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, passive entry passive start systems (PEPS), steering column and instrument panel ignition lock housings, latches, power sliding door systems, power tailgate 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 Automotive Group” 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, along with our VAST LLC partners, provide full service and aftermarket support for each VAST Automotive Group partner’s products.
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”), for which we exercise significant influence but do not control and are not variable interest entities of STRATTEC, are accounted for using the equity method. VAST LLC consists primarily of four wholly owned subsidiaries in China, one wholly owned subsidiary in Brazil and one joint venture entity in India. The results of the VAST LLC foreign subsidiaries and joint venture are reported on a one-month lag basis. We have only one reporting segment.
In the opinion of management, the accompanying condensed consolidated balance sheets as of January 1, 2023 and July 3, 2022, 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 2022 Form 10-K, which was filed with the Securities and Exchange Commission on September 8, 2022.
During December 2022, management determined that a previously unrecorded liability for postretirement death benefits is required to be recognized in accordance with ASC 715. Eligible participants for this death benefit include all salaried retirees who retired prior to October 1, 2001 and all hourly retirees who were hired prior to June 27, 2005 and retired prior to January 1, 2010. As such, the actuarially calculated liability and the unrecognized actuarial losses impacting Accumulated Other Comprehensive Loss will be reported in the Condensed Consolidated Balance Sheets. Additionally, interest cost and amortization of actuarial losses will be reported in the in the Condensed Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income.
Additionally, management identified a correction to previously reported Equity Earnings of Joint Ventures in the Condensed Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income, which correction also impacts the previously reported Investment in Joint Ventures amount reported in the Condensed Consolidated Balance Sheets. While prior period amounts have been corrected for comparability, the corrections, both individually and in total, were not material to the previously reported condensed consolidated financial statements.
6
The impact of the prior period corrections on the Condensed Consolidated Balance Sheet, the related components of Stockholders’ Equity, and the related components of Accumulate Other Comprehensive Loss is as follows (thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
July 3, 2022 |
|
|
Previously Reported |
|
Adjustment |
|
As Reported |
|
ASSETS |
|
|
|
|
|
|
Investment in joint ventures |
$ |
26,344 |
|
$ |
310 |
|
$ |
26,654 |
|
Deferred income taxes |
|
6,937 |
|
|
144 |
|
|
7,081 |
|
Total assets |
$ |
318,680 |
|
$ |
454 |
|
$ |
319,134 |
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
Accrued Liabilities: Payroll and
benefits |
$ |
17,905 |
|
$ |
54 |
|
$ |
17,959 |
|
Total current liabilities |
|
81,475 |
|
|
54 |
|
|
81,529 |
|
Accrued postretirement obligations |
|
463 |
|
|
866 |
|
|
1,329 |
|
|
|
|
|
|
|
|
Retained earnings |
|
241,504 |
|
|
(535 |
) |
|
240,969 |
|
Accumulated other comprehensive loss |
|
(18,657 |
) |
|
69 |
|
|
(18,588 |
) |
Total STRATTEC SECURITY
CORPORATION shareholders'
equity |
|
188,866 |
|
|
(466 |
) |
|
188,400 |
|
Total shareholders' equity |
|
220,413 |
|
|
(466 |
) |
|
219,947 |
|
Total liabilities and shareholders'
equity |
$ |
318,680 |
|
$ |
454 |
|
$ |
319,134 |
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss: |
|
|
|
|
|
|
Foreign currency translation adjustments |
$ |
(16,723 |
) |
$ |
(10 |
) |
$ |
(16,733 |
) |
Retirement and Postretirement Benefit Plans |
|
(1,934 |
) |
|
79 |
|
|
(1,855 |
) |
Accumulated other comprehensive loss |
$ |
(18,657 |
) |
$ |
69 |
|
$ |
(18,588 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2022 |
|
|
December 26, 2021 |
|
|
Previously Reported |
|
Adjustment |
|
As Reported |
|
|
Previously Reported |
|
Adjustment |
|
As Reported |
|
Retained earnings |
$ |
241,632 |
|
$ |
(538 |
) |
$ |
241,094 |
|
|
$ |
237,967 |
|
$ |
(525 |
) |
$ |
237,442 |
|
Accumulated other comprehensive loss |
|
(19,320 |
) |
|
64 |
|
|
(19,256 |
) |
|
|
(17,391 |
) |
|
(122 |
) |
|
(17,513 |
) |
Total STRATTEC SECURITY
CORPORATION shareholders' equity |
|
189,068 |
|
|
(474 |
) |
|
188,594 |
|
|
|
185,820 |
|
|
(647 |
) |
|
185,173 |
|
Total shareholders' equity |
$ |
219,883 |
|
$ |
(474 |
) |
$ |
219,409 |
|
|
$ |
217,071 |
|
$ |
(647 |
) |
$ |
216,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
$ |
(17,461 |
) |
$ |
(10 |
) |
$ |
(17,471 |
) |
|
$ |
(15,438 |
) |
$ |
2 |
|
$ |
(15,436 |
) |
Retirement and Postretirement Benefit
Plans |
|
(1,859 |
) |
|
74 |
|
|
(1,785 |
) |
|
|
(1,953 |
) |
|
(124 |
) |
|
(2,077 |
) |
Accumulated other comprehensive loss |
$ |
(19,320 |
) |
$ |
64 |
|
$ |
(19,256 |
) |
|
$ |
(17,391 |
) |
$ |
(122 |
) |
$ |
(17,513 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26, 2021 |
|
|
June 27, 2021 |
|
|
Previously Reported |
|
Adjustment |
|
As Reported |
|
|
Previously Reported |
|
Adjustment |
|
As Reported |
|
Retained earnings |
$ |
234,573 |
|
$ |
(522 |
) |
$ |
234,051 |
|
|
$ |
234,472 |
|
$ |
(519 |
) |
$ |
233,953 |
|
Accumulated other comprehensive loss |
|
(17,278 |
) |
|
(120 |
) |
|
(17,398 |
) |
|
|
(16,797 |
) |
|
(117 |
) |
|
(16,914 |
) |
Total STRATTEC SECURITY
CORPORATION shareholders' equity |
|
182,281 |
|
|
(642 |
) |
|
181,639 |
|
|
|
181,646 |
|
|
(636 |
) |
|
181,010 |
|
Total shareholders' equity |
$ |
213,439 |
|
$ |
(642 |
) |
$ |
212,797 |
|
|
$ |
213,433 |
|
$ |
(636 |
) |
$ |
212,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
$ |
(15,247 |
) |
$ |
2 |
|
$ |
(15,245 |
) |
|
$ |
(14,685 |
) |
$ |
2 |
|
$ |
(14,683 |
) |
Retirement and Postretirement Benefit
Plans |
|
(2,031 |
) |
|
(122 |
) |
|
(2,153 |
) |
|
|
(2,112 |
) |
|
(119 |
) |
|
(2,231 |
) |
Accumulated other comprehensive loss |
$ |
(17,278 |
) |
$ |
(120 |
) |
$ |
(17,398 |
) |
|
$ |
(16,797 |
) |
$ |
(117 |
) |
$ |
(16,914 |
) |
7
The impact of the prior period corrections on the Condensed Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income is as follows (thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 26, 2021 |
|
|
Six Months Ended December 26, 2021 |
|
|
Previously Reported |
|
Adjustment |
|
As Reported |
|
|
Previously Reported |
|
Adjustment |
|
As Reported |
|
Other (expense) income, net |
$ |
(95 |
) |
$ |
(5 |
) |
$ |
(100 |
) |
|
$ |
35 |
|
$ |
(9 |
) |
$ |
26 |
|
Income before provision for
income taxes and non-controlling
interest |
|
4,095 |
|
|
(5 |
) |
|
4,090 |
|
|
|
4,354 |
|
|
(9 |
) |
|
4,345 |
|
Provision for income taxes |
|
255 |
|
|
(2 |
) |
|
253 |
|
|
|
292 |
|
|
(3 |
) |
|
289 |
|
Net income |
|
3,840 |
|
|
(3 |
) |
|
3,837 |
|
|
|
4,062 |
|
|
(6 |
) |
|
4,056 |
|
Net income attributed to STRATTEC
SECURITY CORPORATION |
$ |
3,394 |
|
$ |
(3 |
) |
$ |
3,391 |
|
|
$ |
3,495 |
|
$ |
(6 |
) |
$ |
3,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
$ |
3,840 |
|
$ |
(3 |
) |
$ |
3,837 |
|
|
$ |
4,062 |
|
$ |
(6 |
) |
$ |
4,056 |
|
Pension and postretirement plans,
net of tax |
|
78 |
|
|
(2 |
) |
|
76 |
|
|
|
159 |
|
|
(5 |
) |
|
154 |
|
Other comprehensive (loss)
income, net of tax |
|
(466 |
) |
|
(2 |
) |
|
(468 |
) |
|
|
(1,097 |
) |
|
(5 |
) |
|
(1,102 |
) |
Comprehensive income |
|
3,374 |
|
|
(5 |
) |
|
3,369 |
|
|
|
2,965 |
|
|
(11 |
) |
|
2,954 |
|
Comprehensive income attributed
to STRATTEC SECURITY
CORPORATION |
$ |
3,281 |
|
$ |
(5 |
) |
$ |
3,276 |
|
|
$ |
2,901 |
|
$ |
(11 |
) |
$ |
2,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributed to
STRATTEC SECURITY
CORPORATION: diluted |
$ |
0.87 |
|
$ |
- |
|
$ |
0.87 |
|
|
$ |
0.90 |
|
$ |
(0.01 |
) |
$ |
0.89 |
|
The correction of prior period amounts had no impact on total operating, investing, and financing activities on the Condensed Consolidated Statements of Cash Flows during the six month period ended December 26, 2021. In conjunction with the correction of the prior period amounts, the following footnotes, which were impacted by the above adjustments, were also corrected: Shareholders’ Equity, Other Income (Expense), net, Earnings Per Share, Pension and Postretirement Benefits, and Accumulated Other Comprehensive Loss.
Risks and Uncertainties
In December 2019, a novel strain of coronavirus (COVID-19) was reported in Wuhan, China. The coronavirus subsequently spread, and infections occurred in multiple countries around the world, including the United States. In March 2020, the World Health Organization recognized the COVID-19 outbreak as a pandemic based on the global spread of the disease, the severity of illnesses it causes and its effects on society. In response to the COVID-19 outbreak, the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations, and in certain cases, advising or requiring individuals to limit or forego their time outside of their homes or from participating in large group gatherings. Accordingly, the COVID-19 outbreak, as well as the recent conflict in the Ukraine, has severely restricted the level of economic activity in many countries, and continues to adversely impact global economic activity, including with respect to customer purchasing actions and supply chain continuity and disruption, and in particular the supply of semiconductor chips, transponders and related components to the automotive industry.
8
STRATTEC’s operating performance is subject to global economic conditions, inflationary pressures and levels of consumer spending specifically within the automotive industry and its operating performance has been impacted by the lingering effects of the COVID-19 pandemic and the war in the Ukraine, all as described above. During the period from late March 2020 through mid-June 2020, the majority of our OEM customer assembly plant operations were completely closed including most of the supply chain. Additionally, during most of this same period, STRATTEC’s Mexico facilities were closed as a result of the Mexican government’s shutdown of non-essential businesses. Re-opening of our OEM customer facilities and our Mexico facilities began in June 2020, and the automotive industry continued to ramp-up throughout our fiscal year ended June 27, 2021. Nonetheless, during the fourth quarter of our fiscal 2021, our net sales were negatively impacted by a global semiconductor chip shortage (especially as it relates to the automotive industry), which shortage continued into our fiscal 2022. Although semiconductor chip availability improved during the first six months of our fiscal 2023 relative to our fiscal 2022, negative impacts of the shortage continue to affect STRATTEC, specifically as it pertains to aftermarket products, which trail the prioritization of production of components for production vehicles in the allocation of semiconductor chips. Additionally, inflationary pressures resulted in increased raw material and purchased part costs as well as higher labor costs associated with mandatory minimum wage increases in Mexico beginning in calendar 2021. Such increases negatively impacted our operating results in our fiscal 2022 and continued to escalate during the first six months of our fiscal 2023.
Each of the COVID-19 outbreak, the Ukraine conflict and the resulting inflationary pressures in the U.S. and global economy, which have adversely impacted, and continue to do so, pricing conditions for necessary raw materials and purchased components in our products, continue to adversely impact our operating results due mostly to the supply chain continuity and disruption issues noted above, and in particular related to the supply of semiconductor chips, transponders and related components to our customers in the automotive industry. The extent of such impacts, including related to their duration and intensity, depends upon any continued spread of the COVID-19 outbreak, the length of the Ukraine conflict, and related regulatory or operating restraints, which may be precautionary, imposed by local governments and the private sector and by any continuing inflationary pressures in the U.S. and global economies. All of these events may continue to impact the supply chain and our operations, including impacting our customers, workforce and suppliers, any of which may continue to disrupt and limit sourcing of semiconductor chips, transponders and other critical supply chain components needed by us and our customers to meet expected production schedules. Moreover, these events may continue to create added inflationary pressures on our operations, including related to wages and the prices of raw materials and purchased parts. All of these foregoing matters, including their scope and duration are uncertain and cannot be predicted as to timing and cost impacts. These changing conditions may also affect the estimates and assumptions made by our management in our financial statements. Such estimates and assumptions affect, among other things, our long-lived asset valuations, equity investment valuation, assessment of our annual effective tax rate, valuation of deferred income taxes, assessment of excess and obsolete inventory reserves, and assessment of collectability of trade receivables.
New Accounting Standard
In June 2016, the FASB issued ASU 2016-13, Financial instruments – Credit Losses. This update revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. Originally, the update was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. In November 2019, the FASB issued ASU 2019-10, Financial instruments – Credit Losses, Derivatives and Hedging Activities, and Leases. This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are planning to adopt this standard in the first quarter of our fiscal 2024. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.
Subsequent Event
Subsequent to January 1, 2023, the ADAC-STRATTEC Credit Facility, as described under Credit Facilities, was amended such that effective with the first borrowing subsequent to February 6, 2023, interest on borrowings under the credit facility will be at varying rates based, at our option, on Term SOFR plus 1.35 percent or the bank’s prime rate. The amendment also modifies the calculation of the fixed charge coverage ratio and the required level of minimum net worth for all future periods under the ADAC-STRATTEC Credit Facility. Refer to the discussion under Credit Facilities.
9
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 have contracts with Bank of Montreal that provide for monthly Mexican peso currency forward contracts for a portion of our estimated peso denominated operating costs. Our objective in entering into currency forward contracts from time to time 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.
The following table quantifies the outstanding Mexican peso forward contracts as of January 1, 2023 (thousands of dollars, except with respect to the average forward contractual exchange rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Dates |
|
Notional Amount |
|
|
Average Forward Contractual Exchange Rate |
|
|
Fair Value |
|
Buy MXP/Sell USD |
|
January 17, 2023 - June 13, 2023 |
|
$ |
4,500 |
|
|
|
22.51 |
|
|
$ |
604 |
|
The fair market value of all outstanding Mexican peso forward contracts in the accompanying Condensed Consolidated Balance Sheets as of the dates specified was as follows (thousands of dollars):
|
|
|
|
|
|
|
|
|
January 1,
2023 |
|
|
July 3,
2022 |
|
Not Designated as Hedging Instruments: |
|
|
|
|
|
Other Current Assets: |
|
|
|
|
|
Mexican Peso Forward Contracts |
$ |
604 |
|
|
$ |
627 |
|
The pre-tax effects of the Mexican peso forward contracts are included in Other Income (Expense), net on the accompanying Condensed Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income and consisted of the following for the periods indicated below (thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
Not Designated as Hedging Instruments: |
|
|
|
|
|
|
|
|
|
|
|
Realized Gain |
$ |
307 |
|
|
$ |
45 |
|
|
$ |
545 |
|
|
$ |
184 |
|
Realized (Loss) |
$ |
— |
|
|
$ |
(49 |
) |
|
$ |
— |
|
|
$ |
(49 |
) |
Unrealized (Loss) Gain |
$ |
12 |
|
|
$ |
(126 |
) |
|
$ |
(23 |
) |
|
$ |
(224 |
) |
Fair Value of Financial Instruments
The fair value of our cash and cash equivalents, accounts receivable, accounts payable and borrowings under our credit facilities approximated book value as of January 1, 2023 and July 3, 2022. 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.
10
The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of January 1, 2023 (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 |
$ |
148 |
|
|
$ |
— |
|
|
$ |
— |
|
Mid Cap |
|
300 |
|
|
|
— |
|
|
|
— |
|
Large Cap |
|
421 |
|
|
|
— |
|
|
|
— |
|
International |
|
460 |
|
|
|
— |
|
|
|
— |
|
Fixed Income Funds |
|
1,004 |
|
|
|
— |
|
|
|
— |
|
Cash and Cash Equivalents |
|
— |
|
|
|
970 |
|
|
|
— |
|
Mexican Peso Forward Contracts |
|
— |
|
|
|
604 |
|
|
|
— |
|
Total Assets at Fair Value |
$ |
2,333 |
|
|
$ |
1,574 |
|
|
$ |
— |
|
The Rabbi Trust assets fund our Amended and Restated Supplemental Executive Retirement Plan. Of the January 1, 2023 $3.3 million Rabbi Trust asset balance, $863,000 was included in Other Current Assets and $2.4 million was included in Other Long-term Assets in the accompanying Condensed Consolidated Balance Sheets.
Investment in Joint Ventures and Majority Owned Subsidiaries
We participate in certain Alliance Agreements with WITTE Automotive (“WITTE”) and ADAC Automotive (“ADAC”). WITTE, of Velbert, Germany, is a privately held automotive supplier. WITTE designs, manufactures and markets automotive components, including locks and keys, hood latches, rear compartment latches, seat back latches, door handles and specialty fasteners. WITTE’s primary market for these products has been Europe. ADAC, of Grand Rapids, Michigan, is a privately held automotive supplier and manufactures engineered products, including door handles and other automotive trim parts, utilizing plastic injection molding, automated painting and various assembly processes.
The Alliance Agreements include a set of cross-licensing agreements for the manufacture, distribution and sale of WITTE products by STRATTEC and ADAC in North America, and the manufacture, distribution and sale of STRATTEC and ADAC products by WITTE in Europe. Additionally, a joint venture company, Vehicle Access Systems Technology LLC (“VAST LLC”), in which WITTE, STRATTEC and ADAC each hold a one-third interest, exists to seek opportunities to manufacture and sell each company’s products in areas of the world outside of North America and Europe. As a result of these relationships, the entities involved purchase products from each other on an as needed basis to use as components in end products assembled and sold in their respective home markets. STRATTEC currently purchases such component parts from WITTE. These purchases totaled $142,000 and $277,000 during the three and six month periods ended January 1, 2023, and $228,000 and $415,000 during the three and six month periods ended December 26, 2021.
VAST LLC has investments in Sistema de Acesso Veicular Ltda, VAST Fuzhou, VAST Great Shanghai, VAST Shanghai Co., VAST Jingzhou Co. Ltd., and Minda-VAST Access Systems. Sistema de Acesso Veicular Ltda is located in Brazil and services customers in South America. VAST Fuzhou, VAST Great Shanghai, VAST Shanghai Co., and VAST Jingzhou Co. Ltd. (collectively known as VAST China), provide a base of operations to service each VAST partner’s automotive customers in the Asian market. Minda-VAST Access Systems is based in Pune, India and is a 50:50 joint venture between VAST LLC and Minda Management Services Limited, an affiliate of both Minda Corporation Limited and Spark Minda, Ashok Minda Group of New Delhi, India (collectively “Minda”). Minda and its affiliates cater to the needs of all major car, motorcycle, commercial vehicle, tractor and off-road vehicle manufacturers in India. They are a leading manufacturer in the Indian marketplace of security & access products, handles, automotive safety, restraint systems, driver information and telematics systems for both OEMs and the aftermarket. VAST LLC also maintains branch offices in South Korea and Japan in support of customer sales and engineering requirements.
11
The VAST LLC investments are accounted for using the equity method of accounting and the results of the VAST LLC foreign subsidiaries and joint venture are reported on a one-month lag basis. The activities related to the VAST LLC foreign subsidiaries and joint venture resulted in equity earnings of joint ventures to STRATTEC of $1.1 million during the six month period ended January 1, 2023 and $364,000 during the six month period ended December 26, 2021. During the six months ended January 1, 2023, capital contributions totaling $312,000 were made to VAST for purposes of funding operations in Brazil. STRATTEC's portion of the capital contributions totaled $104,000. During the six months ended December 26, 2021, no capital contributions were made to VAST LLC by any of the members.
ADAC-STRATTEC LLC, a Delaware limited liability company, was formed in fiscal year 2007 to support injection molding and door handle assembly operations in Mexico. ADAC-STRATTEC LLC was 51 percent owned by STRATTEC and 49 percent owned by ADAC for all periods presented in this report. An additional Mexican entity, ADAC-STRATTEC de Mexico, is wholly owned by ADAC-STRATTEC LLC. ADAC-STRATTEC LLC’s financial results are consolidated with the financial results of STRATTEC and resulted in increased net sales and reduced net income to STRATTEC of approximately $58.5 million and $950,000, respectively, during the six month period ended January 1, 2023 and increased net sales and reduced net income to STRATTEC of approximately $51.9 million and $326,000, respectively, during the six month period ended December 26, 2021. ADAC charges ADAC STRATTEC LLC an engineering, research and design fee as well as a sales fee. Such fees are calculated as a percentage of net sales, are included in the consolidated results of STRATTEC, and totaled $2.0 million and $4.1 million in the three and six month periods ended January 1, 2023 and $2.0 million and $3.6 million in the three and six month periods ended December 26, 2021. Effective January 1, 2023, ADAC and STRATTEC have agreed to suspend the payment of these fees as needed to comply with debt covenant provisions. Refer to Credit Facilities for further discussion. Additionally, ADAC-STRATTEC LLC sells production parts to ADAC. Sales to ADAC are included in the consolidated results of STRATTEC and totaled $2.5 million and $5.3 million in the three and six month periods ended January 1, 2023 and $1.9 million and $3.1 million in the three and six month periods ended December 26, 2021.
STRATTEC POWER ACCESS LLC (“SPA”) was originally formed in fiscal year 2009 to supply the North American portion of the power sliding door, lift gate, tail gate and deck lid system access control products some of which were acquired from Delphi Corporation in 2009. SPA was 80 percent owned by STRATTEC and 20 percent owned by WITTE for all periods presented in this report. An additional Mexican entity, STRATTEC POWER ACCESS de Mexico, is wholly owned by SPA. The financial results of SPA are consolidated with the financial results of STRATTEC and resulted in increased net sales and increased net income to STRATTEC of approximately $51.3 million and $1.6 million, respectively, during the six month period ended January 1, 2023 and $44.7 million and $2.2 million, respectively, during the six month period ended December 26, 2021.
Equity Earnings of Joint Ventures
As discussed above under Investment in Joint Ventures and Majority Owned Subsidiaries, we hold a one-third interest in a joint venture company, VAST LLC. Our investment in VAST LLC, for which we exercise significant influence but do not control and is not a variable interest entity of STRATTEC, is accounted for using the equity method. The results of the VAST LLC foreign subsidiaries and joint venture are reported on a one-month lag basis. We assess the impairment of equity investments whenever events or changes in circumstances indicate that a decrease in value of the investment has occurred that is other than temporary.
The following are summarized statements of operations for VAST LLC (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
Net Sales |
$ |
56,953 |
|
|
$ |
55,556 |
|
|
$ |
123,099 |
|
|
$ |
98,173 |
|
Cost of Goods Sold |
|
45,969 |
|
|
|
45,712 |
|
|
|
101,751 |
|
|
|
80,604 |
|
Gross Profit |
|
10,984 |
|
|
|
9,844 |
|
|
|
21,348 |
|
|
|
17,569 |
|
Engineering, Selling and Administrative Expenses |
|
9,227 |
|
|
|
7,949 |
|
|
|
17,759 |
|
|
|
16,500 |
|
Income From Operations |
|
1,757 |
|
|
|
1,895 |
|
|
|
3,589 |
|
|
|
1,069 |
|
Other (Expense) Income, net |
|
386 |
|
|
|
304 |
|
|
|
458 |
|
|
|
393 |
|
Income before Provision for Income Taxes |
|
2,143 |
|
|
|
2,199 |
|
|
|
4,047 |
|
|
|
1,462 |
|
Provision for Income Taxes |
|
382 |
|
|
|
354 |
|
|
|
750 |
|
|
|
375 |
|
Net Income |
$ |
1,761 |
|
|
$ |
1,845 |
|
|
$ |
3,297 |
|
|
$ |
1,087 |
|
STRATTEC's Share of VAST LLC Net Income (Loss) |
|
587 |
|
|
|
615 |
|
|
|
1,099 |
|
|
|
362 |
|
Intercompany Profit Elimination |
|
1 |
|
|
|
— |
|
|
|
16 |
|
|
|
2 |
|
STRATTEC’s Equity Earnings of VAST LLC |
$ |
588 |
|
|
$ |
615 |
|
|
$ |
1,115 |
|
|
$ |
364 |
|
12
We have sales of component parts to VAST 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 for the periods indicated below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
|
Sales to VAST LLC |
$ |
17 |
|
|
$ |
702 |
|
|
$ |
27 |
|
|
$ |
1,217 |
|
|
Purchases from VAST LLC |
$ |
13 |
|
|
$ |
19 |
|
|
$ |
27 |
|
|
$ |
151 |
|
|
Expenses Charged to VAST LLC |
$ |
161 |
|
|
$ |
204 |
|
|
$ |
242 |
|
|
$ |
378 |
|
|
Expenses Charged from VAST LLC |
$ |
209 |
|
|
$ |
189 |
|
|
$ |
452 |
|
|
$ |
442 |
|
|
Leases
We have an operating lease for our El Paso, Texas finished goods and service parts distribution warehouse that has a current lease term through October 2023. This lease includes renewal terms that can extend the lease term for five additional years. For purposes of calculating operating lease obligations, we included the option to extend the lease as it is reasonably certain that we will exercise such option. The lease does not contain material residual value guarantees or restrictive covenants. Operating lease expense is recognized on a straight-line basis over the lease term.
As the lease does not provide an implicit rate, we used our incremental borrowing rate at lease commencement to determine the present value of our lease payments. The incremental borrowing rate is an entity-specific rate which represents the rate of interest we would pay to borrow over a similar term with similar payments.
The operating lease asset and obligation related to our El Paso warehouse lease included in the accompanying Condensed Consolidated Balance Sheets are presented below (in thousands):
|
|
|
|
|
January 1,
2023 |
|
Right-of Use Asset Under Operating Lease: |
|
|
Other Long-Term Assets |
$ |
2,823 |
|
Lease Obligation Under Operating Lease: |
|
|
Current Liabilities: Accrued Liabilities: Other |
$ |
415 |
|
Other Long-Term Liabilities |
|
2,408 |
|
|
$ |
2,823 |
|
Future minimum lease payments, by our fiscal year, including options to extend that are reasonably certain to be exercised, under this non-cancelable lease are as follows as of January 1, 2023 (in thousands):
|
|
|
|
2023 (for the remaining six months) |
$ |
250 |
|
2024 |
|
509 |
|
2025 |
|
522 |
|
2026 |
|
535 |
|
2027 |
|
548 |
|
Thereafter |
|
751 |
|
Total Future Minimum Lease Payments |
|
3,115 |
|
Less: Imputed Interest |
|
(292 |
) |
Total Lease Obligations |
$ |
2,823 |
|
Cash flow information related to the operating lease is shown below (in thousands):
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
Operating Cash Flows: |
|
|
|
|
|
Cash Paid Related to Operating Lease Obligation |
$ |
247 |
|
|
$ |
241 |
|
13
The weighted average lease term and discount rate for the El Paso, Texas operating lease are shown below:
|
|
|
|
|
January 1,
2023 |
|
Weighted Average Remaining Lease Term (in years) |
|
5.8 |
|
Weighted Average Discount Rate |
|
3.3 |
% |
Operating lease expense for the three and six month periods ended January 1, 2023 totaled $125,000 and $247,000, respectively. Operating lease expense for the three and six month periods ended December 26, 2021 totaled $122,000 and $241,000, respectively.
Credit Facilities
STRATTEC has a $40 million secured revolving credit facility (the “STRATTEC Credit Facility”) with BMO Harris Bank N.A. ADAC-STRATTEC LLC has a $25 million secured revolving credit facility (the “ADAC-STRATTEC Credit Facility”) with BMO Harris Bank N.A., which is guaranteed by STRATTEC. The credit facilities both expire August 1, 2024. Borrowings under either credit facility are secured by our U.S. cash balances, accounts receivable, inventory, and fixed assets. Interest on borrowings under both credit facilities were at varying rates based, at our option, on LIBOR plus 1.25 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. Subsequent to January 1, 2023, a waiver was received from BMO Harris Bank N.A. related to non-compliance with the ADAC-STRATTEC Credit Facility fixed charge coverage ratio as of January 1, 2023. Furthermore, subsequent to January 1, 2023, the ADAC-STRATTEC Credit Facility was amended to modify the calculation of the fixed charge coverage ratio and the minimum level of net worth for all future periods such that it is probable ADAC-STRATTEC will comply with the amended covenant in future periods. As of January 1, 2023, we were in compliance with all other financial covenants required by these credit facilities.
Outstanding borrowings under the credit facilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
January 1,
2023 |
|
|
July 3,
2022 |
|
STRATTEC Credit Facility |
$ |
4,000 |
|
|
$ |
— |
|
ADAC-STRATTEC Credit Facility |
|
13,000 |
|
|
|
11,000 |
|
|
$ |
17,000 |
|
|
$ |
11,000 |
|
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 |
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
STRATTEC Credit Facility |
$ |
3,121 |
|
|
$ |
170 |
|
|
|
4.4 |
% |
|
|
3.3 |
% |
ADAC-STRATTEC Credit Facility |
$ |
11,852 |
|
|
$ |
14,846 |
|
|
|
4.3 |
% |
|
|
1.4 |
% |
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.
14
In 1995, we recorded a provision 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 years 2010, 2016, and 2021, we obtained updated third party estimates of projected costs to adequately cover the cost for active remediation of this contamination and adjusted the reserve as needed. We monitor and evaluate the site with the use of 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 our 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 environmental reserve of $1.4 million at January 1, 2023 is adequate.
Shareholders’ Equity
A summary of activity impacting shareholders’ equity for the three and six month periods ended January 1, 2023 and December 26, 2021 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended January 1, 2023 |
|
|
Total
Shareholders’
Equity |
|
|
Common Stock |
|
|
Capital in Excess of Par Value |
|
|
Retained Earnings |
|
|
Accumulated Other Comprehensive Loss |
|
|
Treasury Stock |
|
|
Non-Controlling Interest |
|
Balance, October 2, 2022 |
$ |
219,409 |
|
|
$ |
75 |
|
|
$ |
102,250 |
|
|
$ |
241,094 |
|
|
$ |
(19,256 |
) |
|
$ |
(135,569 |
) |
|
$ |
30,815 |
|
Net Loss |
|
(2,515 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,839 |
) |
|
|
— |
|
|
|
— |
|
|
|
(676 |
) |
Translation Adjustments |
|
429 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(40 |
) |
|
|
— |
|
|
|
469 |
|
Stock Based Compensation |
|
263 |
|
|
|
— |
|
|
|
263 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Pension and Postretirement
Adjustment, Net of
Tax |
|
70 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
70 |
|
|
|
— |
|
|
|
— |
|
Employee Stock Purchases |
|
20 |
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
|
|
— |
|
|
|
13 |
|
|
|
— |
|
Balance, January 1, 2023 |
$ |
217,676 |
|
|
$ |
75 |
|
|
$ |
102,520 |
|
|
$ |
239,255 |
|
|
$ |
(19,226 |
) |
|
$ |
(135,556 |
) |
|
$ |
30,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 26, 2021 |
|
|
Total
Shareholders’
Equity |
|
|
Common Stock |
|
|
Capital in Excess of Par Value |
|
|
Retained Earnings |
|
|
Accumulated Other Comprehensive Loss |
|
|
Treasury Stock |
|
|
Non-Controlling Interest |
|
Balance, September 26, 2021 |
$ |
212,797 |
|
|
$ |
75 |
|
|
$ |
100,519 |
|
|
$ |
234,051 |
|
|
$ |
(17,398 |
) |
|
$ |
(135,608 |
) |
|
$ |
31,158 |
|
Net Income |
|
3,837 |
|
|
|
— |
|
|
|
— |
|
|
|
3,391 |
|
|
|
— |
|
|
|
— |
|
|
|
446 |
|
Translation Adjustments |
|
(544 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(191 |
) |
|
|
— |
|
|
|
(353 |
) |
Stock Based Compensation |
|
238 |
|
|
|
— |
|
|
|
238 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Pension and Postretirement
Adjustment, Net of
Tax |
|
76 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
76 |
|
|
|
— |
|
|
|
— |
|
Employee Stock Purchases |
|
20 |
|
|
|
— |
|
|
|
11 |
|
|
|
— |
|
|
|
— |
|
|
|
9 |
|
|
|
— |
|
Balance, December 26, 2021 |
$ |
216,424 |
|
|
$ |
75 |
|
|
$ |
100,768 |
|
|
$ |
237,442 |
|
|
$ |
(17,513 |
) |
|
$ |
(135,599 |
) |
|
$ |
31,251 |
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended January 1, 2023 |
|
|
Total
Shareholders’
Equity |
|
|
Common Stock |
|
|
Capital in Excess of Par Value |
|
|
Retained Earnings |
|
|
Accumulated Other Comprehensive Loss |
|
|
Treasury Stock |
|
|
Non-Controlling Interest |
|
Balance, July 3, 2022 |
$ |
219,947 |
|
|
$ |
75 |
|
|
$ |
101,524 |
|
|
$ |
240,969 |
|
|
$ |
(18,588 |
) |
|
$ |
(135,580 |
) |
|
$ |
31,547 |
|
Net Loss |
|
(2,578 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,714 |
) |
|
|
— |
|
|
|
— |
|
|
|
(864 |
) |
Dividend Declared – Non-
controlling Interests of
Subsidiaries |
|
(600 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(600 |
) |
Translation Adjustments |
|
(253 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(778 |
) |
|
|
— |
|
|
|
525 |
|
Stock Based Compensation |
|
874 |
|
|
|
— |
|
|
|
874 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Pension and Postretirement
Adjustment, Net of
Tax |
|
140 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
140 |
|
|
|
— |
|
|
|
— |
|
Stock Option Exercises |
|
109 |
|
|
|
— |
|
|
|
109 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Employee Stock Purchases |
|
37 |
|
|
|
— |
|
|
|
13 |
|
|
|
— |
|
|
|
— |
|
|
|
24 |
|
|
|
— |
|
Balance, January 1, 2023 |
$ |
217,676 |
|
|
$ |
75 |
|
|
$ |
102,520 |
|
|
$ |
239,255 |
|
|
$ |
(19,226 |
) |
|
$ |
(135,556 |
) |
|
$ |
30,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended December 26, 2021 |
|
|
Total
Shareholders’
Equity |
|
|
Common Stock |
|
|
Capital in Excess of Par Value |
|
|
Retained Earnings |
|
|
Accumulated Other Comprehensive Loss |
|
|
Treasury Stock |
|
|
Non-Controlling Interest |
|
Balance, June 27, 2021 |
$ |
212,797 |
|
|
$ |
74 |
|
|
$ |
99,512 |
|
|
$ |
233,953 |
|
|
$ |
(16,914 |
) |
|
$ |
(135,615 |
) |
|
$ |
31,787 |
|
Net Income |
|
4,056 |
|
|
|
— |
|
|
|
— |
|
|
|
3,489 |
|
|
|
— |
|
|
|
— |
|
|
|
567 |
|
Dividend Declared – Non-
controlling Interests of
Subsidiaries |
|
(600 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(600 |
) |
Translation Adjustments |
|
(1,256 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(753 |
) |
|
|
— |
|
|
|
(503 |
) |
Stock Based Compensation |
|
634 |
|
|
|
— |
|
|
|
634 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Pension and Postretirement
Adjustment, Net of
Tax |
|
154 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
154 |
|
|
|
— |
|
|
|
— |
|
Stock Option Exercises |
|
600 |
|
|
|
1 |
|
|
|
599 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Employee Stock Purchases |
|
39 |
|
|
|
— |
|
|
|
23 |
|
|
|
— |
|
|
|
— |
|
|
|
16 |
|
|
|
— |
|
Balance, December 26, 2021 |
$ |
216,424 |
|
|
$ |
75 |
|
|
$ |
100,768 |
|
|
$ |
237,442 |
|
|
$ |
(17,513 |
) |
|
$ |
(135,599 |
) |
|
$ |
31,251 |
|
Revenue from Contracts with Customers
We generate revenue from the production of parts sold to automotive and light-truck Original Equipment Manufacturers (“OEMs”), or Tier 1 suppliers at the direction of the OEM, under long-term supply agreements supporting new vehicle production. Such agreements also require related production of service parts subsequent to the initial vehicle production periods. Additionally, we generate revenue from the production of parts sold in aftermarket service channels and to non-automotive commercial customers.
Contract Balances:
We have no material contract assets or contract liabilities as of January 1, 2023 or July 3, 2022.
16
Revenue by Product Group and Customer:
Revenue by product group for the periods presented was as follows (thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
|
Door Handles & Exterior Trim |
$ |
28,425 |
|
|
$ |
28,358 |
|
|
$ |
58,550 |
|
|
$ |
51,898 |
|
|
Keys & Locksets |
|
24,716 |
|
|
|
26,654 |
|
|
|
53,381 |
|
|
|
49,495 |
|
|
Power Access |
|
26,445 |
|
|
|
23,529 |
|
|
|
51,286 |
|
|
|
44,669 |
|
|
Latches |
|
13,658 |
|
|
|
11,915 |
|
|
|
28,420 |
|
|
|
22,022 |
|
|
Aftermarket & OE Service |
|
9,493 |
|
|
|
11,414 |
|
|
|
20,141 |
|
|
|
23,310 |
|
|
User Interface Controls (formerly Driver Controls) |
|
8,620 |
|
|
|
8,775 |
|
|
|
17,738 |
|
|
|
16,792 |
|
|
Other |
|
1,827 |
|
|
|
2,263 |
|
|
|
4,028 |
|
|
|
5,063 |
|
|
|
$ |
113,184 |
|
|
$ |
112,908 |
|
|
$ |
233,544 |
|
|
$ |
213,249 |
|
|
Revenue by customer or customer group for the periods presented was as follows (thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
|
General Motors Company |
$ |
35,534 |
|
|
$ |
31,129 |
|
|
$ |
73,684 |
|
|
$ |
56,813 |
|
|
Ford Motor Company |
|
22,149 |
|
|
|
21,070 |
|
|
|
46,765 |
|
|
|
38,765 |
|
|
Stellantis |
|
16,995 |
|
|
|
23,050 |
|
|
|
34,150 |
|
|
|
39,610 |
|
|
Tier 1 Customers |
|
16,083 |
|
|
|
15,607 |
|
|
|
33,392 |
|
|
|
27,582 |
|
|
Commercial and Other OEM
Customers |
|
13,134 |
|
|
|
16,190 |
|
|
|
27,960 |
|
|
|
33,602 |
|
|
Hyundai / Kia |
|
9,289 |
|
|
|
5,862 |
|
|
|
17,593 |
|
|
|
16,877 |
|
|
|
$ |
113,184 |
|
|
$ |
112,908 |
|
|
$ |
233,544 |
|
|
$ |
213,249 |
|
|
Other Income (Expense), net
Net other income (expense) included in the accompanying Condensed Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income primarily included foreign currency transaction gains and losses, realized and unrealized gains or losses on our Mexican peso currency forward contracts, net periodic pension and postretirement benefit costs, other than the service cost component, related to our Supplemental Executive Retirement Plan (“SERP”) and postretirement plans 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 described above to minimize earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. Unrealized gains and losses on the peso forward contracts recognized as a result of mark-to-market adjustments as of January 1, 2023 may or may not be realized in future periods, depending on the actual Mexican peso to U.S. dollar exchange rates experienced during the balance of the contract period. The Rabbi Trust assets fund our Amended and Restated Supplemental Executive Retirement Plan. The investments held in this Trust are considered trading securities.
17
The impact of these items for each of the periods presented was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
|
Foreign Currency Transaction (Loss) Gain |
$ |
(514 |
) |
|
$ |
104 |
|
|
$ |
(585 |
) |
|
$ |
243 |
|
|
Unrealized Gain (Loss) on Peso Forward
Contracts |
|
12 |
|
|
|
(126 |
) |
|
|
(23 |
) |
|
|
(224 |
) |
|
Realized Gain (Loss) on Peso Forward
Contracts, net |
|
307 |
|
|
|
(4 |
) |
|
|
545 |
|
|
|
135 |
|
|
Pension and Postretirement Plans Cost |
|
(131 |
) |
|
|
(125 |
) |
|
|
(260 |
) |
|
|
(249 |
) |
|
Rabbi Trust Gain |
|
389 |
|
|
|
48 |
|
|
|
23 |
|
|
|
70 |
|
|
Other |
|
(11 |
) |
|
|
3 |
|
|
|
59 |
|
|
|
51 |
|
|
|
$ |
52 |
|
|
$ |
(100 |
) |
|
$ |
(241 |
) |
|
$ |
26 |
|
|
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. The recorded liability balance involves judgement and estimates. Our liability estimate is based on analysis of historical warranty data as well as current trends and information, including our customers recent extension and /or expansion of their warranty programs. In recent fiscal periods, our largest customers have extended their warranty protection for their vehicles and have since demanded higher warranty cost sharing arrangements from their suppliers in their terms and conditions to purchase, including from STRATTEC. As additional information becomes available, actual results may differ from recorded estimates, which may require us to adjust the amount of our warranty provision.
During the quarter ended January 1, 2023, we received notice that a product we shipped failed to perform as the customer expected. While it is probable we will incur costs related to this matter, it is not possible to reasonably estimate those costs based on limited information available, including uncertainty as to STRATTEC's responsibility and the responsibility of STRATTEC's supplier in the matter, as of the date of filing of this Form 10-Q. As additional information related to this matter becomes available, we may need to record additional warranty provisions.
Income Taxes
Our effective tax rate was 40.8% and 6.2% for the three months ended January 1, 2023 and December 26, 2021, respectively. Our effective tax rate was 40.7% and 6.7% for the six month periods ended January 1, 2023 and December 26, 2021, respectively. The increased effective tax rate in the current year three and six month periods was due to the impact of available R&D and foreign tax credits on projected pre-tax book losses for the fiscal year. The reduced effective tax rate for the prior year three and six month periods was due to an increase in our foreign tax credits in the prior year periods as compared to the current year periods. Our effective tax rate differs from the statutory tax rate due to the application of the Global Intangible Low Taxed Income (GILTI) tax provisions, our available R&D tax credit and the non-controlling interest portion of our pre-tax income. The non-controlling interest portion impacts the effective tax rate as ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entities are taxed as partnerships for U.S. tax purposes.
(Loss) Earnings Per Share
Basic (loss) earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding during the applicable period. Diluted (loss) 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.
18
A reconciliation of the components of the basic and diluted per-share computations follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
|
|
Net Loss |
|
|
Shares |
|
|
Per-Share Amount |
|
|
Net Income |
|
|
Shares |
|
|
Per-Share Amount |
|
|
Basic (Loss) Earnings Per Share |
$ |
(1,839 |
) |
|
|
3,927 |
|
|
$ |
(0.47 |
) |
|
$ |
3,391 |
|
|
|
3,866 |
|
|
$ |
0.88 |
|
|
Stock Option and Restricted
Stock Awards |
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
42 |
|
|
|
|
|
Diluted (Loss) Earnings Per Share |
$ |
(1,839 |
) |
|
|
3,927 |
|
|
$ |
(0.47 |
) |
|
$ |
3,391 |
|
|
|
3,908 |
|
|
$ |
0.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
|
Net Loss |
|
|
Shares |
|
|
Per-Share Amount |
|
|
Net Income |
|
|
Shares |
|
|
Per-Share Amount |
|
Basic (Loss) Earnings Per Share |
$ |
(1,714 |
) |
|
|
3,913 |
|
|
$ |
(0.44 |
) |
|
$ |
3,489 |
|
|
|
3,848 |
|
|
$ |
0.91 |
|
Stock Option and Restricted
Stock Awards |
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
53 |
|
|
|
|
Diluted (Loss) Earnings Per Share |
$ |
(1,714 |
) |
|
|
3,913 |
|
|
$ |
(0.44 |
) |
|
$ |
3,489 |
|
|
|
3,901 |
|
|
$ |
0.89 |
|
The calculation of (loss) earnings per share excluded 125,871 share-based payment awards as of January 1, 2023 and 9,010 share-based payment awards as of December 26, 2021 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 January 1, 2023, the Board of Directors had designated 2 million shares of common stock available for the grant of awards under the plan. Remaining shares available to be granted under the plan as of January 1, 2023 were 129,359. 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 as determined by the Compensation Committee of the Board of Directors. 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 one year from the date of grant. Unvested restricted shares granted 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. Restricted stock grants vest 1 to 3 years after the date of grant as determined by the Compensation Committee of the Board of Directors.
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.
A summary of stock option activity under our stock incentive plan for the six months ended January 1, 2023 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Weighted
Average
Exercise Price |
|
|
Weighted
Average
Remaining
Contractual
Term (years) |
|
|
Aggregate
Intrinsic
Value
(in thousands) |
|
Balance, July 3, 2022 |
|
41,172 |
|
|
$ |
46.34 |
|
|
|
|
|
|
|
Exercised |
|
(4,251 |
) |
|
$ |
25.64 |
|
|
|
|
|
|
|
Balance, January 1, 2023 |
|
36,921 |
|
|
$ |
48.72 |
|
|
|
0.9 |
|
|
|
— |
|
Exercisable, January 1, 2023 |
|
36,921 |
|
|
$ |
48.72 |
|
|
|
0.9 |
|
|
|
— |
|
19
The intrinsic value of stock options exercised and the fair value of stock options that vested during the three and six month periods presented below were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
|
Intrinsic Value of Options Exercised |
$ |
— |
|
|
$ |
— |
|
|
$ |
31 |
|
|
$ |
331 |
|
|
Fair Value of Stock Options Vesting |
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
No options were granted during the six month periods ended January 1, 2023 or December 26, 2021.
A summary of restricted stock activity under our stock incentive plan for the six months ended January 1, 2023 follows:
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
Weighted
Average
Grant Date
Fair Value |
|
Nonvested Balance, July 3, 2022 |
|
85,100 |
|
|
|
$ |
31.89 |
|
Granted |
|
49,050 |
|
|
|
$ |
29.91 |
|
Vested |
|
(44,750 |
) |
|
|
$ |
29.00 |
|
Forfeited |
|
(450 |
) |
|
|
$ |
30.34 |
|
Nonvested Balance, January 1, 2023 |
|
88,950 |
|
|
|
$ |
32.09 |
|
As of January 1, 2023, all compensation cost related to outstanding stock options granted under our omnibus stock incentive plan has been recognized. As of January 1, 2023, there was approximately $1.9 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 1.1 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.
Pension and Postretirement Benefits
We have a noncontributory Supplemental Executive Retirement Plan (“SERP”), which is a nonqualified defined benefit plan. The SERP is funded through a Rabbi Trust with TMI Trust Company. Under the SERP, as amended December 31, 2013, 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 nonqualified 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 $3.3 million at both January 1, 2023 and at July 3, 2022. At both January 1, 2023 and July 3, 2022, $863,000 of the Rabbi Trust asset balance was included in Other Current Assets and the remaining balance was included in Other Long-Term Assets in the accompanying Condensed Consolidated Balance Sheets.
We also sponsor a postretirement health care plan for all current and future eligible U.S. retirees 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. Additionally, we sponsor a postretirement life plan for all U.S. salaried retirees who retired prior to October 1, 2001 and all U.S. hourly retirees who were hired prior to June 27, 2005 and retired prior to January 1, 2010. The benefit provides for a death benefit of $8,000, which is increased to $70,000 for disability retirees until reaching the age of 65, in which case the death benefit decreased to $8,000. The postretirement life plan is unfunded. See "Basis of Financial Statements" above for additional information regarding certain matters related to recording a liability adjustment for the death benefit owed to eligible participants under the postretirement life plan.
The service cost component of the net periodic benefit costs under these plans is allocated between Cost of Goods Sold and Engineering, Selling and Administrative Expenses while the remaining components of the net periodic benefit costs are included in Other Income (Expense), net in the accompanying Condensed Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income.
20
The following tables summarize the net periodic benefit cost recognized for each of the periods indicated under these plans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERP Benefits |
|
|
Postretirement Benefits |
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
Service Cost |
$ |
19 |
|
|
$ |
15 |
|
|
$ |
2 |
|
|
$ |
3 |
|
Interest Cost |
|
24 |
|
|
|
12 |
|
|
|
15 |
|
|
|
14 |
|
Amortization of Unrecognized Net Loss |
|
31 |
|
|
|
21 |
|
|
61 |
|
|
|
78 |
|
Net Periodic Benefit Cost |
$ |
74 |
|
|
$ |
48 |
|
|
$ |
78 |
|
|
$ |
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERP Benefits |
|
|
Postretirement Benefits |
|
|
Six Months Ended |
|
|
Six Months Ended |
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
|
January 1,
2023 |
|
|
December 26,
2021 |
|
Service Cost |
$ |
39 |
|
|
$ |
31 |
|
|
$ |
5 |
|
|
$ |
6 |
|
Interest Cost |
|
47 |
|
|
|
25 |
|
|
|
30 |
|
|
|
23 |
|
Amortization of Unrecognized Net Loss |
|
62 |
|
|
|
43 |
|
|
|
121 |
|
|
|
158 |
|
Net Periodic Benefit Cost |
$ |
148 |
|
|
$ |
99 |
|
|
$ |
156 |
|
|
$ |
187 |
|
Accumulated Other Comprehensive Loss
The following tables summarize the changes in accumulated other comprehensive loss (“AOCL”) for each period presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended January 1, 2023 |
|
|
Foreign
Currency
Translation
Adjustments |
|
|
Retirement
and
Postretirement
Benefit Plans |
|
|
Total |
|
Balance, October 2, 2022 |
$ |
17,471 |
|
|
$ |
1,785 |
|
|
$ |
19,256 |
|
Other Comprehensive Income Before Reclassifications |
|
(429 |
) |
|
|
— |
|
|
|
(429 |
) |
Net Other Comprehensive Income Before
Reclassifications |
|
(429 |
) |
|
|
— |
|
|
|
(429 |
) |
Reclassifications: |
|
|
|
|
|
|
|
|
Unrecognized Net Loss (A) |
|
— |
|
|
|
(92 |
) |
|
|
(92 |
) |
Income Tax |
|
— |
|
|
|
22 |
|
|
|
22 |
|
Net Reclassifications |
|
— |
|
|
|
(70 |
) |
|
|
(70 |
) |
Other Comprehensive Income |
|
(429 |
) |
|
|
(70 |
) |
|
|
(499 |
) |
Other Comprehensive Income Attributable to Non-
Controlling Interest |
|
(469 |
) |
|
|
— |
|
|
|
(469 |
) |
Balance, January 1, 2023 |
$ |
17,511 |
|
|
$ |
1,715 |
|
|
$ |
19,226 |
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 26, 2021 |
|
|
Foreign
Currency
Translation
Adjustments |
|
|
Retirement
and
Postretirement
Benefit Plans |
|
|
Total |
|
Balance, September 26, 2021 |
$ |
15,245 |
|
|
$ |
2,153 |
|
|
$ |
17,398 |
|
Other Comprehensive Loss Before Reclassifications |
|
544 |
|
|
|
— |
|
|
|
544 |
|
Net Other Comprehensive Loss Before
Reclassifications |
|
544 |
|
|
|
— |
|
|
|
544 |
|
Reclassifications: |
|
|
|
|
|
|
|
|
Unrecognized Net Loss (A) |
|
— |
|
|
|
(99 |
) |
|
|
(99 |
) |
Income Tax |
|
— |
|
|
|
23 |
|
|
|
23 |
|
Net Reclassifications |
|
— |
|
|
|
(76 |
) |
|
|
(76 |
) |
Other Comprehensive Loss |
|
544 |
|
|
|
(76 |
) |
|
|
468 |
|
Other Comprehensive Loss Attributable to Non-
Controlling Interest |
|
353 |
|
|
|
— |
|
|
|
353 |
|
Balance, December 26, 2021 |
$ |
15,436 |
|
|
$ |
2,077 |
|
|
$ |
17,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended January 1, 2023 |
|
|
Foreign
Currency
Translation
Adjustments |
|
|
Retirement
and
Postretirement
Benefit Plans |
|
|
Total |
|
Balance, July 3, 2022 |
$ |
16,733 |
|
|
$ |
1,855 |
|
|
$ |
18,588 |
|
Other Comprehensive Loss Before Reclassifications |
|
253 |
|
|
|
— |
|
|
|
253 |
|
Net Other Comprehensive Loss Before
Reclassifications |
|
253 |
|
|
|
— |
|
|
|
253 |
|
Reclassifications: |
|
|
|
|
|
|
|
|
Unrecognized Net Loss (A) |
|
— |
|
|
|
(183 |
) |
|
|
(183 |
) |
Income Tax |
|
— |
|
|
|
43 |
|
|
|
43 |
|
Net Reclassifications |
|
— |
|
|
|
(140 |
) |
|
|
(140 |
) |
Other Comprehensive Loss |
|
253 |
|
|
|
(140 |
) |
|
|
113 |
|
Other Comprehensive Income Attributable to Non-
Controlling Interest |
|
(525 |
) |
|
|
— |
|
|
|
(525 |
) |
Balance, January 1, 2023 |
$ |
17,511 |
|
|
$ |
1,715 |
|
|
$ |
19,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 26, 2021 |
|
|
Foreign
Currency
Translation
Adjustments |
|
|
Retirement
and
Postretirement
Benefit Plans |
|
|
Total |
|
Balance, June 27, 2021 |
$ |
14,683 |
|
|
$ |
2,231 |
|
|
$ |
16,914 |
|
Other Comprehensive Loss Before Reclassifications |
|
1,256 |
|
|
|
— |
|
|
|
1,256 |
|
Net Other Comprehensive Loss Before
Reclassifications |
|
1,256 |
|
|
|
— |
|
|
|
1,256 |
|
Reclassifications: |
|
|
|
|
|
|
|
|
Unrecognized Net Loss (A) |
|
— |
|
|
|
(201 |
) |
|
|
(201 |
) |
Income Tax |
|
— |
|
|
|
47 |
|
|
|
47 |
|
Net Reclassifications |
|
— |
|
|
|
(154 |
) |
|
|
(154 |
) |
Other Comprehensive Loss |
|
1,256 |
|
|
|
(154 |
) |
|
|
1,102 |
|
Other Comprehensive Loss Attributable to Non-
Controlling Interest |
|
503 |
|
|
|
— |
|
|
|
503 |
|
Balance, December 26, 2021 |
$ |
15,436 |
|
|
$ |
2,077 |
|
|
$ |
17,513 |
|
(A)Amounts reclassified are included in the computation of net periodic benefit cost, which is included in Other Income (Expense), net in the accompanying Condensed Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income. See Pension and Postretirement Benefits note to these Notes to Condensed Consolidated Financial Statements above.
22
Item 2
STRATTEC SECURITY CORPORATION AND SUBSIDIARIES