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Strattec Security 10-Q 2018

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
strt-10q_20171231.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 December 31, 2017

or

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

For the transition period from                      to                     

Commission File Number 0-25150

 

STRATTEC SECURITY CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

Wisconsin

 

39-1804239

(State of Incorporation)

 

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

3333 West Good Hope Road, Milwaukee, WI 53209

(Address of Principal Executive Offices)

(414) 247-3333

(Registrant’s Telephone Number, Including Area Code)

 

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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

 

Emerging growth company

 

  

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

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: 3,704,230 shares outstanding as of January 2, 2018 (which number includes all restricted shares previously awarded that have not vested as of such date).

 

 

 

 


STRATTEC SECURITY CORPORATION

FORM 10-Q

December 31, 2017

INDEX

 

 

 

Page

Part I - FINANCIAL INFORMATION

 

Item 1

Financial Statements

 

 

Condensed Consolidated Statements of Income and Comprehensive Income (Loss)

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

18-29

Item 3

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4

Controls and Procedures

31

 

 

 

Part II - OTHER INFORMATION

 

Item 1

Legal Proceedings

32

Item 1A  

Risk Factors

32

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 3

Defaults Upon Senior Securities

32

Item 4

Mine Safety Disclosures

32

Item 5

Other Information

32

Item 6

Exhibits

32

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 discussion of such matters and subject areas contained herein is 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 7, 2017 with the Securities and Exchange Commission for the year ended July 2, 2017.

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 (Loss)

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

2017

 

 

January 1,

2017

 

 

December 31,

2017

 

 

January 1,

2017

 

Net sales

 

$

103,182

 

 

$

98,945

 

 

$

205,642

 

 

$

199,189

 

Cost of goods sold

 

 

90,536

 

 

 

85,251

 

 

 

179,533

 

 

 

170,692

 

Gross profit

 

 

12,646

 

 

 

13,694

 

 

 

26,109

 

 

 

28,497

 

Engineering, selling and administrative expenses

 

 

10,152

 

 

 

11,243

 

 

 

20,194

 

 

 

22,526

 

Income from operations

 

 

2,494

 

 

 

2,451

 

 

 

5,915

 

 

 

5,971

 

Interest income

 

 

3

 

 

 

39

 

 

 

7

 

 

 

80

 

Equity earnings of joint ventures

 

 

1,473

 

 

 

229

 

 

 

2,499

 

 

 

291

 

Interest expense

 

 

(253

)

 

 

(98

)

 

 

(456

)

 

 

(176

)

Other income, net

 

 

109

 

 

 

426

 

 

 

196

 

 

 

184

 

Income before provision for income taxes and

     non-controlling interest

 

 

3,826

 

 

 

3,047

 

 

 

8,161

 

 

 

6,350

 

(Benefit) Provision for income taxes

 

 

(9

)

 

 

1,410

 

 

 

1,057

 

 

 

2,308

 

Net income

 

 

3,835

 

 

 

1,637

 

 

 

7,104

 

 

 

4,042

 

Net income attributable to non-controlling

     Interest

 

 

953

 

 

 

1,239

 

 

 

1,766

 

 

 

2,102

 

Net income attributable to STRATTEC SECURITY

      CORPORATION

 

$

2,882

 

 

$

398

 

 

$

5,338

 

 

$

1,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,835

 

 

$

1,637

 

 

$

7,104

 

 

$

4,042

 

Pension and postretirement plans, net of tax

 

 

277

 

 

 

474

 

 

 

555

 

 

 

949

 

Currency translation adjustments

 

 

(2,591

)

 

 

(3,408

)

 

 

(2,294

)

 

 

(5,031

)

Other comprehensive loss, net of tax

 

 

(2,314

)

 

 

(2,934

)

 

 

(1,739

)

 

 

(4,082

)

Comprehensive income (loss)

 

 

1,521

 

 

 

(1,297

)

 

 

5,365

 

 

 

(40

)

Comprehensive income attributable to non-

      controlling interest

 

 

80

 

 

 

346

 

 

 

815

 

 

 

1,099

 

Comprehensive income (loss) attributable to STRATTEC

      SECURITY CORPORATION

 

$

1,441

 

 

$

(1,643

)

 

$

4,550

 

 

$

(1,139

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to STRATTEC

     SECURITY CORPORATION:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.79

 

 

$

0.11

 

 

$

1.47

 

 

$

0.54

 

Diluted

 

$

0.78

 

 

$

0.11

 

 

$

1.44

 

 

$

0.53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

3,631

 

 

 

3,589

 

 

 

3,621

 

 

 

3,583

 

Diluted

 

 

3,715

 

 

 

3,667

 

 

 

3,698

 

 

 

3,664

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

 

$

0.14

 

 

$

0.14

 

 

$

0.28

 

 

$

0.28

 

 

 

 

 

 

 

 

 

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

 

3


 

STRATTEC SECURITY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In Thousands, Except Share Amounts)

 

 

 

December 31,

2017

 

 

July 2,

2017

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

8,385

 

 

$

8,361

 

Receivables, net

 

 

60,587

 

 

 

64,933

 

Inventories:

 

 

 

 

 

 

 

 

Finished products

 

 

11,748

 

 

 

9,976

 

Work in process

 

 

9,758

 

 

 

9,328

 

Purchased materials

 

 

25,349

 

 

 

20,682

 

Excess and obsolete reserve

 

 

(4,568

)

 

 

(4,510

)

Inventories, net

 

 

42,287

 

 

 

35,476

 

Other current assets

 

 

23,278

 

 

 

20,235

 

Total current assets

 

 

134,537

 

 

 

129,005

 

Investment in joint ventures

 

 

19,724

 

 

 

16,840

 

Deferred income taxes

 

 

1,558

 

 

 

256

 

Other long-term assets

 

 

17,182

 

 

 

16,022

 

Property, plant and equipment

 

 

260,901

 

 

 

251,519

 

Less: accumulated depreciation

 

 

(145,380

)

 

 

(139,928

)

Net property, plant and equipment

 

 

115,521

 

 

 

111,591

 

 

 

$

288,522

 

 

$

273,714

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

37,405

 

 

$

39,679

 

Accrued Liabilities:

 

 

 

 

 

 

 

 

Payroll and benefits

 

 

11,082

 

 

 

13,055

 

Environmental

 

 

1,296

 

 

 

1,308

 

Warranty

 

 

6,012

 

 

 

5,550

 

Other

 

 

6,402

 

 

 

8,303

 

Total current liabilities

 

 

62,197

 

 

 

67,895

 

Borrowings under credit facility

 

 

46,000

 

 

 

30,000

 

Accrued pension obligations

 

 

1,551

 

 

 

1,492

 

Accrued postretirement obligations

 

 

857

 

 

 

1,003

 

Other long-term liabilities

 

 

2,061

 

 

 

610

 

Shareholders’ Equity:

 

 

 

 

 

 

 

 

Common stock, authorized 12,000,000 shares, $.01 par value, 7,251,937

   issued shares at December 31, 2017 and 7,216,103 issued shares at

   July 2, 2017

 

 

72

 

 

 

72

 

Capital in excess of par value

 

 

94,603

 

 

 

93,813

 

Retained earnings

 

 

230,234

 

 

 

225,913

 

Accumulated other comprehensive loss

 

 

(33,676

)

 

 

(32,888

)

Less: treasury stock, at cost (3,618,182 shares at December 31, 2017 and

   3,619,487 shares at July 2, 2017)

 

 

(135,801

)

 

 

(135,822

)

Total STRATTEC SECURITY CORPORATION shareholders’ equity

 

 

155,432

 

 

 

151,088

 

Non-controlling interest

 

 

20,424

 

 

 

21,626

 

Total shareholders’ equity

 

 

175,856

 

 

 

172,714

 

 

 

$

288,522

 

 

$

273,714

 

 

 

 

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 31,

2017

 

 

January 1,

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

7,104

 

 

$

4,042

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,667

 

 

 

5,647

 

Foreign currency transaction gain

 

 

(419

)

 

 

(2,497

)

Unrealized loss on peso forward contracts

 

 

1,079

 

 

 

1,563

 

Stock based compensation expense

 

 

621

 

 

 

792

 

Equity earnings of joint ventures

 

 

(2,499

)

 

 

(291

)

Deferred income taxes

 

 

(1,710

)

 

 

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

4,330

 

 

 

4,085

 

Inventories

 

 

(6,811

)

 

 

(403

)

Other assets

 

 

(4,813

)

 

 

(2,541

)

Accounts payable and accrued liabilities

 

 

(2,478

)

 

 

(248

)

Other, net

 

 

(33

)

 

 

(148

)

Net cash provided by operating activities

 

 

1,038

 

 

 

10,001

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Investment in joint ventures

 

 

 

 

 

(100

)

Loan to joint ventures

 

 

 

 

 

(1,400

)

Repayment from loan to joint ventures

 

 

150

 

 

 

75

 

Purchase of property, plant and equipment

 

 

(14,349

)

 

 

(16,329

)

Proceeds received on sale of property, plant, and equipment

 

 

2

 

 

 

 

Net cash used in investing activities

 

 

(14,197

)

 

 

(17,754

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Borrowings under credit facility

 

 

18,000

 

 

 

21,000

 

Repayments of borrowings under credit facility

 

 

(2,000

)

 

 

(21,000

)

Contribution from non-controlling interest of subsidiaries

 

 

 

 

 

2,940

 

Dividends paid to non-controlling interests of subsidiaries

 

 

(2,017

)

 

 

(1,764

)

Dividends paid

 

 

(1,017

)

 

 

(1,006

)

Exercise of stock options and employee stock purchases

 

 

190

 

 

 

160

 

Net cash provided by financing activities

 

 

13,156

 

 

 

330

 

Foreign currency impact on cash

 

 

27

 

 

 

136

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

24

 

 

 

(7,287

)

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS

 

 

 

 

 

 

 

 

Beginning of period

 

 

8,361

 

 

 

15,477

 

End of period

 

$

8,385

 

 

$

8,190

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Income taxes

 

$

1,351

 

 

$

1,026

 

Interest

 

$

424

 

 

$

167

 

Non-cash investing activities:

 

 

 

 

 

 

 

 

Change in capital expenditures in accounts payable

 

$

(1,228

)

 

$

(2,051

)

 

 

 

 

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 VAST partner’s products. We also maintain a 51 percent interest in a joint venture, STRATTEC Advanced Logic, LLC (“SAL LLC”), which was formed 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. Currently, we, along with our joint venture partner, are winding down operating the business of SAL LLC.

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 and Leon, 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 December 31, 2017 and July 2, 2017, 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 2017 Annual Report, which was filed with the Securities and Exchange Commission as an exhibit to our Form 10-K on September 7, 2017.

 

 

New Accounting Standards

In May 2014, the FASB issued an update to the accounting guidance for the recognition of revenue arising from contracts with customers. The update supersedes most current revenue recognition guidance and outlines a single comprehensive model for revenue recognition based on the principle that an entity should recognize revenue in an amount that reflects the expected consideration to be received in the exchange of goods and services. The guidance update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The guidance permits two methods of adoption: the full retrospective method, which requires retrospective restatement of each prior reporting period presented, or the modified retrospective method, which requires the cumulative effect of initially applying the guidance be recognized at the date of initial application. Currently, we do not expect the adoption of this standard to have a material impact on our results of operations or financial position; however, we expect to expand disclosures in line with the requirements of the new standard. We currently do not expect any changes to how we account for reimbursable pre-production costs, which are currently accounted for as a cost reduction. We expect revenue related to parts shipped under our production contracts to remain unchanged. We will adopt this standard as of July 2, 2018, the first day of our 2019 fiscal year. We currently plan to adopt the new standard using the modified retrospective approach.

 

6


 

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

 

In February 2016, the FASB issued an update to the accounting guidance for leases. The update increases the transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about leasing arrangements. The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those years. We do not expect that the adoption of this pronouncement will have a material impact 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. The adoption of this pronouncement did not have a material impact on our consolidated financial statements.

 

In August 2016, the FASB issued an update to the accounting guidance on the classification of certain cash receipts and cash payments. The update aims to eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years. We do not expect that the adoption of this pronouncement will have a material impact on our consolidated financial statements.

 

In March 2017, the FASB issued an update to the accounting guidance for the presentation of net periodic pension cost and net periodic postretirement benefit cost. The update requires the service cost component of net periodic benefit cost be reported in the same line items as other compensation costs arising from services rendered by the pertinent employees during the applicable period. The remaining components of net periodic benefit cost are required to be presented separately from the service cost component outside a subtotal of income from operations. Additionally, the update allows only the service cost component to be eligible for capitalization when applicable. The guidance requires retrospective restatement for each period presented for the presentation of the service cost component and the other components of net periodic benefit cost in the income statement and prospective application for the capitalization of the service cost component of net periodic benefit cost. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years, with early adoption permitted. We elected early adoption beginning with the interim periods of our fiscal 2018. The adoption of this guidance resulted in the reclassification of expense within our Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three and six months ended January 1, 2017 of $199,000 and $397,000, respectively, from cost of goods sold to Other income, net and $86,000 and $173,000, respectively, from engineering, selling and administrative expenses to Other Income, net.      

 

 

Derivative Instruments

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

7


 

The following table quantifies the outstanding Mexican peso forward contracts as of December 31, 2017 (thousands of dollars, except average forward contractual exchange rates):

 

 

Effective Dates

 

Notional Amount

 

 

Average Forward Contractual Exchange Rate

 

 

Fair Value

 

Buy MXP/Sell USD

 

January 12, 2018 - June 15, 2018

 

$

9,000

 

 

 

20.08

 

 

$

42

 

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 31,

2017

 

 

July 2,

2017

 

Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

Other Current Assets:

 

 

 

 

 

 

 

 

Mexican Peso Forward Contracts

 

$

42

 

 

$

1,121

 

 

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

2017

 

 

January 1,

2017

 

 

December 31,

2017

 

 

January 1,

2017

 

Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized Gain (Loss)

 

$

201

 

 

$

(576

)

 

$

659

 

 

$

(806

)

Unrealized Loss

 

$

(821

)

 

$

(664

)

 

$

(1,079

)

 

$

(1,563

)

 

 

 

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 31, 2017 and July 2, 2017. 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 December 31, 2017 (in thousands):  

 

 

Fair Value Inputs

 

 

 

Level 1 Assets:

Quoted Prices

In Active Markets

 

 

Level 2 Assets:

Observable

Inputs Other

Than Market

Prices

 

 

Level 3 Assets:

Unobservable

Inputs

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Rabbi Trust Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Stock Index Funds:

 

 

 

 

 

 

 

 

 

 

 

 

Small Cap

 

$

281

 

 

$

 

 

$

 

Mid Cap

 

 

284

 

 

 

 

 

 

 

Large Cap

 

 

567

 

 

 

 

 

 

 

International

 

 

841

 

 

 

 

 

 

 

Fixed Income Funds

 

 

818

 

 

 

 

 

 

 

Mexican Peso Forward Contracts

 

 

 

 

 

42

 

 

 

 

Total Assets at Fair Value

 

$

2,791

 

 

$

42

 

 

$

 

 

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 31, 2017.

 

8


 

 

Equity 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 31,

2017

 

 

January 1,

2017

 

 

December 31,

2017

 

 

January 1,

2017

 

 

Net Sales

$

45,333

 

 

$

34,007

 

 

$

83,843

 

 

$

59,016

 

 

Cost of Goods Sold

 

35,263

 

 

 

27,124

 

 

 

64,276

 

 

 

47,217

 

 

Gross Profit

 

10,070

 

 

 

6,883

 

 

 

19,567

 

 

 

11,799

 

 

Engineering, Selling and Administrative Expenses

 

6,325

 

 

 

5,212

 

 

 

12,346

 

 

 

9,227

 

 

Income From Operations

 

3,745

 

 

 

1,671

 

 

 

7,221

 

 

 

2,572

 

 

Other Income, net

 

636

 

 

 

730

 

 

 

786

 

 

 

1,171

 

 

Income before Provision for Income Taxes

 

4,381

 

 

 

2,401

 

 

 

8,007

 

 

 

3,743

 

 

Provision for Income Taxes

 

162

 

 

 

405

 

 

 

684

 

 

 

577

 

 

Net Income

$

4,219

 

 

$

1,996

 

 

$

7,323

 

 

$

3,166

 

 

STRATTEC’s Share of VAST LLC Net Income

$

1,406

 

 

$

665

 

 

$

2,441

 

 

$

1,055

 

 

Intercompany Profit Elimination

 

(2

)

 

 

(23

)

 

 

(2

)

 

 

(23

)

 

STRATTEC’s Equity Earnings of VAST LLC

$

1,404

 

 

$

642

 

 

$

2,439

 

 

$

1,032

 

 

 

We hold a 51% ownership interest in a joint venture company, SAL LLC, which was formed to introduce a new generation of biometric security products based upon the designs of Actuator Systems LLC, our partner. SAL LLC is considered a variable interest entity based on loans from STRATTEC as discussed below. STRATTEC is not the primary beneficiary and does not control the entity. Accordingly, our investment in SAL LLC is accounted for using the equity method.

SAL LLC maintains a license agreement with Westinghouse allowing SAL LLC to do business as Westinghouse Security. Payments due Westinghouse under the license agreement were guaranteed by STRATTEC. As of December 31, 2017 and July 2, 2017, 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 Accrued Liabilities: Other 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 $2.6 million as of December 31, 2017 and July 2, 2017. As of each balance sheet date, the outstanding loan amount was eliminated against STRATTEC’s Investment in SAL LLC in the preparation of the consolidated financial statements.

Even though we maintain a 51 percent ownership interest in SAL LLC, effective with our fiscal 2015 fourth quarter, 100 percent of the funding for SAL LLC was being made by loans from STRATTEC to SAL LLC. Therefore, STRATTEC recognized 100 percent of the losses of SAL LLC up to our committed financial support through Equity (Loss) Earnings of Joint Ventures in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for all periods presented in this report. The equity earnings reported for the quarter and year to date periods ended December 31, 2017 was the result of a reduction in our estimated required financial support needed to satisfy the liabilities of SAL LLC.

9


 

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

 

December 31,

2017

 

 

January 1,

2017

 

 

December 31,

2017

 

 

January 1,

2017

 

 

Net Sales

 

$

122

 

 

$

96

 

 

$

230

 

 

$

196

 

 

Cost of Goods Sold

 

 

259

 

 

 

97

 

 

 

411

 

 

 

184

 

 

Gross (Loss) Profit

 

 

(137

)

 

 

(1

)

 

 

(181

)

 

 

12

 

 

Engineering, Selling and Administrative Expenses

 

 

(15

)

 

 

369

 

 

 

(25

)

 

 

706

 

 

Loss From Operations

 

 

(122

)

 

 

(370

)

 

 

(156

)

 

 

(694

)

 

Other Expense, net

 

 

(64

)

 

 

(35

)

 

 

(129

)

 

 

(47

)

 

Net Loss

 

$

(186

)

 

$

(405

)

 

$

(285

)

 

$

(741

)

 

STRATTEC’s Equity Earnings (Loss) of SAL LLC

 

$

69

 

 

$

(413

)

 

$

60

 

 

$

(741

)

 

 

Currently, we, along with our joint venture partner, are winding down operating the business of SAL LLC.

 

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 31,

2017

 

 

January 1,

2017

 

 

December 31,

2017

 

 

January 1,

2017

 

 

Sales to VAST LLC

 

$

987

 

 

$

50

 

 

$

1,583

 

 

$

103

 

 

Sales to SAL, LLC

 

$

147

 

 

$

52

 

 

$

182

 

 

$

127

 

 

Purchases from VAST LLC

 

$

84

 

 

$

71

 

 

$

129

 

 

$

102

 

 

Expenses Charged to VAST LLC

 

$

171

 

 

$

226

 

 

$