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STRATTEC SECURITY CORP - Quarter Report: 2023 January (Form 10-Q)

10-Q

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 January 1, 2023

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: 4,015,133 shares outstanding as of January 2, 2023 (which number includes all restricted shares previously awarded that have not vested as of such date).

 

 


STRATTEC SECURITY CORPORATION

FORM 10-Q

January 1, 2023

INDEX

 

 

 

Page

Part I - FINANCIAL INFORMATION

 

Item 1

Financial Statements

 

 

Condensed Consolidated Statements of (Loss) 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)

6-22

Item 2

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

23-30

Item 3

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4

Controls and Procedures

31

 

 

 

Part II - OTHER INFORMATION

 

Item 1

Legal Proceedings

32

Item 1A

Risk Factors

32

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 3

Defaults Upon Senior Securities

32

Item 4

Mine Safety Disclosures

32

Item 5

Other Information

32

Item 6

Exhibits

33

PROSPECTIVE INFORMATION

A number of the matters and subject areas discussed in this Form 10-Q contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as “anticipate,” “believe,” “could,” “expect,” “intend,” “may,” “planned,” “potential,” “should,” “will,” and “would,” or the negative of these terms or words of similar meaning. These statements include expected future financial results, product offerings, global expansion, liquidity needs, financing ability, planned capital expenditures, management’s or the Company’s expectations and beliefs, and similar matters discussed in this Form 10-Q. The discussion of such matters and subject areas contained herein is qualified by the inherent risks and uncertainties surrounding future expectations generally, and also may materially differ from the Company’s actual future experience.

The Company’s business, operations and financial performance are subject to certain risks and uncertainties, which could result in material differences in actual results from the Company’s current expectations. These risks and uncertainties include, but are not limited to, general economic conditions, in particular relating to the automotive industry, consumer demand for the Company’s and its customers’ products, competitive and technological developments, customer purchasing actions, changes in warranty provisions and customers’ product recall policies, work stoppages at the Company or at the location of its key customers as a result of labor disputes, foreign currency fluctuations, uncertainties stemming from U.S. trade policies, tariffs and reactions to same from foreign countries, the volume and scope of product returns or customer cost reimbursement actions, changes in the costs of operations, warranty claims, adverse business and operational issues resulting from the global supply chain and logistics disruption, the semiconductor chip supply shortages and the Coronavirus (COVID-19) pandemic, 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, matters related to pricing actions implemented by the Company and customer responses and concessions related to same, and other matters described in the section titled “Risk Factors” in the Company’s Form 10-K report filed on September 8, 2022 with the Securities and Exchange Commission for the year ended July 3, 2022.

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 (Loss) Income and Comprehensive (Loss) Income

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

 

Three Months Ended

 

 

Six Months Ended

 

 

January 1,
2023

 

 

December 26,
2021

 

 

January 1,
2023

 

 

December 26,
2021

 

Net sales

$

113,184

 

 

$

112,908

 

 

$

233,544

 

 

$

213,249

 

Cost of goods sold

 

105,797

 

 

 

97,975

 

 

 

213,661

 

 

 

185,767

 

Gross profit

 

7,387

 

 

 

14,933

 

 

 

19,883

 

 

 

27,482

 

Engineering, selling and administrative expenses

 

12,081

 

 

 

11,301

 

 

 

24,781

 

 

 

23,422

 

(Loss) income from operations

 

(4,694

)

 

 

3,632

 

 

 

(4,898

)

 

 

4,060

 

Equity earnings of joint ventures

 

588

 

 

 

615

 

 

 

1,115

 

 

 

364

 

Interest expense

 

(196

)

 

 

(57

)

 

 

(325

)

 

 

(105

)

Other income (expense), net

 

52

 

 

 

(100

)

 

 

(241

)

 

 

26

 

(Loss) income before provision for
      income taxes and non-controlling interest

 

(4,250

)

 

 

4,090

 

 

 

(4,349

)

 

 

4,345

 

(Benefit) provision for income taxes

 

(1,735

)

 

 

253

 

 

 

(1,771

)

 

 

289

 

Net (loss) income

 

(2,515

)

 

 

3,837

 

 

 

(2,578

)

 

 

4,056

 

Net (loss) income attributable to non-
      controlling interest

 

(676

)

 

 

446

 

 

 

(864

)

 

 

567

 

Net (loss) income attributable to STRATTEC
      SECURITY CORPORATION

$

(1,839

)

 

$

3,391

 

 

$

(1,714

)

 

$

3,489

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

$

(2,515

)

 

$

3,837

 

 

$

(2,578

)

 

$

4,056

 

Pension and postretirement plans, net of tax

 

70

 

 

 

76

 

 

 

140

 

 

 

154

 

Currency translation adjustments

 

429

 

 

 

(544

)

 

 

(253

)

 

 

(1,256

)

Other comprehensive income (loss), net of tax

 

499

 

 

 

(468

)

 

 

(113

)

 

 

(1,102

)

Comprehensive (loss) income

 

(2,016

)

 

 

3,369

 

 

 

(2,691

)

 

 

2,954

 

Comprehensive (loss) income attributable to
       non-controlling interest

 

(207

)

 

 

93

 

 

 

(339

)

 

 

64

 

Comprehensive (loss) income attributable to
      STRATTEC SECURITY CORPORATION

$

(1,809

)

 

$

3,276

 

 

$

(2,352

)

 

$

2,890

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings per share attributable to
      STRATTEC SECURITY CORPORATION:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.47

)

 

$

0.88

 

 

$

(0.44

)

 

$

0.91

 

Diluted

$

(0.47

)

 

$

0.87

 

 

$

(0.44

)

 

$

0.89

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

3,927

 

 

 

3,866

 

 

 

3,913

 

 

 

3,848

 

Diluted

 

3,927

 

 

 

3,908

 

 

 

3,913

 

 

 

3,901

 

 

 

 

 

 

 

 

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

3


 

STRATTEC SECURITY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In Thousands, Except Share Amounts)

(Unaudited)

 

 

January 1,
2023

 

 

July 3,
2022

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

$

13,578

 

 

$

8,774

 

Receivables, net

 

73,205

 

 

 

75,827

 

Inventories:

 

 

 

 

 

Finished products

 

14,953

 

 

 

19,499

 

Work in process

 

15,211

 

 

 

18,263

 

Purchased materials

 

43,532

 

 

 

48,209

 

Excess and obsolete reserve

 

(5,845

)

 

 

(5,489

)

Inventories, net

 

67,851

 

 

 

80,482

 

Other current assets

 

34,646

 

 

 

23,149

 

Total current assets

 

189,280

 

 

 

188,232

 

Investment in joint ventures

 

26,301

 

 

 

26,654

 

Deferred Income Taxes

 

7,150

 

 

 

7,081

 

Other long-term assets

 

5,263

 

 

 

5,438

 

Property, plant and equipment

 

287,997

 

 

 

278,249

 

Less: accumulated depreciation

 

(195,220

)

 

 

(186,520

)

Net property, plant and equipment

 

92,777

 

 

 

91,729

 

 

$

320,771

 

 

$

319,134

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

$

37,292

 

 

$

43,950

 

Accrued Liabilities:

 

 

 

 

 

Payroll and benefits

 

18,878

 

 

 

17,959

 

Environmental

 

1,390

 

 

 

1,390

 

Warranty

 

7,760

 

 

 

8,100

 

Other

 

14,216

 

 

 

10,130

 

Total current liabilities

 

79,536

 

 

 

81,529

 

Borrowings under credit facilities

 

17,000

 

 

 

11,000

 

Accrued pension obligations

 

1,338

 

 

 

1,259

 

Accrued postretirement obligations

 

1,333

 

 

 

1,329

 

Other long-term liabilities

 

3,888

 

 

 

4,070

 

Shareholders’ Equity:

 

 

 

 

 

Common stock, authorized 18,000,000 shares, $.01 par value, 7,530,170
   issued shares at January 1, 2023 and
7,481,169 issued shares at
   July 3, 2022

 

75

 

 

 

75

 

Capital in excess of par value

 

102,520

 

 

 

101,524

 

Retained earnings

 

239,255

 

 

 

240,969

 

Accumulated other comprehensive loss

 

(19,226

)

 

 

(18,588

)

Less: treasury stock, at cost (3,602,937 shares at January 1, 2023 and
   
3,604,466 shares at July 3, 2022)

 

(135,556

)

 

 

(135,580

)

Total STRATTEC SECURITY CORPORATION shareholders’ equity

 

187,068

 

 

 

188,400

 

Non-controlling interest

 

30,608

 

 

 

31,547

 

Total shareholders’ equity

 

217,676

 

 

 

219,947

 

 

$

320,771

 

 

$

319,134

 

 

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)

 

 

Six Months Ended

 

 

January 1,
2023

 

 

December 26,
2021

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net (loss) income

$

(2,578

)

 

$

4,056

 

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

 

 

 

 

 

Depreciation

 

8,798

 

 

 

9,968

 

Foreign currency transaction loss (gain)

 

585

 

 

 

(243

)

Unrealized loss on peso forward contracts

 

23

 

 

 

224

 

Stock-based compensation expense

 

874

 

 

 

634

 

Equity earnings of joint ventures

 

(1,115

)

 

 

(364

)

Change in operating assets and liabilities:

 

 

 

 

 

Receivables

 

2,702

 

 

 

(2,644

)

Inventories

 

12,631

 

 

 

(2,383

)

Other assets

 

(11,177

)

 

 

1,365

 

Accounts payable and accrued liabilities

 

(2,258

)

 

 

(10,928

)

Other, net

 

250

 

 

 

333

 

Net cash provided by operating activities

 

8,735

 

 

 

18

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Investment in joint ventures

 

(104

)

 

 

 

Purchase of property, plant and equipment

 

(9,477

)

 

 

(5,362

)

Proceeds received on sale of property, plant and equipment

 

4

 

 

 

 

Net cash used in investing activities

 

(9,577

)

 

 

(5,362

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Borrowings under credit facilities

 

9,000

 

 

 

8,000

 

Repayment of borrowings under credit facilities

 

(3,000

)

 

 

(3,000

)

Dividends paid to non-controlling interests of subsidiaries

 

(600

)

 

 

(600

)

Exercise of stock options and employee stock purchases

 

146

 

 

 

639

 

Net cash provided by financing activities

 

5,546

 

 

 

5,039

 

Foreign currency impact on cash

 

100

 

 

 

(89

)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

4,804

 

 

 

(394

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS

 

 

 

 

 

Beginning of period

 

8,774

 

 

 

14,465

 

End of period

$

13,578

 

 

$

14,071

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid (recovered) during the period for:

 

 

 

 

 

Income taxes

$

946

 

 

$

(2,031

)

Interest

$

244

 

 

$

100

 

Non-cash investing activities:

 

 

 

 

 

Change in capital expenditures in accounts payable

$

(553

)

 

$

624

 

 

 

 

 

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 January 1, 2023 and July 3, 2022, 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 2022 Form 10-K, which was filed with the Securities and Exchange Commission on September 8, 2022.

During December 2022, management determined that a previously unrecorded liability for postretirement death benefits is required to be recognized in accordance with ASC 715. Eligible participants for this death benefit include all salaried retirees who retired prior to October 1, 2001 and all hourly retirees who were hired prior to June 27, 2005 and retired prior to January 1, 2010. As such, the actuarially calculated liability and the unrecognized actuarial losses impacting Accumulated Other Comprehensive Loss will be reported in the Condensed Consolidated Balance Sheets. Additionally, interest cost and amortization of actuarial losses will be reported in the in the Condensed Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income.

Additionally, management identified a correction to previously reported Equity Earnings of Joint Ventures in the Condensed Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income, which correction also impacts the previously reported Investment in Joint Ventures amount reported in the Condensed Consolidated Balance Sheets. While prior period amounts have been corrected for comparability, the corrections, both individually and in total, were not material to the previously reported condensed consolidated financial statements.

 

6


 

The impact of the prior period corrections on the Condensed Consolidated Balance Sheet, the related components of Stockholders’ Equity, and the related components of Accumulate Other Comprehensive Loss is as follows (thousands of dollars):

 

 

July 3, 2022

 

 

Previously Reported

 

Adjustment

 

As Reported

 

ASSETS

 

 

 

 

 

 

Investment in joint ventures

$

26,344

 

$

310

 

$

26,654

 

Deferred income taxes

 

6,937

 

 

144

 

 

7,081

 

Total assets

$

318,680

 

$

454

 

$

319,134

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

Accrued Liabilities: Payroll and
     benefits

$

17,905

 

$

54

 

$

17,959

 

Total current liabilities

 

81,475

 

 

54

 

 

81,529

 

Accrued postretirement obligations

 

463

 

 

866

 

 

1,329

 

 

 

 

 

 

 

 

Retained earnings

 

241,504

 

 

(535

)

 

240,969

 

Accumulated other comprehensive loss

 

(18,657

)

 

69

 

 

(18,588

)

Total STRATTEC SECURITY
     CORPORATION shareholders'
     equity

 

188,866

 

 

(466

)

 

188,400

 

Total shareholders' equity

 

220,413

 

 

(466

)

 

219,947

 

Total liabilities and shareholders'
     equity

$

318,680

 

$

454

 

$

319,134

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Loss:

 

 

 

 

 

 

Foreign currency translation adjustments

$

(16,723

)

$

(10

)

$

(16,733

)

Retirement and Postretirement Benefit Plans

 

(1,934

)

 

79

 

 

(1,855

)

Accumulated other comprehensive loss

$

(18,657

)

$

69

 

$

(18,588

)

 

 

October 2, 2022

 

 

December 26, 2021

 

 

Previously Reported

 

Adjustment

 

As Reported

 

 

Previously Reported

 

Adjustment

 

As Reported

 

Retained earnings

$

241,632

 

$

(538

)

$

241,094

 

 

$

237,967

 

$

(525

)

$

237,442

 

Accumulated other comprehensive loss

 

(19,320

)

 

64

 

 

(19,256

)

 

 

(17,391

)

 

(122

)

 

(17,513

)

Total STRATTEC SECURITY
     CORPORATION shareholders' equity

 

189,068

 

 

(474

)

 

188,594

 

 

 

185,820

 

 

(647

)

 

185,173

 

Total shareholders' equity

$

219,883

 

$

(474

)

$

219,409

 

 

$

217,071

 

$

(647

)

$

216,424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

$

(17,461

)

$

(10

)

$

(17,471

)

 

$

(15,438

)

$

2

 

$

(15,436

)

Retirement and Postretirement Benefit
     Plans

 

(1,859

)

 

74

 

 

(1,785

)

 

 

(1,953

)

 

(124

)

 

(2,077

)

Accumulated other comprehensive loss

$

(19,320

)

$

64

 

$

(19,256

)

 

$

(17,391

)

$

(122

)

$

(17,513

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 26, 2021

 

 

June 27, 2021

 

 

Previously Reported

 

Adjustment

 

As Reported

 

 

Previously Reported

 

Adjustment

 

As Reported

 

Retained earnings

$

234,573

 

$

(522

)

$

234,051

 

 

$

234,472

 

$

(519

)

$

233,953

 

Accumulated other comprehensive loss

 

(17,278

)

 

(120

)

 

(17,398

)

 

 

(16,797

)

 

(117

)

 

(16,914

)

Total STRATTEC SECURITY
     CORPORATION shareholders' equity

 

182,281

 

 

(642

)

 

181,639

 

 

 

181,646

 

 

(636

)

 

181,010

 

Total shareholders' equity

$

213,439

 

$

(642

)

$

212,797

 

 

$

213,433

 

$

(636

)

$

212,797

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

$

(15,247

)

$

2

 

$

(15,245

)

 

$

(14,685

)

$

2

 

$

(14,683

)

Retirement and Postretirement Benefit
     Plans

 

(2,031

)

 

(122

)

 

(2,153

)

 

 

(2,112

)

 

(119

)

 

(2,231

)

Accumulated other comprehensive loss

$

(17,278

)

$

(120

)

$

(17,398

)

 

$

(16,797

)

$

(117

)

$

(16,914

)

 

7


 

The impact of the prior period corrections on the Condensed Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income is as follows (thousands of dollars):

 

 

Three Months Ended December 26, 2021

 

 

Six Months Ended December 26, 2021

 

 

Previously Reported

 

Adjustment

 

As Reported

 

 

Previously Reported

 

Adjustment

 

As Reported

 

Other (expense) income, net

$

(95

)

$

(5

)

$

(100

)

 

$

35

 

$

(9

)

$

26

 

Income before provision for
     income taxes and non-controlling
     interest

 

4,095

 

 

(5

)

 

4,090

 

 

 

4,354

 

 

(9

)

 

4,345

 

Provision for income taxes

 

255

 

 

(2

)

 

253

 

 

 

292

 

 

(3

)

 

289

 

Net income

 

3,840

 

 

(3

)

 

3,837

 

 

 

4,062

 

 

(6

)

 

4,056

 

Net income attributed to STRATTEC
     SECURITY CORPORATION

$

3,394

 

$

(3

)

$

3,391

 

 

$

3,495

 

$

(6

)

$

3,489

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

3,840

 

$

(3

)

$

3,837

 

 

$

4,062

 

$

(6

)

$

4,056

 

Pension and postretirement plans,
     net of tax

 

78

 

 

(2

)

 

76

 

 

 

159

 

 

(5

)

 

154

 

Other comprehensive (loss)
     income, net of tax

 

(466

)

 

(2

)

 

(468

)

 

 

(1,097

)

 

(5

)

 

(1,102

)

Comprehensive income

 

3,374

 

 

(5

)

 

3,369

 

 

 

2,965

 

 

(11

)

 

2,954

 

Comprehensive income attributed
     to STRATTEC SECURITY
     CORPORATION

$

3,281

 

$

(5

)

$

3,276

 

 

$

2,901

 

$

(11

)

$

2,890

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributed to
     STRATTEC SECURITY
     CORPORATION: diluted

$

0.87

 

$

-

 

$

0.87

 

 

$

0.90

 

$

(0.01

)

$

0.89

 

 

The correction of prior period amounts had no impact on total operating, investing, and financing activities on the Condensed Consolidated Statements of Cash Flows during the six month period ended December 26, 2021. In conjunction with the correction of the prior period amounts, the following footnotes, which were impacted by the above adjustments, were also corrected: Shareholders’ Equity, Other Income (Expense), net, Earnings Per Share, Pension and Postretirement Benefits, and Accumulated Other Comprehensive Loss.

Risks and Uncertainties

In December 2019, a novel strain of coronavirus (COVID-19) was reported in Wuhan, China. The coronavirus subsequently spread, and infections occurred 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, as well as the recent conflict in the Ukraine, 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.

 

 

8


 

STRATTEC’s operating performance is subject to global economic conditions, inflationary pressures and levels of consumer spending specifically within the automotive industry and its operating performance has been impacted by the lingering effects of the COVID-19 pandemic and the war in the Ukraine, all as described above. 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 fiscal 2022. Although semiconductor chip availability improved during the first six months of our fiscal 2023 relative to our fiscal 2022, negative impacts of the shortage continue to affect STRATTEC, specifically as it pertains to aftermarket products, which trail the prioritization of production of components for production vehicles in the allocation of semiconductor chips. Additionally, inflationary pressures resulted in increased raw material and purchased part costs as well as higher labor costs associated with mandatory minimum wage increases in Mexico beginning in calendar 2021. Such increases negatively impacted our operating results in our fiscal 2022 and continued to escalate during the first six months of our fiscal 2023.

 

Each of the COVID-19 outbreak, the Ukraine conflict and the resulting inflationary pressures in the U.S. and global economy, which have adversely impacted, and continue to do so, pricing conditions for necessary raw materials and purchased components in our products, continue to adversely impact our operating results due mostly to the supply chain continuity and disruption issues noted above, and in particular related to the supply of semiconductor chips, transponders and related components to our customers in the automotive industry. The extent of such impacts, including related to their duration and intensity, depends upon any continued spread of the COVID-19 outbreak, the length of the Ukraine conflict, and related regulatory or operating restraints, which may be precautionary, imposed by local governments and the private sector and by any continuing inflationary pressures in the U.S. and global economies. All of these events may continue to impact the supply chain and our operations, including impacting our customers, workforce and suppliers, any of which may continue to disrupt and limit sourcing of semiconductor chips, transponders and other critical supply chain components needed by us and our customers to meet expected production schedules. Moreover, these events may continue to create added inflationary pressures on our operations, including related to wages and the prices of raw materials and purchased parts. All of these foregoing matters, including their scope and duration 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 in our financial statements. 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 Standard

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 do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.

 

Subsequent Event

Subsequent to January 1, 2023, the ADAC-STRATTEC Credit Facility, as described under Credit Facilities, was amended such that effective with the first borrowing subsequent to February 6, 2023, interest on borrowings under the credit facility will be at varying rates based, at our option, on Term SOFR plus 1.35 percent or the bank’s prime rate. The amendment also modifies the calculation of the fixed charge coverage ratio and the required level of minimum net worth for all future periods under the ADAC-STRATTEC Credit Facility. Refer to the discussion under Credit Facilities.

 

 

9


 

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 January 1, 2023 (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

 

January 17, 2023 - June 13, 2023

 

$

4,500

 

 

 

22.51

 

 

$

604

 

 

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):

 

 

January 1,
2023

 

 

July 3,
2022

 

Not Designated as Hedging Instruments:

 

 

 

 

 

Other Current Assets:

 

 

 

 

 

Mexican Peso Forward Contracts

$

604

 

 

$

627

 

 

 

The pre-tax effects of the Mexican peso forward contracts are included in Other Income (Expense), net on the accompanying Condensed Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income and consisted of the following for the periods indicated below (thousands of dollars):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

January 1,
2023

 

 

December 26,
2021

 

 

January 1,
2023

 

 

December 26,
2021

 

Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

Realized Gain

$

307

 

 

$

45

 

 

$

545

 

 

$

184

 

Realized (Loss)

$

 

 

$

(49

)

 

$

 

 

$

(49

)

Unrealized (Loss) Gain

$

12

 

 

$

(126

)

 

$

(23

)

 

$

(224

)

 

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 January 1, 2023 and July 3, 2022. 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.

10


 

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of January 1, 2023 (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

$

148

 

 

$

 

 

$

 

Mid Cap

 

300

 

 

 

 

 

 

 

Large Cap

 

421

 

 

 

 

 

 

 

International

 

460

 

 

 

 

 

 

 

Fixed Income Funds

 

1,004

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

 

 

 

970

 

 

 

 

Mexican Peso Forward Contracts

 

 

 

 

604

 

 

 

 

Total Assets at Fair Value

$

2,333

 

 

$

1,574

 

 

$

 

 

The Rabbi Trust assets fund our Amended and Restated Supplemental Executive Retirement Plan. Of the January 1, 2023 $3.3 million Rabbi Trust asset balance, $863,000 was included in Other Current Assets and $2.4 million was included in Other Long-term Assets in the accompanying Condensed Consolidated Balance Sheets.

Investment in Joint Ventures and Majority Owned Subsidiaries

We participate in certain Alliance Agreements with WITTE Automotive (“WITTE”) and ADAC Automotive (“ADAC”). WITTE, of Velbert, Germany, is a privately held automotive supplier. WITTE designs, manufactures and markets automotive components, including locks and keys, hood latches, rear compartment latches, seat back latches, door handles and specialty fasteners. WITTE’s primary market for these products has been Europe. ADAC, of Grand Rapids, Michigan, is a privately held automotive supplier and manufactures engineered products, including door handles and other automotive trim parts, utilizing plastic injection molding, automated painting and various assembly processes.

The Alliance Agreements include a set of cross-licensing agreements for the manufacture, distribution and sale of WITTE products by STRATTEC and ADAC in North America, and the manufacture, distribution and sale of STRATTEC and ADAC products by WITTE in Europe. Additionally, a joint venture company, Vehicle Access Systems Technology LLC (“VAST LLC”), in which WITTE, STRATTEC and ADAC each hold a one-third interest, exists to seek opportunities to manufacture and sell each company’s products in areas of the world outside of North America and Europe. As a result of these relationships, the entities involved purchase products from each other on an as needed basis to use as components in end products assembled and sold in their respective home markets. STRATTEC currently purchases such component parts from WITTE. These purchases totaled $142,000 and $277,000 during the three and six month periods ended January 1, 2023, and $228,000 and $415,000 during the three and six month periods ended December 26, 2021.

VAST LLC has investments in Sistema de Acesso Veicular Ltda, VAST Fuzhou, VAST Great Shanghai, VAST Shanghai Co., VAST Jingzhou Co. Ltd., and Minda-VAST Access Systems. Sistema de Acesso Veicular Ltda is located in Brazil and services customers in South America. VAST Fuzhou, VAST Great Shanghai, VAST Shanghai Co., and VAST Jingzhou Co. Ltd. (collectively known as VAST China), provide a base of operations to service each VAST partner’s automotive customers in the Asian market. Minda-VAST Access Systems is based in Pune, India and is a 50:50 joint venture between VAST LLC and Minda Management Services Limited, an affiliate of both Minda Corporation Limited and Spark Minda, Ashok Minda Group of New Delhi, India (collectively “Minda”). Minda and its affiliates cater to the needs of all major car, motorcycle, commercial vehicle, tractor and off-road vehicle manufacturers in India. They are a leading manufacturer in the Indian marketplace of security & access products, handles, automotive safety, restraint systems, driver information and telematics systems for both OEMs and the aftermarket. VAST LLC also maintains branch offices in South Korea and Japan in support of customer sales and engineering requirements.

11


 

The VAST LLC investments are accounted for using the equity method of accounting and the results of the VAST LLC foreign subsidiaries and joint venture are reported on a one-month lag basis. The activities related to the VAST LLC foreign subsidiaries and joint venture resulted in equity earnings of joint ventures to STRATTEC of $1.1 million during the six month period ended January 1, 2023 and $364,000 during the six month period ended December 26, 2021. During the six months ended January 1, 2023, capital contributions totaling $312,000 were made to VAST for purposes of funding operations in Brazil. STRATTEC's portion of the capital contributions totaled $104,000. During the six months ended December 26, 2021, 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 reduced net income to STRATTEC of approximately $58.5 million and $950,000, respectively, during the six month period ended January 1, 2023 and increased net sales and reduced net income to STRATTEC of approximately $51.9 million and $326,000, respectively, during the six month period ended December 26, 2021. ADAC charges ADAC STRATTEC LLC an engineering, research and design fee as well as a sales fee. Such fees are calculated as a percentage of net sales, are included in the consolidated results of STRATTEC, and totaled $2.0 million and $4.1 million in the three and six month periods ended January 1, 2023 and $2.0 million and $3.6 million in the three and six month periods ended December 26, 2021. Effective January 1, 2023, ADAC and STRATTEC have agreed to suspend the payment of these fees as needed to comply with debt covenant provisions. Refer to Credit Facilities for further discussion. Additionally, ADAC-STRATTEC LLC sells production parts to ADAC. Sales to ADAC are included in the consolidated results of STRATTEC and totaled $2.5 million and $5.3 million in the three and six month periods ended January 1, 2023 and $1.9 million and $3.1 million in the three and six month periods ended December 26, 2021.

STRATTEC POWER ACCESS LLC (“SPA”) was originally formed in fiscal year 2009 to supply the North American portion of the power sliding door, lift gate, tail gate and deck lid system access control products some of which were acquired from Delphi Corporation in 2009. SPA was 80 percent owned by STRATTEC and 20 percent owned by WITTE for all periods presented in this report. An additional Mexican entity, STRATTEC POWER ACCESS de Mexico, is wholly owned by SPA. The financial results of SPA are consolidated with the financial results of STRATTEC and resulted in increased net sales and increased net income to STRATTEC of approximately $51.3 million and $1.6 million, respectively, during the six month period ended January 1, 2023 and $44.7 million and $2.2 million, respectively, during the six month period ended December 26, 2021.

 

Equity 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.

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

 

 

Three Months Ended

 

 

Six Months Ended

 

 

January 1,
2023

 

 

December 26,
2021

 

 

January 1,
2023

 

 

December 26,
2021

 

Net Sales

$

56,953

 

 

$

55,556

 

 

$

123,099

 

 

$

98,173

 

Cost of Goods Sold

 

45,969

 

 

 

45,712

 

 

 

101,751

 

 

 

80,604

 

Gross Profit

 

10,984

 

 

 

9,844

 

 

 

21,348

 

 

 

17,569

 

Engineering, Selling and Administrative Expenses

 

9,227

 

 

 

7,949

 

 

 

17,759

 

 

 

16,500

 

Income From Operations

 

1,757

 

 

 

1,895

 

 

 

3,589

 

 

 

1,069

 

Other (Expense) Income, net

 

386

 

 

 

304

 

 

 

458

 

 

 

393

 

Income before Provision for Income Taxes

 

2,143

 

 

 

2,199

 

 

 

4,047

 

 

 

1,462

 

Provision for Income Taxes

 

382

 

 

 

354

 

 

 

750

 

 

 

375

 

Net Income

$

1,761

 

 

$

1,845

 

 

$

3,297

 

 

$

1,087

 

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

 

587

 

 

 

615

 

 

 

1,099

 

 

 

362

 

Intercompany Profit Elimination

 

1

 

 

 

 

 

 

16

 

 

 

2

 

STRATTEC’s Equity Earnings of VAST LLC

$

588

 

 

$

615

 

 

$

1,115

 

 

$

364

 

 

12


 

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

 

 

Six Months Ended

 

 

 

January 1,
2023

 

 

December 26,
2021

 

 

January 1,
2023

 

 

December 26,
2021

 

 

Sales to VAST LLC

$

17

 

 

$

702

 

 

$

27

 

 

$

1,217

 

 

Purchases from VAST LLC

$

13

 

 

$

19

 

 

$

27

 

 

$

151

 

 

Expenses Charged to VAST LLC

$

161

 

 

$

204

 

 

$

242

 

 

$

378

 

 

Expenses Charged from VAST LLC

$

209

 

 

$

189

 

 

$

452

 

 

$

442

 

 

 

 

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):

 

 

January 1,
2023

 

Right-of Use Asset Under Operating Lease:

 

 

Other Long-Term Assets

$

2,823

 

Lease Obligation Under Operating Lease:

 

 

Current Liabilities: Accrued Liabilities: Other

$

415

 

Other Long-Term Liabilities

 

2,408

 

 

$

2,823

 

 

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 January 1, 2023 (in thousands):

 

2023 (for the remaining six months)

$

250

 

2024

 

509

 

2025

 

522

 

2026

 

535

 

2027

 

548

 

Thereafter

 

751

 

Total Future Minimum Lease Payments

 

3,115

 

Less: Imputed Interest

 

(292

)

Total Lease Obligations

$

2,823

 

 

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

 

 

Six Months Ended

 

 

January 1,
2023

 

 

December 26,
2021

 

Operating Cash Flows:

 

 

 

 

 

Cash Paid Related to Operating Lease Obligation

$

247

 

 

$

241

 

 

13


 

 

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

 

 

January 1,
2023

 

Weighted Average Remaining Lease Term (in years)

 

5.8

 

Weighted Average Discount Rate

 

3.3

%

 

Operating lease expense for the three and six month periods ended January 1, 2023 totaled $125,000 and $247,000, respectively. Operating lease expense for the three and six month periods ended December 26, 2021 totaled $122,000 and $241,000, 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 both credit facilities were at varying rates based, at our option, on LIBOR plus 1.25 percent or the bank’s prime rate. Both credit facilities contain a restrictive financial covenant that requires the applicable borrower to maintain a minimum net worth level. The ADAC-STRATTEC Credit Facility includes an additional restrictive financial covenant that requires the maintenance of a minimum fixed charge coverage ratio. Subsequent to January 1, 2023, a waiver was received from BMO Harris Bank N.A. related to non-compliance with the ADAC-STRATTEC Credit Facility fixed charge coverage ratio as of January 1, 2023. Furthermore, subsequent to January 1, 2023, the ADAC-STRATTEC Credit Facility was amended to modify the calculation of the fixed charge coverage ratio and the minimum level of net worth for all future periods such that it is probable ADAC-STRATTEC will comply with the amended covenant in future periods. As of January 1, 2023, we were in compliance with all other financial covenants required by these credit facilities.

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

 

 

January 1,
2023

 

 

July 3,
2022

 

STRATTEC Credit Facility

$

4,000

 

 

$

 

ADAC-STRATTEC Credit Facility

 

13,000

 

 

 

11,000

 

 

$

17,000

 

 

$

11,000

 

 

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

 

 

Six Months Ended

 

 

Average Outstanding Borrowings

 

 

Weighted Average Interest Rate

 

 

January 1,
2023

 

 

December 26,
2021

 

 

January 1,
2023

 

 

December 26,
2021

 

STRATTEC Credit Facility

$

3,121

 

 

$

170

 

 

 

4.4

%

 

 

3.3

%

ADAC-STRATTEC Credit Facility

$

11,852

 

 

$

14,846

 

 

 

4.3

%

 

 

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.

14


 

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 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 January 1, 2023 is adequate.

 

Shareholders’ Equity

A summary of activity impacting shareholders’ equity for the three and six month periods ended January 1, 2023 and December 26, 2021 were as follows (in thousands):

 

 

Three months ended January 1, 2023

 

 

Total
Shareholders’
Equity

 

 

Common Stock

 

 

Capital in Excess of Par Value

 

 

Retained Earnings

 

 

Accumulated Other Comprehensive Loss

 

 

Treasury Stock

 

 

Non-Controlling Interest

 

Balance, October 2, 2022

$

219,409

 

 

$

75

 

 

$

102,250

 

 

$

241,094

 

 

$

(19,256

)

 

$

(135,569

)

 

$

30,815

 

Net Loss

 

(2,515

)

 

 

 

 

 

 

 

 

(1,839

)

 

 

 

 

 

 

 

 

(676

)

Translation Adjustments

 

429

 

 

 

 

 

 

 

 

 

 

 

 

(40

)

 

 

 

 

 

469

 

Stock Based Compensation

 

263

 

 

 

 

 

 

263

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and Postretirement
   Adjustment, Net of
   Tax

 

70

 

 

 

 

 

 

 

 

 

 

 

 

70

 

 

 

 

 

 

 

Employee Stock Purchases

 

20

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

13

 

 

 

 

Balance, January 1, 2023

$

217,676

 

 

$

75

 

 

$

102,520

 

 

$

239,255

 

 

$

(19,226

)

 

$

(135,556

)

 

$

30,608

 

 

 

Three months ended December 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, September 26, 2021

$

212,797

 

 

$

75

 

 

$

100,519

 

 

$

234,051

 

 

$

(17,398

)

 

$

(135,608

)

 

$

31,158

 

Net Income

 

3,837

 

 

 

 

 

 

 

 

 

3,391

 

 

 

 

 

 

 

 

 

446

 

Translation Adjustments

 

(544

)

 

 

 

 

 

 

 

 

 

 

 

(191

)

 

 

 

 

 

(353

)

Stock Based Compensation

 

238

 

 

 

 

 

 

238

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and Postretirement
    Adjustment, Net of
    Tax

 

76

 

 

 

 

 

 

 

 

 

 

 

 

76

 

 

 

 

 

 

 

Employee Stock Purchases

 

20

 

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

9

 

 

 

 

Balance, December 26, 2021

$

216,424

 

 

$

75

 

 

$

100,768

 

 

$

237,442

 

 

$

(17,513

)

 

$

(135,599

)

 

$

31,251

 

 

15


 

 

Six months ended January 1, 2023

 

 

Total
Shareholders’
Equity

 

 

Common Stock

 

 

Capital in Excess of Par Value

 

 

Retained Earnings

 

 

Accumulated Other Comprehensive Loss

 

 

Treasury Stock

 

 

Non-Controlling Interest

 

Balance, July 3, 2022

$

219,947

 

 

$

75

 

 

$

101,524

 

 

$

240,969

 

 

$

(18,588

)

 

$

(135,580

)

 

$

31,547

 

Net Loss

 

(2,578

)

 

 

 

 

 

 

 

 

(1,714

)

 

 

 

 

 

 

 

 

(864

)

Dividend Declared – Non-
   controlling Interests of
   Subsidiaries

 

(600

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(600

)

Translation Adjustments

 

(253

)

 

 

 

 

 

 

 

 

 

 

 

(778

)

 

 

 

 

 

525

 

Stock Based Compensation

 

874

 

 

 

 

 

 

874

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and Postretirement
   Adjustment, Net of
   Tax

 

140

 

 

 

 

 

 

 

 

 

 

 

 

140

 

 

 

 

 

 

 

Stock Option Exercises

 

109

 

 

 

 

 

 

109

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee Stock Purchases

 

37

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

24

 

 

 

 

Balance, January 1, 2023

$

217,676

 

 

$

75

 

 

$

102,520

 

 

$

239,255

 

 

$

(19,226

)

 

$

(135,556

)

 

$

30,608

 

 

 

Six months ended December 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

$

212,797

 

 

$

74

 

 

$

99,512

 

 

$

233,953

 

 

$

(16,914

)

 

$

(135,615

)

 

$

31,787

 

Net Income

 

4,056

 

 

 

 

 

 

 

 

 

3,489

 

 

 

 

 

 

 

 

 

567

 

Dividend Declared – Non-
   controlling Interests of
   Subsidiaries

 

(600

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(600

)

Translation Adjustments

 

(1,256

)

 

 

 

 

 

 

 

 

 

 

 

(753

)

 

 

 

 

 

(503

)

Stock Based Compensation

 

634

 

 

 

 

 

 

634

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and Postretirement
   Adjustment, Net of
   Tax

 

154

 

 

 

 

 

 

 

 

 

 

 

 

154

 

 

 

 

 

 

 

Stock Option Exercises

 

600

 

 

 

1

 

 

 

599

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee Stock Purchases

 

39

 

 

 

 

 

 

23

 

 

 

 

 

 

 

 

 

16

 

 

 

 

Balance, December 26, 2021

$

216,424

 

 

$

75

 

 

$

100,768

 

 

$

237,442

 

 

$

(17,513

)

 

$

(135,599

)

 

$

31,251

 

 

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 January 1, 2023 or July 3, 2022.

 

 

16


 

Revenue by Product Group and Customer:

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

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

January 1,
2023

 

 

December 26,
2021

 

 

January 1,
2023

 

 

December 26,
2021

 

 

Door Handles & Exterior Trim

$

28,425

 

 

$

28,358

 

 

$

58,550

 

 

$

51,898

 

 

Keys & Locksets

 

24,716

 

 

 

26,654

 

 

 

53,381

 

 

 

49,495

 

 

Power Access

 

26,445

 

 

 

23,529

 

 

 

51,286

 

 

 

44,669

 

 

Latches

 

13,658

 

 

 

11,915

 

 

 

28,420

 

 

 

22,022

 

 

Aftermarket & OE Service

 

9,493

 

 

 

11,414

 

 

 

20,141

 

 

 

23,310

 

 

User Interface Controls (formerly Driver Controls)

 

8,620

 

 

 

8,775

 

 

 

17,738

 

 

 

16,792

 

 

Other

 

1,827

 

 

 

2,263

 

 

 

4,028

 

 

 

5,063

 

 

 

$

113,184

 

 

$

112,908

 

 

$

233,544

 

 

$

213,249

 

 

 

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

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

January 1,
2023

 

 

December 26,
2021

 

 

January 1,
2023

 

 

December 26,
2021

 

 

General Motors Company

$

35,534

 

 

$

31,129

 

 

$

73,684

 

 

$

56,813

 

 

Ford Motor Company

 

22,149

 

 

 

21,070

 

 

 

46,765

 

 

 

38,765

 

 

Stellantis

 

16,995

 

 

 

23,050

 

 

 

34,150

 

 

 

39,610

 

 

Tier 1 Customers

 

16,083

 

 

 

15,607

 

 

 

33,392

 

 

 

27,582

 

 

Commercial and Other OEM
    Customers

 

13,134

 

 

 

16,190

 

 

 

27,960

 

 

 

33,602

 

 

Hyundai / Kia

 

9,289

 

 

 

5,862

 

 

 

17,593

 

 

 

16,877

 

 

 

$

113,184

 

 

$

112,908

 

 

$

233,544

 

 

$

213,249

 

 

 

Other Income (Expense), net

Net other income (expense) included in the accompanying Condensed Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income primarily included foreign currency transaction gains and losses, realized and unrealized gains or losses on our Mexican peso currency forward contracts, net periodic pension and postretirement benefit costs, other than the service cost component, related to our Supplemental Executive Retirement Plan (“SERP”) and postretirement plans and Rabbi Trust gains and losses. Foreign currency transaction gains and losses resulted from activity associated with foreign denominated assets held by our Mexican subsidiaries. We entered into the Mexican Peso currency forward contracts described above to minimize earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. Unrealized gains and losses on the peso forward contracts recognized as a result of mark-to-market adjustments as of January 1, 2023 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.

 

17


 

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

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

January 1,
2023

 

 

December 26,
2021

 

 

January 1,
2023

 

 

December 26,
2021

 

 

Foreign Currency Transaction (Loss) Gain

$

(514

)

 

$

104

 

 

$

(585

)

 

$

243

 

 

Unrealized Gain (Loss) on Peso Forward
   Contracts

 

12

 

 

 

(126

)

 

 

(23

)

 

 

(224

)

 

Realized Gain (Loss) on Peso Forward
   Contracts, net

 

307

 

 

 

(4

)

 

 

545

 

 

 

135

 

 

Pension and Postretirement Plans Cost

 

(131

)

 

 

(125

)

 

 

(260

)

 

 

(249

)

 

Rabbi Trust Gain

 

389

 

 

 

48

 

 

 

23

 

 

 

70

 

 

Other

 

(11

)

 

 

3

 

 

 

59

 

 

 

51

 

 

 

$

52

 

 

$

(100

)

 

$

(241

)

 

$

26

 

 

 

Warranty

We have a warranty liability recorded related to our known and potential exposure to warranty claims in the event our products fail to perform as expected, and in the event we may be required to participate in the repair costs incurred by our customers for such products. The recorded liability balance involves judgement and estimates. Our liability estimate is based on analysis of historical warranty data as well as current trends and information, including our customers recent extension and /or expansion of their warranty programs. In recent fiscal periods, our largest customers have extended their warranty protection for their vehicles and have since demanded higher warranty cost sharing arrangements from their suppliers in their terms and conditions to purchase, including from STRATTEC. As additional information becomes available, actual results may differ from recorded estimates, which may require us to adjust the amount of our warranty provision.

During the quarter ended January 1, 2023, we received notice that a product we shipped failed to perform as the customer expected. While it is probable we will incur costs related to this matter, it is not possible to reasonably estimate those costs based on limited information available, including uncertainty as to STRATTEC's responsibility and the responsibility of STRATTEC's supplier in the matter, as of the date of filing of this Form 10-Q. As additional information related to this matter becomes available, we may need to record additional warranty provisions.

Income Taxes

Our effective tax rate was 40.8% and 6.2% for the three months ended January 1, 2023 and December 26, 2021, respectively. Our effective tax rate was 40.7% and 6.7% for the six month periods ended January 1, 2023 and December 26, 2021, respectively. The increased effective tax rate in the current year three and six month periods was due to the impact of available R&D and foreign tax credits on projected pre-tax book losses for the fiscal year. The reduced effective tax rate for the prior year three and six month periods was due to an increase in our foreign tax credits in the prior year periods as compared to the current year periods. Our effective tax rate differs from the statutory tax rate due to the application of the Global Intangible Low Taxed Income (GILTI) tax provisions, our available R&D tax credit and the non-controlling interest portion of our pre-tax income. The non-controlling interest portion impacts the effective tax rate as ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entities are taxed as partnerships for U.S. tax purposes.

 

(Loss) Earnings Per Share

Basic (loss) earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding during the applicable period. Diluted (loss) 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.

18


 

A reconciliation of the components of the basic and diluted per-share computations follows (in thousands, except per share amounts):

 

 

Three Months Ended

 

 

 

January 1,
2023

 

 

December 26,
2021

 

 

 

Net Loss

 

 

Shares

 

 

Per-Share Amount

 

 

Net Income

 

 

Shares

 

 

Per-Share Amount

 

 

Basic (Loss) Earnings Per Share

$

(1,839

)

 

 

3,927

 

 

$

(0.47

)

 

$

3,391

 

 

 

3,866

 

 

$

0.88

 

 

Stock Option and Restricted
   Stock Awards

 

 

 

 

 

 

 

 

 

 

 

 

 

42

 

 

 

 

 

Diluted (Loss) Earnings Per Share

$

(1,839

)

 

 

3,927

 

 

$

(0.47

)

 

$

3,391

 

 

 

3,908

 

 

$

0.87

 

 

 

 

Six Months Ended

 

 

January 1,
2023

 

 

December 26,
2021

 

 

Net Loss

 

 

Shares

 

 

Per-Share Amount

 

 

Net Income

 

 

Shares

 

 

Per-Share Amount

 

Basic (Loss) Earnings Per Share

$

(1,714

)

 

 

3,913

 

 

$

(0.44

)

 

$

3,489

 

 

 

3,848

 

 

$

0.91

 

Stock Option and Restricted
   Stock Awards

 

 

 

 

 

 

 

 

 

 

 

 

 

53

 

 

 

 

Diluted (Loss) Earnings Per Share

$

(1,714

)

 

 

3,913

 

 

$

(0.44

)

 

$

3,489

 

 

 

3,901

 

 

$

0.89

 

 

The calculation of (loss) earnings per share excluded 125,871 share-based payment awards as of January 1, 2023 and 9,010 share-based payment awards as of December 26, 2021 because their inclusion would have been anti-dilutive.

 

Stock-based Compensation

We maintain an omnibus stock incentive plan. This plan provides for the granting of stock options, shares of restricted stock and stock appreciation rights. As of January 1, 2023, 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 January 1, 2023 were 129,359. 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 3 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 six months ended January 1, 2023 follows:

 

 

Shares

 

 

Weighted
Average
Exercise Price

 

 

Weighted
Average
Remaining
Contractual
Term (years)

 

 

Aggregate
Intrinsic
Value
(in thousands)

 

Balance, July 3, 2022

 

41,172

 

 

$

46.34

 

 

 

 

 

 

 

Exercised

 

(4,251

)

 

$

25.64

 

 

 

 

 

 

 

Balance, January 1, 2023

 

36,921

 

 

$

48.72

 

 

 

0.9

 

 

 

 

Exercisable, January 1, 2023

 

36,921

 

 

$

48.72

 

 

 

0.9

 

 

 

 

 

19


 

 

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

 

Three Months Ended

 

 

Six Months Ended

 

 

 

January 1,
2023

 

 

December 26,
2021

 

 

January 1,
2023

 

 

December 26,
2021

 

 

Intrinsic Value of Options Exercised

$

 

 

$

 

 

$

31

 

 

$

331

 

 

Fair Value of Stock Options Vesting

$

 

 

$

 

 

$

 

 

$

 

 

 

No options were granted during the six month periods ended January 1, 2023 or December 26, 2021.

 

A summary of restricted stock activity under our stock incentive plan for the six months ended January 1, 2023 follows:

 

 

Shares

 

 

 

Weighted
Average
Grant Date
Fair Value

 

Nonvested Balance, July 3, 2022

 

85,100

 

 

 

$

31.89

 

Granted

 

49,050

 

 

 

$

29.91

 

Vested

 

(44,750

)

 

 

$

29.00

 

Forfeited

 

(450

)

 

 

$

30.34

 

Nonvested Balance, January 1, 2023

 

88,950

 

 

 

$

32.09

 

 

As of January 1, 2023, all compensation cost related to outstanding stock options granted under our omnibus stock incentive plan has been recognized. As of January 1, 2023, there was approximately $1.9 million of total unrecognized compensation cost related to unvested restricted stock grants outstanding under the plan. This cost is expected to be recognized over a remaining weighted average period of 1.1 years. Total unrecognized compensation cost will be adjusted for any future changes in estimated and actual forfeitures of awards granted under our omnibus stock incentive plan.

 

Pension and Postretirement Benefits

We have a noncontributory Supplemental Executive Retirement Plan (“SERP”), which is a nonqualified defined benefit plan. The SERP is funded through a Rabbi Trust with TMI Trust Company. Under the SERP, as amended December 31, 2013, participants received an accrued lump-sum benefit as of December 31, 2013, which was credited to each participant’s account. Subsequent to December 31, 2013, each eligible participant receives a supplemental retirement benefit equal to the foregoing lump sum benefit, plus an annual benefit accrual equal to 8 percent of the participant’s base salary and cash bonus, plus annual credited interest on the participant’s account balance. All then current participants as of December 31, 2013 are fully vested in their account balances with any new individuals participating in the SERP effective on or after January 1, 2014 being subject to a five year vesting period. The SERP, which is considered a nonqualified defined benefit plan under applicable rules and regulations of the Internal Revenue Code, will continue to be funded through use of a Rabbi Trust to hold investment assets to be used in part to fund any future required lump sum benefit payments to participants. The Rabbi Trust assets had a value of $3.3 million at both January 1, 2023 and at July 3, 2022. At both January 1, 2023 and July 3, 2022, $863,000 of the Rabbi Trust asset balance was included in Other Current Assets and the remaining balance was included in Other Long-Term Assets in the accompanying Condensed Consolidated Balance Sheets.

We also sponsor a postretirement health care plan for all current and future eligible U.S. retirees 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. Additionally, we sponsor a postretirement life plan for all U.S. salaried retirees who retired prior to October 1, 2001 and all U.S. hourly retirees who were hired prior to June 27, 2005 and retired prior to January 1, 2010. The benefit provides for a death benefit of $8,000, which is increased to $70,000 for disability retirees until reaching the age of 65, in which case the death benefit decreased to $8,000. The postretirement life plan is unfunded. See "Basis of Financial Statements" above for additional information regarding certain matters related to recording a liability adjustment for the death benefit owed to eligible participants under the postretirement life plan.

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 (Loss) Income and Comprehensive (Loss) Income.

20


 

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

 

 

SERP Benefits

 

 

Postretirement Benefits

 

 

Three Months Ended

 

 

Three Months Ended

 

 

January 1,
2023

 

 

December 26,
2021

 

 

January 1,
2023

 

 

December 26,
2021

 

Service Cost

$

19

 

 

$

15

 

 

$

2

 

 

$

3

 

Interest Cost

 

24

 

 

 

12

 

 

 

15

 

 

 

14

 

Amortization of Unrecognized Net Loss

 

31

 

 

 

21

 

 

61

 

 

 

78

 

Net Periodic Benefit Cost

$

74

 

 

$

48

 

 

$

78

 

 

$

95

 

 

 

SERP Benefits

 

 

Postretirement Benefits

 

 

Six Months Ended

 

 

Six Months Ended

 

 

January 1,
2023

 

 

December 26,
2021

 

 

January 1,
2023

 

 

December 26,
2021

 

Service Cost

$

39

 

 

$

31

 

 

$

5

 

 

$

6

 

Interest Cost

 

47

 

 

 

25

 

 

 

30

 

 

 

23

 

Amortization of Unrecognized Net Loss

 

62

 

 

 

43

 

 

 

121

 

 

 

158

 

Net Periodic Benefit Cost

$

148

 

 

$

99

 

 

$

156

 

 

$

187

 

 

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 January 1, 2023

 

 

Foreign
Currency
Translation
Adjustments

 

 

Retirement
and
Postretirement
Benefit Plans

 

 

Total

 

Balance, October 2, 2022

$

17,471

 

 

$

1,785

 

 

$

19,256

 

Other Comprehensive Income Before Reclassifications

 

(429

)

 

 

 

 

 

(429

)

Net Other Comprehensive Income Before
      Reclassifications

 

(429

)

 

 

 

 

 

(429

)

Reclassifications:

 

 

 

 

 

 

 

 

Unrecognized Net Loss (A)

 

 

 

 

(92

)

 

 

(92

)

Income Tax

 

 

 

 

22

 

 

 

22

 

Net Reclassifications

 

 

 

 

(70

)

 

 

(70

)

Other Comprehensive Income

 

(429

)

 

 

(70

)

 

 

(499

)

Other Comprehensive Income Attributable to Non-
   Controlling Interest

 

(469

)

 

 

 

 

 

(469

)

Balance, January 1, 2023

$

17,511

 

 

$

1,715

 

 

$

19,226

 

 

 

21


 

 

Three Months Ended December 26, 2021

 

 

Foreign
Currency
Translation
Adjustments

 

 

Retirement
and
Postretirement
Benefit Plans

 

 

Total

 

Balance, September 26, 2021

$

15,245

 

 

$

2,153

 

 

$

17,398

 

Other Comprehensive Loss Before Reclassifications

 

544

 

 

 

 

 

 

544

 

Net Other Comprehensive Loss Before
      Reclassifications

 

544

 

 

 

 

 

 

544

 

Reclassifications:

 

 

 

 

 

 

 

 

Unrecognized Net Loss (A)

 

 

 

 

(99

)

 

 

(99

)

Income Tax

 

 

 

 

23

 

 

 

23

 

Net Reclassifications

 

 

 

 

(76

)

 

 

(76

)

Other Comprehensive Loss

 

544

 

 

 

(76

)

 

 

468

 

Other Comprehensive Loss Attributable to Non-
   Controlling Interest

 

353

 

 

 

 

 

 

353

 

Balance, December 26, 2021

$

15,436

 

 

$

2,077

 

 

$

17,513

 

 

 

Six Months Ended January 1, 2023

 

 

Foreign
Currency
Translation
Adjustments

 

 

Retirement
and
Postretirement
Benefit Plans

 

 

Total

 

Balance, July 3, 2022

$

16,733

 

 

$

1,855

 

 

$

18,588

 

Other Comprehensive Loss Before Reclassifications

 

253

 

 

 

 

 

 

253

 

Net Other Comprehensive Loss Before
      Reclassifications

 

253

 

 

 

 

 

 

253

 

Reclassifications:

 

 

 

 

 

 

 

 

Unrecognized Net Loss (A)

 

 

 

 

(183

)

 

 

(183

)

Income Tax

 

 

 

 

43

 

 

 

43

 

Net Reclassifications

 

 

 

 

(140

)

 

 

(140

)

Other Comprehensive Loss

 

253

 

 

 

(140

)

 

 

113

 

Other Comprehensive Income Attributable to Non-
   Controlling Interest

 

(525

)

 

 

 

 

 

(525

)

Balance, January 1, 2023

$

17,511

 

 

$

1,715

 

 

$

19,226

 

 

 

Six Months Ended December 26, 2021

 

 

Foreign
Currency
Translation
Adjustments

 

 

Retirement
and
Postretirement
Benefit Plans

 

 

Total

 

Balance, June 27, 2021

$

14,683

 

 

$

2,231

 

 

$

16,914

 

Other Comprehensive Loss Before Reclassifications

 

1,256

 

 

 

 

 

 

1,256

 

Net Other Comprehensive Loss Before
      Reclassifications

 

1,256

 

 

 

 

 

 

1,256

 

Reclassifications:

 

 

 

 

 

 

 

 

Unrecognized Net Loss (A)

 

 

 

 

(201

)

 

 

(201

)

Income Tax

 

 

 

 

47

 

 

 

47

 

Net Reclassifications

 

 

 

 

(154

)

 

 

(154

)

Other Comprehensive Loss

 

1,256

 

 

 

(154

)

 

 

1,102

 

Other Comprehensive Loss Attributable to Non-
   Controlling Interest

 

503

 

 

 

 

 

 

503

 

Balance, December 26, 2021

$

15,436

 

 

$

2,077

 

 

$

17,513

 

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

22


 

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 2022 Form 10-K, which was filed with the Securities and Exchange Commission on September 8, 2022. Also, refer to discussion of prior period corrections under Basis of Financial Statements included in the Notes to Condensed Consolidated Financial Statements in this Form 10-Q. Unless otherwise indicated, all references to quarters and years refer to fiscal quarters and fiscal years.

Outlook

Refer to discussion of Risks and Uncertainties included in the Notes to Condensed Consolidated Financial Statements beginning on page 8 of this Form 10-Q.

 

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

 

While supply chain shortages improved in the first half of fiscal year 2023 relative to the prior year period, they continued to constrain a full return to demand-driven production levels mainly affecting the recovery of our aftermarket product sales and, moreover, adverse inflationary pricing and wage conditions have persisted in spite of improvements in the supply chain. The sales outlook from our customers over the remainder of fiscal year 2023 projects a stable sales environment with potential for modest growth. However, this sales outlook is contingent on continued progress toward stability for supply chains post COVID-19 pandemic, and minimal disruption of the North American and overall global economy due to higher inflation and interest rates and the economic implications from the conflict in the Ukraine and other international political unrest.

 

From a gross profit margin perspective, we anticipate continued inflationary pressures from the cost of raw materials, purchased materials and labor for the remainder of fiscal year 2023. Seeking pricing recovery from our customers for such inflationary costs is an immediate and prime focus of ours, however, given the long-term nature of our supply agreements, such negotiations are not customary and therefore, have outcomes that are difficult to predict.

 

 

Analysis of Results of Operations

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

 

 

Three Months Ended

 

 

January 1,
2023

 

 

December 26,
2021

 

Net Sales (in millions)

$

113.2

 

 

$

112.9

 

 

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

 

Three Months Ended

 

 

January 1,
2023

 

 

December 26,
2021

 

General Motors Company

$

35.5

 

 

$

31.1

 

Ford Motor Company

 

22.2

 

 

 

21.1

 

Stellantis

 

17.0

 

 

 

23.1

 

Tier 1 Customers

 

16.1

 

 

 

15.6

 

Commercial and Other OEM Customers

 

13.1

 

 

 

16.1

 

Hyundai / Kia

 

9.3

 

 

 

5.9

 

 

$

113.2

 

 

$

112.9

 

 

23


 

 

Overall net sales were stable for the current quarter relative to the prior year quarter. The following items specifically impacted sales to the above noted customer groups between quarters:

-
Sales to General Motors Company, Ford Motor Company and Hyundai/Kia were positively impacted in the current year quarter due to higher vehicle production volumes resulting from improved global semiconductor chip availability relative to the prior year quarter. Sales growth to General Motors Company in the current year quarter was attributed to higher production volumes of their GMC and Chevrolet pickup trucks and certain SUVs for which we supply a wide range of components. Sales to Hyundai / Kia increased quarter-over-quarter due to higher levels of production of the Kia Carnival minivan in the current year quarter as compared to the prior year quarter.
-
The decrease in sales to Stellantis between quarters resulted primarily from its plant shutdowns in the current year quarter, which reduced production volumes compared to the prior year quarter.
-
Sales to Commercial and Other OEM Customers, which are comprised of aftermarket products and vehicle access control products, such as latches, fobs, driver controls and door handles, declined in the current year quarter as compared to the prior year quarter due to continued semiconductor chip availability issues, primarily for aftermarket keys. The increases in availability of semiconductor chips were allocated toward the production of components for production vehicles ahead of aftermarket products and, therefore, sales to aftermarket customers continued to be negatively impacted in the current year quarter due to these issues.

 

 

Three Months Ended

 

 

January 1, 2023

 

 

December 26, 2021

 

 

Millions of
Dollars

 

 

Percent of
Cost of
Goods Sold

 

 

Millions of
Dollars

 

 

Percent of
Cost of
Goods Sold

 

Direct Material Costs

$

69.1

 

 

 

65.3

%

 

$

64.3

 

 

 

65.6

%

Labor and Overhead Costs

 

36.7

 

 

 

34.7

%

 

 

33.7

 

 

 

34.4

%

Total Cost of Goods Sold

$

105.8

 

 

 

 

 

$

98.0

 

 

 

 

 

Despite relatively stable sales for the quarter compared to the prior year quarter, the total cost of goods sold increased by $7.8 million between the two periods. Both direct material costs and labor and overhead costs increased proportionately with the total cost of goods sold increase quarter-to-quarter, resulting in only minor changes in their respective percentage of cost of goods sold between quarters. The increase in direct material costs of $4.8 million between quarters was due to the continued trend of higher costs for raw material and purchased components in the current year quarter as compared to the prior year quarter.

 

Labor and overhead costs increased $3.0 million between quarters. Labor and overhead costs were impacted by the following:

Cost Increases:

-
Mexico wages and benefits increased $1.9 million in the current year quarter as compared to the prior year quarter as a result of a January 1, 2022 government mandated minimum wage increase.
-
The U.S. dollar value of our Mexican operations was negatively impacted by approximately $1.1 million in the current year quarter as compared to the prior year quarter due to an unfavorable Mexican peso to U.S. dollar exchange rate between quarterly periods. The average U.S. dollar / Mexican peso exchange rate decreased to approximately 19.57 pesos to the dollar in the current year quarter from approximately 20.89 pesos to the dollar in the prior year quarter.
-
Freight costs increased $800,000 between quarterly periods due to an increase in fuel costs and supply chain disruptions.

Cost Decrease:

-
Royalty costs paid on sales of certain aftermarket products decreased $570,000 in the current year quarter as compared to the prior year quarter due to lower volumes in these aftermarket products stemming from the current semiconductor chip shortage.
-
Production efficiencies that controlled headcount at our Mexico facilities resulted in reduced labor and benefit costs between quarterly periods of approximately $500,000.

 

 

Three Months Ended

 

 

January 1,
2023

 

 

December 26,
2021

 

Gross Profit (in millions)

$

7.4

 

 

$

14.9

 

Gross Profit as a percentage of net sales

 

6.5

%

 

 

13.2

%

 

Gross profit dollars in the current year quarter decreased $7.5 million as compared to the prior year quarter driven by the aforementioned inflationary pressures on direct material and labor and overhead costs as well as by the strengthening of the Mexican peso against the U.S. dollar. The resulting decrease in gross profit as a percentage of net sales was 6.7 percentage points from the prior year quarter to the current year quarter.

 

24


 

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

 

 

Three Months Ended

 

 

January 1,
2023

 

 

December 26,
2021

 

Expenses (in millions)

$

12.1

 

 

$

11.3

 

Expenses as a percentage of net sales

 

10.7

%

 

 

10.0

%

 

Engineering, selling and administrative expenses in the current year quarter increased in comparison to the prior year quarter primarily due to increased salary and recruiting costs in the current year quarter and lower costs in the prior year quarter due to a customer reimbursement of engineering and design costs incurred on a new program.

Loss from operations was $4.7 million in the current year quarter compared to income from operations of $3.6 million in the prior year quarter due a reduction in gross profit margin dollars and higher engineering, selling and administrative expenses between quarters, all as discussed above.

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

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

 

 

Three Months Ended

 

 

January 1,
2023

 

 

December 26,
2021

 

Foreign Currency Transaction (Loss) Gain

$

(514

)

 

$

104

 

Unrealized Gain (Loss) on Peso Forward Contracts

 

12

 

 

 

(126

)

Realized Gain (Loss) on Peso Forward Contracts, net

 

307

 

 

 

(4

)

Pension and Postretirement Plan Cost

 

(131

)

 

 

(125

)

Rabbi Trust Gain

 

389

 

 

 

48

 

Other

 

(11

)

 

 

3

 

 

$

52

 

 

$

(100

)

 

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

-
Foreign currency transaction losses and gains resulted from activity associated with foreign denominated assets held by our Mexican subsidiaries.
-
The Rabbi Trust assets fund our amended and restated supplemental executive retirement plan. The investments held in the Trust are considered trading securities.
-
We entered into the Mexican peso currency forward contracts during fiscal 2023 and 2022 to minimize earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. Unrealized gains and losses on the peso forward contracts recognized as a result of mark-to-market adjustments as of January 1, 2023 may or may not be realized in future periods, depending on actual Mexican peso to U.S. dollar exchange rates experienced during the balance of the contract period.
-
Pension and postretirement plan costs include the components of net periodic benefit cost other than the service cost component.

 

Our effective tax rate was 40.8% and 6.2% for the three months ended January 1, 2023 and December 26, 2021, respectively. The increased effective tax rate in the current year period was due to the impact of available R&D and foreign tax credits on projected pre-tax book losses for the fiscal year. The prior year period effective tax rate was reduced due to an increase in our foreign tax credits in the prior year period as compared to the current year period. Our effective tax rate differs from the statutory tax rate due to the application of the Global Intangible Low Taxed Income (GILTI) tax provisions, our available R&D tax credit and the non-controlling interest portion of our pre-tax income. The non-controlling interest portion impacts the effective tax rate as ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entities are taxed as partnerships for U.S. tax purposes.

 

25


 

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

 

 

Six Months Ended

 

 

January 1,
2023

 

 

December 26,
2021

 

Net Sales (in millions)

$

233.5

 

 

$

213.2

 

 

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

 

 

Six Months Ended

 

 

January 1,
2023

 

 

December 26,
2021

 

General Motors Company

$

73.7

 

 

$

56.8

 

Ford Motor Company

 

46.7

 

 

 

38.8

 

Stellantis (Formerly Fiat Chrysler Automobiles)

 

34.2

 

 

 

39.6

 

Tier 1 Customers

 

33.4

 

 

 

27.6

 

Commercial and Other OEM Customers

 

27.9

 

 

 

33.5

 

Hyundai / Kia

 

17.6

 

 

 

16.9

 

 

$

233.5

 

 

$

213.2

 

 

Overall, the period-over-period sales increase was due to improved global semiconductor chip availability in the current year period relative to the prior year period. The following items specifically impacted sales to the above noted customer groups between periods:

-
Sales to General Motors Company and Ford Motor Company were positively impacted in the current year period due to higher vehicle production volumes resulting from improved global semiconductor chip availability relative to the prior year period. Specifically, sales growth to General Motors Company and Ford Motor Company in the current year period was attributed to higher production volumes of their GMC and Chevrolet pickup trucks and certain SUVs for which we supply a wide range of components.
-
The decrease in net sales to at Stellantis was driven primarily by its plant shutdowns which resulted in decreased production volumes in the current year compared to the prior year especially as it related to the Chrysler Pacifica minivan, the Jeep Compass and the Dodge Ram pickup truck.
-
Sales to Tier 1 Customers improved in the current year period compared to the prior year period due to higher vehicle production volumes relating to the semiconductor chip availability referenced above.
-
Sales to Commercial and Other OEM Customers, which are comprised of aftermarket products and vehicle access control products, such as latches, fobs, driver controls and door handles, declined in the current year period as compared to the prior year period due to continued semiconductor chip availability issues, primarily for aftermarket keys. The increases in availability of semiconductor chips were allocated toward the production of components for production vehicles ahead of aftermarket products and, therefore, sales to aftermarket customers continued to be negatively impacted in the current year period due to these issues.

 

 

Six Months Ended

 

 

January 1, 2023

 

 

December 26, 2021

 

 

Millions of
Dollars

 

 

Percent of
Cost of
Goods Sold

 

 

Millions of
Dollars

 

 

Percent of
Cost of
Goods Sold

 

Direct Material Costs

$

141.6

 

 

 

66.3

%

 

$

120.5

 

 

 

64.9

%

Labor and Overhead Costs

 

72.1

 

 

 

33.7

%

 

 

65.3

 

 

 

35.1

%

Total Cost of Goods Sold

$

213.7

 

 

 

 

 

$

185.8

 

 

 

 

 

The increase in direct material costs between periods was primarily due to the aforementioned increase in sales, higher costs for raw material and purchased components and a shift toward products with a higher proportion of material costs as a percent of their total cost of goods sold. The increase in the proportion of direct material costs as a percent of total cost of goods sold between periods was due to its higher rate of growth compared with that for labor and overhead, which benefited from improved overhead absorption associated with higher sales between the periods, albeit partially mitigated by a reduction in inventory during the current year period.

 

Labor and overhead costs increased $6.8 million between periods. The variable portion of labor and overhead costs increased in the current year period commensurate with the production volume increase required to support the increased sales volumes compared to prior year period. However, this impact was partially offset by production efficiencies stemming from controlled headcount and overtime costs at our Milwaukee and Mexico facilities in the current year period. Labor and overhead costs were further impacted by the following:

26


 

Cost Increase:

-
Mexico wages and benefits increased $3.3 million in the current year period as compared to the prior year period as a result of a January 1, 2022 government mandated minimum wage increase.
-
Freight costs increased $1.6 million between year-to-date periods due to an increase in fuel costs and supply chain disruptions.
-
The U.S. dollar value of our Mexican operations was negatively impacted by approximately $960,000 in the current year period as compared to the prior year period due to an unfavorable Mexican peso to U.S. dollar exchange rate between year-to-date periods. The average U.S. dollar / Mexican peso exchange rate decreased to approximately 19.88 pesos to the dollar in the current year period from approximately 20.44 pesos to the dollar in the prior year period.

Cost Decreases:

-
Royalty costs paid on sales of certain aftermarket products decreased $1.0 million in the current year period as compared to the prior year period due to lower volumes in these aftermarket products stemming from the current semiconductor chip shortage.
-
Prior year period costs included lump sum bonuses totaling $100,000 paid to our Milwaukee represented hourly workers upon the ratification of a new four-year labor contract, which contract is effective through November 1, 2025.

 

 

Six Months Ended

 

 

January 1,
2023

 

 

December 26,
2021

 

Gross Profit (in millions)

$

19.9

 

 

$

27.5

 

Gross Profit as a percentage of net sales

 

8.5

%

 

 

12.9

%

 

Gross profit dollars in the current year period decreased $7.6 million as compared to the prior year period driven by the aforementioned inflationary pressures on direct material and labor and overhead costs as well as by the strengthening of the Mexican peso against the U.S. dollar. The resulting decrease in gross profit as a percentage of net sales was 4.4 percentage points from the prior year period to the current year period.

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

 

 

Six Months Ended

 

 

January 1,
2023

 

 

December 26,
2021

 

Expenses (in millions)

$

24.8

 

 

$

23.4

 

Expenses as a percentage of net sales

 

10.6

%

 

 

11.0

%

 

Engineering, selling and administrative expenses in the current year period increased in comparison to the prior year period due to higher outside expenditures on new product development costs associated with utilizing third party vendors for a portion of our development work, an increase in engineering costs related to our ADAC-STRATTEC LLC door handle and exterior trim products, and increased salary and recruiting costs. These expenses decreased as a percentage of net sales due to the increase in sales between periods as previously discussed.

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

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

27


 

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

 

 

Six Months Ended

 

 

January 1,
2023

 

 

December 26,
2021

 

Foreign Currency Transaction (Loss) Gain

$

(585

)

 

$

243

 

Unrealized Loss on Peso Forward Contracts

 

(23

)

 

 

(224

)

Realized Gain on Peso Forward Contracts, net

 

545

 

 

 

135

 

Pension and Postretirement Plan Cost

 

(260

)

 

 

(249

)

Rabbi Trust Gain

 

23

 

 

 

70

 

Other

 

59

 

 

 

51

 

 

$

(241

)

 

$

26

 

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

-
Foreign currency transaction losses and gains resulted from activity associated with foreign denominated assets held by our Mexican subsidiaries.
-
The Rabbi Trust assets fund our amended and restated supplemental executive retirement plan. The investments held in the Trust are considered trading securities.
-
We entered into the Mexican peso currency forward contracts during fiscal 2023 and 2022 to minimize earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. Unrealized gains and losses on the peso forward contracts recognized as a result of mark-to-market adjustments as of January 1, 2023 may or may not be realized in future periods, depending on actual Mexican peso to U.S. dollar exchange rates experienced during the balance of the contract period.
-
Pension and postretirement plan costs include the components of net periodic benefit cost other than the service cost component.

 

Our effective tax rate was 40.7% and 6.7% for the six months ended January 1, 2023 and December 26, 2021, respectively. The increased effective tax rate in the current year period was due to the impact of available R&D and foreign tax credits on projected pre-tax book losses for the fiscal year. The prior year period effective tax rate was reduced due to an increase in our foreign tax credits in the prior year period as compared to the current year period. Our effective tax rate differs from the statutory tax rate due to the application of the Global Intangible Low Taxed Income (GILTI) tax provisions, our available R&D tax credit and the non-controlling interest portion of our pre-tax income. The non-controlling interest portion impacts the effective tax rate as ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entities are taxed as partnerships for U.S. tax purposes.

 

 

Liquidity and Capital Resources

Working Capital (in millions)

 

January 1,
2023

 

 

July 3,
2022

 

Current Assets

$

189.3

 

 

$

188.2

 

Current Liabilities

 

79.5

 

 

 

81.5

 

Working Capital

$

109.8

 

 

$

106.7

 

 

Outstanding Receivable Balances from Major Customers

Our primary source of cash flow is from our major customers, which include General Motors Company, Stellantis and Ford Motor Company. As of the date of filing this Form 10-Q with the Securities and Exchange Commission, all of our major customers are making payments on their outstanding accounts receivable in accordance with the payment terms included on their purchase orders. A summary of our outstanding receivable balances from our major customers as of January 1, 2023 was as follows (in millions):

 

General Motors Company

$

22.1

 

Stellantis

$

9.9

 

Ford Motor Company

$

12.8

 

 

28


 

Cash Balances in Mexico

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

Cash Flow Analysis (in millions)

 

Six Months Ended

 

 

January 1,
2023

 

 

December 26,
2021

 

Cash Flows from (in millions):

 

 

 

 

 

Operating Activities

$

8.7

 

 

$

 

Investing Activities

$

(9.6

)

 

$

(5.4

)

Financing Activities

$

5.5

 

 

$

5.0

 

 

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

 

 

Increase (Decrease) in Working Capital Requirements

 

 

Six Months Ended

 

 

 

 

 

January 1,
2023

 

 

December 26,
2021

 

 

Change

 

Accounts Receivable

$

(2.7

)

 

$

2.6

 

 

$

(5.3

)

Inventory

$

(12.6

)

 

$

2.4

 

 

$

(15.0

)

Other Assets

$

11.2

 

 

$

(1.4

)

 

$

12.6

 

Accounts Payable and Accrued Liabilities

$

2.3

 

 

$

10.9

 

 

$

(8.6

)

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

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

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

29


 

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

VAST LLC Cash Requirements

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

Future Capital Expenditures

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

Stock Repurchase Program

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

Credit Facilities

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

Joint Ventures and Majority Owned Subsidiaries

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

30


 

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.

31


 

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 8, 2022.

 

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 January 1, 2023, a total of 3,655,322 shares have been repurchased at a cost of approximately $136.4 million. No shares were repurchased during the six month period ended January 1, 2023.

 

Item 3 Defaults Upon Senior Securities—None

 

Item 4 Mine Safety Disclosures—None

 

Item 5 Other Information—None

 

 

32


 

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.)

 

 

 

10.1

 

Amendment No. 9 to Credit Agreement, dated as of February 6, 2023, between ADAC-STRATTEC LLC and BMO Harris Bank N.A., as lender (Incorporated by reference from Exhibit 10.1 to the Form 8-K report filed on February 7, 2023.)

 

 

 

31.1

 

Rule 13a-14(a) Certification for Frank J. Krejci, President and Chief Executive Officer

 

 

 

31.2

 

Rule 13a-14(a) Certification for Dennis Bowe, 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 January 1, 2023 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Condensed Consolidated Statements of (Loss) 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 January 1, 2023, 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.

 

33


 

 

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: February 9, 2023

By:

 

/s/ Dennis Bowe

 

 

 

Dennis Bowe

 

 

 

Vice President,

 

 

 

Chief Financial Officer,

 

 

 

Treasurer and Secretary

 

 

 

(Principal Accounting and Financial Officer)

 

34