10-Q 1 strt-10q_20151227.htm 10-Q strt-10q_20151227.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549  

 

FORM 10-Q

 

x

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

For the quarterly period ended December 27, 2015

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  x    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  x    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

 

x

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  x

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: 3,637,339 shares outstanding as of December 28, 2015 (which number includes all restricted shares previously awarded that have not vested as of such date).

 

 

 

 

 

 


STRATTEC SECURITY CORPORATION

FORM 10-Q

December 27, 2015

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 statements include expected future financial results, product offerings, global expansion, liquidity needs, financing ability, planned capital expenditures, management's or the Company’s expectations and beliefs, and similar matters discussed in this Form 10-Q. The 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 4, 2015 with the Securities and Exchange Commission for the year ended June 28, 2015.

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 Income

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 27,

2015

 

 

December 28,

2014

 

 

December 27,

2015

 

 

December 28,

2014

 

Net sales

 

$

102,511

 

 

$

101,990

 

 

$

199,024

 

 

$

224,232

 

Cost of goods sold

 

 

83,901

 

 

 

83,538

 

 

 

163,915

 

 

 

177,723

 

Gross profit

 

 

18,610

 

 

 

18,452

 

 

 

35,109

 

 

 

46,509

 

Engineering, selling and administrative expenses

 

 

11,196

 

 

 

10,490

 

 

 

21,770

 

 

 

23,677

 

Income from operations

 

 

7,414

 

 

 

7,962

 

 

 

13,339

 

 

 

22,832

 

Interest income

 

 

8

 

 

 

43

 

 

 

15

 

 

 

65

 

Equity (loss) earnings of joint ventures

 

 

(22

)

 

 

(121

)

 

 

(315

)

 

 

69

 

Interest expense

 

 

(23

)

 

 

(11

)

 

 

(44

)

 

 

(22

)

Other income, net

 

 

350

 

 

 

1,823

 

 

 

318

 

 

 

2,611

 

Income before provision for income taxes and non-controlling

   interest

 

 

7,727

 

 

 

9,696

 

 

 

13,313

 

 

 

25,555

 

Provision for income taxes

 

 

2,514

 

 

 

2,795

 

 

 

4,268

 

 

 

8,314

 

Net income

 

 

5,213

 

 

 

6,901

 

 

 

9,045

 

 

 

17,241

 

Net income attributable to non-controlling interest

 

 

1,810

 

 

 

1,123

 

 

 

2,369

 

 

 

2,163

 

Net income attributable to STRATTEC SECURITY

   CORPORATION

 

$

3,403

 

 

$

5,778

 

 

$

6,676

 

 

$

15,078

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5,213

 

 

$

6,901

 

 

$

9,045

 

 

$

17,241

 

Pension and postretirement plans, net of tax

 

 

364

 

 

 

428

 

 

 

728

 

 

 

856

 

Currency translation adjustments

 

 

(488

)

 

 

(2,590

)

 

 

(3,355

)

 

 

(3,442

)

Other comprehensive loss, net of tax

 

 

(124

)

 

 

(2,162

)

 

 

(2,627

)

 

 

(2,586

)

Comprehensive income

 

 

5,089

 

 

 

4,739

 

 

 

6,418

 

 

 

14,655

 

Comprehensive income attributable to non-controlling interest

 

 

1,779

 

 

 

965

 

 

 

2,179

 

 

 

1,941

 

Comprehensive income attributable to STRATTEC SECURITY

   CORPORATION

 

$

3,310

 

 

$

3,774

 

 

$

4,239

 

 

$

12,714

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to STRATTEC SECURITY

   CORPORATION:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.95

 

 

$

1.62

 

 

$

1.87

 

 

$

4.25

 

Diluted

 

$

0.93

 

 

$

1.58

 

 

$

1.83

 

 

$

4.13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

3,563

 

 

 

3,518

 

 

 

3,553

 

 

 

3,507

 

Diluted

 

 

3,624

 

 

 

3,612

 

 

 

3,621

 

 

 

3,603

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

 

$

0.13

 

 

$

0.12

 

 

$

0.26

 

 

$

0.24

 

 

 

 

 

 

 

 

 

 

 

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

 

 

3


 

STRATTEC SECURITY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In Thousands, Except Share Amounts)

 

 

 

December 27,

2015

 

 

June 28,

2015

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,923

 

 

$

25,695

 

Receivables, net

 

 

60,802

 

 

 

58,807

 

Inventories

 

 

 

 

 

 

 

 

Finished products

 

 

13,576

 

 

 

11,358

 

Work in process

 

 

8,574

 

 

 

7,746

 

Purchased materials

 

 

25,842

 

 

 

17,982

 

Excess and obsolete reserve

 

 

(2,772

)

 

 

(2,300

)

Inventories, net

 

 

45,220

 

 

 

34,786

 

Other current assets

 

 

19,507

 

 

 

18,873

 

Total current assets

 

 

143,452

 

 

 

138,161

 

Investment in joint ventures

 

 

15,464

 

 

 

15,326

 

Other long-term assets

 

 

11,269

 

 

 

10,816

 

Property, plant and equipment

 

 

201,674

 

 

 

194,567

 

Less: accumulated depreciation

 

 

(128,142

)

 

 

(123,441

)

Net property, plant and equipment

 

 

73,532

 

 

 

71,126

 

 

 

$

243,717

 

 

$

235,429

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

35,136

 

 

$

27,838

 

Accrued Liabilities:

 

 

 

 

 

 

 

 

Payroll and benefits

 

 

12,222

 

 

 

16,107

 

Environmental

 

 

1,376

 

 

 

1,383

 

Warranty

 

 

9,431

 

 

 

11,835

 

Other

 

 

9,573

 

 

 

7,572

 

Total current liabilities

 

 

67,738

 

 

 

64,735

 

Deferred income taxes

 

 

4,581

 

 

 

4,595

 

Borrowings under credit facility

 

 

10,000

 

 

 

10,000

 

Accrued pension obligations

 

 

1,382

 

 

 

1,331

 

Accrued postretirement obligations

 

 

1,477

 

 

 

1,657

 

Other long-term liabilities

 

 

764

 

 

 

710

 

Shareholders’ Equity:

 

 

 

 

 

 

 

 

Common stock, authorized 12,000,000 shares, $.01 par value, issued 7,188,363

   shares at December 27, 2015 and 7,151,154 shares at June 28, 2015

 

 

71

 

 

 

71

 

Capital in excess of par value

 

 

91,003

 

 

 

89,560

 

Retained earnings

 

 

219,187

 

 

 

213,442

 

Accumulated other comprehensive loss

 

 

(29,296

)

 

 

(26,859

)

Less: treasury stock, at cost (3,623,724 shares at December 27, 2015 and 3,624,454

   shares at June 28, 2015)

 

 

(135,890

)

 

 

(135,902

)

Total STRATTEC SECURITY CORPORATION shareholders’ equity

 

 

145,075

 

 

 

140,312

 

Non-controlling interest

 

 

12,700

 

 

 

12,089

 

Total shareholders’ equity

 

 

157,775

 

 

 

152,401

 

 

 

$

243,717

 

 

$

235,429

 

 

 

 

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

 

 

 

December 27,

2015

 

 

December 28,

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

9,045

 

 

$

17,241

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,075

 

 

 

4,261

 

Foreign currency transaction gain

 

 

(1,321

)

 

 

(2,421

)

Unrealized loss on peso forward contracts

 

 

867

 

 

 

 

Stock based compensation expense

 

 

870

 

 

 

700

 

Equity loss (earnings) of joint ventures

 

 

315

 

 

 

(69

)

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(2,132

)

 

 

6,780

 

Inventories

 

 

(10,434

)

 

 

(8,391

)

Other assets

 

 

(226

)

 

 

207

 

Accounts payable and accrued liabilities

 

 

1,161

 

 

 

(781

)

Other, net

 

 

 

 

 

157

 

Net cash provided by operating activities

 

 

3,220

 

 

 

17,684

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Investment in joint ventures

 

 

(220

)

 

 

(384

)

Loan to joint ventures

 

 

(150

)

 

 

(215

)

Purchase of property, plant and equipment

 

 

(8,095

)

 

 

(16,955

)

Net cash used in investing activities

 

 

(8,465

)

 

 

(17,554

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Borrowings under credit facility

 

 

5,500

 

 

 

1,500

 

Repayments of borrowings under credit facility

 

 

(5,500

)

 

 

(500

)

Dividends paid to non-controlling interests of subsidiaries

 

 

(1,568

)

 

 

(882

)

Dividends paid

 

 

(932

)

 

 

(854

)

Exercise of stock options and employee stock purchases

 

 

584

 

 

 

714

 

Net cash used in financing activities

 

 

(1,916

)

 

 

(22

)

Foreign currency impact on cash

 

 

(611

)

 

 

(21

)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

 

(7,772

)

 

 

87

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS

 

 

 

 

 

 

 

 

Beginning of period

 

 

25,695

 

 

 

19,756

 

End of period

 

$

17,923

 

 

$

19,843

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Income taxes

 

$

2,395

 

 

$

10,207

 

Interest

 

$

43

 

 

$

17

 

Non-cash investing activities:

 

 

 

 

 

 

 

 

Change in capital expenditures in accounts payable

 

$

456

 

 

$

274

 

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. 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 our products. We also maintain a 51 percent interest in a joint venture, STRATTEC Advanced Logic 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 STRATTEC Advanced Logic, LLC (“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 December 27, 2015 and June 28, 2015, which has 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 Management’s Discussion and Analysis and the financial statements and notes thereto included in the STRATTEC SECURITY CORPORATION 2015 Annual Report, which was filed with the Securities and Exchange Commission as an exhibit to our Form 10-K on September 4, 2015.

 

 

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 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 are currently assessing the impact that this guidance will have on our condensed consolidated financial statements.

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 condensed consolidated financial statements.

6


 

In February 2015, the FASB issued an update to the accounting guidance that amends current consolidation guidance by modifying the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, eliminating the presumption that a general partner should consolidate a limited partnership, and affects the consolidation analysis of reporting entities that are involved with variable interest entities. The update is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. We do not expect that the adoption of this pronouncement will have a material impact on our condensed 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 condensed consolidated financial statements.

In November 2015, the FASB issued an update to an accounting standard to simplify the presentation of deferred income taxes by requiring that deferred tax assets and liabilities be classified as non-current in a classified statement of financial position, which would be a change from our historical presentation whereby certain of our deferred tax assets and liabilities were classified as current and the remainder were classified as non-current. 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 either prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. We are currently assessing the impact that this guidance will have on our condensed consolidated financial statements.

 

 

Subsequent Event

In January 2016, we entered into additional contracts with Bank of Montreal that provide for monthly Mexican peso currency forward contracts covering the period July 15, 2016 through June 15, 2017. The currently effective Mexican peso currency forward contracts continue through June 21, 2016. The contracts provide for the purchase of Mexican pesos at an average U.S. dollar / Mexican peso exchange rate of $18.38. The notional amount over the contract period totals $12 million. See further discussion below under Derivative instruments included in these Notes to Condensed Consolidated Financial Statements.

On January 20, 2016, ADAC STRATTEC de Mexico (ASdM), a wholly owned subsidiary of ADAC-STRATTEC LLC which is a joint venture between STRATTEC SECURITY CORPORATION and ADAC Automotive, signed a “Letter of Intent” to purchase land in Leon, Mexico. ASdM intends to construct a new manufacturing facility on this land in the mid-Mexico area. This facility is expected to be used primarily to paint and assemble door handle products. Currently, the ADAC-STRATTEC LLC joint venture has net sales of approximately $60 million. With newly awarded customer business, we anticipate net sales will increase to approximately $120 million within the next two years. Total capital expenditures required for the land, facility, paint system, and assembly equipment is expected to total approximately $20 million. We anticipate financing the required capital expenditures through a combination of partner capital contributions, bank loans, and current operating cash flow.

 

 

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.  As of December 27, 2015, we have 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 current peso currency forward contracts include settlement dates that began on October 16, 2015 and end on June 15, 2017. No forward contracts were in place during fiscal 2015 or outstanding as of June 28, 2015. Additional contracts were executed subsequent to December 27, 2015. Refer to Subsequent Event included in these Notes to Condensed Consolidated Financial Statements. 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.

7


 

The following table quantifies the outstanding Mexican peso forward contracts as of December 27, 2015 (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 5, 2016 - June 21, 2016

 

$

9,000

 

 

 

16.00

 

 

$

(714

)

Buy MXP/Sell USD

 

July 15, 2016 - June 15, 2017

 

$

12,000

 

 

 

17.51

 

 

$

(153

)

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

 

 

 

December 27,

2015

 

 

June 28,

2015

 

Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

Other Current Liabilities:

 

 

 

 

 

 

 

 

Mexican Peso Forward Contracts

 

$

867

 

 

$

 

 

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 27,

2015

 

 

December 28,

2014

 

 

December 27,

2015

 

 

December 28,

2014

 

Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized Loss

 

$

(178

)

 

$

 

 

$

(178

)

 

$

 

Unrealized Gain (Loss)

 

$

29

 

 

$

 

 

$

(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 December 27, 2015 and June 28, 2015. Fair value is defined as the exchange price that would be received for an asset or paid for a liability 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 December 27, 2015 (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

 

$

341

 

 

$

 

 

$

 

Mid Cap

 

 

346

 

 

 

 

 

 

 

Large Cap

 

 

483

 

 

 

 

 

 

 

International

 

 

391

 

 

 

 

 

 

 

Fixed Income Funds

 

 

678

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

 

 

 

 

1

 

 

 

 

Total Assets at Fair Value

 

$

2,239

 

 

$

1

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Mexican Peso Forward Contracts

 

$

 

 

$

867

 

 

$

 

 

8


 

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 December 27, 2015.

 

 

Equity (Loss) Earnings 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

 

 

 

December 27,

2015

 

 

December 28,

2014

 

 

December 27,

2015

 

 

December 28,

2014

 

Net Sales

 

$

31,402

 

 

$

35,663

 

 

$

57,750

 

 

$

66,661

 

Cost of Goods Sold

 

 

25,497

 

 

 

30,469

 

 

 

47,411

 

 

 

56,552

 

Gross Profit

 

 

5,905

 

 

 

5,194

 

 

 

10,339

 

 

 

10,109

 

Engineering, Selling and Administrative Expenses

 

 

4,491

 

 

 

4,590

 

 

 

8,116

 

 

 

8,788

 

Income From Operations

 

 

1,414

 

 

 

604

 

 

 

2,223

 

 

 

1,321

 

Other (Expense) Income, net

 

(150)

 

 

 

183

 

 

(462)

 

 

 

656

 

Income before Provision for Income taxes

 

 

1,264

 

 

 

787

 

 

 

1,761

 

 

 

1,977

 

Provision for Income Taxes

 

 

217

 

 

 

376

 

 

 

311

 

 

 

435

 

Net Income

 

$

1,047

 

 

$

411

 

 

$

1,450

 

 

$

1,542

 

STRATTEC’s Share of VAST LLC Net Income

 

$

349

 

 

$

137

 

 

$

483

 

 

$

514

 

Intercompany Profit Elimination

 

(4)

 

 

 

5

 

 

(5)

 

 

 

4

 

STRATTEC’s Equity Earnings of VAST LLC

 

$

345

 

 

$

142

 

 

$

478

 

 

$

518

 

 

During 2013, we acquired a 51% ownership interest in a newly formed joint venture company, SAL LLC, which was formed to introduce a new generation of biometric security products based upon designs of Actuator Systems LLC, our partner. SAL LLC has a $1.5 million revolving credit facility (the “SAL Credit Facility”) with BMO Harris Bank N.A., which is fully guaranteed by STRATTEC. The SAL Credit Facility has a maturity date of February 16, 2016. Outstanding borrowings under the SAL Credit Facility as of December 27, 2015 and June 28, 2015 totaled $1.1 million and $995,000, respectively. SAL LLC is considered a variable interest entity based on the STRATTEC guarantee. 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. STRATTEC had a recorded liability related to the guarantee of $1.1 million and $995,000 at December 27, 2015 and June 28, 2015, respectively, which amounts were equal to the estimated fair value of the guarantee as of these balance sheet dates. The guarantee liability is included in Other Current Liabilities in the accompanying Condensed Consolidated Balance Sheets. STRATTEC’s proportionate share of the guarantee based on our ownership percentage in SAL LLC totaled $561,000 and $507,000, respectively, as of December 27, 2015 and June 28, 2015, and accordingly, our investment in SAL LLC included these amounts at these balance sheet dates. Our joint venture partner did not guarantee their proportionate share of the SAL Credit Facility. As a result, we recorded a loss equal to our partner’s proportionate share of the fair value of the STRATTEC guarantee based upon their ownership interest in the joint venture of $488,000 during the fourth quarter of fiscal 2015 and $51,000 during the six months ended December 27, 2015.

SAL LLC maintains a license agreement with Westinghouse allowing SAL LLC to do business as Westinghouse Security. Payments under the license agreement were guaranteed by STRATTEC. As of December 27, 2015 and June 28, 2015, 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. STRATTEC’s proportionate share of the guarantee of these payments based on our ownership percentage in SAL LLC totals $127,000, and accordingly, our investment in SAL LLC as of December 27, 2015 and June 28, 2015 included this amount. Our joint venture partner did not guarantee their proportionate share of the payments required under the license agreement. As a result, we recorded a loss of $123,000 during the fourth quarter of fiscal 2015 which was equal to our partner’s proportionate share, based upon their ownership interest in the joint venture, of the fair value of the STRATTEC guarantee.

9


 

During fiscal 2015 and during the six months ended December 27, 2015, loans were made from STRATTEC to SAL LLC in support of operating expenses and working capital needs. The outstanding loan amounts totaled $250,000 and $100,000 as of December 27, 2015 and June 28, 2015, respectively. A valuation reserve of $250,000 and $100,000 was recorded as of December 27, 2015 and June 28, 2015, respectively, in connection with these loans. The corresponding loss related to this valuation reserve was included in Equity (Loss) Earnings of Joint Ventures in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income in each respective period.

Notwithstanding the existence of the SAL Credit Facility described herein, as a result of STRATTEC’s guarantee of such credit facility and as a result of borrowing limitations imposed by the bank under such credit facility, effective with our fiscal 2015 fourth quarter, 100 percent of the funding for SAL LLC was being made by STRATTEC through loans and guarantees. Therefore, effective with our fiscal 2015 fourth quarter, STRATTEC began recognizing 100 percent of the losses of SAL LLC through Equity (Loss) Earnings of Joint Ventures in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income.

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 27,

2015

 

 

December 28,

2014

 

 

December 27,

2015

 

 

December 28,

2014

 

Net Sales

 

$

65

 

 

$

 

 

$

125

 

 

$

 

Cost of Goods Sold

 

 

40

 

 

 

 

 

 

95

 

 

 

 

Gross Profit

 

 

25

 

 

 

 

 

 

30

 

 

 

 

Engineering, Selling and Administrative Expenses

 

 

358

 

 

 

516

 

 

 

604

 

 

 

880

 

Loss From Operations

 

 

(333

)

 

 

(516

)

 

 

(574

)

 

 

(880

)

Other Expense, net

 

 

(10

)

 

 

 

 

 

(18

)

 

 

 

Net Loss

 

$

(343

)

 

$

(516

)

 

$

(592

)

 

$

(880

)

STRATTEC’s Share of Equity Loss of SAL LLC

 

$

(343

)

 

$

(263

)

 

$

(592

)

 

$

(449

)

Loss on Loan to SAL LLC

 

 

 

 

 

 

 

 

(150

)

 

 

 

Loss on SAL LLC Credit Facility Guarantee

 

 

(24

)

 

 

 

 

 

(51

)

 

 

 

STRATTEC’s Equity Loss of SAL LLC

 

$

(367

)

 

$

(263

)

 

$

(793

)

 

$

(449

)

 

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

 

 

 

December 27,

2015

 

 

December 28,

2014

 

 

December 27,

2015

 

 

December 28,

2014

 

Sales to VAST LLC

 

$

72

 

 

$

657

 

 

$

210

 

 

$

771

 

Sales to SAL, LLC

 

$

27

 

 

$

27

 

 

$

44

 

 

$

32

 

Purchases from VAST LLC

 

$

38

 

 

$

41

 

 

$

63

 

 

$

80

 

Expenses Charged to VAST LLC

 

$

176

 

 

$

245

 

 

$

411

 

 

$

404

 

Expenses Charged from VAST LLC

 

$

405

 

 

$

457

 

 

$

797

 

 

$

940

 

 

 

Warranty

We have a warranty liability recorded related to our known and potential exposure to warranty claims in the event our products fail to perform as expected, and in the event we may be required to participate in the repair costs incurred by our customers for such products. During the six month period ended December 27, 2015, the warranty liability was reduced by approximately $2.05 million as a result of the settlement of a previously accrued customer warranty issue.

 

 

10


 

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 $10 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, 2018. 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. As of December 27, 2015, we were in compliance with all financial covenants.

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

 

 

 

December 27,

2015

 

 

June 28,

2015

 

STRATTEC Credit Facility

 

$

7,500

 

 

$

7,000

 

ADAC-STRATTEC Credit Facility

 

$

2,500

 

 

$

3,000

 

 

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

 

 

 

Six Months Ended

 

 

 

Average Outstanding Borrowings

 

 

Weighted Average Interest Rate

 

 

 

December 27,

2015

 

 

December 28,

2014

 

 

December 27,

2015

 

 

December 28,

2014

 

STRATTEC Credit Facility

 

$

3,646

 

 

$

 

 

 

1.2

%

 

 

%

ADAC-STRATTEC Credit Facility

 

$

3,054

 

 

$

3,819

 

 

 

1.3

%

 

 

1.2

%

 

SAL LLC has a $1.5 million revolving credit facility (the “SAL Credit Facility’) with BMO Harris Bank N.A., which is fully guaranteed by STRATTEC. Interest on borrowings under the SAL Credit Facility is at varying rates based, at SAL LLC’s option, on LIBOR plus 1.0 percent or the bank’s prime rate. The SAL Credit Facility has a maturity date of February 16, 2016. Outstanding borrowings under the SAL Credit Facility as of December 27, 2015 totaled $1.1 million. As of December 27, 2015, STRATTEC had a recorded liability related to its guarantee of this credit facility of $1.1 million, which amount is equal to the estimated fair value of the guarantee as of December 27, 2015.

SAL LLC maintains a license agreement with Westinghouse allowing SAL LLC to do business as Westinghouse Security. STRATTEC guaranteed all payments due under the Westinghouse agreement. As of December 27, 2015, STRATTEC has a recorded liability related to this guarantee of $250,000, which amount is equal to the amount of future payments required under the agreement and the estimated fair value of the guarantee as of December 27, 2015. See further discussion under Equity (Loss) Earnings of Joint Ventures included herein.

    

Commitments and Contingencies

We are from time to time subject to various legal actions and claims incidental to our business, including those arising out of alleged defects, alleged breaches of contracts, product warranties, intellectual property matters and employment related matters. It is our opinion that the outcome of such matters will not have a material adverse impact our consolidated financial position, results of operations or cash flows. With respect to warranty matters, although we cannot ensure that future costs of warranty claims by customers will not be material, we believe our established reserves are adequate to cover potential warranty settlements.

11


 

In 1995, we recorded a provision of $3 million for estimated costs to remediate an environmental contamination site at our Milwaukee facility. The facility was contaminated by a solvent spill, which occurred in 1985, from a former above ground solvent storage tank located on the east side of the facility. The reserve was originally established based on third party estimates to adequately cover the cost for active remediation of the contamination. Due to changing technology and related costs associated with active remediation of the contamination, an updated analysis and estimate was obtained during fiscal 2010. As a result of this analysis, the reserve was reduced by approximately $1.1 million, to $1.5 million in 2010, to reflect the revised monitoring and remediation cost estimate. From 1995 through December 27, 2015, costs of approximately $500,000 have been incurred related to the installation of monitoring wells on the property and ongoing monitoring costs. We continue to monitor and evaluate the site with the use of these groundwater monitoring wells. An environmental consultant samples these wells one or two times a year to determine the status of the contamination and the potential for remediation of the contamination by natural attenuation, the dissipation of the contamination over time to concentrations below applicable standards. If such sampling evidences a sufficient degree of and trend toward natural attenuation of the contamination at the site, we may be able to obtain a closure letter from the regulatory authorities resolving the issue without the need for active remediation. If a sufficient degree and trend toward natural attenuation is not evidenced by sampling, a more active form of remediation beyond natural attenuation may be required. The sampling has not yet satisfied all of the requirements for closure by natural attenuation. As a result, sampling continues and the reserve remains at an amount to reflect the estimated cost of active remediation. The reserve is not measured on a discounted basis. We believe, based on findings-to-date and known environmental regulations, that the remaining environmental reserve of $1.4 million at December 27, 2015 is adequate.

 

 

Shareholders’ Equity

A summary of activity impacting shareholders’ equity for the six month period ended December 27, 2015 was as follows (in thousands):

 

 

 

Total

Shareholders’

Equity

 

 

Equity

Attributable to

STRATTEC

 

 

Equity

Attributable to Non-

Controlling

Interest

 

Balance, June 28, 2015

 

$

152,401

 

 

$

140,312

 

 

$

12,089

 

Net Income

 

 

9,045

 

 

 

6,676

 

 

 

2,369

 

Dividend Declared

 

 

(932

)

 

 

(932

)

 

 

 

Dividend Declared – Non-controlling Interests of

   Subsidiaries

 

 

(1,568

)

 

 

 

 

 

(1,568

)

Translation adjustments