The accompanying notes are an integral part of these Condensed Consolidated Statements of Income and Comprehensive Income.
The accompanying notes are an integral part of these Condensed Consolidated Balance Sheets.
The accompanying notes are an integral part of these Condensed Consolidated Statements of Cash Flows.
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 exists to introduce a new generation of biometric security products based on the designs of Actuator Systems, our partner and the owner of the remaining ownership interest. Currently, we, along with our joint venture partner, are winding down and discontinuing 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 October 1, 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. 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. In addition, we are continuing to evaluate our contracts with customers, analyzing the impact, if any, on revenue from the sale of production parts. 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 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; however, we will decide which retrospective application to apply once our revenue standard assessment is finalized.
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 stateme
nts 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 for the quarter ended October 2, 2016 of $198,000 from cost of goods sold and $87,000 from engineering, selling and administrative expenses to Other Income (Expense), net.
Subsequent Event
In October 2017, we entered into additional contracts with Bank of Montreal that provide for monthly Mexican peso currency forward contracts covering the period January 12, 2018 through June 15, 2018. The contracts provide for the purchase of Mexican pesos at an average U.S. dollar / Mexican peso exchange rate of $19.50. The notional amount over the contract periods totals $3 million. See further discussion of Mexican peso forward contracts under Derivative Instruments included in these Notes to Condensed Consolidated Financial Statements.
Derivative Instruments
We own and operate manufacturing operations in Mexico. As a result, a portion of our manufacturing costs are incurred in Mexican pesos, which causes our earnings and cash flows to fluctuate due to changes in the U.S. dollar/Mexican peso exchange rate. We executed contracts with Bank of Montreal that provide for bi-weekly and monthly Mexican peso currency forward contracts for a portion of our estimated peso denominated operating costs. The peso currency forward contracts include settlement dates that began on October 16, 2015 and end on June 15, 2018. Additional contracts were executed subsequent to October 1, 2017. Refer to
7
Subsequent Event included in these Notes to Condensed Consolidated Financial Statements.
Our objective in entering into these currency forward contracts is to minimize our earnings volatilit
y 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 October 1, 2017 (thousands of dollars, except average forward contractual exchange rates):
|
|
Effective Dates
|
|
Notional Amount
|
|
|
Average Forward Contractual Exchange Rate
|
|
|
Fair Value
|
|
Buy MXP/Sell USD
|
|
October 13, 2017 - June 15, 2018
|
|
$
|
9,000
|
|
|
|
20.37
|
|
|
$
|
862
|
|
The fair market value of all outstanding Mexican peso forward contracts in the accompanying Condensed Consolidated Balance Sheets was as follows (thousands of dollars):
|
|
October 1,
2017
|
|
|
July 2,
2017
|
|
Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
Other Current Assets:
|
|
|
|
|
|
|
|
|
Mexican Peso Forward Contracts
|
|
$
|
862
|
|
|
$
|
1,121
|
|
The pre-tax effects of the Mexican peso forward contracts are included in Other Income (Expense), net on the accompanying Condensed Consolidated Statements of Income and Comprehensive Income and consisted of the following (thousands of dollars):
|
|
Three Months Ended
|
|
|
|
October 1,
2017
|
|
|
October 2,
2016
|
|
Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
Realized Gain (Loss)
|
|
$
|
458
|
|
|
$
|
(230
|
)
|
Unrealized Loss
|
|
$
|
(258
|
)
|
|
$
|
(899
|
)
|
Fair Value of Financial Instruments
The fair value of our cash and cash equivalents, accounts receivable, accounts payable and borrowings under our credit facility approximated book value as of October 1, 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 October 1, 2017 (in thousands):
|
|
Fair Value Inputs
|
|
|
|
Level 1 Assets:
Quoted Prices
In
Active Markets
|
|
|
Level 2 Assets:
Observable
Inputs Other
Than Market
Prices
|
|
|
Level 3 Assets:
Unobservable
Inputs
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rabbi Trust Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Index Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
Small Cap
|
|
$
|
400
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mid Cap
|
|
|
404
|
|
|
|
—
|
|
|
|
—
|
|
Large Cap
|
|
|
542
|
|
|
|
—
|
|
|
|
—
|
|
International
|
|
|
573
|
|
|
|
—
|
|
|
|
—
|
|
Fixed Income Funds
|
|
|
766
|
|
|
|
—
|
|
|
|
—
|
|
Cash and Cash Equivalents
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
Mexican Peso Forward Contracts
|
|
|
—
|
|
|
|
862
|
|
|
|
—
|
|
Total Assets at Fair Value
|
|
$
|
2,685
|
|
|
$
|
864
|
|
|
$
|
—
|
|
8
The Rabbi Trust assets fund our amended and restated supplemental executive retirement plan and are included in Other Long-term Assets in the accompanying Condensed Consolidated Balance Sheets. Refer to discussion of Mexican peso forward contracts under Derivative Instruments above. The fair value of the Mexican peso forward contracts considers the remaining term, current exchange rate, and interest rate differentials between the two currencies. There were no transfers between Level 1 and Level 2 assets during the three month period ended October 1, 2017.
Equity Earnings (Loss) of Joint Ventures
We hold a one-third interest in a joint venture company, VAST LLC, with WITTE and ADAC. VAST LLC exists to seek opportunities to manufacture and sell all three companies’ products in areas of the world outside of North America and Europe. Our investment in VAST LLC, for which we exercise significant influence but do not control and are not the primary beneficiary, is accounted for using the equity method.
The following are summarized statements of operations for VAST LLC (in thousands):
|
Three Months Ended
|
|
|
|
October 1,
2017
|
|
|
October 2,
2016
|
|
|
Net Sales
|
$
|
38,510
|
|
|
$
|
25,009
|
|
|
Cost of Goods Sold
|
|
29,013
|
|
|
|
20,093
|
|
|
Gross Profit
|
|
9,497
|
|
|
|
4,916
|
|
|
Engineering, Selling and Administrative Expenses
|
|
6,021
|
|
|
|
4,015
|
|
|
Income From Operations
|
|
3,476
|
|
|
|
901
|
|
|
Other Income, net
|
|
150
|
|
|
|
441
|
|
|
Income before Provision for Income Taxes
|
|
3,626
|
|
|
|
1,342
|
|
|
Provision for Income Taxes
|
|
522
|
|
|
|
172
|
|
|
Net Income
|
$
|
3,104
|
|
|
$
|
1,170
|
|
|
STRATTEC’s Share of VAST LLC Net Income
|
$
|
1,035
|
|
|
$
|
390
|
|
|
Intercompany Profit Elimination
|
|
—
|
|
|
|
—
|
|
|
STRATTEC’s Equity Earnings of VAST LLC
|
$
|
1,035
|
|
|
$
|
390
|
|
|
We hold a 51% ownership interest in a joint venture company, SAL LLC, which exists to introduce a new generation of biometric security products based upon the designs of Actuator Systems LLC, our partner. SAL LLC 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 October 1, 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 October 1, 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 for all periods presented in this report.
9
The fo
llowing are summarized statements of operations for SAL, LLC (in thousands):
|
|
Three Months Ended
|
|
|
|
|
October 1,
2017
|
|
|
October 2,
2016
|
|
|
Net Sales
|
|
$
|
108
|
|
|
$
|
100
|
|
|
Cost of Goods Sold
|
|
|
152
|
|
|
|
87
|
|
|
Gross Profit
|
|
|
(44
|
)
|
|
|
13
|
|
|
Engineering, Selling and Administrative Expenses
|
|
|
(10
|
)
|
|
|
337
|
|
|
Loss From Operations
|
|
|
(34
|
)
|
|
|
(324
|
)
|
|
Other Expense, net
|
|
|
(65
|
)
|
|
|
(12
|
)
|
|
Net Loss
|
|
$
|
(99
|
)
|
|
$
|
(336
|
)
|
|
STRATTEC’s Equity Loss of SAL LLC
|
|
$
|
(9
|
)
|
|
$
|
(328
|
)
|
|
Currently, we, along with our joint venture partner, are winding down and discontinuing 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
|
|
|
|
|
October 1,
2017
|
|
|
October 2,
2016
|
|
|
Sales to VAST LLC
|
|
$
|
596
|
|
|
$
|
50
|
|
|
Sales to SAL, LLC
|
|
$
|
35
|
|
|
$
|
75
|
|
|
Purchases from VAST LLC
|
|
$
|
45
|
|
|
$
|
31
|
|
|
Expenses Charged to VAST LLC
|
|
$
|
212
|
|
|
$
|
228
|
|
|
Expenses Charged from VAST LLC
|
|
$
|
218
|
|
|
$
|
409
|
|
|
Credit Facilities and Guarantees
STRATTEC has a $30 million secured revolving credit facility (the “STRATTEC Credit Facility”) with BMO Harris Bank N.A. ADAC-STRATTEC LLC has a $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, 2020. Borrowings under either credit facility are secured by our U.S. cash balances, accounts receivable, inventory, and fixed assets located in the U.S. Interest on borrowings under both credit facilities is at varying rates based, at our option, on the London Interbank Offering Rate (“LIBOR”) plus 1.0 percent or the bank’s prime rate. Both credit facilities contain a restrictive financial covenant that requires the applicable borrower to maintain a minimum net worth level. The ADAC-STRATTEC Credit Facility includes an additional restrictive financial covenant that requires the maintenance of a minimum fixed charge coverage ratio. The ADAC-STRATTEC Credit Facility also required that a capital contribution to ADAC-STRATTEC LLC of $6 million collectively from STRATTEC and ADAC be completed by September 30, 2016. This capital contribution was completed as required. STRATTEC’s portion of the capital contribution totaled $3.06 million. As of October 1, 2017, we were in compliance with all financial covenants required by these credit facilities.
Outstanding borrowings under the credit facilities were as follows (in thousands):
|
|
October 1,
2017
|
|
|
July 2,
2017
|
|
STRATTEC Credit Facility
|
|
$
|
20,000
|
|
|
$
|
16,000
|
|
ADAC-STRATTEC Credit Facility
|
|
$
|
20,000
|
|
|
$
|
14,000
|
|
10
Average outstanding borrowings and the weighted average interest rate under each credit facility referenced above were as follows for each period presented (in thousands):
|
|
Three Months Ended
|
|
|
|
Average
Outstanding Borrowings
|
|
|
Weighted Average Interest Rate
|
|
|
|
October 1,
2017
|
|
|
October 2,
2016
|
|
|
October 1,
2017
|
|
|
October 2,
2016
|
|
STRATTEC Credit Facility
|
|
$
|
18,143
|
|
|
$
|
12,159
|
|
|
|
2.3
|
%
|
|
|
1.5
|
%
|
ADAC-STRATTEC Credit Facility
|
|
$
|
18,022
|
|
|
$
|
8,473
|
|
|
|
2.2
|
%
|
|
|
1.5
|
%
|
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.
In 1995, we recorded a provision of $3 million for estimated costs to remediate an environmental contamination site at our Milwaukee facility. The facility was contaminated by a solvent spill, which occurred in 1985, from a former above ground solvent storage tank located on the east side of the facility. The reserve was originally established based on third party estimates to adequately cover the cost for active remediation of the contamination. Due to changing technology and related costs associated with active remediation of the contamination, in fiscal 2010, the reserve was adjusted based on updated third party estimates to adequately cover the cost for active remediation of the contamination. Additionally, in fiscal 2016, we obtained updated third party estimates for adequately covering the cost for active remediation of this contamination. Based upon the updated estimates, no further adjustment to the reserve was required. From 1995 through October 1, 2017, costs of approximately $568,000 have been incurred related to the installation of monitoring wells on the property and ongoing monitoring costs. We monitor and evaluate the site with the use of these groundwater monitoring wells. An environmental consultant samples these wells one or two times a year to determine the status of the contamination and the potential for remediation of the contamination by natural attenuation, the dissipation of the contamination over time to concentrations below applicable standards. If such sampling evidences a sufficient degree of and trend toward natural attenuation of the contamination at the site, we may be able to obtain a closure letter from the regulatory authorities resolving the issue without the need for active remediation. If a sufficient degree and trend toward natural attenuation is not evidenced by sampling, a more active form of remediation beyond natural attenuation may be required. The sampling has not yet satisfied all of the requirements for closure by natural attenuation. As a result, sampling continues and the reserve remains at an amount to reflect the estimated cost of active remediation. The reserve is not measured on a discounted basis. We believe, based on findings-to-date and known environmental regulations, that the remaining environmental reserve of $1.3 million at October 1, 2017 is adequate.
Shareholders’ Equity
A summary of activity impacting shareholders’ equity for the three month period ended October 1, 2017 was as follows (in thousands):
|
|
Total
Shareholders’
Equity
|
|
|
Equity
Attributable
to STRATTEC
|
|
|
Equity
Attributable
to
Non-
Controlling
Interest
|
|
Balance, July 2, 2017
|
|
$
|
172,714
|
|
|
$
|
151,088
|
|
|
$
|
21,626
|
|
Net Income
|
|
|
3,269
|
|
|
|
2,456
|
|
|
|
813
|
|
Dividend Declared
|
|
|
(508
|
)
|
|
|
(508
|
)
|
|
|
—
|
|
Dividend Declared – Non-controlling Interests of
Subsidiaries
|
|
|
(2,017
|
)
|
|
|
—
|
|
|
|
(2,017
|
)
|
Translation adjustments
|
|
|
297
|
|
|
|
375
|
|
|
|
(78
|
)
|
Stock Based Compensation
|
|
|
371
|
|
|
|
371
|
|
|
|
—
|
|
Pension and Postretirement Adjustment, Net of
tax
|
|
|
278
|
|
|
|
278
|
|
|
|
—
|
|
Employee Stock Purchases and Stock Option
Exercises
|
|
|
25
|
|
|
|
25
|
|
|
|
—
|
|
Balance, October 1, 2017
|
|
$
|
174,429
|
|
|
$
|
154,085
|
|
|
$
|
20,344
|
|
11
Other Income (Expense), net
Net other income (expense) included in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income primarily included foreign currency transaction gains and losses, realized and unrealized losses on our Mexican peso currency forward contracts, net periodic pension and postretirement benefit (costs) credits, other than the service cost component, and Rabbi Trust gains and losses. Foreign currency transaction gains and losses resulted from activity associated with foreign denominated assets held by our Mexican subsidiaries. We entered into the Mexican Peso currency forward contracts to minimize earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. Pension and postretirement plan impacts include the components of net periodic benefit cost other than the service cost component. The Rabbi Trust assets fund our amended and restated supplemental executive retirement plan. The investments held in this Trust are considered trading securities.
The impact of these items for each of the periods presented was as follows (in thousands):
|
|
Three Months Ended
|
|
|
|
|
October 1,
2017
|
|
|
October 2,
2016
|
|
|
Foreign Currency Transaction (Loss) Gain
|
|
$
|
(137
|
)
|
|
$
|
689
|
|
|
Unrealized Loss on Peso Forward Contracts
|
|
|
(258
|
)
|
|
|
(899
|
)
|
|
Realized Gain (Loss) on Peso Forward Contracts
|
|
|
458
|
|
|
|
(230
|
)
|
|
Pension and Postretirement Plans
|
|
|
112
|
|
|
|
(285
|
)
|
|
Rabbi Trust Gain
|
|
|
89
|
|
|
|
83
|
|
|
Other
|
|
|
(177
|
)
|
|
|
400
|
|
|
|
|
$
|
87
|
|
|
$
|
(242
|
)
|
|
Income Taxes
The income tax provisions for the three month periods ended October 1, 2017 and October 2, 2016 were affected by the non-controlling interest portion of our pre-tax income. The non-controlling interest impacts the effective tax rate as ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entities are taxed as partnerships for U.S. tax purposes. The reduction in our effective tax rate in the current year period as compared to the prior year period was due to a larger anticipated research and development tax credit for Federal tax purposes.
Earnings Per Share (EPS)
Basic earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding during the applicable period. Diluted earnings per share is computed on the basis of the weighted average number of shares of common stock plus the potential dilutive common shares outstanding during the applicable period using the treasury stock method. Potential dilutive common shares include outstanding stock options and unvested restricted stock awards.
A reconciliation of the components of the basic and diluted per-share computations follows (in thousands, except per share amounts):
|
Three Months Ended
|
|
|
|
|
|
|
|
October 1,
2017
|
|
|
|
|
|
|
|
|
|
|
October 2,
2016
|
|
|
|
|
|
|
|
Net income
|
|
|
Shares
|
|
|
Per-Share Amount
|
|
|
Net income
|
|
|
Shares
|
|
|
Per-Share Amount
|
|
|
Basic Earnings Per Share
|
$
|
2,456
|
|
|
|
3,611
|
|
|
$
|
0.68
|
|
|
$
|
1,542
|
|
|
|
3,576
|
|
|
$
|
0.43
|
|
|
Stock Option and Restricted
Stock Awards
|
|
—
|
|
|
|
70
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
85
|
|
|
|
|
|
|
Diluted Earnings Per Share
|
$
|
2,456
|
|
|
|
3,681
|
|
|
$
|
0.67
|
|
|
$
|
1,541
|
|
|
|
3,661
|
|
|
$
|
0.42
|
|
|
The calculation of earnings per share excluded 63,550 and 14,010 share-based payment awards as of October 1, 2017 and October 2, 2016, respectively, because their inclusion would have been anti-dilutive.
12
Stock-based Compensation
We maintain an omnibus stock incentive plan. This plan provides for the granting of stock options, shares of restricted stock and stock appreciation rights. As of October 1, 2017, the Board of Directors had designated 1,850,000 shares of common stock available for the grant of awards under the plan. Remaining shares available to be granted under the plan as of October 1, 2017 were 179,164. 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. Prior to August 2016, the restricted stock grants issued vest 3 to 5 years after the date of grant. As of August 2016, restricted stock grants issued vest 1 to 5 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.
There was no stock option activity under our stock incentive plan for the three months ended October 1, 2017. Options outstanding as of October 1, 2017 were as follows:
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding, July 2, 2017
|
|
|
138,508
|
|
|
$
|
29.23
|
|
|
|
|
|
|
|
|
|
Outstanding, October 1, 2017
|
|
|
138,508
|
|
|
$
|
29.23
|
|
|
|
4.2
|
|
|
$
|
1,967
|
|
Exercisable, October 1, 2017
|
|
|
138,508
|
|
|
$
|
25.71
|
|
|
|
4.2
|
|
|
$
|
1,967
|
|
The intrinsic value of stock options exercised and the fair value of stock options that vested during the three month periods presented below were as follows (in thousands):
|
|
Three Months Ended
|
|
|
|
October 1,
2017
|
|
|
October 2,
2016
|
|
Intrinsic Value of Options Exercised
|
|
$
|
—
|
|
|
$
|
71
|
|
Fair Value of Stock Options Vesting
|
|
$
|
315
|
|
|
$
|
596
|
|
No options were granted during the three month period ended October 1, 2017 or October 2, 2016.
A summary of restricted stock activity under our omnibus stock incentive plan for the three months ended October 1, 2017 was as follows:
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Nonvested Balance, July 2, 2017
|
|
|
75,850
|
|
|
$
|
60.61
|
|
Granted
|
|
|
27,950
|
|
|
$
|
33.30
|
|
Vested
|
|
|
(30,400
|
)
|
|
$
|
62.99
|
|
Forfeited
|
|
|
(2,175
|
)
|
|
$
|
56.91
|
|
Nonvested Balance, October 1, 2017
|
|
|
71,225
|
|
|
$
|
48.99
|
|
13
As of October 1, 2017, all compensation cost related to outstanding stock options
granted under our omnibus stock incentive plan has been recognized. As of October 1, 2017, there was approximately $1.9 million of total unrecognized compensation cost related to unvested restricted stock grants outstanding under the plan. This cost is exp
ected 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 qualified, noncontributory defined benefit pension plan (“Qualified Pension Plan”) covering substantially all U.S. associates employed by us prior to January 1, 2010. Benefits under the Qualified Pension Plan are based on credited years of service and final average compensation. Our policy is to fund the Qualified Pension Plan with at least the minimum actuarially computed annual contribution required under the Employee Retirement Income Security Act of 1974 (ERISA). Plan assets consist primarily of listed equity and fixed income securities. Effective December 31, 2009, the Board of Directors amended the Qualified Pension Plan to freeze benefit accruals and future eligibility. The Board of Directors has approved the termination of the Qualified Pension Plan with a proposed termination date of December 31, 2017. The termination of the Qualified Pension Plan is contingent upon receipt of an IRS determination letter that the Qualified Pension Plan was qualified upon termination and approval by the Pension Benefit Guaranty Corporation (“PBGC”). The date the termination will be approved and benefits can be distributed will not be known until we receive all required regulatory approvals. On or about October 13, 2017, we submitted a request to the IRS for a determination letter that the Qualified Pension Plan is qualified upon termination prior to the end of the 2017 calendar year. Depending on the time receipt of IRS and PBGC approval, we intend to distribute Qualified Pension Plan assets prior to the end of the 2018 calendar year. Additionally, in connection with preparing for the termination of the Qualified Pension Plan, we have amended the plan to provide that participants are 100 percent vested in their accrued benefits as of the effective date of the plan termination, to adopt a new standard for disability benefits that will apply when the plan’s assets are distributed due to the termination, to add a lump sum distribution for employees and terminated vested participants who are not in payment status when Qualified Pension Plan assets are distributed due to the termination and to make certain other conforming amendments to the Qualified Pension Plan to comply with applicable laws that may be required by the IRS or may be deemed necessary or advisable to improve the administration of the Qualified Pension Plan or facilitate its termination and liquidation. We will contribute to the Trust Fund for the Qualified Pension Plan as necessary to ensure there are sufficient assets to provide all Qualified Pension Plan benefits as required by the PBGC. The financial impact of the Qualified Pension Plan termination will be recognized as a settlement of the Qualified Pension Plan liabilities. The settlement date and related financial impact have not yet been determined.
We have historically had in place a noncontributory supplemental executive retirement plan (“SERP”), which prior to January 1, 2014 was a nonqualified defined benefit plan that essentially mirrored the Qualified Pension Plan, but provided benefits in excess of certain limits placed on our Qualified Pension Plan by the Internal Revenue Code. As noted above, we froze our Qualified Pension Plan effective as of December 31, 2009 and the SERP provided benefits to participants as if the Qualified Pension Plan had not been frozen. Because the Qualified Pension Plan was frozen and because new employees were not eligible to participate in the Qualified Pension Plan, our Board of Directors adopted amendments to the SERP on October 8, 2013 that were effective as of December 31, 2013 to simplify the SERP calculation. The SERP is funded through a Rabbi Trust with BMO Harris Bank N.A. Under the amended SERP, participants received an accrued lump-sum benefit as of December 31, 2013 which was credited to each participant’s account. Subsequent to December 31, 2013, each eligible participant receives a supplemental retirement benefit equal to the foregoing lump sum benefit, plus an annual benefit accrual equal to 8 percent of the participant’s base salary and cash bonus, plus annual credited interest on the participant’s account balance. All then current participants as of December 31, 2013 are fully vested in their account balances with any new individuals participating in the SERP effective on or after January 1, 2014 being subject to a five year vesting period. The SERP, which is considered a defined benefit plan under applicable rules and regulations of the Internal Revenue Code, will continue to be funded through use of a Rabbi Trust to hold investment assets to be used in part to fund any future required lump sum benefit payments to participants. The Rabbi Trust assets had a value of $2.7 million at October 1, 2017 and $2.6 million at July 2, 2017, respectively, and are included in Other Long-Term Assets in the accompanying Condensed Consolidated Balance Sheets.
We also sponsor a postretirement health care plan for all U.S. associates hired prior to June 1, 2001. The expected cost of retiree health care benefits is recognized during the years the associates who are covered under the plan render service. Effective January 1, 2010, an amendment to the postretirement health care plan limited the benefit for future eligible retirees to $4,000 per plan year and the benefit is further subject to a maximum five year coverage period based on the associate’s retirement date and age. The postretirement health care plan is unfunded.
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 Income and Comprehensive Income.
14
The following table summarizes the net periodic benefit cost recognized for each of the periods indicated under these plans (in thousands):
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
October 1,
2017
|
|
|
October 2,
2016
|
|
|
October 1,
2017
|
|
|
October 2,
2016
|
|
Service cost
|
|
$
|
17
|
|
|
$
|
14
|
|
|
$
|
3
|
|
|
$
|
3
|
|
Interest cost
|
|
|
964
|
|
|
|
981
|
|
|
11
|
|
|
|
14
|
|
Expected return on plan assets
|
|
|
(1,528
|
)
|
|
|
(1,464
|
)
|
|
|
—
|
|
|
|
—
|
|
Amortization of prior service cost (credit)
|
|
3
|
|
|
|
3
|
|
|
|
(191
|
)
|
|
|
(191
|
)
|
Amortization of unrecognized net loss
|
|
509
|
|
|
|
807
|
|
|
120
|
|
|
|
135
|
|
Net periodic benefit cost (credit)
|
|
$
|
(35
|
)
|
|
$
|
341
|
|
|
$
|
(57
|
)
|
|
$
|
(39
|
)
|
No voluntary contributions were made to the Qualified Pension Plan during the three month period ended October 1, 2017. Voluntary contributions of $3 million were made to the Qualified Pension Plan during the three month period ended October 2, 2016. Additional contributions totaling $3 million are anticipated to be made during the remainder of fiscal 2018.
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 October 1, 2017
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Retirement
and
Postretirement
Benefit Plans
|
|
|
Total
|
|
Balance, July 2, 2017
|
|
$
|
14,138
|
|
|
$
|
18,750
|
|
|
$
|
32,888
|
|
Other comprehensive loss before reclassifications
|
|
|
(297
|
)
|
|
|
—
|
|
|
|
(297
|
)
|
Income tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net other comprehensive loss before
reclassifications
|
|
|
(297
|
)
|
|
|
—
|
|
|
|
(297
|
)
|
Reclassifications:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credits (A)
|
|
|
—
|
|
|
|
188
|
|
|
|
188
|
|
Actuarial gains (A)
|
|
|
—
|
|
|
|
(629
|
)
|
|
|
(629
|
)
|
Total reclassifications before tax
|
|
|
—
|
|
|
|
(441
|
)
|
|
|
(441
|
)
|
Income tax
|
|
|
—
|
|
|
|
163
|
|
|
|
163
|
|
Net reclassifications
|
|
|
—
|
|
|
|
(278
|
)
|
|
|
(278
|
)
|
Other comprehensive loss (income)
|
|
|
(297
|
)
|
|
|
(278
|
)
|
|
|
(575
|
)
|
Other comprehensive loss attributable to non-
controlling interest
|
|
|
78
|
|
|
|
—
|
|
|
|
78
|
|
Balance, October 1, 2017
|
|
$
|
13,763
|
|
|
$
|
18,472
|
|
|
$
|
32,235
|
|
15
|
|
Three Months Ended October 2, 2016
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Retirement
and
Postretirement
Benefit Plans
|
|
|
Total
|
|
Balance, July 3, 2016
|
|
$
|
13,155
|
|
|
$
|
24,518
|
|
|
$
|
37,673
|
|
Other comprehensive loss before reclassifications
|
|
|
1,623
|
|
|
|
—
|
|
|
|
1,623
|
|
Income tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net other comprehensive loss before
Reclassifications
|
|
|
1,623
|
|
|
|
—
|
|
|
|
1,623
|
|
Reclassifications:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credits (A)
|
|
|
—
|
|
|
|
188
|
|
|
|
188
|
|
Unrecognized net loss (A)
|
|
|
—
|
|
|
|
(941
|
)
|
|
|
(941
|
)
|
Total reclassifications before tax
|
|
|
—
|
|
|
|
(753
|
)
|
|
|
(753
|
)
|
Income tax
|
|
|
—
|
|
|
|
278
|
|
|
|
278
|
|
Net reclassifications
|
|
|
—
|
|
|
|
(475
|
)
|
|
|
(475
|
)
|
Other comprehensive loss (income)
|
|
|
1,623
|
|
|
|
(475
|
)
|
|
|
1,148
|
|
Other comprehensive loss attributable to non-
controlling interest
|
|
|
110
|
|
|
|
—
|
|
|
|
110
|
|
Balance, October 2, 2016
|
|
$
|
14,668
|
|
|
$
|
24,043
|
|
|
$
|
38,711
|
|
(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 Income and Comprehensive Income. See Pension and Postretirement Benefits note to these Notes to Condensed Consolidated Financial Statements above.
|
16
Item 2
STRATTEC SECURITY CORPORATION AND SUBSIDIARIES