What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-09-08 compared with 2021-09-02 · 129 added, 130 removed, 149 unchanged (63% of the section changed)

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Executive Overview

Historically, a significant portion of our total net sales have been to domestic automotive OEMs (General Motors, Ford and Fiat Chrysler).

Historically, a significant portion of our total net sales have been to domestic automotive OEMs (General Motors, Ford and Stellantis (formerly Fiat Chrysler)).

During the past two decades these customers lost North American market share to the New Domestic automotive manufacturers (primarily the Japanese and Korean automotive manufacturers).

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and global economies.

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 2022 and 2021, the above domestic automotive OEMs together represented each year 65 percent and 62 percent, respectively, of our total net sales.

During fiscal years 2022 and 2021, 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 as a strategy to improve their overall profitability going forward.

If gas prices continue to rise over the next several years, this consumer buying trend may not continue, which is approximately 80 percent light trucks and sport utility vehicles in comparison to 20 percent passenger car vehicle purchases today.

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

Additionally, several of our significant customers have announced plans to increase production volumes for their models of Electric Vehicles.

As these customers start migrating over to Electric Vehicles we believe a significant amount of our current and future product content will continue to be purchased by our key customers and will be adopted in this changeover (refer to vehicle list included at page 7 in this Form 10-K).

Fiscal 2022 net sales were $452 million compared to $485 million in 2021.

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 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.

Both the fiscal 2022 and 2021 net sales were negatively impacted by the global semiconductor chip shortage which caused our OEM customers to temporarily shut down their assembly plants and which ultimately reduced our net sales and profitability during each of these years.

In addition, we see these supply chain shortages continuing into fiscal year 2023.

Net income attributable to STRATTEC for fiscal 2022 was $7.0 million and the Net income attributable to STRATTEC in fiscal 2021 was $22.5 million.

In addition, during fiscal years 2022 and 2021 the Company produced additional finished goods inventory in anticipation of our OEM customers coming out of the temporary shutdowns from the impact of the COVID-19 pandemic and other supply chain shortages to fill their dealer pipelines which are at historic low levels.

Also impacting profitability in fiscal year 2022 were increased costs for purchased raw materials relating to zinc, steel, nickel silver, brass, aluminum and plastic resins.

In most cases we were not able to pass along all these increased costs to our customers through pricing increases.

Another factor impacting our profitability is our U.S.

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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.

Finally, on each of January 1, 2022 and 2021, the Mexican Government mandated minimum wage increases of 22% and 15%, respectively which also negatively impacted our overall profitability.

As we look out into the future, the July 2022 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 2022 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 2022 vehicle build of 13.4 million vehicles, 15.8 million vehicles for 2023, 16.8 million vehicles for 2024, 16.8 million vehicles for 2025 and 16.5 million vehicles for 2026.

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.

As part of this third party projection, the Ford Motor Company, General Motors and Stellantis are expected to experience increased 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 and other supply chain shortages and the lingering impacts of the COVID-19 pandemic that may shut down our customers' assembly facilities and further disrupt 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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Maintain our strong financial position by deploying capital spending targeted for growth and productivity improvement

Leverage the “VAST Automotive Group Brand” with customer relationships to generate organic growth from global programs

Leverage the “VAST Automotive Group Brand” with customer relationships to generate organic growth for STRATTEC from global programs

Offer our customers innovative products and technologies, in particular electronics capabilities, along with cost savings solutions to meet their changing demands

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June 27, 2021

June 28, 2020

Net Sales (millions of dollars)

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June 28, 2020

General Motors Company

Fiat Chrysler Automobiles (FCA)

Stellantis (Formerly Fiat Chrysler Automobiles)

Ford Motor Company

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Hyundai / Kia

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.

Current year sales were adversely impacted by the global semiconductor chip shortage that temporarily closed several of our customers’ assembly plants, caused production schedule reductions for all of our customers and, as a result, reduced orders for our products and our net sales to all customer groups (other than Ford Motor Company as noted below) in the current year period as compared to the prior year period.

Our 2022 fiscal year was 53 weeks while our 2021 fiscal year was 52 weeks.

The impact of the additional week of sales during the current year partially offset the reduction in net sales resulting from the semiconductor chip shortage and increased current year sales by approximately $7.4 million.

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

Sales to Ford Motor Company were positively impacted in the current year 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

The favorable impact of this higher product content more than offset the volume reduction in the current year resulting from the global semiconductor chip shortage.

Sales to Stellantis were positively impacted in the current year due to increased sales of the Chrysler Pacifica.

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

Sales to Commercial and Other OEM Customers were negatively impacted in the current year by a reduction in sales related to door handle and power access products sold to Volkswagen and Honda of America Manufacturing.

Sales to Tier 1 Customers in the current year period were negatively impacted by lower sales volumes on our driver control steering column lock products.

Hyundai / Kia sales were negatively impacted in the current year due to lower levels of production on their Kia Carnival, formerly the Kia Sedona and Hyundai Starex minivans, for which we supply primarily power sliding door components.

June 27, 2021

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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:

The direct material cost decrease was due to reduced sales volumes between years, as discussed above, which more than offset an increase in direct material costs in the current year as compared to the prior resulting from higher raw material and purchased component costs.

In the current year period as compared to the prior year period, our direct material costs decreased as a percent of cost of goods sold while our labor and overhead costs increased as a percent of cost of goods sold.

This shift was due to our material costs varying with the sales volume reduction between years while our labor and overhead cost reduction, as discussed below, did not keep pace with the sales reduction between years.

Labor and overhead costs decreased between years.

The variable portion of our labor and overhead costs decreased due to lower levels of production at our facilities in the current year as compared to the prior year and production efficiencies at our Milwaukee and Mexico facilities, which reduced labor and overhead costs in the current year as compared to the prior year.

This impact was partially offset by less favorable absorption of our fixed overhead costs in the current year as compared to the prior year resulting from the production volume reduction between years and an additional week of expense in the current year as compared to the prior year as our fiscal 2022 was a 53 week year and our fiscal 2021 was a 52 week year.

Labor and overhead costs were further 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.

Mexico wages and benefits increased $5.2 million in the current year as compared to the prior year period as a result of January 1, 2021 and January 1, 2022 government mandated minimum wage increases.

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

dollar exchange rate between years.

The average U.S.

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.

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dollar / Mexican peso exchange rate decreased to approximately 20.33 pesos to the dollar in the current year period from approximately 20.90 pesos to the dollar in the prior year period.

Current year period costs included lump sum bonuses totaling $100,000 paid to our Milwaukee represented hourly workers upon the ratification of a new four-year labor contract, which contract is effective through November 1, 2025.

Cost Decreases:

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

The prior year period included a loss on disposal of fixed assets of $1.4 million compared to a current year quarter loss of $192,000.

June 27, 2021

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Gross Profit as a percentage of net sales

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.

The decrease in gross profit dollars in the current year as compared to the prior year was attributed to the decrease in net sales between years, 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 reduced sales, which resulted in less favorable absorption of our fixed costs, and due to increased direct material costs between periods, which negatively impacted the gross profit margin percentage by 210 basis points between years, as discussed above.

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

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June 28, 2020

Expenses (millions of dollars)

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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):

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June 28, 2020

Vehicle Access Systems Technology LLC

STRATTEC Advanced Logic, LLC ("SAL LLC")

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.

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

Prior year customer reimbursement of engineering development costs, which costs were incurred in periods prior to 2021, decreased costs $1.5 million between years, which reimbursement was agreed to in the prior year.

Customer reimbursement of engineering development costs, in addition to the $1.5 million noted above, decreased $900,000 between years and resulted from the timing of customer reimbursement for development spending on new product programs.

The prior year included temporary wage reductions for our salaried work force, which we implemented to address the impacts of the COVID-19 pandemic on our operations.

The current year includes an additional week of expense as our fiscal 2022 was a 53 week year and our fiscal 2021 was a 52 week year.

Cost Decrease:

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

Income from operations in the current year was $8.9 million compared to income from operations of $33.9 million in the prior year.

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

Equity earnings of joint ventures during the fiscal years ending July 3, 2022 and June 27, 2021 were $181,000 and $2.6 million respectively.

Lower profitability during fiscal 2022 from our VAST LLC joint venture resulted from reduced net sales and reduced profitability in our VAST China operation between years.

The reduced profitability in our VAST China operation stemmed from the current global semiconductor chip shortage described above and Chinese Government mandated temporary facility shutdowns due to COVID-19.

VAST China’s profitability in the current year was also partially offset with continued startup losses related to their new plant in Jingzhou, China.

Additionally, during the current year, VAST China experienced a fire at their Taicang plant.

As a result, certain door handle and painting operations were subsequently transferred to their new Jingzhou facility and another supplier.

The transfer of production negatively impacted VAST China’s profitability during the second half of our fiscal 2022.

We currently believe a presence in the Asian 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 Asian 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 and prior year were the following items (thousands of dollars):

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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

Foreign currency transaction gain (loss)

Rabbi Trust Assets (loss) gain

Unrealized gain on Mexican peso forward contracts

Realized gain on Mexican peso forward contracts, net

Pension and postretirement plans cost

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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 June 27, 2021 may or may not be realized in future periods, depending on actual Mexican peso to U.S.

Unrealized gains and losses on the peso forward contracts recognized as a result of mark-to-market adjustments as of July 3, 2022 may or may not be realized in future periods, depending on actual Mexican peso to U.S.

dollar exchange rates experienced during the balance of the contract period.

Pension and postretirement plan costs include the components of net periodic benefit cost other than the service cost component.

During fiscal 2020, other miscellaneous income net includes $450,000 of favorable valued added tax adjustments realized by our Mexican entities and $434,000 of experience gains from asset returns related to the termination of our Qualified Pension Plan as discussed under Retirement Plans and Postretirement Costs within our Notes to Financial Statements under Item 8 of this report on Form 10-K.

Pension and postretirement plan costs include net periodic benefit cost other than the service cost component.

Our effective income tax rate for 2022 was 4.5 percent compared to 14.6 percent in 2021.

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.

The reduction in our effective tax rate in 2022 as compared to 2021 was due to adjustments made to the amount of our 2021 estimated foreign tax credits and estimated tax impacts associated with our investment in VAST LLC.

These true-up adjustments resulted from the filing of our 2021 U.S.

income tax returns during 2022 and were attributable to actual results included in non-U.S.

income tax returns, which are filed on a calendar year basis, and which differ from estimates included in our 2021 tax provision.

The adjustment amounts recorded during 2022 totaled $1.0 million.

Our effective tax rate for 2022 excluding these adjustments was 15.6 percent.

These adjustments were not material to our previously issued financial statements.

Additionally, effective July 20, 2020, the U.S.

Treasury Department finalized and enacted previously proposed regulations regarding Global Intangible Low Taxed Income (GILTI) tax provisions of the Tax Cuts and Jobs Act of 2017 (TCJA).

Prior to this enactment, GILTI represented a significant U.S.

income tax on our foreign earnings during 2020.

With the enactment of these final regulations, we became eligible for an exclusion from GILTI since we met provisions for the GILTI High-Tax exception included in the final regulations.

The enactment of these new regulations and our eligibility for the GILTI High-Tax exception was retroactive to the original enactment of the GILTI tax provision, which included our fiscal 2020.

As a result, we

recorded an income tax benefit of $675,000 during 2021.

O ur income tax provision for each year 202 2 and 202 1 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 part nerships for U.S.

tax purposes.

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June 28, 2020

Current Assets

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Outstanding Receivable Balances from Major Customers

Our primary source of cash flow is from our major customers, which include Fiat Chrysler Automobiles LLC, General Motors Company and Ford Motor Company.

Our primary source of cash flow is from our major customers, which include Stellantis (formerly Fiat Chrysler Automobiles), General Motors Company and Ford Motor Company.

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 27, 2021 and June 28, 2020 was as follows (millions of dollars):

June 27, 2021

A summary of our outstanding receivable balances from our major customers as of July 3, 2022 and June 27, 2021 was as follows (millions of dollars):

June 27, 2021

General Motors Company

Fiat Chrysler Automobiles

Ford Motor Company

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

We earn a portion of our operating income in Mexico.

As of June 27, 2021, $2.3 million of our $14.5 million cash and cash equivalents balance was held in Mexico.

As of July 3, 2022, $2.2 million of our $8.8 million cash and cash equivalents balance was held in Mexico.

These funds are available for repatriation as deemed necessary.

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June 28, 2020

Cash Flows from (millions of dollars):

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Financing Activities

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):

The decrease in cash provided by operating activities between 2021 and 2022 was due to a reduction in operating income as previously discussed.

The decrease in operating income was slightly offset by a net decrease in working capital requirements between these years of $1.3 million, with the net decrease 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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Customer Tooling

Accounts Payable and

Other Liabilities

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.

Accounts Payable and Other Liabilities

The increase in accounts receivable balances during the current year was mostly due to payments from a specific customer being made in advance of the payment term due dates in the prior year while current year payments from that customer were made according to payment term due.

The increase in the accounts receivable balances in 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.

As sales ramped up during our fiscal 2021, the accounts receivable balance increased accordingly.

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 current year increase was due to increased raw material and purchased part costs and an intentional build-up of inventory in order to meet future customer demand associated with potential order volume increases.

The prior 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 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.

The prior year change in other assets was the result of an increase in the income tax recoverable, 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 prior year change in accounts payable and accrued liability balances was primarily the result of an increase in accounts payable balances and accruals under our bonus plans.

Bonus accruals at June 2021 totaled $6.6 million.

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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.

The current year change in accounts payable and accrued liability balances includes an increase in accounts payable balances partially offset by a reduction in accruals under our bonus plans.

Accounts payable balances continued to increase during our fiscal 2022 due to increase raw material and purchased part costs and increased inventory balances.

The reduction in accruals under our bonus plans resulted from a payout of the $6.6 million accrued bonus as of June 2021 during 2022.

Bonus accruals were zero at June 2022.

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

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Capital expenditures during each year were made in support of requirements for new product programs and the upgrade and replacement of existing equipment.

Net cash used by investing activities during 2021 also included an investment in our VAST LLC joint venture of $100,000.

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 by investing activities during 2022 and 2021 also included an investment in our VAST LLC joint venture of $150,000 and $100,000, respectively.

The investments were 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 $1.9 million during 2022 included repayments of borrowings under credit facilities of $14.0 million and $1.8 million of dividend payments to non-controlling interests in our subsidiaries, partially offset by borrowings under credit facilities of $13 million and $908,000 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 $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.

Cash Requirements

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, 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.

No dividends were paid to shareholders during fiscal 2022 and fiscal 2021.

VAST LLC Cash Requirements

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STRATTEC’s portion of the capital contribution totaled $150,000.

No capital contributions were made to VAST LLC in 2020.

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 contribution totaled $100,000.

Due to economic conditions in Brazil, we anticipate Sistema de Acesso Veicular Ltda may require an additional capital contribution of approximately $300,000 collectively by all VAST LLC partners to fund operations during our fiscal year 2023.

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During 2022 and 2021, 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.

We currently anticipate no required future capital contributions to Minda-VAST Access Systems for fiscal year 2023.

Future Capital Expenditures

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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 June 27, 2021.

A total of 3,655,322 shares have been repurchased over the life of the program through June 27, 2021, at a cost of approximately $136.4 million.

Shares authorized for buy back under the program totaled 3,839,395 at July 3, 2022.

A total of 3,655,322 shares have been repurchased over the life of the program through July 3, 2022, at a cost of approximately $136.4 million.

No shares were repurchased during fiscal 2022 or 2021.

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At this time, we anticipate minimal or no stock repurchase activity in fiscal year 2023.

Other Cash Requirements

We have an operating lease for our El Paso, Texas finished goods and service parts distribution warehouse, which has a term in excess of one year.

We also have purchase commitments related to zinc and other purchased parts.

Refer to required future payments under the lease and purchase commitments in the discussion of Leases under Organization and Summary of Significant Accounting Policies and in the discussion of Commitments and Contingencies included in the Notes to Financial Statements included as part of Item 8 within this Form 10-K.

Credit Facilities

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

The credit facilities expire August 1, 2024.

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

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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.

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.

As of July 3, 2022, we were in compliance with all financial covenants required by these credit facilities.

There were no outstanding borrowings under the STRATTEC Credit Facility as of July 3, 2022 or June 27, 2021.

The average outstanding borrowings and weighted average interest rate on the STRATTEC Credit Facility loans were approximately $332,000 and 2.0 percent, respectively, during 2022.

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.

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

Outstanding borrowings under the ADAC-STRATTEC Credit Facility totaled $11 million at July 3, 2022 and $12 million at June 27, 2021.

The average outstanding borrowings and weighted average interest rate on the ADAC-STRATTEC Credit Facility loans were approximately $14.2 million and 1.5 percent, respectively, during 2022.

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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.

Inflation and Other Changes in Prices

Over the past several years, we have been impacted by rising health care costs, which have increased our cost of associate medical coverage.

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

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

dollar costs of our Mexican operations.

We have negotiated raw material price adjustment clauses with certain, but not all, of our customers to offset some of the market price fluctuations in the cost of zinc.

We own and operate manufacturing operations in Mexico.

As a result, a portion of our manufacturing costs are incurred in Mexican pesos.

We have from time to time entered into contracts with Bank of Montreal that provide for bi-weekly and monthly Mexican peso currency forward contracts for a portion of our estimated peso denominated operating costs to minimize our earnings volatility resulting from changes in exchange rates affecting the U.S.

dollar cost of our Mexican operations.

Refer to the discussion of Derivative Instruments 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.

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 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 of Joint Ventures included in the Notes to Financial Statements included within this Form 10-K.

Critical Accounting Policies

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A reserve is established for the difference between a position taken in an income tax return and the amount recognized in the financial statements.

The amount of unrecognized benefits, that if recognized, would affect the effective tax rate was $1.0 million at July 3, 2022 and $1.1 million at June 27, 2021.

An increase or decrease in our assessment of the recorded amount of unrecognized benefits by 10 percent would result in an increase or decrease in the reported tax provision, before the impact of interest and penalties, of $100,000 at July 3, 2022 and $110,000 at June 27, 2021.

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.

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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.

Therefore, future actual claims experience could result in changes in our estimates of the required liability.

Sensitivity of potential warranty or product recall claims is dependent on the respective customer platform, volumes, production years and product content.

We have product recall insurance once a recall claim exceeds $5 million with a limit of $35 million.

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.

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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