10-Q 1 strt-10q_20161002.htm 10-Q strt-10q_20161002.htm

H9DruF4 

 

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 October 2, 2016

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: 3,587,921 shares outstanding as of October 3, 2016 (which number includes all restricted shares previously awarded that have not vested as of such date).

 

 

 

 

 

 


STRATTEC SECURITY CORPORATION

FORM 10-Q

October 2, 2016

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

18-24

Item 3

Quantitative and Qualitative Disclosures About Market Risk

25

Item 4

Controls and Procedures

27

 

 

 

Part II - OTHER INFORMATION

 

Item 1

Legal Proceedings

28

Item 1A  

Risk Factors

28

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

28

Item 3

Defaults Upon Senior Securities

28

Item 4

Mine Safety Disclosures

28

Item 5

Other Information

28

Item 6

Exhibits

28

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 Income

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

October 2,

2016

 

 

September 27,

2015

 

Net sales

 

$

100,244

 

 

$

96,513

 

Cost of goods sold

 

 

85,639

 

 

 

80,014

 

Gross profit

 

 

14,605

 

 

 

16,499

 

Engineering, selling and administrative expenses

 

 

11,370

 

 

 

10,574

 

Income from operations

 

 

3,235

 

 

 

5,925

 

Interest income

 

 

41

 

 

 

7

 

Equity earnings (loss) of joint ventures

 

 

62

 

 

 

(293

)

Interest expense

 

 

(78

)

 

 

(21

)

Other income (expense), net

 

 

43

 

 

 

(32

)

Income before provision for income taxes and non-controlling interest

 

 

3,303

 

 

 

5,586

 

Provision for income taxes

 

 

898

 

 

 

1,754

 

Net income

 

 

2,405

 

 

 

3,832

 

Net income attributable to non-controlling interest

 

 

863

 

 

 

559

 

Net income attributable to STRATTEC SECURITY CORPORATION

 

$

1,542

 

 

$

3,273

 

 

 

 

 

 

 

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

Net income

 

$

2,405

 

 

$

3,832

 

Pension and postretirement plans, net of tax

 

 

475

 

 

 

364

 

Currency translation adjustments

 

 

(1,623

)

 

 

(2,867

)

Other comprehensive loss, net of tax

 

 

(1,148

)

 

 

(2,503

)

Comprehensive income

 

 

1,257

 

 

 

1,329

 

Comprehensive income attributable to non-controlling interest

 

 

753

 

 

 

400

 

Comprehensive income attributable to STRATTEC SECURITY CORPORATION

 

$

504

 

 

$

929

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to STRATTEC SECURITY CORPORATION:

 

 

 

 

 

 

 

 

Basic

 

$

0.43

 

 

$

0.92

 

Diluted

 

$

0.42

 

 

$

0.90

 

 

 

 

 

 

 

 

 

 

Average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

3,576

 

 

 

3,543

 

Diluted

 

 

3,661

 

 

 

3,617

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

 

$

0.14

 

 

$

0.13

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

October 2,

2016

 

 

July 3,

2016

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,069

 

 

$

15,477

 

Receivables, net

 

 

68,060

 

 

 

63,726

 

Inventories:

 

 

 

 

 

 

 

 

Finished products

 

 

10,693

 

 

 

10,137

 

Work in process

 

 

8,788

 

 

 

8,291

 

Purchased materials

 

 

22,045

 

 

 

23,055

 

Excess and obsolete reserve

 

 

(2,840

)

 

 

(2,800

)

Inventories, net

 

 

38,686

 

 

 

38,683

 

Other current assets

 

 

14,985

 

 

 

16,565

 

Total current assets

 

 

138,800

 

 

 

134,451

 

Investment in joint ventures

 

 

14,419

 

 

 

14,168

 

Deferred income taxes

 

 

5,018

 

 

 

5,387

 

Other long-term assets

 

 

6,395

 

 

 

3,021

 

Property, plant and equipment

 

 

220,369

 

 

 

216,859

 

Less: accumulated depreciation

 

 

(133,385

)

 

 

(131,710

)

Net property, plant and equipment

 

 

86,984

 

 

 

85,149

 

 

 

$

251,616

 

 

$

242,176

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

37,008

 

 

$

32,416

 

Accrued Liabilities:

 

 

 

 

 

 

 

 

Payroll and benefits

 

 

11,127

 

 

 

11,210

 

Environmental

 

 

1,359

 

 

 

1,365

 

Warranty

 

 

9,186

 

 

 

9,228

 

Other

 

 

8,385

 

 

 

9,996

 

Total current liabilities

 

 

67,065

 

 

 

64,215

 

Borrowings under credit facility

 

 

24,000

 

 

 

20,000

 

Accrued pension obligations

 

 

1,491

 

 

 

1,466

 

Accrued postretirement obligations

 

 

1,191

 

 

 

1,262

 

Other long-term liabilities

 

 

925

 

 

 

721

 

Shareholders’ Equity:

 

 

 

 

 

 

 

 

Common stock, authorized 12,000,000 shares, $.01 par value, 7,209,763

   issued shares at October 2, 2016 and 7,188,363 issued shares at

   July 3, 2016

 

 

72

 

 

 

72

 

Capital in excess of par value

 

 

92,567

 

 

 

92,076

 

Retained earnings

 

 

221,767

 

 

 

220,728

 

Accumulated other comprehensive loss

 

 

(38,711

)

 

 

(37,673

)

Less: treasury stock, at cost (3,621,842 shares at October 2, 2016 and

   3,622,506 shares at July 3, 2016)

 

 

(135,860

)

 

 

(135,871

)

Total STRATTEC SECURITY CORPORATION shareholders’ equity

 

 

139,835

 

 

 

139,332

 

Non-controlling interest

 

 

17,109

 

 

 

15,180

 

Total shareholders’ equity

 

 

156,944

 

 

 

154,512

 

 

 

$

251,616

 

 

$

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)

 

 

 

Three Months Ended

 

 

 

October 2,

2016

 

 

September 27,

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

2,405

 

 

$

3,832

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,760

 

 

 

2,396

 

Foreign currency transaction gain

 

 

(689

)

 

 

(957

)

Unrealized loss on peso forward contracts

 

 

899

 

 

 

896

 

Stock based compensation expense

 

 

428

 

 

 

498

 

Equity (earnings) loss of joint ventures

 

 

(62

)

 

 

293

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(4,433

)

 

 

1,998

 

Inventories

 

 

(3

)

 

 

(7,226

)

Other assets

 

 

(1,372

)

 

 

610

 

Accounts payable and accrued liabilities

 

 

5,268

 

 

 

1,636

 

Other, net

 

 

(172

)

 

 

35

 

Net cash provided by operating activities

 

 

5,029

 

 

 

4,011

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Loan to joint ventures

 

 

(850

)

 

 

(150

)

Repayment from loan to joint ventures

 

 

75

 

 

 

 

Purchase of property, plant and equipment

 

 

(7,446

)

 

 

(3,865

)

Net cash used in investing activities

 

 

(8,221

)

 

 

(4,015

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Borrowings under credit facility

 

 

8,000

 

 

 

1,000

 

Repayments of borrowings under credit facility

 

 

(4,000

)

 

 

(4,500

)

Contribution from non-controlling interest of subsidiaries

 

 

2,940

 

 

 

 

Dividends paid to non-controlling interests of subsidiaries

 

 

(1,764

)

 

 

(1,568

)

Dividends paid

 

 

(503

)

 

 

(466

)

Exercise of stock options and employee stock purchases

 

 

74

 

 

 

483

 

Net cash provided by (used in) financing activities

 

 

4,747

 

 

 

(5,051

)

Foreign currency impact on cash

 

 

37

 

 

 

(673

)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

1,592

 

 

 

(5,728

)

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS

 

 

 

 

 

 

 

 

Beginning of period

 

 

15,477

 

 

 

25,695

 

End of period

 

$

17,069

 

 

$

19,967

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Income taxes

 

$

487

 

 

$

954

 

Interest

 

$

86

 

 

$

12

 

Non-cash investing activities:

 

 

 

 

 

 

 

 

Change in capital expenditures in accounts payable

 

$

(1,714

)

 

$

(35

)

Guarantee of joint venture revolving credit facility

 

$

 

 

$

55

 

 

 

 

 

 

 

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 October 2, 2016 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 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 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 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. The adoption of this pronouncement did not have a material impact on our consolidated financial statements.

 

In April 2015 and August 2015, the FASB issued updates to the accounting guidance for debt issuance costs. The updated guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability and allows an entity to defer and present debt issuance costs associated with a line of credit arrangement as an asset, regardless of whether there are any outstanding borrowings on the line of credit arrangement. The guidance updates are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The adoption of this pronouncement did not 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 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 have elected to adopt this guidance effective July 3, 2016, and have applied the guidance retrospectively.

 

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 are currently assessing the impact that this guidance will have 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 (Expense), net.

7


 

The following table quantifies the outstanding Mexican peso forward contracts as of October 2, 2016 (thousands of dollars, except average forward contractual exchange rates):

 

 

Effective Dates

 

Notional Amount

 

 

Average Forward Contractual Exchange Rate

 

 

Fair Value

 

Buy MXP/Sell USD

 

October 14, 2016 - June 15, 2017

 

$

18,000

 

 

 

17.95

 

 

$

(1,573

)

Buy MXP/Sell USD

 

July 14, 2017 - June 15, 2018

 

$

9,000

 

 

 

19.93

 

 

$

(215

)

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

 

 

 

October 2,

2016

 

 

July 3,

2016

 

Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

Other Current Liabilities:

 

 

 

 

 

 

 

 

Mexican Peso Forward Contracts

 

$

1,592

 

 

$

107

 

Other Long-term Liabilities:

 

 

 

 

 

 

 

 

Mexican Peso Forward Contracts

 

$

196

 

 

$

996

 

 

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

 

 

 

Three Months Ended

 

 

 

October 2,

2016

 

 

September 27,

2015

 

Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

Realized Loss

 

$

230

 

 

$

 

Unrealized Loss

 

$

899

 

 

$

896

 

 

 

 

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 October 2, 2016 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 October 2, 2016 (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

 

$

376

 

 

$

 

 

$

 

Mid Cap

 

 

374

 

 

 

 

 

 

 

Large Cap

 

 

516

 

 

 

 

 

 

 

International

 

 

414

 

 

 

 

 

 

 

Fixed Income Funds

 

 

704

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

 

 

 

 

2

 

 

 

 

Total Assets at Fair Value

 

$

2,384

 

 

$

2

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Mexican Peso Forward Contracts

 

$

 

 

$

1,788

 

 

$

 

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 three month period ended October 2, 2016.

 

 

Equity Earnings (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

 

 

 

October 2,

2016

 

 

September 27,

2015

 

Net Sales

 

$

25,009

 

 

$

26,348

 

Cost of Goods Sold

 

 

20,093

 

 

 

21,914

 

Gross Profit

 

 

4,916

 

 

 

4,434

 

Engineering, Selling and Administrative Expenses

 

 

4,015

 

 

 

3,625

 

Income From Operations

 

 

901

 

 

 

809

 

Other Income (Expense), net

 

 

441

 

 

 

(312

)

Income before Provision for Income Taxes

 

 

1,342

 

 

 

497

 

Provision for Income Taxes

 

 

172

 

 

 

94

 

Net Income

 

$

1,170

 

 

$

403

 

STRATTEC’s Share of VAST LLC Net Income

 

$

390

 

 

$

134

 

Intercompany Profit Elimination

 

 

 

 

 

(1

)

STRATTEC’s Equity Earnings of VAST LLC

 

$

390

 

 

$

133

 

 

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. Prior to making the guarantee payment, STRATTEC had a recorded liability related to the guarantee of $1.5 million at February 16, 2016, which amount was equal to the estimated fair value of the guarantee as of this date. STRATTEC’s proportionate share of the guarantee based on our ownership percentage in SAL LLC totaled $765,000 as of February 16, 2016, and accordingly, our investment in SAL LLC included this amount as of this date. 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 our partner’s ownership interest in the joint venture during our fiscal years 2015 and 2016.

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 October 2, 2016 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 $1.2 million and $325,000 as of October 2, 2016 and July 3, 2016, respectively. As of October 2, 2016, the outstanding loan amount was eliminated against STRATTEC’s Investment in SAL LLC in the preparation of the consolidated financial statements.

9


 

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 for all periods presented in this report.

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

 

 

 

Three Months Ended

 

 

 

October 2,

2016

 

 

September 27,

2015

 

Net Sales

 

$

100

 

 

$

60

 

Cost of Goods Sold

 

 

87

 

 

 

55

 

Gross Profit

 

 

13

 

 

 

5

 

Engineering, Selling and Administrative Expenses

 

 

337

 

 

 

246

 

Loss From Operations

 

 

(324

)

 

 

(241

)

Other Expense, net

 

 

(12

)

 

 

(8

)

Net Loss

 

$

(336

)

 

$

(249

)

STRATTEC’s Share of Equity Loss of SAL LLC

 

$

(328

)

 

$

(249

)

Loss on Loan to SAL LLC

 

 

 

 

 

(150

)

Loss on SAL LLC Credit Facility Guarantee

 

 

 

 

 

(27

)

STRATTEC’s Equity Loss of SAL LLC

 

$

(328

)

 

$

(426

)

 

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

 

 

 

October 2,

2016

 

 

September 27,

2015

 

Sales to VAST LLC

 

$

50

 

 

$

138

 

Sales to SAL, LLC

 

$

75

 

 

$

17

 

Purchases from VAST LLC

 

$

31

 

 

$

25

 

Expenses Charged to VAST LLC

 

$

228

 

 

$

235

 

Expenses Charged from VAST LLC

 

$

409

 

 

$

392

 

 

 

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 October 2, 2016, we were in compliance with all financial covenants required by these credit facilities.

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

 

 

 

October 2,

2016

 

 

July 3,

2016

 

STRATTEC Credit Facility

 

$

16,000

 

 

$

11,500

 

ADAC-STRATTEC Credit Facility

 

$

8,000

 

 

$

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):

 

 

 

Three Months Ended

 

 

 

Average Outstanding Borrowings

 

 

Weighted Average Interest Rate

 

 

 

October 2,

2016

 

 

September 27,

2015

 

 

October 2,

2016

 

 

September 27,

2015

 

STRATTEC Credit Facility

 

$

12,159

 

 

$

3,747

 

 

 

1.5

%

 

 

1.2

%

ADAC-STRATTEC Credit Facility

 

$

8,473

 

 

$

3,137

 

 

 

1.5

%

 

 

1.2

%

 

    

Commitments and Contingencies

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

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, is in the process of constructing a new manufacturing facility in Leon, Mexico. Total capital expenditures required for the land, facility, paint system, and assembly equipment is expected to total approximately $22 million. Capital expenditures made through October 2, 2016 for the land, facility and equipment totaled $10.7 million. We anticipate financing the required capital expenditures through a combination of current cash balances, bank loans, and current operating cash flow.

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, in fiscal 2010, the reserve was adjusted based on updated third party estimates to adequately cover the cost for active remediation of the contamination. Additionally, in fiscal 2016, we obtained updated third party estimates for adequately covering the cost for active remediation of this contamination. Based upon the updated estimates, no further adjustment to the reserve was required. From 1995 through October 2, 2016, costs of approximately $515,000 have been incurred related to the installation of monitoring wells on the property and ongoing monitoring costs. We 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 October 2, 2016 is adequate.

 

 

11


 

Shareholders’ Equity

A summary of activity impacting shareholders’ equity for the three month period ended October 2, 2016 was as follows (in thousands):

 

 

Total

Shareholders’

Equity

 

 

Equity

Attributable to

STRATTEC

 

 

Equity

Attributable to Non-

Controlling

Interest

 

Balance, July 3, 2016

 

$

154,512

 

 

$

139,332

 

 

$

15,180

 

Net Income

 

 

2,405

 

 

 

1,542

 

 

 

863

 

Dividend Declared

 

 

(503

)

 

 

(503

)

 

 

 

Dividend Declared – Non-controlling Interests of

   Subsidiaries

 

 

(1,764

)

 

 

 

 

 

(1,764

)

Contributions from Non-controlling Interests of

   Subsidiaries

 

 

2,940

 

 

 

 

 

 

2,940

 

Translation adjustments

 

 

(1,623

)

 

 

(1,513

)

 

 

(110

)

Stock Based Compensation

 

 

428

 

 

 

428

 

 

 

 

Pension and Postretirement Adjustment, Net of

   tax

 

 

475

 

 

 

475

 

 

 

 

Employee Stock Purchases and Stock Option

   Exercises

 

 

74

 

 

 

74

 

 

 

 

Balance, October 2, 2016

 

$

156,944

 

 

$

139,835

 

 

$

17,109

 

 

 

Other Income (Expense), net

Net other income included in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income primarily included foreign currency transaction gains and losses, realized and unrealized losses on our Mexican peso currency forward contracts and Rabbi Trust gains and losses. Foreign currency transaction gains and losses resulted from activity associated with foreign denominated assets held by our Mexican subsidiaries. We entered into the Mexican Peso currency forward contracts to minimize earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. The Rabbi Trust assets fund our amended and restated supplemental executive retirement plan. The investments held in this Trust are considered trading securities.

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

 

 

 

Three Months Ended

 

 

 

October 2,

2016

 

 

September 27,

2015

 

Foreign Currency Transaction Gain

 

$

689

 

 

$

957

 

Unrealized Loss on Peso Forward Contracts

 

 

(899

)

 

 

(896

)

Realized Loss on Peso Forward Contracts

 

 

(230

)

 

 

 

Rabbi Trust Gain (Loss)

 

 

83

 

 

 

(164

)

Other

 

 

400

 

 

 

71

 

 

 

$

43

 

 

$

(32

)

 

Income Taxes

The income tax provisions for the three months periods ended October 2, 2016 and September 27, 2015 were affected by the non-controlling interest portion of our pre-tax income. The reduction in our effective tax rate in the current year quarter as compared to the prior year quarter was due to the increased impact of the non-controlling interest in certain of our subsidiaries. The non-controlling interest impacts the effective tax rate as ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entities are taxed as partnerships for U.S. tax purposes.

 

 

Earnings Per Share (EPS)

Basic earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding during the applicable period. Diluted earnings per share is computed on the basis of the weighted average number of shares of common stock plus the potential dilutive common shares outstanding during the applicable period using the treasury stock method. Potential dilutive common shares include outstanding stock options and unvested restricted stock awards.

12


 

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

 

 

 

Three Months Ended

 

 

 

October 2,

2016

 

 

September 27,

2015

 

Net Income Attributable to STRATTEC SECURITY

   CORPORATION

 

$

1,542

 

 

$

3,273

 

Less: Income Attributable to Participating Securities

 

 

1

 

 

 

21

 

Net Income Attributable to Common Shareholders

 

$

1,541

 

 

$

3,252

 

 

 

 

 

 

 

 

 

 

Basic Weighted Average Shares of Common Stock

   Outstanding

 

 

3,576

 

 

 

3,543

 

Incremental Shares – Stock based Compensation

 

 

85

 

 

 

74

 

Diluted Weighted Average Shares of Common Stock

   Outstanding

 

 

3,661

 

 

 

3,617

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share

 

$

0.43

 

 

$

0.92

 

Diluted Earnings Per Share

 

$

0.42

 

 

$

0.90

 

 

We consider unvested restricted stock that provides the holder with a non-forfeitable right to receive dividends to be a participating security.

The calculation of earnings per share excluded 14,010 and 10,000 share-based payment awards for the three month periods ended October 2, 2016 and September 27, 2015, respectively, because their inclusion would have been anti-dilutive.

 

 

Stock-based Compensation

We maintain an omnibus stock incentive plan. This plan provides for the granting of stock options, shares of restricted stock and stock appreciation rights. As of October 2, 2016, the Board of Directors had designated 1,850,000 shares of common stock available for the grant of awards under the plan. Remaining shares available to be granted under the plan as of October 2, 2016 were 204,939. Awards that expire or are canceled without delivery of shares become available for re-issuance under the plan. We issue new shares of common stock to satisfy stock option exercises.

Nonqualified and incentive stock options and shares of restricted stock have been granted to our officers, outside directors and specified associates under our stock incentive plan. Stock options granted under the plan may not be issued with an exercise price less than the fair market value of the common stock on the date the option is granted. Stock options become exercisable as determined at the date of grant by the Compensation Committee of the Board of Directors. The options expire 10 years after the grant date unless an earlier expiration date is set at the time of grant. The options vest 1 to 4 years after the date of grant. Shares of restricted stock granted under the plan are subject to vesting criteria determined by the Compensation Committee of the Board of Directors at the time the shares are granted and have a minimum vesting period of three years from the date of grant. Restricted shares granted prior to August 2014 have voting and dividend rights, regardless of whether the shares are vested or unvested. Restricted shares granted during August 2014 and thereafter have voting rights, regardless of whether the shares are vested or unvested, but only have the right to receive cash dividends after such shares become vested. Prior to August 2015, the restricted stock grants issued vest 3 years after the date of grant. As of August 2015, restricted stock grants issued vest 3 to 5 years after the date of grant.

The fair value of each stock option grant was estimated as of the date of grant using the Black-Scholes pricing model. The fair value of each restricted stock grant was based on the market price of the underlying common stock as of the date of grant. The resulting compensation cost for fixed awards with graded vesting schedules is amortized on a straight line basis over the vesting period for the entire award.

13


 

A summary of stock option activity under our stock incentive plan for the three months ended October 2, 2016 was as follows:

 

 

 

Shares

 

 

Weighted

Average

Exercise Price

 

 

Weighted

Average

Remaining

Contractual

Term (years)

 

 

Aggregate

Intrinsic

Value

(in thousands)

 

Outstanding, July 3, 2016

 

 

144,998

 

 

$

28.86

 

 

 

 

 

 

 

 

 

Exercised

 

 

(2,200

)

 

$

10.92

 

 

 

 

 

 

 

 

 

Outstanding, October 2, 2016

 

 

142,798

 

 

$

29.13

 

 

 

5.2

 

 

$

1,391

 

Exercisable, October 2, 2016

 

 

133,788

 

 

$

25.73

 

 

 

5.0

 

 

$

1,391

 

 

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

 

 

Three Months Ended

 

 

 

October 2,

2016

 

 

September 27,

2015

 

Intrinsic Value of Options Exercised

 

$

71

 

 

$

414

 

Fair Value of Stock Options Vesting

 

$

596

 

 

$

331

 

 

No options were granted during the three month period ended October 2, 2016 or September 27, 2015.  

 

A summary of restricted stock activity under our omnibus stock incentive plan for the three months ended October 2, 2016 was as follows:

 

 

Shares

 

 

Weighted

Average

Grant Date

Fair Value

 

Nonvested Balance, July 3, 2016

 

 

71,750

 

 

$

60.05

 

Granted

 

 

27,150

 

 

$

43.87

 

Vested

 

 

(19,200

)

 

$

35.89

 

Forfeited

 

 

(1,800

)

 

$

58.24

 

Nonvested Balance, October 2, 2016

 

 

77,900

 

 

$

60.40

 

 

As of October 2, 2016, there was $92,375 of total unrecognized compensation cost related to outstanding stock options granted under our omnibus stock incentive plan. This cost is expected to be recognized over a remaining weighted average period of 0.5 years. As of October 2, 2016, there was approximately $2.5 million of total unrecognized compensation cost related to unvested restricted stock grants outstanding under the plan. This cost is expected to be recognized over a remaining weighted average period of 1.2 years. Total unrecognized compensation cost will be adjusted for any future changes in estimated and actual forfeitures of awards granted under our omnibus stock incentive plan.

 

 

14


 

Pension and Postretirement Benefits

We have a qualified, noncontributory defined benefit pension plan (“Qualified Pension Plan”) covering substantially all U.S. associates. Benefits under the Qualified Pension Plan are based on years of service and final average compensation. Our policy is to fund the Qualified Pension Plan with at least the minimum actuarially computed annual contribution required under the Employee Retirement Income Security Act of 1974 (ERISA). Plan assets consist primarily of listed equity and fixed income securities. Effective December 31, 2009, an amendment to the Qualified Pension Plan discontinued the benefit accruals for salary increases and credited service rendered after that date.  On April 2, 2014, our Board of Directors approved a resolution to terminate the Qualified Pension Plan.  The termination of the Qualified Pension Plan is subject to the Internal Revenue Service’s (“IRS”) determination that the Qualified Pension Plan is qualified on termination.  We believe it will take 18 to 24 months to finalize the complete termination of the Qualified Pension Plan after obtaining IRS approval.  We have not yet received IRS approval that the Qualified Pension Plan is qualified on termination. Additionally, we have amended the Qualified Pension Plan to provide that participants are 100 percent vested in their accrued benefits as of the effective date of the plan termination, to adopt a new standard for disability benefits that will apply when the plan’s assets are distributed due to the termination, to add a lump sum distribution for employees and terminated vested participants who are not in payment status when Qualified Pension Plan assets are distributed due to the termination and to make certain other conforming amendments to the Qualified Pension Plan to comply with applicable laws that may be required by the IRS or may be deemed necessary or advisable to improve the administration of the Qualified Pension Plan or facilitate its termination and liquidation.  We also intend to make contributions to the Trust Fund for the Qualified Pension Plan to ensure that there are sufficient assets to provide all Qualified Pension Plan benefits as of the anticipated distribution date.  The financial impact of the plan termination will be recognized as a settlement of the Qualified Pension Plan liabilities.  The settlement date and related financial impact have not yet been determined.

We have historically had in place a noncontributory supplemental executive retirement plan (“SERP”), which prior to January 1, 2014 was a nonqualified defined benefit plan that essentially mirrored the Qualified Pension Plan, but provided benefits in excess of certain limits placed on our Qualified Pension Plan by the Internal Revenue Code.  As noted above, we froze our Qualified Pension Plan effective as of December 31, 2009 and the SERP provided benefits to participants as if the Qualified Pension Plan had not been frozen.  Because the Qualified Pension Plan was frozen and because new employees were not eligible to participate in the Qualified Pension Plan, our Board of Directors adopted amendments to the SERP on October 8, 2013 that were effective as of December 31, 2013 to simplify the SERP calculation.  The SERP is funded through a Rabbi Trust with BMO Harris Bank N.A.  Under the amended SERP, participants received an accrued lump-sum benefit as of December 31, 2013 which was credited to each participant’s account.  Subsequent to December 31, 2013, each eligible participant receives a supplemental retirement benefit equal to the foregoing lump sum benefit, plus an annual benefit accrual equal to 8 percent of the participant’s base salary and cash bonus, plus annual credited interest on the participant’s account balance.  All then current participants as of December 31, 2013 are fully vested in their account balances with any new individuals participating in the SERP effective on or after January 1, 2014 being subject to a five year vesting period.  The SERP, which is considered a defined benefit plan under applicable rules and regulations of the Internal Revenue Code, will continue to be funded through use of a Rabbi Trust to hold investment assets to be used in part to fund any future required lump sum benefit payments to participants.  The Rabbi Trust assets had a value of $2.4 million at October 2, 2016 and $2.3 million at July 3, 2016, respectively, and are included in Other Long-Term Assets in the accompanying Condensed Consolidated Balance Sheets.

We also sponsor a postretirement health care plan for all U.S. associates hired prior to June 1, 2001. The expected cost of retiree health care benefits is recognized during the years the associates who are covered under the plan render service. Effective January 1, 2010, an amendment to the postretirement health care plan limited the benefit for future eligible retirees to $4,000 per plan year and the benefit is further subject to a maximum five year coverage period based on the associate’s retirement date and age. The postretirement health care plan is unfunded.

Net periodic benefit costs under these plans are allocated between Cost of Goods Sold and Engineering, Selling and Administrative Expenses in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income.

15


 

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

 

 

 

 

Pension Benefits

 

 

Postretirement Benefits

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

October 2,

2016

 

 

September 27,

2015

 

 

October 2,

2016

 

 

September 27,

2015

 

Service cost

 

$

14

 

 

$

12

 

 

$

3

 

 

$

3

 

Interest cost

 

 

981

 

 

 

1,076

 

 

14

 

 

 

21

 

Expected return on plan assets

 

 

(1,464

)

 

 

(1,351

)

 

 

 

 

 

 

Amortization of prior service cost (credit)

 

3