What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-09-02 compared with 2020-09-03 · 126 added, 115 removed, 153 unchanged (61% of the section changed)

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and global economies.

During fiscal years 2020 and 2019, the above domestic automotive OEMs together represented 62 percent and 60 percent, respectively, of our total net sales.

During fiscal years 2020 and 2019, we experienced stronger sales demand for our components from our major North American customers noted above as it relates to light trucks and both sport utility and car based utility vehicles in comparison to passenger cars, which was likely influenced by lower gas prices and customer preferences.

During fiscal years 2021 and 2020, the above domestic automotive OEMs together represented each year 62 percent, respectively, of our total net sales.

During fiscal years 2021 and 2020, we experienced stronger sales demand for our components from our major North American customers noted above as it relates to light trucks and both sport utility and car based utility vehicles in comparison to passenger cars, which was likely influenced by customer preferences and gas prices.

If gas prices continue to remain flat or slightly higher over the next several years, we anticipate this consumer buying trend will continue, which is approximately 77 percent light trucks and sport utility vehicles in comparison to 23 percent passenger car vehicle purchases today.

During the last 3-5 years our major customers General Motors, Ford and Fiat Chrysler eliminated passenger car production on several models in North America in anticipation to improve their overall profitability going forward.

During the last 3-5 years our major customers General Motors, Ford and Fiat Chrysler eliminated passenger car production on several models in North America as a strategy to improve their overall profitability going forward.

Fiscal 2021 net sales were $485 million compared to $385 million in 2020.

The fiscal 2021 net sales were impacted by the global semiconductor chip shortage that reduced net sales and profitability primarily in the fourth quarter of fiscal 2021 and we see these shortages continuing into fiscal year 2022.

The reduced sales in fiscal year 2020 was attributed to the General Motors labor strike with the United Auto Workers in September and October 2019 which reduced net sales to General Motors by approximately $10 million and as a result of the COVID-19 pandemic.

During March, April and May 2020, the North American OEM assembly plant operations were shut down for the COVID-19 pandemic reducing our net sales to our customers by approximately $78 million during that period.

Net loss attributable to STRATTEC for fiscal 2020 was $7.6 million primarily attributed to the lost net sales previously described above.

In response to the COVID -19 pandemic, the Company implemented temporary layoffs of production workers in our Milwaukee, WI and Mexico plant operations, reduced the US Salaried workforce by ten percent, reduced salaried working hours by ten percent, allowed remote working from home, significantly reduced nonessential operating costs, delayed capital expenditures and temporarily suspended the quarterly cash dividend to preserve cash flow during the fourth quarter of fiscal year 2020.

In addition, during the fourth quarter the Company produced additional finished goods inventory in anticipation of our OEM customers pipeline fill to their dealers once vehicle production began starting up in June, 2020.

Also, the Mexican Government has continued to limit our operating capacity to restart production since June 2020 due to COVID -19.

Net Loss attributable to STRATTEC in fiscal 2019 was $17.0 million (which included non-cash pension settlement and compensation expense charges of approximately $28.0, net of tax relating to termination our defined pension benefit plan which is described in more detail below).

As described in "Retirement Plans and Postretirement Costs" in the Notes to Financial Statements under Item 8 in this Form 10-K, our Board of Directors approved the termination of the STRATTEC qualified, noncontributory defined benefit pension plan.

During our fiscal 2019, we completed a substantial portion of the termination by (1) making distributions from the qualified pension plan trust to participants electing lump sum distributions and (2) entering into an agreement with an insurance company whereby we sold, through a series of annuity contracts, our remaining obligations under the qualified pension plan and, therefore, settled the remaining obligations under this plan with use of funds remaining in the plan.

No additional cash contributions to the pension trust were required from STRATTEC to settle these pension obligations.

In connection with those actions, we incurred a pre-tax settlement charge of $31.9 million during fiscal 2019.

We also incurred a $4.2 million noncash compensation charge during fiscal 2019 related to the future transfer of the remaining excess pension plan assets to a STRATTEC defined contribution plan for subsequent pay-out to eligible participating STRATTEC employees based on a plan approved by the Board of Directors in June 2019.

An additional $4.8 million non-cash compensation expense charge related to the final transfer and pay-out of the excess Qualified Pension Plan assets was recorded during fiscal 2020.

With these final actions, we completed the full termination of the qualified pension plan during fiscal 2020 and removed significant financial risk associated with the pension liability from the Company’s overall financial position going forward.

As we look out into the future, the July 2020 projections from our third-party forecasting service indicate that North American light vehicle production will show a significant decline in the 2020 vehicle production build due to the COVID-19 pandemic and then increase and remain steady to flat production for the next four years.

By model year, based on these projections we are expecting a 2020 build of 12.8 million vehicles, 15.1 million vehicles for 2021, 15.1 million vehicles for 2022, 15.5 million vehicles for 2023 and 15.8 million vehicles for 2024.

These vehicle production estimates going forward were significantly reduced due to the impact of COVID-19.

As part of this third party projection, the Ford Motor Company and General Motors are expected to experience flat vehicle production volumes in their production levels during this time period.

Fiat Chrysler, however, is expected to slightly decrease production as they eliminate or reduce car production on certain models during this time horizon.

Of course, all of these forecasts are subject to variability based on what happens in the overall North American and global economies, especially as it relates to the world wide status of the COVID-19 pandemic that may shut down our customers assembly facilities and supply chains in the foreseeable future, potential tariff enactment by the United States Government or other foreign countries, the current levels of employment, availability of consumer credit, home equity values, fluctuating fuel prices, changes in customer vehicle and option preferences, product quality issues, including related to recall and product warranty coverage issues, and other key factors that we believe could determine whether consumers can or will purchase new vehicles or particular brands.

Net income attributable to STRATTEC for fiscal 2021 was $22.5 million and the Net loss attributable to STRATTEC in fiscal 2020 was $7.6 million (which included a $3.7 million non-cash compensation expense charges net of tax), which as noted above was primarily attributed to the lost net sales previously described above.

In response to the COVID -19 pandemic in the fourth quarter of fiscal 2020, the Company implemented temporary layoffs of production workers in our Milwaukee, WI and Mexico plant operations, reduced the US Salaried workforce by ten percent, reduced salaried working hours by ten percent, allowed remote working from home, significantly reduced nonessential operating costs, delayed capital expenditures and temporarily suspended the quarterly cash dividend to preserve cash flow during the fourth quarter of fiscal year 2020.

In addition, during fiscal year 2021 the Company produced additional finished goods inventory in anticipation of our OEM customers pipeline fill to their dealers once vehicle production began starting up in July, 2020 coming out of the temporary shutdowns from the impact of the COVID-19 pandemic.

We continued to build inventory as it relates to the global chip shortage and low inventory levels at the dealers today.

Also impacting profitability in late fiscal year 2021 were increased costs for purchased raw materials relating to zinc, steel, nickel silver, brass, aluminum and plastic resins that in most cases we were not able to pass along all these increased costs to our customers.

Another factor impacting our profitability is our U.S.

Dollar and Mexican Peso exchange rate that affects our operations in Mexico.

In the case of the Mexican Peso, the Company does have certain hedging strategies to offset the impact of the exchange rate effects on profitability.

As we look out into the future, the July 2021 projections from our third-party forecasting service indicate that North American light vehicle production will show a significant increase in demand in vehicle production build for the next four years from our original 2021 forecast which was originally set lower due to the expected lingering effects of the COVID-19 pandemic and the ongoing global semiconductor chip shortage.

By model year, based on these projections we are expecting a 2021 vehicle build of 14.7 million vehicles, 17.1 million vehicles for 2022, 17.0 million vehicles for 2023, 16.6 million vehicles for 2024 and 16.8 million vehicles for 2025.

These vehicle production estimates going forward were significantly increased due to the impact of COVID-19 that lowered vehicle production in late fiscal 2020 and the global semiconductor chip shortage in late fiscal 2021.

As part of this third party projection, the Ford Motor Company, General Motors and Fiat Chrysler are expected to experience slightly decreased vehicle production volumes in their production levels during this time period.

Of course, all of these forecasts are subject to variability based on what happens in the overall North American and global economies, especially as it relates to the world wide status of the global semiconductor chip shortage and the lingering impacts of the COVID-19 pandemic that may shut down our customers assembly facilities and supply chains in the foreseeable future, potential tariff enactment by the United States Government or other foreign countries, the current levels of employment, availability of consumer credit, home equity values, fluctuating fuel prices, changes in customer vehicle and option preferences, product quality issues, including related to recall and product warranty coverage issues, and other key factors that we believe could determine whether consumers can or will purchase new vehicles or particular brands.

Focus and Strategy Going Forward

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General Motors Company

Fiat Chrysler Automobiles

Fiat Chrysler Automobiles (FCA)

Ford Motor Company

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Hyundai / Kia

Sales to each of our customers or customer groups decreased in the current year as compared to the prior year.

As discussed in our prior filings with the Securities and Exchange Commission, we were impacted in fiscal 2020 by the General Motors UAW strike, which reduced our net sales by approximately $10 million in the current year.

Additionally, during the period late March 2020 through mid-June 2020, our OEM customers reduced production schedules and closed their assembly plants due to COVID-19.

The impact of these plant closures and resulting production schedule reductions reduced our net sales in the current year by approximately $78 million.

Current year sales were adversely impacted by the global semiconductor chip shortage, and prior year sales were significantly and negatively impacted by the decision of our OEM customers to fully close their assembly plants in April and May 2020 due to the COVID-19 pandemic.

The impact of these production schedule reductions reduced our net sales in the prior year by approximately $78.0 million.

Sales to all customer groups in the current year were higher in comparison to the prior year due to the foregoing impact of the COVID-19 virus disruption on our operations.

The following items further impacted sales to the noted customer groups between years:

Sales to General Motors were negatively impacted by a UAW strike in the prior year, which further reduced our prior year net sales by approximately $10 million.

Sales to FCA were negatively impacted in the current year due to their lower vehicle production volumes of the vehicles for which we supply components, in particular related to Chrysler minivans.

The Dodge Grand Caravan minivan went out of production during July 2020.

Sales to Ford Motor Company were positively impacted in the current year due to higher product content, and in particular for the new power tailgate program on the F-150 pickup trucks.

Sales to Commercial and Other OEM Customers were negatively impacted during the current year due to decreases in sales related to door handle products and power access products sold to Honda of America Manufacturing, Inc.

and related to reductions in sales of door handle products to Volkswagon.

These Commercial and Other OEM Customers, along with Tier 1 Customers, primarily represent purchasers of vehicle access control products, such as latches, key fobs, driver controls, steering column locks and door handles, that we have developed in recent years to complement our historic core business of locks and keys.

Hyundai / Kia sales were positively impacted in the current year due to the introduction of the new Kia Sedona and Hyundai Starex minivans for which we supply primarily power sliding door components.

June 27, 2021

June 28, 2020

Cost of Goods Sold (millions of dollars)

Direct material costs are the most significant component of our cost of goods sold and comprised $218.1 million or 62.3 percent of cost of goods sold in the current year compared to $280.5 million or 65.4 percent of cost of goods sold in the prior year.

This dollar value decrease in our direct material costs of $62.4 million or 22.2 percent was due to decreased sales volumes in the current year as compared to the prior year and reduced scrap costs resulting from efforts to reduce nonconforming costs resulting from internal manufacturing process quality issues.

The decrease in our direct material costs as a percentage of our cost of goods sold in the current year as compared to the prior year was due to reduced scrap costs and a reduction in sales of our power access products as a percentage of our consolidated sales.

Power access products have a higher purchased content percentage as compared to our other products.

Thus, the decreased sales mix of power access products between periods further reduced our direct material costs as a percentage of our cost of goods sold.

The remaining components of cost of goods sold consist of labor and ove rhead costs which de creased $16.9 million or 11.4 percent to $131.8 million in the current year from $148.7 million in the prior year as the va riable portion of these costs decreased due to the reduction in sales volumes between years.

Additionally, the de crease in labor and overhead costs in the current year as compared to t he prior year was impacted by cost reduction initiatives implemented during our fiscal 2020 fourth quarter as a result of COVID-19 and the impact of a favorable Mexican peso to U.S.

dollar exchange rate affecting our operations in Mexico.

Cost reduction initiatives included temporary and permanent layoffs at our U.S.

and Mexico locations, reductions in pay for our officers, reductions in working hours for most salaried associates, and a reduction in our U.S.

salaried workforce.

dollar value of our Mexican operations was favorably impacte d by approximately $2.4 million in the current year as co mpared to the prior year due to a favorable Mexican peso to U.S.

dollar exchang e rate between these annual periods .

Millions of Dollars

Percent of Cost of Goods Sold

Millions of Dollars

Percent of Cost of Goods Sold

Direct Material Costs

Labor and Overhead Costs

Total Cost of Goods Sold

The direct material cost increase was due to increased sales volumes between years, as discussed above, and increased purchased costs for certain raw materials and purchased components in the current year as compared to the prior year.

The impact of increased zinc, brass, and nickel silver costs increased current year material costs by approximately $1.3 million as compared to the prior year.

The increase in our direct material costs as a percentage of our cost of goods sold was due to the increased raw material costs as previously discussed and due to a reduction in our labor and overhead costs as a percentage of our cost of goods sold, as discussed below.

Labor and overhead costs increased between years, yet these costs decreased as a percentage of our cost of goods sold as a result of favorable absorption of fixed overhead costs resulting from production volume increases and cost improvement initiatives at our Milwaukee and Mexico facilities.

Labor and overhead costs were impacted by the following:

Cost Increases:

The variable portion of our labor and overhead costs increased as a result of the increase in sales volumes.

The current year results included losses on the disposal of property, plant and equipment of $1.4 million compared to a loss on disposal of $369,000 during the prior year.

Expense provisions under our incentive bonus plan impacting cost of goods sold increased $3.8 million between periods.

Mexico wages and benefits increased $1.9 million as a result of a January 1, 2021 minimum wage increase.

Cost Decreases:

The prior year included a $3.0 million non-cash compensation expense charge related to the transfer of excess Qualified Pension Plan assets as described under Pension and Postretirement Benefits within Notes to Financial Statements included elsewhere herein.

Labor and overhead costs in the current year period were favorably impacted by cost improvements implemented at our Milwaukee, WI and Mexico facilities in response to the COVID-19 pandemic.

dollar value of our Mexican operations was favorably impacted by approximately $1.8 million in the current year as compared to the prior year due to a favorable Mexican peso to U.S.

dollar exchange rate between these annual periods.

The average U.S.

dollar / Mexican peso exchange rate increased to app roximately 20.50 pesos to the do llar in the current year from approximately 19.34 pesos to the dollar in the prior year .

These favorable impacts were partially offset by an increase in the Mexican minimum wage for our Mexican workforce, which was effective January 1, 2019 and resulted in higher costs during the six month period ended December 2019 as compared to the prior year period.

Additionally, labor and overhead costs in both the current year and prior year periods included non-cash compensation expense charges related to the transfer of excess Qualified Pension Plan assets, as discussed above.

These non-cash compensation expense charges increased labor and overhead costs by $3.0 million in the current year and $2.5 million in the prior year.

dollar / Mexican peso exchange rate increased to approximately 20.90 pesos to the dollar in the current year from approximately 20.50 pesos to the dollar in the prior year.

June 27, 2021

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Gross Profit as a percentage of net sales

The decrease in gross profit dollars in the current year as compared to the prior year was attributed to the decrease in sales, partially offset by the decrease in cost of goods sold as discussed above.

Gross profit as a percentage of net sales decreased between years due to the reduction in sales as discussed above, which resulted in under absorption of our fixed costs.

The increase in gross profit dollars in the current year as compared to the prior year was attributed to the increase in net sales between years, partially offset by the increase in cost of goods sold as discussed above.

Gross profit as a percentage of net sales improved between years due to the increase in net sales as discussed above, which resulted in more favorable absorption of our fixed costs and due to cost improvement initiatives at our Milwaukee and Mexico facilities.

Engineering, Selling and Administrative Expenses in the current year and prior year were as follows:

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Expenses as a percentage of net sales

Engineering, selling and administrative expenses decreased $3.1 million between years.

Due to the impacts of COVID-19, during our fiscal 2020 fourth quarter, we implemented reductions in pay for our officers, reductions in working hours for most salaried associates, and a reduction in our U.S.

salaried workforce, which reduced our 2020 engineering, selling, and administrative costs.

These costs were further reduced by a reduction in expenditures for new product development costs associated with utilizing third party vendors for a portion of our development work.

Additionally, Engineering, selling and administrative expenses in both the current year and prior year periods included non-cash compensation expense charges related to the transfer of excess Qualified Pension Plan assets, as discussed above.

These non-cash compensation expense charges increased engineering, selling and administrative expense by $1.9 million in the current year and $1.7 million in the prior year.

Loss from operations in the current year was $8.7 million compared to income from operations of $10.6 million in the prior year.

This change was the result of reduced sales, which were partially offset by a reduction in cost of goods sold and decreased engineering, selling and administrative expenses in the current year as compared to the prior year, all as discussed above.

The equity (loss) earnings of joint ventures was comprised of the following in the current year and prior year (thousands of dollars):

Engineering, selling and administrative expenses were impacted by the following:

Cost Increases:

Expense provisions under our incentive bonus plan impacting engineering, selling and administrative expenses increased $2.8 million between years.

The prior year fourth quarter included a ten percent reduction in the salaried work force, a temporary reduction in hours worked, and reductions in various other operating costs, many of which were implemented as cost saving measures to address the impact of the COVID-19 pandemic on our reduced sales levels.

Cost Decreases:

Customer reimbursement of engineering development costs incurred in prior year periods decreased costs $1.5 million between years, which reimbursement was agreed to in the current year.

Prior year costs included a $1.9 million non-cash compensation expense charge related to the transfer of excess Qualified Pension Plan assets as described under Pension and Postretirement Benefits within Notes to Financial Statements included elsewhere herein.

Income from operations in the current year was $33.9 million compared to loss from operations of $8.7 million in the prior year.

This change was the result of increase sales, which were partially offset by an increase in cost of goods sold in the current year as compared to the prior year, all as discussed above.

The equity earnings (loss) of joint ventures was comprised of the following in the current year and prior year (thousands of dollars):

June 27, 2021

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STRATTEC Advanced Logic, LLC ("SAL LLC")

Lower profitability from our Vehicle Access Systems Technology LL C (“VAST LLC”) joint ventures was due to lower profitability in our VAST China operation related to extended OEM customer plant shutdowns associated with the COVID-19 outbreak during the period January 2020 through March 2020 and higher development costs for new programs and startup costs associated with a new plant in Jingzhou, China, which we believe will give VAST added capacity, efficiencies, and a broader geographic footprint in the China market going forward.

The current year equity loss of joint ventures for VAST LLC also included a $2 million impairment charge related to its Minda-VAST Access Systems joint venture in India.

STRATTEC’s portion of this impairment charge for 2020 totaled $667,000.

Our VAST LLC joint ventures in India and Brazil continue to report losses due to our limited amount of business in both region s as well as the impact of COVID -19.

Higher profitability from our VAST LLC joint venture was due to higher net sales and improved profitability in our VAST China operation between years.

The improved profitability in our VAST China operation between years stemmed from the extended OEM customer plant shutdowns associated with the COVID-19 pandemic in the prior year.

VAST China’s profitability in the current year was also partially offset by startup costs for their new plant in Jingzhou, China and by costs associated with the closure of our VAST China plant in Fuzhou, China, which operations were consolidated into the new Jingzhou facility.

We continue to believe these actions related to the changes in facilities, will give VAST China added capacity, greater operating efficiencies and a broader geographic footprint in the China market going forward.

VAST LLC, including VAST China, is a crucial part of our global strategy and we anticipate that it will contribute to our overall long term sales growth as the China market continues to expand.

Our VAST LLC joint ventures in India and Brazil continue to report losses due to our limited amount of business in both regions as well as the impact of COVID-19.

SAL LLC was dissolved during fiscal 2020.

STRATTEC was not the primary beneficiary and did not control SAL LLC.

Current year equ ity earnings of SAL LLC included a gain on dissolution of $342,000.

Included in other income (expense), net in the current year and prior year were the following items (thousands of dollars):

Our 2020 equity earnings of SAL LLC included a gain on dissolution of $342,000.

Included in other (expense) income, net in the current year and prior year were the following items (thousands of dollars):

June 27, 2021

June 28, 2020

Foreign currency transaction gain (loss)

Rabbi Trust (loss) gain

Unrealized (loss) gain on Mexican peso forward contracts

Realized (loss) gain on Mexican peso forward contracts

Foreign currency transaction (loss) gain

Rabbi Trust gain (loss)

Unrealized gain (loss) on Mexican peso forward contracts

Realized gain (loss) on Mexican peso forward contracts

Pension and postretirement plans cost

Other miscellaneous income, net

Foreign currency transaction gains and losses resulted from activity associated with foreign denominated assets held by our Mexican subsidiaries.

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Our effective income tax rate for 2021 was 14.6 percent compared to 27.9 percent in 2020.

During 2020, our effective tax rate was impacted by the carry-back of losses to tax years with a higher statutory tax rate.

During 2019, our effective tax rate was impacted by a $372,000 benefit resulting from measurement period adjustments to the one-time transition tax on non-previously taxed post 1986 accumulated foreign earnings occurring as a result of the enactment of the Tax Cuts and Jobs Act of 2017.

Additionally, our income tax provision for each year 2020 and 2019 was affected by the non-controlling interest portion of our pre-tax income.

Our effective tax rate for 2020 was higher due to our pre-tax book loss and the beneficial carry-back of losses.

Additionally, our income tax provision for each year 2021 and 2020 was affected by the non-controlling interest portion of our pre-tax income, GILTI provisions and R&D tax credit.

The non-controlling interest impacts the effective tax rate as our ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entities are taxed as partnerships for U.S.

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As of the date of filing this Annual Report with the Securities and Exchange Commission, all of our 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 June 28, 2020 was as follows (millions of dollars):

A summary of our outstanding receivable balances from our major customers as of June 27, 2021 and June 28, 2020 was as follows (millions of dollars):

June 27, 2021

June 28, 2020

Fiat Chrysler Automobiles

General Motors Company

Fiat Chrysler Automobiles

Ford Motor Company

The reduction in accounts receivable balances during the current year reflected reduced sales levels from the end of March 2020 through June 2020 as compared to our fiscal 2019 fourth quarter, which reduction was primarily due to our OEM customers reducing production schedules and closing their assembly plants, which reduced orders for our products, due to the COVID-19 outbreak.

Reduced accounts receivable balances as of June 28, 2020 was primarily due to reduced sales levels from the end of March 2020 through June 2020 as a result of our OEM customers reducing production schedules and closing their assembly plants, which reduced orders for our products, due to the COVID-19 outbreak.

Cash Balances in Mexico

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Financing Activities

The decrease in cash provided by operating activities between 2019 and 2020 was due to a reduction in operating income as previously discussed.

The reduction in operating income was partially offset by a net reduction in working capital requirements between the two years of $9.6 million, with the net decrease in our working capital requirements being made up of the following working capital changes (millions of dollars):

The increase in cash provided by operating activities between 2020 and 2021 was due to an increase in operating income as previously discussed.

The increase in operating income was partially offset by a net increase in working capital requirements between these years of $28.7 million, with the net increase in our working capital requirements being made up of the following working capital changes (millions of dollars):

Increase (Decrease) in Working Capital Requirements

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Other Liabilities

The year over year change in the accounts receivable balances is the result of the amount and timing of sales during each year.

The reduction in accounts receivable balances during the current year reflected reduced sales levels from the end of March 2020 through June 2020 as compared to the end of our prior year, which reduction was primarily due to our OEM customers reducing production schedules and closing their assembly plants, which reduced orders for our products, due to the COVID-19 outbreak.

The increase in accounts receivable balances during the prior year reflected increased sales levels toward the end June 2019 as compared to the end of June 2018.

The year over year change in inventory reflected an increase in inventory balances during the current year due to an inventory build-up resulting from our OEM customers reducing production schedules and closing their assembly plants due to COVID-19.

The year over year change in customer tooling balances, which consisted of costs incurred for the development of tooling that will be directly reimbursed by the customer whose parts are produced from the tool, was the result of the timing of tooling development spending required to meet customer production requirements and related billings for customer reimbursements.

The year over year change in other assets was the result of a decrease in the income tax recoverable balance in 2019, which changes were based on the required income tax provision, the timing and amounts of Federal, state and foreign tax payments made, and the timing of the utilization of foreign tax credits and research and development tax credits.

The year over year change in accounts payable and accrued liability balances reflected an increase in working capital requirements during the current year and a reduction in working capital

requirements during the prior year .

The current year increase in working capital requirements resulted from a decrease in account payable and accrued liability balances, which resulted from a reduction in purchases from our vendors due to the impact of COVID-19.

Current year payments to our vendors were based on our normal payment terms.

The prior year reduction in w orking capital requirements was the result of an increase in accounts payable a nd accrual balances , which resulted from the timing of purchases and payments with our vendors based on our normal payment terms.

The change in the accounts receivable balances is the result of the amount and timing of sales during each year.

The increase in accounts receivable balances during the current year and the reduction in accounts receivable during the prior year reflected reduced sales levels from the end of March 2020 through June 2020, which reduction was primarily due to our OEM customers reducing production schedules and closing their assembly plants due to the COVID-19 outbreak.

The change in inventory reflected an increase in inventory balances during both the current year period and the prior year period.

The current year period increase was due to an inventory build-up as of June 2021 while our OEM customers experienced assembly plant shut-downs and reduced production schedule during late March 2021 through June 2021 due to

certain part shortages.

The prior year increase was due to an inventory build-up resulting from our OEM customers reducing production schedules and closing their assembly plants from the end of March 2020 through June 2020 due to COVID-19.

The change in customer tooling balances, which consisted of costs incurred for the development of tooling that will be directly reimbursed by the customer whose parts are produced from the tool, was the result of the timing of tooling development spending required to meet customer production requirements and related billings for customer reimbursements.

The change in other assets was the result of an increase in the income tax recoverable balance in 2021, which changes were based on the required income tax provision, the timing and amounts of Federal, state and foreign tax payments made, and the timing of the utilization of foreign tax credits and research and development tax credits.

The change in accounts payable and accrued liability balances was primarily the result of an increase in accounts payable balances and accruals under our bonus plan during the current year.

Bonus accruals at June 2021 totaled $6.6 million.

Bonus accruals were zero at June 2020.

Accounts payable balances were significantly reduced as of June 2020 due to the impact of COVID-19 and the lower production levels stemming from that impact.

Accounts payable balances increased as of June 2021 as our business had ramped-up throughout our fiscal 2021 along with business in the automotive industry in general.

Accounts payable balances reflect the timing of purchases and payments with our vendors based on normal, established payment terms.

Net cash used by investing activities of $9.0 million during 2021 and $12.3 million during 2020 included capital expenditures of $8.9 million and $12.4 million, respectively.

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The investment was made for the purpose of funding general operating expenses for Sistema de Acesso Veicular Ltda, our Brazilian joint venture.

Net cash used in financing activities of $22.9 million during 2021 included repayments of borrowings under credit facilities of $23.0 million and $490,000 of dividend payments to non-controlling interests in our subsidiaries, partially offset by $604,000 received for the exercise of stock options under our stock incentive plan and purchases under our employee stock purchase plan.

Net cash used in financing activities of $9.0 million during 2020 included repayments of borrowings under credit facilities of $15.0 million, $1.6 million of regular quarterly dividend payments to shareholders and $980,000 of dividend payments to non-controlling interests in our subsidiaries, partially offset by $8 million in additional borrowings under credit facilities as well as $560,000 received for the exercise of stock options under our stock incentive plan and purchases under our employee stock purchase plan.

Net cash used in financing activities of $12.2 million during 2019 included repayments of borrowings under credit facilities of $14.0 million, $2.1 million of regular quarterly dividend payments to shareholders and $1.4 million of dividend payments to non-controlling interests in our subsidiaries, partially offset by $5 million in additional borrowings under credit facilities as well as $271,000 received for the exercise of stock options under our stock incentive plan and purchases under our employee stock purchase plan.

On May 13, 2020, our Board of Directors took action to temporarily suspend payment of our quarterly dividend for the foreseeable future in order to conserve cash as a result of the economic downturn caused by COVID-19.

During the first nine months of fiscal 2020, approximately $1.6 million of cash dividends were paid to our shareholders.

During the first nine months of fiscal 2020, prior to the suspension of dividend payments as discussed above, approximately $1.6 million of cash dividends were paid to our shareholders.

No dividends were paid to shareholders during fiscal 2021.

VAST LLC Cash Requirements

VAST China maintains debt facilities to cover operating and capital requirements.

If COVID-19 continues in China causing their operations to be unprofitable, VAST China may not be able to renew working capital loans, which may require a capital call from the VAST partners.

No capital contributions were made to VAST LLC during 2020.

We currently anticipate that VAST China has adequate debt facilities in place over the next fiscal year to cover the future operating and capital requirements of its business.

During 2021, capital contributions totaling $300,000 were made to VAST LLC for purposes of funding operations in Brazil.

STRATTEC’s portion of the capital contributions totaled $200,000.

We anticipate the Brazilian entity will require a capital contribution of approximately $375,000 collectively by all VAST partners to fund operations during fiscal 2021.

STRATTEC’s portion of the capital contributions is anticipated to be $125,000.

Due to Minda-VAST Access Systems recently experiencing losses and being shut-down for an extended period due to the COVID-19 outbreak, future capital contributions by the VAST partners, including STRATTEC, may be required during fiscal 2021.

STRATTEC’s portion of the capital contribution totaled $100,000.

No capital contributions were made to VAST LLC in 2020.

Due to economic conditions in Brazil, we anticipate Sistema de Acesso Veicular Ltda may require an additional capital contribution of approximately $300,000 collectively by all VAST LLC partners to fund operations during our fiscal year 2022.

STRATTEC’s portion of these capital contributions is anticipated to be $100,000.

During 2021 and 2020, VAST LLC made no capital contributions to Minda-VAST Access Systems.

Due to Minda-VAST Access System recently experiencing losses and due to the COVID-19 outbreak, future capital contributions may be required by the partners in this joint venture.

Future Capital Expenditures

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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, 2022.

The credit facilities were extended during June 2021 and both expire August 1, 2024.

Borrowings under either credit facility are secured by our U.S.

cash balances, accounts receivable, inventory, and fixed assets located in the U.S.

Interest on borrowings under the STRATTEC Credit Facility and interest on borrowings under the ADAC-STRATTEC Credit Facility prior to December 31, 2018 were at varying rates based, at our option, on the London Interbank Offering Rate (“LIBOR”) plus 1.0 percent or the bank’s prime rate.

Effective December 31, 2018 and thereafter, interest on borrowings under the ADAC-STRATTEC Credit Facility is 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.

Interest on borrowings under the STRATTEC Credit Facility through May 31, 2021 was at varying rates based, at our option, on the London Interbank Offering Rate (“LIBOR”) plus 1.0 percent or the bank’s prime rate.

Interest on borrowings under the ADAC-STRATTEC Credit Facility through May 31, 2021 was at varying rates based, at our option, on LIBOR plus 1.25 percent or the bank’s prime rate.

Effective June 1, 2021 interest on borrowings under both credit facilities were at varying rates based, at our option, on the London Interbank Offering Rate (“LIBOR”) plus 1.25 percent or the bank’s prime rate.

Both credit facilities contain a restrictive financial covenant that requires the applicable borrower to maintain a minimum net worth level.

The ADAC-STRATTEC Credit Facility includes an additional restrictive financial covenant that requires the maintenance of a minimum fixed charge coverage ratio.

As of June 27, 2021, we were in compliance with all financial covenants required by these credit facilities.

Outstanding borrowings under the STRATTEC Credit Facility totaled $18 million at both June 28, 2020 and June 30, 2019.

There were no outstanding borrowings under the STRATTEC Credit Facility as of June 27, 2021.

Outstanding borrowings under the STRATTEC Credit Facility totaled $18 million at June 28, 2020.

The average outstanding borrowings and weighted average interest rate on the STRATTEC Credit Facility loans were approximately $8.8 million and 1.2 percent, respectively, during 2021.

The average outstanding borrowings and weighted average interest rate on the STRATTEC Credit Facilit y loans were approximately $21.2 million and 3.3 percent, respectively, during 2019.

The average outstanding borrowings and weighted average interest rate on the STRATTEC Credit Facility loans were approximately $13.8 million and 2.6 percent, respectively, during 2020.

Outstanding borrowings under the ADAC-STRATTEC Credit Facility totaled $12 million at June 27, 2021 and $17 million at June 28, 2020.

The average outstanding borrowings and w eighted average interest rate on the ADAC-STRATTEC Credit Facility loans were approximately $19.1 million and 2.9 percent, respectively , during 2020.

The average outstanding borrowings and weighted average interest rate on the ADAC-STRATTEC Credit Facility loans were approximately $14.3 million and 1.4 percent, respectively, during 2021.

The average outstanding borrowings and weighted average interest rate on the ADAC-STRATTEC Credit Facility loans were approximately $19.1 million and 2.9 percent, respectively, during 2020.

We believe that the credit facilities are adequate, along with existing cash flows from operations, to meet our anticipated capital expenditure, working capital, dividend, and operating expenditure requirements.

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A portion of these increases have been offset by plan design changes and associate wellness initiatives.

We have also been impacted by increases in the market price of zinc and brass and inflation in Mexico, which impacts the U.

We have also been impacted by increases in the market price of zinc, steel, brass, nickel silver, and aluminum as well as inflation in Mexico, which impacts the U.

dollar costs of our Mexican operations.

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Joint Ventures and Majority Owned Subsidiaries

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

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

Critical Accounting Policies

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Refer to the discussion of Income Taxes included in the Notes to Financial Statements included as part of Item 8 within this Form 10-K.

Other Reserves – We have reserves such as a warranty reserve and an excess and obsolete inventory reserve.

These reserves require the use of estimates and judgment with regard to risk exposure, ultimate liability and net realizable value.

Warranty Reserve – We have a warranty liability recorded related to our exposure to warranty claims in the event our products fail to perform as expected, and we may be required to participate in the repair costs incurred by our customers for such products.

The recorded warranty liability balance involves judgment and estimates.

Our liability estimate is based on an analysis of historical warranty data as well as current trends and information, including our customers’ recent extension or expansion of their warranty programs.

Our liability estimate is based on an analysis of historical

warranty data as well as current trends and information, including our customers’ recent extension or expansion of their warranty programs.

Actual warranty costs might differ from estimates due to the level of actual claims varying from our claims experience and estimates and final negotiations and settlements reached with our customers.

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Refer to the discussion of Warranty Reserve under Organization and Summary of Significant Accounting Policies included in the Notes to Financial Statements included as part of Item 8 within this Form 10-K.

Excess and Obsolete Inventory Reserve – We record a reserve for excess and obsolete inventory based on historical and estimated future demand and market conditions.

The reserve level is determined by comparing inventory levels of individual materials and parts to historical usage and estimated future sales by analyzing the age of the inventory in order to identify specific material and parts that are unlikely to be sold.

Technical obsolescence and other known factors are also considered in evaluating the reserve level.

Actual future write-offs of inventory may differ from estimates and calculations used to determine reserve levels due to changes in customer demand, changes in technology and other factors.

Refer to the discussion of Inventories under Organization and Summary of Significant Accounting Policies included in the Notes to Financial Statements included as part of Item 8 within this Form 10-K.

We believe the reserves discussed above are estimated using consistent and appropriate methods.

However, changes to the assumptions could materially affect the recorded reserves.

We believe the reserve discussed above is estimated using consistent and appropriate methods.

However, changes to the assumptions could materially affect the recorded reserve amount.

New Accounting Standards

Refer to the discussion of New Accounting Standards under Organization and Summary of Significant Accounting Policies included in the Notes to Financial Statements included as part of Item 8 within this Form 10-K.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis