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EX-32 - EX-32 - STRATTEC SECURITY CORPstrt-ex32_8.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549  

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 1, 2017

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 0-25150

 

STRATTEC SECURITY CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

Wisconsin

 

39-1804239

(State of Incorporation)

 

(I.R.S. Employer Identification No.)

3333 West Good Hope Road, Milwaukee, WI 53209

(Address of Principal Executive Offices)

(414) 247-3333

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     YES      NO  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     YES      NO  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

(Do not check if a smaller reporting company)

  

Smaller Reporting Company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES      NO  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Common stock, par value $0.01 per share: 3,668,787 shares outstanding as of January 2, 2017 (which number includes all restricted shares previously awarded that have not vested as of such date).

 

 

 

 

 

 


STRATTEC SECURITY CORPORATION

FORM 10-Q

January 1, 2017

INDEX

 

 

 

Page

Part I - FINANCIAL INFORMATION

 

Item 1

Financial Statements

 

 

Condensed Consolidated Statements of Income and Comprehensive Income

3

 

Condensed Consolidated Balance Sheets

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Condensed Consolidated Financial Statements

6-17

Item 2

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

18-27

Item 3

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4

Controls and Procedures

30

 

 

 

Part II - OTHER INFORMATION

 

Item 1

Legal Proceedings

31

Item 1A  

Risk Factors

31

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

31

Item 3

Defaults Upon Senior Securities

31

Item 4

Mine Safety Disclosures

31

Item 5

Other Information

31

Item 6

Exhibits

31

PROSPECTIVE INFORMATION

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

The Company’s business, operations and financial performance are subject to certain risks and uncertainties, which could result in material differences in actual results from the Company’s current expectations. These risks and uncertainties include, but are not limited to, general economic conditions, in particular relating to the automotive industry, consumer demand for the Company’s and its customers’ products, competitive and technological developments, customer purchasing actions, changes in warranty provisions and customers’ product recall policies,  foreign currency fluctuations, costs of operations, the volume and scope of product returns and warranty claims and other matters described in the section titled “Risk Factors” in the Company’s Form 10-K report filed on September 8, 2016 with the Securities and Exchange Commission for the year ended July 3, 2016.

Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this Form 10-Q and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances occurring after the date of this Form 10-Q.

 

 

 

 


 

Item 1 Financial Statements

STRATTEC SECURITY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Income and Comprehensive (Loss) Income

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

January 1,

2017

 

 

December 27,

2015

 

 

January 1,

2017

 

 

December 27,

2015

 

Net sales

 

$

98,945

 

 

$

102,511

 

 

$

199,189

 

 

$

199,024

 

Cost of goods sold

 

 

85,450

 

 

 

83,901

 

 

 

171,089

 

 

 

163,915

 

Gross profit

 

 

13,495

 

 

 

18,610

 

 

 

28,100

 

 

 

35,109

 

Engineering, selling and administrative expenses

 

 

11,329

 

 

 

11,196

 

 

 

22,699

 

 

 

21,770

 

Income from operations

 

 

2,166

 

 

 

7,414

 

 

 

5,401

 

 

 

13,339

 

Interest income

 

 

39

 

 

 

8

 

 

 

80

 

 

 

15

 

Equity earnings (loss) of joint ventures

 

 

229

 

 

 

(22

)

 

 

291

 

 

 

(315

)

Interest expense

 

 

(98

)

 

 

(23

)

 

 

(176

)

 

 

(44

)

Other income, net

 

 

711

 

 

 

350

 

 

 

754

 

 

 

318

 

Income before provision for income taxes and non-

   controlling interest

 

 

3,047

 

 

 

7,727

 

 

 

6,350

 

 

 

13,313

 

Provision for income taxes

 

 

1,410

 

 

 

2,514

 

 

 

2,308

 

 

 

4,268

 

Net income

 

 

1,637

 

 

 

5,213

 

 

 

4,042

 

 

 

9,045

 

Net income attributable to non-controlling interest

 

 

1,239

 

 

 

1,810

 

 

 

2,102

 

 

 

2,369

 

Net income attributable to STRATTEC SECURITY

   CORPORATION

 

$

398

 

 

$

3,403

 

 

$

1,940

 

 

$

6,676

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,637

 

 

$

5,213

 

 

$

4,042

 

 

$

9,045

 

Pension and postretirement plans, net of tax

 

 

474

 

 

 

364

 

 

 

949

 

 

 

728

 

Currency translation adjustments

 

 

(3,408

)

 

 

(488

)

 

 

(5,031

)

 

 

(3,355

)

Other comprehensive loss, net of tax

 

 

(2,934

)

 

 

(124

)

 

 

(4,082

)

 

 

(2,627

)

Comprehensive (loss) income

 

 

(1,297

)

 

 

5,089

 

 

 

(40

)

 

 

6,418

 

Comprehensive income attributable to non-controlling

    interest

 

 

346

 

 

 

1,779

 

 

 

1,099

 

 

 

2,179

 

Comprehensive (loss) income attributable to STRATTEC

      SECURITY CORPORATION

 

$

(1,643

)

 

$

3,310

 

 

$

(1,139

)

 

$

4,239

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to STRATTEC SECURITY

   CORPORATION:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.11

 

 

$

0.95

 

 

$

0.54

 

 

$

1.87

 

Diluted

 

$

0.11

 

 

$

0.93

 

 

$

0.53

 

 

$

1.83

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

3,589

 

 

 

3,563

 

 

 

3,583

 

 

 

3,553

 

Diluted

 

 

3,667

 

 

 

3,624

 

 

 

3,664

 

 

 

3,621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

 

$

0.14

 

 

$

0.13

 

 

$

0.28

 

 

$

0.26

 

 

 

 

 

 

 

 

 

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

 

 

3


 

STRATTEC SECURITY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In Thousands, Except Share Amounts)

 

 

 

January 1,

2017

 

 

July 3,

2016

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

8,190

 

 

$

15,477

 

Receivables, net

 

 

59,393

 

 

 

63,726

 

Inventories:

 

 

 

 

 

 

 

 

Finished products

 

 

11,740

 

 

 

10,137

 

Work in process

 

 

9,297

 

 

 

8,291

 

Purchased materials

 

 

21,392

 

 

 

23,055

 

Excess and obsolete reserve

 

 

(3,343

)

 

 

(2,800

)

Inventories, net

 

 

39,086

 

 

 

38,683

 

Other current assets

 

 

14,966

 

 

 

16,565

 

Total current assets

 

 

121,635

 

 

 

134,451

 

Investment in joint ventures

 

 

14,713

 

 

 

14,168

 

Deferred income taxes

 

 

4,214

 

 

 

5,387

 

Other long-term assets

 

 

8,899

 

 

 

3,021

 

Property, plant and equipment

 

 

226,382

 

 

 

216,859

 

Less: accumulated depreciation

 

 

(135,241

)

 

 

(131,710

)

Net property, plant and equipment

 

 

91,141

 

 

 

85,149

 

 

 

$

240,602

 

 

$

242,176

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

32,294

 

 

$

32,416

 

Accrued Liabilities:

 

 

 

 

 

 

 

 

Payroll and benefits

 

 

10,709

 

 

 

11,210

 

Environmental

 

 

1,320

 

 

 

1,365

 

Warranty

 

 

7,805

 

 

 

9,228

 

Other

 

 

9,023

 

 

 

9,996

 

Total current liabilities

 

 

61,151

 

 

 

64,215

 

Borrowings under credit facility

 

 

20,000

 

 

 

20,000

 

Accrued pension obligations

 

 

1,517

 

 

 

1,466

 

Accrued postretirement obligations

 

 

1,144

 

 

 

1,262

 

Other long-term liabilities

 

 

1,195

 

 

 

721

 

Shareholders’ Equity:

 

 

 

 

 

 

 

 

Common stock, authorized 12,000,000 shares, $.01 par value, 7,212,353

   issued shares at January 1, 2017 and 7,188,363 issued shares at

   July 3, 2016

 

 

72

 

 

 

72

 

Capital in excess of par value

 

 

93,008

 

 

 

92,076

 

Retained earnings

 

 

221,662

 

 

 

220,728

 

Accumulated other comprehensive loss

 

 

(40,752

)

 

 

(37,673

)

Less: treasury stock, at cost (3,621,166 shares at January 1, 2017 and

   3,622,506 shares at July 3, 2016)

 

 

(135,850

)

 

 

(135,871

)

Total STRATTEC SECURITY CORPORATION shareholders’ equity

 

 

138,140

 

 

 

139,332

 

Non-controlling interest

 

 

17,455

 

 

 

15,180

 

Total shareholders’ equity

 

 

155,595

 

 

 

154,512

 

 

 

$

240,602

 

 

$

242,176

 

 

 

 

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

 

 

4


 

STRATTEC SECURITY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

January 1,

2017

 

 

December 27,

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

4,042

 

 

$

9,045

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,647

 

 

 

5,075

 

Foreign currency transaction gain

 

 

(2,497

)

 

 

(1,321

)

Unrealized loss on peso forward contracts

 

 

1,563

 

 

 

867

 

Stock based compensation expense

 

 

792

 

 

 

870

 

Equity (earnings) loss of joint ventures

 

 

(291

)

 

 

315

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

4,085

 

 

 

(2,132

)

Inventories

 

 

(403

)

 

 

(10,434

)

Other assets

 

 

(2,541

)

 

 

(226

)

Accounts payable and accrued liabilities

 

 

(248

)

 

 

1,161

 

Other, net

 

 

(148

)

 

 

 

Net cash provided by operating activities

 

 

10,001

 

 

 

3,220

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Investment in joint ventures

 

 

(100

)

 

 

(220

)

Loan to joint ventures

 

 

(1,400

)

 

 

(150

)

Repayment from loan to joint ventures

 

 

75

 

 

 

 

Purchase of property, plant and equipment

 

 

(16,329

)

 

 

(8,095

)

Net cash used in investing activities

 

 

(17,754

)

 

 

(8,465

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Borrowings under credit facility

 

 

21,000

 

 

 

5,500

 

Repayments of borrowings under credit facility

 

 

(21,000

)

 

 

(5,500

)

Contribution from non-controlling interest of subsidiaries

 

 

2,940

 

 

 

 

Dividends paid to non-controlling interests of subsidiaries

 

 

(1,764

)

 

 

(1,568

)

Dividends paid

 

 

(1,006

)

 

 

(932

)

Exercise of stock options and employee stock purchases

 

 

160

 

 

 

584

 

Net cash provided by (used in) financing activities

 

 

330

 

 

 

(1,916

)

Foreign currency impact on cash

 

 

136

 

 

 

(611

)

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(7,287

)

 

 

(7,772

)

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS

 

 

 

 

 

 

 

 

Beginning of period

 

 

15,477

 

 

 

25,695

 

End of period

 

$

8,190

 

 

$

17,923

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Income taxes

 

$

1,026

 

 

$

2,395

 

Interest

 

$

167

 

 

$

43

 

Non-cash investing activities:

 

 

 

 

 

 

 

 

Change in capital expenditures in accounts payable

 

$

(2,051

)

 

$

456

 

Guarantee of joint venture revolving credit facility

 

$

 

 

$

105

 

 

 

 

 

 

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

 

 

5


 

STRATTEC SECURITY CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Basis of Financial Statements

STRATTEC SECURITY CORPORATION designs, develops, manufactures and markets automotive access control products including mechanical locks and keys, electronically enhanced locks and keys, steering column and instrument panel ignition lock housings, latches, power sliding door systems, power lift gate systems, power deck lid systems, door handles and related products for primarily North American automotive customers. We also supply global automotive manufacturers through a unique strategic relationship with WITTE Automotive (“WITTE”) of Velbert, Germany, and ADAC Automotive (“ADAC”) of Grand Rapids, Michigan. Under this relationship, STRATTEC, WITTE and ADAC market the products of each company to global customers under the “VAST” brand name (as more fully described herein). STRATTEC products are shipped to customer locations in the United States, Canada, Mexico, Europe, South America, Korea, China and India, and we provide full service and aftermarket support for each partner’s company’s products. We also maintain a 51 percent interest in a joint venture, STRATTEC Advanced Logic, LLC (“SAL LLC”), which exists to introduce a new generation of biometric security products based on the designs of Actuator Systems, our partner and the owner of the remaining ownership interest.

The accompanying condensed consolidated financial statements reflect the consolidated results of STRATTEC SECURITY CORPORATION, its wholly owned Mexican subsidiary, STRATTEC de Mexico, and its majority owned subsidiaries, ADAC-STRATTEC, LLC and STRATTEC POWER ACCESS LLC. STRATTEC SECURITY CORPORATION is located in Milwaukee, Wisconsin. STRATTEC de Mexico is located in Juarez, Mexico. ADAC-STRATTEC, LLC and STRATTEC POWER ACCESS LLC have operations in El Paso, Texas and Juarez, Mexico. Equity investments in Vehicle Access Systems Technology LLC (“VAST LLC”) and SAL LLC, for which we exercise significant influence but do not control and are not the primary beneficiary, are accounted for using the equity method. VAST LLC consists primarily of three wholly owned subsidiaries in China, one wholly owned subsidiary in Brazil and one joint venture entity in India. SAL LLC is located in El Paso, Texas. We have only one reporting segment.

In the opinion of management, the accompanying condensed consolidated balance sheets as of January 1, 2017 and July 3, 2016, which have been derived from our audited financial statements, and the related unaudited interim condensed consolidated financial statements included herein contain all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and in accordance with Rule 10-01 of Regulation S-X. All significant intercompany transactions have been eliminated.

Interim financial results are not necessarily indicative of operating results for an entire year. The information included in this Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the STRATTEC SECURITY CORPORATION 2016 Annual Report, which was filed with the Securities and Exchange Commission as an exhibit to our Form 10-K on September 8, 2016.

 

 

New Accounting Standards

In May 2014, the FASB issued an update to the accounting guidance for the recognition of revenue arising from contracts with customers. The update supersedes most current revenue recognition guidance and outlines a single comprehensive model for revenue recognition based on the principle that an entity should recognize revenue in an amount that reflects the expected consideration to be received in the exchange of goods and services. The guidance update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The guidance permits two methods of adoption: the full retrospective method, which requires retrospective restatement of each prior reporting period presented, or the cumulative catch-up transition method, which requires the cumulative effect of initially applying the guidance be recognized at the date of initial application. We currently anticipate adopting the standard using the full retrospective method. The guidance update is effective for annual reporting periods beginning after December 15, 2017 and becomes effective for us at the beginning of our 2019 fiscal year. We do not anticipate early adoption. Our ability to adopt using the full retrospective method is dependent on system readiness and the completion of our analysis of information necessary to restate prior period financial statements. While we are continuing to assess all potential impacts of the standard, we currently anticipate changes to revenue recognition of customer owned tooling and engineering recoveries. We expect revenue related to parts shipped under our production contracts to remain unchanged.

 

6


 

In August 2014, the FASB issued an update to the accounting guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new guidance requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued.  An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. This accounting update is effective for annual and interim periods beginning on or after December 15, 2016, with early adoption permitted.  We do not expect that the adoption of this pronouncement will have a material impact on our consolidated financial statements.

 

In July 2015, the FASB issued an accounting standard to simplify the measurement of inventory by changing the subsequent measurement guidance from the lower of cost or market to the lower of cost and net realizable value for inventory. The standard update is effective for fiscal years beginning after December 15, 2016 and interim periods within those years, and early adoption is permitted. The standard is to be applied prospectively. We do not expect that the adoption of this pronouncement will have a material impact on our consolidated financial statements.

 

In February 2016, the FASB issued an update to the accounting guidance for leases. The update increases the transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about leasing arrangements. The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those years. We are currently assessing the impact that this guidance will have on our consolidated financial statements.

 

In March 2016, the FASB issued an update to the accounting guidance for share-based payments. The update simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification of such items in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those years. We do not expect that the adoption of this pronouncement will have a material impact on our consolidated financial statements.

 

In August 2016, the FASB issued an update to the accounting guidance on the classification of certain cash receipts and cash payments. The update aims to eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years. We are currently assessing the impact that this guidance will have on our consolidated financial statements.

 

 

Derivative Instruments

We own and operate manufacturing operations in Mexico.  As a result, a portion of our manufacturing costs are incurred in Mexican pesos, which causes our earnings and cash flows to fluctuate due to changes in the U.S. dollar/Mexican peso exchange rate.  We executed 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. The peso currency forward contracts include settlement dates that began on October 16, 2015 and end on June 15, 2018.  Our objective in entering into these currency forward contracts is to minimize our earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. The Mexican peso forward contracts are not used for speculative purposes and are not designated as hedges.  As a result, all currency forward contracts are recognized in our accompanying condensed consolidated financial statements at fair value and changes in the fair value are reported in current earnings as part of Other Income, net.

The following table quantifies the outstanding Mexican peso forward contracts as of January 1, 2017 (thousands of dollars, except average forward contractual exchange rates):

 

 

Effective Dates

 

Notional Amount

 

 

Average Forward Contractual Exchange Rate

 

 

Fair Value

 

Buy MXP/Sell USD

 

January 13, 2017 - June 15, 2017

 

$

12,000

 

 

 

17.95

 

 

$

1,686

 

Buy MXP/Sell USD

 

July 14, 2017 - June 15, 2018

 

$

12,000

 

 

 

20.37

 

 

$

766

 

7


 

The fair market value of all outstanding Mexican peso forward contracts in the accompanying Condensed Consolidated Balance Sheets was as follows (thousands of dollars):

 

 

 

January 1,

2017

 

 

July 3,

2016

 

Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

Other Current Liabilities:

 

 

 

 

 

 

 

 

Mexican Peso Forward Contracts

 

$

1,992

 

 

$

107

 

Other Long-term Liabilities:

 

 

 

 

 

 

 

 

Mexican Peso Forward Contracts

 

$

460

 

 

$

996

 

 

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

January 1,

2017

 

 

December 27,

2015

 

 

January 1,

2017

 

 

December 27,

2015

 

Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized Loss

 

$

(576

)

 

$

(178

)

 

$

(806

)

 

$

(178

)

Unrealized (Loss) Gain

 

$

(664

)

 

$

29

 

 

$

(1,563

)

 

$

(867

)

 

 

 

Fair Value of Financial Instruments

The fair value of our cash and cash equivalents, accounts receivable, accounts payable and borrowings under our credit facility approximated book value as of January 1, 2017 and July 3, 2016. Fair value is defined as the exchange price that would be received for an asset or paid for a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date.

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of January 1, 2017 (in thousands):

 

 

 

Fair Value Inputs

 

 

 

Level 1 Assets:

Quoted Prices

In Active Markets

 

 

Level 2 Assets:

Observable

Inputs Other

Than Market

Prices

 

 

Level 3 Assets:

Unobservable

Inputs

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Rabbi Trust Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Stock Index Funds:

 

 

 

 

 

 

 

 

 

 

 

 

Small Cap

 

$

399

 

 

$

 

 

$

 

Mid Cap

 

 

382

 

 

 

 

 

 

 

Large Cap

 

 

536

 

 

 

 

 

 

 

International

 

 

406

 

 

 

 

 

 

 

Fixed Income Funds

 

 

694

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

 

 

 

 

1

 

 

 

 

Total Assets at Fair Value

 

$

2,417

 

 

$

1

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Mexican Peso Forward Contracts

 

$

 

 

$

2,452

 

 

$

 

 

The Rabbi Trust assets fund our amended and restated supplemental executive retirement plan and are included in Other Long-term Assets in the accompanying Condensed Consolidated Balance Sheets. Refer to discussion of Mexican peso forward contracts under Derivative Instruments above. The fair value of the Mexican peso forward contracts considers the remaining term, current exchange rate, and interest rate differentials between the two currencies. There were no transfers between Level 1 and Level 2 assets during the six month period ended January 1, 2017.

 

 

8


 

Equity Earnings (Loss) of Joint Ventures

We hold a one-third interest in a joint venture company, VAST LLC, with WITTE and ADAC. VAST LLC exists to seek opportunities to manufacture and sell all three companies’ products in areas of the world outside of North America and Europe. Our investment in VAST LLC, for which we exercise significant influence but do not control and are not the primary beneficiary, is accounted for using the equity method.

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

 

 

Three Months Ended

 

 

 

Six Months Ended

 

 

January 1,

2017

 

 

December 27,

2015

 

 

 

January 1,

2017

 

 

December 27,

2015

 

Net Sales

$

34,007

 

 

$

31,402

 

 

 

$

59,016

 

 

$

57,750

 

Cost of Goods Sold

 

27,124

 

 

 

25,497

 

 

 

 

47,217

 

 

 

47,411

 

Gross Profit

 

6,883

 

 

 

5,905

 

 

 

 

11,799

 

 

 

10,339

 

Engineering, Selling and Administrative Expenses

 

5,212

 

 

 

4,491

 

 

 

 

9,227

 

 

 

8,116

 

Income From Operations

 

1,671

 

 

 

1,414

 

 

 

 

2,572

 

 

 

2,223

 

Other Income (Expense), net

 

730

 

 

 

(150

)

 

 

 

1,171

 

 

 

(462

)

Income before Provision for Income Taxes

 

2,401

 

 

 

1,264

 

 

 

 

3,743

 

 

 

1,761

 

Provision for Income Taxes

 

405

 

 

 

217

 

 

 

 

577

 

 

 

311

 

Net Income

$

1,996

 

 

$

1,047

 

 

 

$

3,166

 

 

$

1,450

 

STRATTEC’s Share of VAST LLC Net Income

$

665

 

 

$

349

 

 

 

$

1,055

 

 

$

483

 

Intercompany Profit Elimination

 

(23

)

 

 

(4

)

 

 

 

(22

)

 

 

(5

)

STRATTEC’s Equity Earnings of VAST LLC

$

642

 

 

$

345

 

 

 

$

1,033

 

 

$

478

 

 

We hold a 51% ownership interest in a joint venture company, SAL LLC, which exists to introduce a new generation of biometric security products based upon the designs of Actuator Systems LLC, our partner. SAL LLC had a $1.5 million revolving credit facility (the “SAL Credit Facility”) with BMO Harris Bank N.A., which was fully guaranteed by STRATTEC. The SAL Credit Facility had a maturity date of February 16, 2016. Outstanding borrowings under the SAL Credit Facility as of February 16, 2016 totaled $1.5 million. SAL LLC did not have cash available to pay the outstanding debt balance as of the maturity date. Therefore, STRATTEC made a payment of $1.5 million on its guarantee on February 16, 2016. SAL LLC is considered a variable interest entity based on the STRATTEC guarantee and additional loans from STRATTEC as discussed below. STRATTEC is not the primary beneficiary and does not control the entity. Accordingly, our investment in SAL LLC is accounted for using the equity method.

SAL LLC maintains a license agreement with Westinghouse allowing SAL LLC to do business as Westinghouse Security. Payments due Westinghouse under the license agreement were guaranteed by STRATTEC. As of January 1, 2017 and July 3, 2016, STRATTEC has a recorded liability equal to the estimated fair value of the future payments due under this guarantee of $250,000. The liability is included in Other Long-term Liabilities in the accompanying Condensed Consolidated Balance Sheets.

Loans were made from STRATTEC to SAL LLC in support of operating expenses and working capital needs. The outstanding loan amounts totaled $1.7 million and $325,000 as of January 1, 2017 and July 3, 2016, respectively. As of January 1, 2017, the outstanding loan amount was eliminated against STRATTEC’s Investment in SAL LLC in the preparation of the consolidated financial statements.

Even though we maintain a 51 percent ownership interest in SAL LLC, effective with our fiscal 2015 fourth quarter, 100 percent of the funding for SAL LLC was being made by loans from STRATTEC to SAL LLC. Therefore, STRATTEC recognized 100 percent of the losses of SAL LLC up to our committed financial support through Equity (Loss) Earnings of Joint Ventures in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for all periods presented in this report.

9


 

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

January 1,

2017

 

 

December 27,

2015

 

 

January 1,

2017

 

 

December 27,

2015

 

Net Sales

 

$

96

 

 

$

65

 

 

$

196

 

 

$

125

 

Cost of Goods Sold

 

 

97

 

 

 

40

 

 

 

184

 

 

 

95

 

Gross Profit

 

 

(1

)

 

 

25

 

 

 

12

 

 

 

30

 

Engineering, Selling and Administrative Expenses

 

 

369

 

 

 

358

 

 

 

706

 

 

 

604

 

Loss From Operations

 

 

(370

)

 

 

(333

)

 

 

(694

)

 

 

(574

)

Other Expense, net

 

 

(35

)

 

 

(10

)

 

 

(47

)

 

 

(18

)

Net Loss

 

$

(405

)

 

$

(343

)

 

$

(741

)

 

$

(592

)

STRATTEC’s Share of Equity Loss of SAL LLC

 

$

(413

)

 

$

(343

)

 

$

(741

)

 

$

(592

)

Loss on Loan to SAL LLC

 

 

 

 

 

 

 

 

 

 

 

(150

)

Loss on SAL LLC Credit Facility Guarantee

 

 

 

 

 

(24

)

 

 

 

 

 

(51

)

STRATTEC’s Equity Loss of SAL LLC

 

$

(413

)

 

$

(367

)

 

$

(741

)

 

$

(793

)

 

We have sales of component parts to VAST LLC and SAL LLC, purchases of component parts from VAST LLC, expenses charged to VAST LLC for engineering and accounting services and expenses charged to us from VAST LLC for general headquarters expenses.  The following table summarizes these related party transactions with VAST LLC and SAL LLC for the periods indicated below (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

January 1,

2017

 

 

December 27,

2015

 

 

January 1,

2017

 

 

December 27,

2015

 

Sales to VAST LLC

 

$

50

 

 

$

72

 

 

$

103

 

 

$

210

 

Sales to SAL, LLC

 

$

52

 

 

$

27

 

 

$

127

 

 

$

44

 

Purchases from VAST LLC

 

$

71

 

 

$

38

 

 

$

102

 

 

$

63

 

Expenses Charged to VAST LLC

 

$

226

 

 

$

176

 

 

$

454

 

 

$

411

 

Expenses Charged from VAST LLC

 

$

349

 

 

$

405

 

 

$

758

 

 

$

797

 

 

 

Credit Facilities and Guarantees

STRATTEC has a $30 million secured revolving credit facility (the “STRATTEC Credit Facility”) with BMO Harris Bank N.A. ADAC-STRATTEC LLC has a $20 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, 2019. Borrowings under either credit facility are secured by our cash balances, accounts receivable, inventory and fixed assets located in the U.S. Interest on borrowings under both credit facilities is at varying rates based, at our option, on the London Interbank Offering Rate (“LIBOR”) plus 1.0 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. The ADAC-STRATTEC Credit Facility also required that a capital contribution to ADAC-STRATTEC LLC of $6 million collectively from STRATTEC and ADAC be completed by September 30, 2016. This capital contribution was completed as required. STRATTEC’s portion of the capital contribution totaled $3.06 million. As of January 1, 2017, we were in compliance with all financial covenants required by these credit facilities.

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

 

 

 

January 1,

2017

 

 

July 3,

2016

 

STRATTEC Credit Facility

 

$

9,000

 

 

$

11,500

 

ADAC-STRATTEC Credit Facility

 

$

11,000

 

 

$

8,500

 

10


 

 

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

 

 

 

Six Months Ended

 

 

 

Average Outstanding Borrowings

 

 

Weighted Average Interest Rate

 

 

 

January 1,

2017

 

 

December 27,

2015

 

 

January 1,

2017

 

 

December 27,

2015

 

STRATTEC Credit Facility

 

$

13,673

 

 

$

3,646

 

 

 

1.5

%

 

 

1.2

%

ADAC-STRATTEC Credit Facility

 

$

8,703

 

 

$

3,054

 

 

 

1.6

%

 

 

1.3

%

 

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