million during the prior year quarter included repayments of borrowings under credit facilities of $5.0 million and $490,000 of dividend payments to non-controlling interests in our subsidiaries, partially offset by $19,000 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. No capital contributions were made to VAST LLC during the three months ended September 26, 2021 or September 27, 2020. Due to economic conditions in Brazil, we anticipate Sistema de Acesso Veicular Ltda may require an additional capital contribution of approximately $300,000 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 $100,000. During the three months ended September 26, 2021 and September 27, 2020, VAST LLC made no capital contributions to Minda-VAST Access Systems. Due to Minda-VAST Access System recently experiencing losses and due to the continuing impacts of the COVID-19 pandemic and the continuing supply chain shortages of critical electronic component parts, future capital contributions may be required by the partners in this joint venture.

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Future Capital Expenditures

We anticipate capital expenditures will be approximately $13 million in total in fiscal 2022, of which $2.8 million has been made through September 26, 2021, 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 September 26, 2021. A total of 3,655,322 shares have been repurchased over the life of the program through September 26, 2021, at a cost of approximately $136.4 million. No shares were repurchased during the three month periods ended September 26, 2021 or September 27, 2020. Additional repurchases may occur from time to time and are expected to continue to be funded by cash flow from operations and current cash balances. Based on the current economic environment and our preference to conserve cash for other uses, we anticipate modest or no stock repurchase activity for the remainder of fiscal year 2022.

Credit Facilities

STRATTEC has a $40 million secured revolving credit facility (the “STRATTEC Credit Facility”) with BMO Harris Bank N.A. ADAC-STRATTEC LLC has a $25 million secured revolving credit facility (the “ADAC-STRATTEC Credit Facility”) with BMO Harris Bank N.A., which is guaranteed by STRATTEC. The credit facilities both expire August 1, 2024. Borrowings under either credit facility are secured by our U.S. cash balances, accounts receivable, inventory, and fixed assets located in the U.S. Interest on borrowings under the STRATTEC Credit Facility through May 31, 2021 was at varying rates based, at our option, on the London Interbank Offering Rate (“LIBOR”) plus 1.0 percent or the bank’s prime rate. Interest on borrowings under the ADAC-STRATTEC Credit Facility through May 31, 2021 was at varying rates based, at our option, on LIBOR plus 1.25 percent or the bank’s prime rate. Effective June 1, 2021 interest on borrowings under both credit facilities were at varying rates based, at our option, on the London Interbank Offering Rate (“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 September 26, 2021, we were in compliance with all financial covenants required by these credit facilities. Outstanding borrowings under the STRATTEC Credit Facility totaled $1 million at September 26, 2021. There were no outstanding borrowings under the STRATTEC Credit Facility at June 27, 2021. The average outstanding borrowings and weighted average interest rate on the STRATTEC Credit Facility loans were approximately $330,000 and 2.9 percent, respectively, during the three months ended September 26, 2021. Outstanding borrowings under the ADAC-STRATTEC Credit Facility totaled $16 million at September 26, 2021 and $12 million at June 27, 2021. The average outstanding borrowings and weighted average interest rate on the ADAC-STRATTEC Credit Facility loans were approximately $13.3 million and 1.4 percent, respectively, during the three months ended September 26, 2021.

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 (Loss) Earnings of Joint Ventures included elsewhere in Notes to Condensed Consolidated Financial Statements within this Form 10-Q.

 

 

 

 

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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.

 

 

 

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Part II

 

Other Information

 

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 September 26, 2021, a total of 3,655,322 shares have been repurchased at a cost of approximately $136.4 million. No shares were repurchased during the three month period ended September 26, 2021.

 

Item 3 Defaults Upon Senior Securities—None

 

Item 4 Mine Safety Disclosures—None

 

Item 5 Other Information—None

 


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Item 6 Exhibits

(a)

Exhibits

 

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.)

 

 

 

3.3

 

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 September 26, 2021 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Condensed Consolidated Statements of Income and Comprehensive (Loss) 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 September 26, 2021, 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.

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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: November 4, 2021

By:

 

/s/ Patrick J. Hansen

 

 

 

Patrick J. Hansen

 

 

 

Senior Vice President,

 

 

 

Chief Financial Officer,

 

 

 

Treasurer and Secretary

 

 

 

(Principal Accounting and Financial Officer)

 

 

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