The accompanying Notes to Financial Statements are an integral part of these Consolidated Statements of (Loss) Income and Comprehensive Income.
The accompanying Notes to Financial Statements are an integral part of these Consolidated Balance Sheets.
The accompanying Notes to Financial Statements are an integral part of these Consolidated Statements of Shareholders’ Equity.
The accompanying Notes to Financial Statements are an integral part of these Consolidated Statements of Cash Flows.
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 side 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 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 provide full service and aftermarket support for each VAST Automotive Group partner’s products. We also maintain a 51 percent interest in a joint venture, STRATTEC Advanced Logic, LLC (“SAL LLC”), which was established to introduce a new generation of commercial and residential biometric security products based on the designs of Actuator Systems, our partner and the owner of the remaining ownership interest. The business of SAL LLC has been wound down to sell only commercial biometric locks.
The accompanying 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 in 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 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. SAL LLC is located in El Paso, Texas. We have only one reporting segment.
The significant accounting policies followed in the preparation of these financial statements, as summarized in the following paragraphs, are in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP).
Principles of Consolidation and Presentation: The accompanying consolidated financial statements include the accounts of STRATTEC SECURITY CORPORATION, its wholly owned Mexican subsidiary and its majority owned subsidiaries. Equity investments for which STRATTEC exercises significant influence but does not control and is not the primary beneficiary are accounted for using the equity method. All significant inter-company transactions and balances have been eliminated.
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. We implemented the new standard effective July 2, 2018, the first day of our 2019 fiscal year, using the modified retrospective approach to transition to the new standard. We assessed our revenue stream based upon the provisions of our customer contracts in effect on the July 2, 2018 effective date to determine the cumulative effect of initially applying the guidance. Based on our assessment, the adoption date financial statement impact was limited to a balance sheet reclassification required to establish the contract liability concept provided for in the guidance. As such, comparative financial information for reporting periods prior to July 2, 2018 has not been restated and continues to be reported in accordance with our revenue recognition policies prior to the adoption of the new guidance. Additionally, there was no cumulative effect adjustment required to be recorded to our retained earnings. The effect of the reclassification changes made to our July 2, 2018 Consolidated Balance Sheet increased Receivables, net by $1.2 million, with a corresponding increase to Accrued Liabilities: Other. Refer to the discussion of Revenue Recognition included in these Notes to 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 expect the adoption of this guidance will result in the recording of one operating lease asset and lease liability of approximately $4.1 million as of July 1, 2019. Additionally, we expect no cumulative effect adjustment required to be recorded to our retained earnings.
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. The adoption of this pronouncement did not have a material impact on our consolidated financial statements.
31
In August 2017, the FASB issued an update to the accounting for hedging activities. The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness, due to a difference between the economic terms of the hedge instrument and the underlying transaction, and generally requires, for qualifying hedges, the entire change in the fair value of a hedging instrument to be presented in the same line as the hedged item in the consolidated statement of income. The standard also modifies the accounting for components excluded from the assessment of hedge effectiveness and simplifies the application of hedge accounting in certain situations. 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 guidance will have a material impact on our consolidated financial statements.
In February 2018, the FASB issued guidance on the reclassification of certain tax effects from accumulated other comprehensive income. The guidance will permit entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of U.S. tax reform to retained earnings. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within these fiscal years. We elected early adoption beginning effective December 30, 2018. The adoption of the guidance resulted in the reclassification of $4.0 million from accumulated other comprehensive income to retained earnings during the quarter ended December 30, 2018.
In June 2018, the FASB issued an update to the accounting for nonemployee share-based payment accounting. The update aligns measurement and classification guidance for share-based payments to nonemployees with the guidance applicable to employees. Under the new guidance, the measurement of equity-classified nonemployee awards will be fixed at the date of grant. 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 guidance will have a material impact on our consolidated financial statements.
Fiscal Year: Our fiscal year ends on the Sunday nearest June 30. The years ended June 30, 2019 and July 1, 2018 are each comprised of 52 weeks.
Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses for the periods presented. These estimates and assumptions could also affect the disclosure of contingencies. Actual results and outcomes may differ from management’s estimates and assumptions.
Cash and Cash Equivalents: Cash and cash equivalents include all short-term investments with an original maturity of three months or less due to the short-term nature of the instruments. Excess cash balances are placed in short-term commercial paper.
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. During the years ended June 30, 2019 and July 1, 2018, we had contracts with Bank of Montreal that provided for monthly Mexican peso currency forward contracts for a portion of our estimated peso denominated operating costs. Our objective in entering into these currency forward contracts is to minimize our earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. The Mexican peso forward contracts are not used for speculative purposes and are not designated as hedges. As a result, all currency forward contracts are recognized in our accompanying consolidated financial statements at fair value and changes in the fair value are reported in current earnings as part of Other (Expense) Income, net. No Mexican peso forward contracts were outstanding as of June 30, 2019.
The fair market value of all outstanding Mexican peso forward contracts in the accompanying Consolidated Balance Sheets was as follows (thousands of dollars):
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Other current liabilities:
|
|
|
|
|
|
|
|
|
Mexican peso forward contracts
|
|
$
|
—
|
|
|
$
|
39
|
|
The pre-tax effects of the Mexican peso forward contracts on the accompanying Consolidated Statements of (Loss) Income and Comprehensive Income consisted of the following (thousands of dollars):
|
|
Other (Expense) Income, net
|
|
|
|
Years Ended
|
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
Realized gain
|
|
$
|
485
|
|
|
$
|
1,140
|
|
Unrealized gain (loss)
|
|
$
|
39
|
|
|
$
|
(1,160
|
)
|
32
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 their book value as of June 30, 2019 and July 1, 2018. 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 for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. There is an established fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable. Level 1 – Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 – Inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly. These are typically obtained from readily-available pricing sources for comparable instruments. Level 3 – Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own assumptions of the data that market participants would use in pricing the asset or liability, based on the best information available in the circumstances. The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2019 and July 1, 2018 (thousands of dollars):
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rabbi Trust assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock index funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small cap
|
|
$
|
276
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
276
|
|
|
$
|
298
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
298
|
|
Mid cap
|
|
|
293
|
|
|
|
—
|
|
|
|
—
|
|
|
|
293
|
|
|
|
286
|
|
|
|
—
|
|
|
|
—
|
|
|
|
286
|
|
Large cap
|
|
|
589
|
|
|
|
—
|
|
|
|
—
|
|
|
|
589
|
|
|
|
562
|
|
|
|
—
|
|
|
|
—
|
|
|
|
562
|
|
International
|
|
|
864
|
|
|
|
—
|
|
|
|
—
|
|
|
|
864
|
|
|
|
793
|
|
|
|
—
|
|
|
|
—
|
|
|
|
793
|
|
Fixed income funds
|
|
|
913
|
|
|
|
—
|
|
|
|
—
|
|
|
|
913
|
|
|
|
850
|
|
|
|
—
|
|
|
|
—
|
|
|
|
850
|
|
Cash and cash equivalents
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
Total assets at fair value
|
|
$
|
2,935
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
2,938
|
|
|
$
|
2,789
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
2,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican peso forward contracts
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
39
|
|
|
$
|
-
|
|
|
$
|
39
|
|
The Rabbi Trust assets fund our supplemental executive retirement plan and are included in Other Long-Term Assets in the accompanying 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 2019 or 2018.
Receivables: Receivables consist primarily of trade receivables due from Original Equipment Manufacturers in the automotive industry and locksmith/dealership distributors relating to our service and aftermarket sales. We evaluate the collectability of receivables based on a number of factors. An allowance for doubtful accounts is recorded for significant past due receivable balances based on a review of the past due items, general economic conditions and the industry as a whole. The allowance for doubtful accounts totaled $500,000 at June 30, 2019 and July 1, 2018.
Inventories: Inventories are comprised of material, direct labor and manufacturing overhead, and are stated at net realizable value using the first-in, first-out (“FIFO”) cost method of accounting. Inventories consisted of the following (thousands of dollars):
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Finished products
|
|
$
|
11,582
|
|
|
$
|
13,410
|
|
Work in process
|
|
|
10,529
|
|
|
|
10,059
|
|
Purchased materials
|
|
|
29,376
|
|
|
|
27,185
|
|
|
|
|
51,487
|
|
|
|
50,654
|
|
Excess and obsolete reserve
|
|
|
(4,225
|
)
|
|
|
(4,000
|
)
|
Inventories, net
|
|
$
|
47,262
|
|
|
$
|
46,654
|
|
33
We record a reserve for excess and obsolete inventory based on historical and estimated future demand and market conditions. The reserve level is determined by comparing inventory levels of individual materials and parts to historical usage and estimated future sales by analyzing the age of the inventory in order to identify specific materials and parts that are unlikely to be sold. Technical obsolescence and other known factors are also considered in evaluating the reserve level. The activity related to the excess and obsolete inventory reserve was as follows (thousands of dollars):
|
|
Balance,
Beginning
of Year
|
|
|
Provision
Charged to
Expense
|
|
|
Amounts
Written Off
|
|
|
Balance,
End of Year
|
|
Year ended June 30, 2019
|
|
$
|
4,000
|
|
|
$
|
799
|
|
|
$
|
574
|
|
|
$
|
4,225
|
|
Year ended July 1, 2018
|
|
$
|
4,510
|
|
|
$
|
1,002
|
|
|
$
|
1,512
|
|
|
$
|
4,000
|
|
Customer Tooling in Progress: We incur costs related to tooling used in component production and assembly. Costs for development of certain tooling, which will be directly reimbursed by the customer whose parts are produced from the tool, are accumulated on the balance sheet and are then billed to the customer. The accumulated costs are billed upon formal acceptance by the customer of products produced with the individual tool. Other tooling costs are not directly reimbursed by the customer. These costs are capitalized and amortized over the life of the related product based on the fact that the related tool will be used over the life of the supply arrangement. To the extent that estimated costs exceed expected reimbursement from the customer we recognize a loss.
Property, Plant and Equipment: Property, plant and equipment are stated at cost. Property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets as follows:
Classification
|
|
Expected
Useful Lives
|
Land improvements
|
|
20 years
|
Buildings and improvements
|
|
15 to 35 years
|
Machinery and equipment
|
|
3 to 15 years
|
Property, plant and equipment consisted of the following (thousands of dollars):
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Land and improvements
|
|
$
|
5,679
|
|
|
$
|
5,545
|
|
Buildings and improvements
|
|
|
35,742
|
|
|
|
34,483
|
|
Machinery and equipment
|
|
|
246,000
|
|
|
|
229,688
|
|
|
|
|
287,421
|
|
|
|
269,716
|
|
Less: accumulated depreciation
|
|
|
(169,301
|
)
|
|
|
(153,174
|
)
|
|
|
$
|
118,120
|
|
|
$
|
116,542
|
|
Depreciation expense was as follows for the periods indicated (thousands of dollars):
Fiscal Year
|
|
Depreciation
Expense
|
|
2019
|
|
$
|
17,159
|
|
2018
|
|
$
|
14,544
|
|
The gross and net book value of property, plant and equipment located outside of the United States, primarily in Mexico, were as follows (thousands of dollars):
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Gross book value
|
|
$
|
157,551
|
|
|
$
|
140,681
|
|
Net book value
|
|
$
|
80,922
|
|
|
$
|
74,364
|
|
34
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment recognized is measured by the excess of the carrying amount of the asset over the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less estimated costs to sell. There were no impairments recorded in the years ended June 30, 2019 or July 1, 2018.
Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and betterments, which significantly extend the useful lives of existing plant and equipment, are capitalized and depreciated. Upon retirement or disposition of plant and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in income.
Supplier Concentrations: The following inventory purchases were made from major suppliers during each fiscal year noted:
Fiscal Year
|
|
Percentage of
Inventory
Purchases
|
|
|
Number of
Suppliers
|
|
2019
|
|
|
39
|
%
|
|
|
7
|
|
2018
|
|
|
32
|
%
|
|
|
5
|
|
We have long-term contracts or arrangements with most of our suppliers to guarantee the availability of raw materials and component parts.
Labor Concentrations: We had approximately 4,209 full-time associates of which approximately 250 or 5.9 percent were represented by a labor union at June 30, 2019. The associates represented by a labor union account for all production associates at our Milwaukee facility. The current contract with the unionized associates is effective through September 17, 2021.
Revenue Recognition: 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.
Revenue Recognition:
Our contracts with customers under long-term supply agreements do not commit the customer to a specified quantity of parts. However, we are generally required to fulfill our customers’ purchasing requirements for the production life of the vehicle. Contracts do not become a performance obligation until we receive either a purchase order and/or customer release for a specific number of parts at a specified price. While long-term supply agreements may range from four to six years for new vehicle production and ten to fifteen subsequent years for service parts production, contracts may be terminated by customers at any time. Historically, terminations have been minimal. Contracts may also provide for annual price reductions over the production life of the vehicle, and prices are adjusted on an ongoing basis to reflect changes in product content/cost and other commercial factors.
Revenue is recognized at a point in time when control of the parts produced are transferred to the customer according to the terms of the contract, which is usually when the parts are shipped or delivered to the customer’s premises. Customers are generally invoiced upon shipment or delivery and payment generally occurs within 45 to 90 days after the shipment date. The amount of revenue recognized reflects the consideration that we expect to be entitled to receive in exchange for those products based on purchase orders, annual price reductions and ongoing price adjustments, some of which are accounted for as variable consideration. We use the most likely amount method, the single most likely outcome of the contract, to estimate the amount to which we expect to be entitled. There were no significant changes to our estimates of variable consideration during the reporting periods referenced in our accompanying financial statements and significant changes to our estimates of variable consideration are not expected in future periods.
We do not have an enforceable right to payment at any time prior to when the parts are shipped or delivered to the customer. Therefore, we recognize revenue at the point in time we satisfy a performance obligation by transferring control of a part to a customer. Amounts billed to customers related to shipping and handling costs are included in Net Sales in the accompanying Consolidated Statements of (Loss) Income and Comprehensive Income. Shipping and handling costs are accounted for as fulfillment costs and are included in Cost of Goods Sold in the accompanying Consolidated Statements of (Loss) Income and Comprehensive Income.
35
Tooling and Pre-Production Engineering Costs Related to Long-Term Supply Arrangements:
We incur pre-production engineering and tooling costs related to the products produced for our customers under long-term supply agreements. Customer reimbursements for tooling and pre-production engineering activities that are part of a long-term supply arrangement are accounted for as a reduction of cost in accordance with ASC 340, Other Assets and Deferred Costs. Pre-production costs related to long-term supply agreements with a contractual guarantee for reimbursement are included in Other Current Assets in the accompanying Consolidated Balance Sheets. We expense all pre-production engineering costs for which reimbursement is not contractually guaranteed by the customer. All pre-production tooling costs related to customer-owned tools for which reimbursement is not contractually guaranteed by the customer or for which we do not have a non-cancelable right to use the tooling is also expensed when incurred.
Receivables, net:
Receivables, net include amounts billed and currently due from customers. We maintain an allowance for doubtful accounts to provide for estimated amounts of receivables not expected to be collected. We continually assess our receivables for collectability and any allowance is recorded based upon age of the outstanding receivables, historical payment experience, customer creditworthiness and general economic conditions.
Contract Balances:
We have no material contract assets as of June 30, 2019. Contract liability balances primarily include discounts recognized as a reduction in sales at the point of revenue recognition, but which will be applied by the customer agreement after the end of the reporting period. The activity related to contract liability balances during the year ended June 30, 2019 was as follows (thousands of dollars):
Balance, July 1, 2018
|
|
$
|
1,195
|
|
Discounts Recorded as a Reduction in Sales
|
|
|
1,858
|
|
Payments of Discounts to Customers
|
|
|
(1,654
|
)
|
Other
|
|
|
(467
|
)
|
Balance, June 30, 2019
|
|
$
|
932
|
|
Refer to Product Sales and Sales and Receivable Concentration included herein for revenue by product group and revenue by customer.
Research and Development Costs: Expenditures relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed as incurred. Research and development expenditures were approximately $13.8 million in 2019 and $4.8 million in 2018.
Other (Expense) Income, Net: Net other (expense) income included in the accompanying Consolidated Statements of (Loss) Income and Comprehensive Income primarily included foreign currency transaction gains and losses, realized and unrealized gains and losses on our Mexican peso currency forward contracts, the components of net periodic benefit cost other than the service cost component related to our pension and postretirement plans and Rabbi Trust gains. 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 during fiscal 2018 and 2019 to minimize earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. The Rabbi Trust assets fund our amended and restated supplemental executive retirement plan. The investments held in the Trust are considered trading securities. The impact of these items for the periods presented was as follows (thousands of dollars):
|
|
Years Ended
|
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Foreign currency transaction (loss) gain
|
|
$
|
(397
|
)
|
|
$
|
549
|
|
Rabbi Trust gain
|
|
|
146
|
|
|
|
193
|
|
Unrealized gain (loss) on Mexican peso forward contracts
|
|
|
39
|
|
|
|
(1,160
|
)
|
Realized gain on Mexican peso forward contracts
|
|
|
485
|
|
|
|
1,140
|
|
Pension and postretirement plans (cost) credit
|
|
|
(689
|
)
|
|
|
447
|
|
Other
|
|
|
79
|
|
|
|
(149
|
)
|
|
|
$
|
(337
|
)
|
|
$
|
1,020
|
|
36
Warranty Reserve: 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 warranty liability balance involves judgment and estimates. Our liability estimate is based on an 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. The 2018 warranty provision included costs for various known or expected warranty issues as of July 1, 2018 for which amounts were reasonably estimable. As additional information becomes available, actual results may differ from recorded estimates, which may require us to adjust the amount of our warranty provision. Changes in the warranty reserve were as follows (thousands of dollars):
|
|
Balance,
Beginning
of Year
|
|
|
Provision
Charged
to Expense
|
|
|
Payments
|
|
|
Balance,
End of Year
|
|
Year ended June 30, 2019
|
|
$
|
7,800
|
|
|
$
|
559
|
|
|
$
|
459
|
|
|
$
|
7,900
|
|
Year ended July 1, 2018
|
|
$
|
5,550
|
|
|
$
|
2,617
|
|
|
$
|
367
|
|
|
$
|
7,800
|
|
Foreign Currency Translation: The financial statements of our foreign subsidiaries and equity investees are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and the average exchange rate for each applicable period for sales, costs and expenses. Foreign currency translation adjustments are included as a component of accumulated other comprehensive loss. Foreign currency transaction gains and losses are included in other (expense) income, net in the accompanying Consolidated Statements of (Loss) Income and Comprehensive Income.
Accumulated Other Comprehensive Loss: Accumulated other comprehensive loss (“AOCL”) was comprised of the following (thousands of dollars):
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Unrecognized pension and postretirement benefit
liabilities, net of tax
|
|
$
|
2,251
|
|
|
$
|
18,148
|
|
Foreign currency translation, net of tax
|
|
|
16,317
|
|
|
|
15,291
|
|
|
|
$
|
18,568
|
|
|
$
|
33,439
|
|
The following tables summarize the changes in AOCL for the years ended June 30, 2019 and July 1, 2018 (thousands of dollars):
|
|
Year Ended June 30, 2019
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Retirement
and
Postretirement
Plans
|
|
|
Total
|
|
Balance July 1, 2018
|
|
$
|
15,291
|
|
|
$
|
18,148
|
|
|
$
|
33,439
|
|
Other comprehensive loss before reclassifications
|
|
|
545
|
|
|
|
170
|
|
|
|
715
|
|
Income Tax
|
|
|
10
|
|
|
|
(40
|
)
|
|
|
(30
|
)
|
Net other comprehensive loss before
Reclassifications
|
|
|
555
|
|
|
|
130
|
|
|
|
685
|
|
Reclassifications:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension termination settlements (A)
|
|
|
—
|
|
|
|
(25,668
|
)
|
|
|
(25,668
|
)
|
Prior service credits (A)
|
|
|
—
|
|
|
|
439
|
|
|
|
439
|
|
Actuarial gains (A)
|
|
|
—
|
|
|
|
(1,262
|
)
|
|
|
(1,262
|
)
|
Total reclassifications before tax
|
|
|
—
|
|
|
|
(26,491
|
)
|
|
|
(26,491
|
)
|
Income Tax
|
|
|
—
|
|
|
|
6,500
|
|
|
|
6,500
|
|
Net reclassifications
|
|
|
—
|
|
|
|
(19,991
|
)
|
|
|
(19,991
|
)
|
Other comprehensive loss (income)
|
|
|
555
|
|
|
|
(19,861
|
)
|
|
|
(19,306
|
)
|
Other comprehensive loss attributable
|
|
|
|
|
|
|
|
|
|
|
|
|
to non-controlling interest
|
|
|
(388
|
)
|
|
|
—
|
|
|
|
(388
|
)
|
Reclassification of stranded tax effects
|
|
|
83
|
|
|
|
3,964
|
|
|
|
4,047
|
|
Balance June 30, 2019
|
|
$
|
16,317
|
|
|
$
|
2,251
|
|
|
$
|
18,568
|
|
37
|
|
Year ended July 1, 2018
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Retirement
and
Postretirement
Plans
|
|
|
Total
|
|
Balance July 2, 2017
|
|
$
|
14,138
|
|
|
$
|
18,750
|
|
|
$
|
32,888
|
|
Other comprehensive loss before reclassifications
|
|
|
2,370
|
|
|
|
820
|
|
|
|
3,190
|
|
Income Tax
|
|
|
(151
|
)
|
|
|
(193
|
)
|
|
|
(344
|
)
|
Net other comprehensive loss before
Reclassifications
|
|
|
2,219
|
|
|
|
627
|
|
|
|
2,846
|
|
Reclassifications:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credits (A)
|
|
|
—
|
|
|
|
752
|
|
|
|
752
|
|
Actuarial gains (A)
|
|
|
—
|
|
|
|
(2,514
|
)
|
|
|
(2,514
|
)
|
Total reclassifications before tax
|
|
|
—
|
|
|
|
(1,762
|
)
|
|
|
(1,762
|
)
|
Income Tax
|
|
|
—
|
|
|
|
533
|
|
|
|
533
|
|
Net reclassifications
|
|
|
—
|
|
|
|
(1,229
|
)
|
|
|
(1,229
|
)
|
Other comprehensive loss (income)
|
|
|
2,219
|
|
|
|
(602
|
)
|
|
|
1,617
|
|
Other comprehensive income attributable to
non-controlling interest
|
|
|
1,066
|
|
|
|
—
|
|
|
|
1,066
|
|
Balance July 1, 2018
|
|
$
|
15,291
|
|
|
$
|
18,148
|
|
|
$
|
33,439
|
|
(A)
|
Amounts reclassified are included in the computation of net periodic benefit cost, which is included in Other (Expense) Income, net in the accompanying Consolidated Statements of (Loss) Income and Comprehensive Income. See Retirement Plans and Postretirement Costs note to these Notes to Financial Statements below.
|
Accounting For 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. The Board of Directors has 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 June 30, 2019 were 149,289. Awards that expire or are cancelled 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 the 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 our Board of Directors. The options expire 10 years after the grant date unless an earlier expiration date is set at the time of grant. The options vest 1 to 4 years after the date of grant. Shares of restricted stock granted under the plan are subject to vesting criteria determined by the Compensation Committee of our Board of Directors at the time the shares are granted and have a minimum vesting period of one year from the date of grant. Restricted shares granted prior to August 2014 have voting and dividend rights, regardless of whether the shares are vested or unvested. Restricted shares granted during August 2014 and thereafter have voting rights, regardless of whether the shares are vested or unvested, but only have the right to receive cash dividends after such shares become vested. Restricted stock grants issued vest 1 to 5 years after the date of grant.
The fair value of each stock option grant was estimated as of the date of grant using the Black-Scholes pricing model. The 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. The expected term of awards granted is determined based on historical experience with similar awards, giving consideration to the contractual terms and vesting schedules. The expected volatility is determined based on our historical stock prices over the most recent period commensurate with the expected term of the award. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term commensurate with the expected term of the award. Expected pre-vesting option forfeitures are based primarily on historical data. 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 is amortized on a straight line basis over the vesting period. We record stock based compensation only for those awards that are expected to vest.
38
All compensation cost related to stock options granted under the plan has been recognized as of June 30, 2019. Unrecognized compensation cost as of June 30, 2019 related to restricted stock granted under the plan was as follows (thousands of dollars):
|
|
Compensation
Cost
|
|
|
Weighted Average
Period over
which Cost is to be
Recognized
(in years)
|
|
Restricted stock granted
|
|
$
|
1,128
|
|
|
|
0.9
|
|
Unrecognized compensation cost will be adjusted for any future changes in estimated and actual forfeitures.
Cash received from stock option exercises and the related income tax benefit were as follows (thousands of dollars):
Fiscal Year
|
|
Cash Received
from
Stock Option
Exercises
|
|
|
Income Tax
Benefit
|
|
2019
|
|
$
|
172
|
|
|
$
|
76
|
|
2018
|
|
$
|
139
|
|
|
$
|
—
|
|
The intrinsic value of stock options exercised and the fair value of options vested were as follows (thousands of dollars):
|
|
Years Ended
|
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Intrinsic value of options exercised
|
|
$
|
324
|
|
|
$
|
110
|
|
Fair value of stock options vested
|
|
$
|
—
|
|
|
$
|
315
|
|
No options were granted during the fiscal years ended June 30, 2019 or July 1, 2018.
The range of options outstanding as of June 30, 2019 was as follows:
|
|
Number of
Options
Outstanding/
Exercisable
|
|
Weighted
Average
Exercise Price
Outstanding/
Exercisable
|
|
Weighted
Average
Remaining
Contractual
Life Outstanding
(In Years)
|
$17.59-$18.49
|
|
26,500/26,500
|
|
$18.00/$18.00
|
|
0.5
|
$26.53-$38.71
|
|
81,850/81,850
|
|
$31.06/$31.06
|
|
3.2
|
$79.73
|
|
9,010/9,010
|
|
$79.73/$79.73
|
|
5.1
|
|
|
|
|
$31.85/$31.85
|
|
|
Income Taxes: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases and operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and operating loss carry-forwards are expected to be recovered, settled or utilized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. We recognize the benefit of an income tax position only if it is more likely than not (greater than 50 percent) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit is recognized. The tax benefits recognized are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. Additionally, we accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. Interest and penalties on uncertain tax positions are classified in the Provision for Income Taxes in the accompanying Consolidated Statements of (Loss) Income and Comprehensive Income.
39
Our income tax provision for 2018 was impacted by the Tax Cuts and Jobs Act of 2017 (“the Act”), which was signed into law on December 22, 2017 with an effective date of January 1, 2018. The Act makes broad and complex changes to the U.S. tax code that affected our fiscal year ending July 1, 2018, including but not limited to (1) a reduction in the U.S. statutory tax rate to 21 percent following its effective date and a change in the measurement of our deferred tax assets and deferred tax liabilities resulting from the reduction in the statutory rate, (2) requiring a one-time transition tax on certain deemed repatriated earnings of foreign subsidiaries that is payable over eight years, and (3) bonus depreciation that will allow for full expensing of qualified property. Section 15 of the Internal Revenue Code stipulates that for our fiscal year ending July 1, 2018, a blended statutory corporate tax rate of 28% was applicable, which is based on the applicable statutory tax rates before and after the Act and the number of days in our fiscal year.
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Act. SAB 118 provides a measurement period that should not extend beyond one year from the Act’s enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Act is incomplete but it is still able to determine a reasonable estimate of the tax effect, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provision of the tax laws that were in effect immediately before the enactment of the Act.
In connection with our analysis of the impact of the Act, we recorded a discrete net tax benefit of approximately $3 million during 2018. This net tax benefit primarily consisted of (1) the impact of the change in measurement of our deferred tax assets and liabilities, which resulted in a favorable provision impact of $1.6 million, (2) the one-time transition tax on non-previously taxed post-1986 accumulated foreign earnings, which resulted in a net favorable impact of $500,000 and included a transition tax of $1.4 million offset by the reversal of net deferred tax liability balances totaling $1.9 million, which related to basis differences in foreign earnings, and (3) the impact of changing our annualized effective tax rate, which resulted in a favorable provision impact of $900,000. For various reasons that are discussed more fully below, we did not complete our accounting for the income tax effects for certain elements of the Act as of December 31, 2017. However, we were able to make reasonable estimates of certain effects and, therefore, we recorded provisional adjustments of these elements in the accompanying consolidated financial statements. We identified these items as provisional since our analysis of the items was not complete.
The Act reduced the corporate tax rate to 21 percent, effective January 1, 2018. For certain of our net deferred tax assets, we have recorded a provisional adjustment to reflect the reduction in the corporate tax rate. While we are able to make a reasonable estimate of the impact of the reduction in the corporate rate, it may be affected by other analyses related to the Act, including, but not limited to, the impact of our calculation of deemed repatriation of deferred foreign income and the impact of full expensing for certain assets.
The Deemed Repatriation Transition Tax (“Transition Tax”) is a tax on previously untaxed accumulated and current earnings and profits (E&P) of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. We were able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation in these consolidated financial statements. However, as of December 31, 2017, additional information needed to be gathered to more precisely compute the amount of the Transition Tax.
We were required to assess whether our valuation allowance analyses was affected by various aspects of the Act (e.g., deemed repatriation of deferred foreign income, Global Intangible Low-Taxed Income (“GILTI”) inclusions, and new categories of Foreign Tax Credits). Since, as discussed herein, we have recorded provisional amounts related to certain portions of the Act, any corresponding determination of the need for, or any change in, a valuation allowance was also provisional.
As of December 30, 2018, we had completed our accounting for all income tax elements of the Act. Measurement period adjustments related to the Act recorded in 2019 totaled $372,000.
Our income tax provision for 2019 was impacted by a $7.5 million tax benefit resulting from the termination of our qualified, noncontributory defined benefit pension plan as discussed under Retirement Plans and Postretirement Costs below and a reduction in the expected effective tax rate as compared to 2018. Our income tax provision for 2019 was also impacted by a discrete benefit of $372,000, which represents measurement period adjustments to the one-time transition tax on non-previously taxed post-1986 accumulated foreign earnings.
Additionally, our income tax provisions for 2019 and 2018 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.
40
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 equity interest, exists to seek opportunities to manufacture and sell each company’s products in areas of the world outside of North America and Europe.
VAST LLC has investments in Sistema de 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. anf 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 with 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.
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 joint ventures resulted in equity earnings of joint ventures to STRATTEC of approximately $2.7 million during 2019 and approximately $4.4 million during 2018. During 2019 and 2018, capital contributions totaling $600,000 and $375,000, respectively, were made to VAST LLC for purposes of funding operations in Brazil. STRATTEC’s portion of the capital contributions totaled $200,000 in 2019 and $125,000 in 2018.
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 income to STRATTEC of approximately $2.7 million in 2019 and $1.8 million in 2018.
STRATTEC POWER ACCESS LLC (“SPA”) was formed in fiscal year 2009 to supply the North American portion of the power sliding door, lift gate and deck lid system access control products which were acquired from Delphi Corporation. 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 income to STRATTEC of approximately $2.5 million in 2019 and approximately $2.2 million in 2018.
SAL LLC was formed in fiscal 2013 to introduce a new generation of biometric security products based upon the designs of Actuator Systems LLC, our partner and the owner of the remaining ownership interest. SAL LLC was 51 percent owned by STRATTEC for all periods presented in this report. Our investment in SAL 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 activities related to SAL LLC resulted in equity earnings of joint ventures to STRATTEC of approximately $128,000 in 2019 and equity earnings of joint ventures to STRATTEC of approximately $91,000 in 2018. During all periods presented in this report, 100 percent of the funding for SAL LLC was being made through loans from STRATTEC to SAL LLC. Therefore, for all periods presented in this report, even though STRATTEC maintains a 51 percent ownership interest in SAL LLC, STRATTEC recognized 100 percent of the losses of SAL LLC up to our committed financial support through Equity Earnings of Joint Ventures in the accompanying Consolidated Statements of (Loss) Income and Comprehensive Income.
41
During fiscal 2018, we, along with our joint venture partner, reduced operating the business of SAL LLC to winding down and selling only commercial biometric locks.
STRATTEC’s joint venture investments are included in the accompanying Consolidated Balance Sheets as follows (thousands of dollars):
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Investment in Joint Ventures:
|
|
|
|
|
|
|
|
|
Investment in VAST LLC
|
|
$
|
23,528
|
|
|
$
|
22,192
|
|
Other Current Liabilities:
|
|
|
|
|
|
|
|
|
Investment in SAL LLC
|
|
$
|
328
|
|
|
$
|
458
|
|
See further discussion under Equity Earnings of Joint Ventures included in Notes to Financial Statements herein.
EQUITY EARNINGS OF JOINT VENTURES
As discussed above under the note Investment in Joint Ventures and Majority Owned Subsidiaries, we hold a one-third ownership interest in VAST LLC, for which we exercise significant influence but do not control and are not the primary beneficiary. Our investment in VAST LLC 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. The following are summarized statements of operations and summarized balance sheet data for VAST LLC (thousands of dollars):
|
|
Years Ended
|
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Net sales
|
|
$
|
161,660
|
|
|
$
|
174,896
|
|
Cost of goods sold
|
|
|
128,375
|
|
|
|
134,185
|
|
Gross profit
|
|
|
33,285
|
|
|
|
40,711
|
|
Engineering, selling and administrative expense
|
|
|
27,624
|
|
|
|
26,450
|
|
Income from operations
|
|
|
5,661
|
|
|
|
14,261
|
|
Other income, net
|
|
|
3,559
|
|
|
|
1,757
|
|
Income before provision for income taxes
|
|
|
9,220
|
|
|
|
16,018
|
|
Provision for income taxes
|
|
|
1,292
|
|
|
|
2,632
|
|
Net income
|
|
$
|
7,928
|
|
|
$
|
13,386
|
|
STRATTEC’s share of VAST LLC net
|
|
|
|
|
|
|
|
|
income
|
|
$
|
2,643
|
|
|
$
|
4,463
|
|
Intercompany profit eliminations
|
|
|
12
|
|
|
|
(22
|
)
|
STRATTEC’s equity earnings of VAST LLC
|
|
$
|
2,655
|
|
|
$
|
4,441
|
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Cash and cash equivalents
|
|
$
|
6,854
|
|
|
$
|
8,959
|
|
Receivables, net
|
|
|
35,639
|
|
|
|
43,930
|
|
Inventories, net
|
|
|
20,465
|
|
|
|
20,510
|
|
Other current assets
|
|
|
19,701
|
|
|
|
16,020
|
|
Total current assets
|
|
|
82,659
|
|
|
|
89,419
|
|
Property, plant and equipment, net
|
|
|
49,953
|
|
|
|
42,923
|
|
Other long-term assets
|
|
|
16,868
|
|
|
|
14,974
|
|
Total assets
|
|
$
|
149,480
|
|
|
$
|
147,316
|
|
Current debt
|
|
$
|
7,240
|
|
|
$
|
8,580
|
|
Other current liabilities
|
|
|
63,799
|
|
|
|
66,140
|
|
Long-term debt
|
|
|
5,015
|
|
|
|
5,143
|
|
Other long-term liabilities
|
|
|
2,512
|
|
|
|
512
|
|
Total liabilities
|
|
$
|
78,566
|
|
|
$
|
80,375
|
|
Net assets
|
|
$
|
70,914
|
|
|
$
|
66,941
|
|
STRATTEC’s share of VAST LLC net assets
|
|
$
|
23,638
|
|
|
$
|
22,314
|
|
42
As discussed above under the note Investment in Joint Ventures and Majority Owned Subsidiaries, we hold a 51 percent ownership interest in a joint venture company, SAL LLC, which was established to introduce a new generation of commercial and residential biometric security products based on the designs of Actuator Systems, our partner and the owner of the remaining ownership interest. During fiscal 2018, we, along with our joint venture partner, reduced operating the business of SAL LLC to winding down and selling only commercial biometric locks. SAL LLC is considered a variable interest entity based on the STRATTEC guarantee and additional loans from STRATTEC as discussed below. STRATTEC is not the primary beneficiary and does not control the entity. Accordingly, our investment in SAL LLC is accounted for using the equity method.
SAL LLC maintained a license agreement with Westinghouse allowing SAL LLC to do business as Westinghouse Security. This license agreement expired August 16, 2018. Payments due to Westinghouse under the license agreement were guaranteed by STRATTEC. STRATTEC made a payment to Westinghouse of $250,000 on this guarantee during 2018. STRATTEC’s proportionate share of the guarantee of this payment based on our ownership percentage in SAL LLC totaled $127,000, and accordingly, our investment in SAL LLC was increased by this amount as of July 1, 2018.
Loans were made from STRATTEC to SAL LLC in support of operating expenses and working capital needs. The outstanding loan amount totaled $2.6 million as of June 30, 2019 and July 1, 2018 and was eliminated against STRATTEC’s negative 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 began recognizing 100 percent of the losses of SAL LLC up to our committed financial support through Equity Earnings of Joint Ventures in the accompanying Consolidated Statements of (Loss) Income and Comprehensive Income effective with our fiscal 2015 fourth quarter.
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 from VAST LLC to STRATTEC for general headquarter expenses. The following tables summarize the related party transactions with VAST LLC and SAL LLC for the periods indicated (thousands of dollars):
|
|
Years Ended
|
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Sales to VAST LLC
|
|
$
|
3,731
|
|
|
$
|
3,151
|
|
Sales to SAL LLC
|
|
$
|
34
|
|
|
$
|
98
|
|
Purchases from VAST LLC
|
|
$
|
221
|
|
|
$
|
183
|
|
Expenses charged to VAST LLC
|
|
$
|
1,594
|
|
|
$
|
984
|
|
Expenses charged from VAST LLC
|
|
$
|
834
|
|
|
$
|
886
|
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Accounts receivable from VAST LLC
|
|
$
|
264
|
|
|
$
|
53
|
|
Accounts receivable from SAL LLC (A)
|
|
$
|
—
|
|
|
$
|
—
|
|
Current loan receivable from SAL LLC (A)
|
|
$
|
—
|
|
|
$
|
—
|
|
Accounts payable to VAST LLC
|
|
$
|
127
|
|
|
$
|
87
|
|
|
(A)
|
As of June 30, 2019, outstanding loan and accounts receivable balances due from SAL LLC to STRATTEC totaled $2.6 million and $82,000, respectively. As of July 1, 2018, outstanding loan and accounts receivable balances due from SAL LLC to STRATTEC totaled $2.6 million and $82,000, respectively. As of June 30, 2019 and July 1, 2018, these outstanding balances have been offset against our investment in SAL LLC, which is included in Other Current Liabilities in the Consolidated Balance Sheet.
|
43
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 $30 million secured revolving credit facility (the “ADAC-STRATTEC Credit Facility”) with BMO Harris Bank N.A., which is guaranteed by STRATTEC. The ADAC-STRATTEC Credit Facility borrowing limit decreased to $25 million effective July 1, 2019. The credit facilities both expire on August 1, 2021. Interest on borrowings under the STRATTEC Credit Facility and interest on borrowings under the ADAC-STRATTEC Credit Facility prior to December 31, 2018 were at varying rates based, at our option, on the London Interbank Offering Rate (“LIBOR”) plus 1.0 percent or the bank’s prime rate. Effective December 31 2018, and thereafter, interest on borrowings under the ADAC-STRATTEC Credit Facility is 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. As of June 30, 2019, we were in compliance with all financial covenants required by these credit facilities.
Outstanding borrowings under the credit facilities referenced in the above paragraph as of the end of 2019 and 2018 were as follows (thousands of dollars):
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
STRATTEC Credit Facility
|
|
$
|
18,000
|
|
|
$
|
23,000
|
|
ADAC-STRATTEC Credit Facility
|
|
|
24,000
|
|
|
|
28,000
|
|
|
|
$
|
42,000
|
|
|
$
|
51,000
|
|
Average outstanding borrowings and the weighted average interest rate under each such credit facility during 2019 and 2018 were as follows (thousands of dollars):
|
|
Average Outstanding
Borrowings
|
|
|
Weighted Average
Interest Rate
|
|
|
|
Years Ended
|
|
|
Years Ended
|
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
STRATTEC Credit Facility
|
|
$
|
21,212
|
|
|
$
|
21,668
|
|
|
|
3.3
|
%
|
|
|
2.5
|
%
|
ADAC-STRATTEC Credit Facility
|
|
$
|
25,901
|
|
|
$
|
22,621
|
|
|
|
3.4
|
%
|
|
|
2.5
|
%
|
We believe that the credit facilities referenced above are adequate, along with existing cash balances and cash flow from operations, to meet our anticipated capital expenditure, working capital, dividend and operating expenditure requirements.
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 the consolidated financial position, results of operations or cash flows of STRATTEC. With respect to warranty matters, although we cannot ensure that the future costs of warranty claims by customers will not be material, we believe our established reserves are adequate to cover potential warranty settlements.
We have a reserve for estimated costs to remediate an environmental contamination site at our Milwaukee facility. The site 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 initially established in 1995. Due to changing technology and related costs associated with active remediation of the site, 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, STRATTEC obtained updated third party estimates for adequately covering the cost of active remediation of this contamination. Based upon the updated estimates, no further adjustment to the reserve was required. From 1995 through June 30, 2019, costs of approximately $597,000 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 groundwater monitoring wells that are installed on the property. 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, 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 environmental reserve of $1.3 million at June 30, 2019, is adequate.
44
At June 30, 2019, we had purchase commitments related to zinc, other purchased parts and natural gas. We also had minimum rental commitments under non-cancelable operating leases with a term in excess of one year. The purchase and minimum rental commitments are payable as follows (thousands of dollars):
|
|
Purchase
|
|
|
Minimum Rental
|
|
Fiscal Year
|
|
Commitments
|
|
|
Commitments
|
|
2020
|
|
$
|
8,936
|
|
|
$
|
539
|
|
2021
|
|
$
|
4,945
|
|
|
$
|
504
|
|
2022
|
|
$
|
3,358
|
|
|
$
|
495
|
|
2023
|
|
$
|
—
|
|
|
$
|
498
|
|
2024-2025
|
|
$
|
—
|
|
|
$
|
168
|
|
Rental expense under all non-cancelable operating leases was as follows (thousands of dollars):
Fiscal Year
|
|
Rental Expense
|
|
2019
|
|
$
|
773
|
|
2018
|
|
$
|
731
|
|
INCOME TAXES
The provision for income taxes consisted of the following (thousands of dollars):
|
|
Years Ended
|
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Currently payable:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
705
|
|
|
$
|
156
|
|
State
|
|
|
162
|
|
|
|
73
|
|
Foreign
|
|
|
1,515
|
|
|
|
812
|
|
|
|
|
2,382
|
|
|
|
1,041
|
|
Deferred tax provision
|
|
|
(10,122
|
)
|
|
|
1,029
|
|
|
|
$
|
(7,740
|
)
|
|
$
|
2,070
|
|
The items accounting for the difference between income taxes computed at the Federal statutory tax rate and the provision for income taxes were as follows:
|
|
Years Ended
|
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
U.S. statutory rate
|
|
|
21.0
|
%
|
|
|
28.0
|
%
|
State taxes, net of Federal tax benefit
|
|
|
3.7
|
|
|
|
1.6
|
|
Foreign subsidiaries
|
|
|
(1.8
|
)
|
|
|
(0.7
|
)
|
U.S. tax reform: transition tax
|
|
|
2.7
|
|
|
|
(3.0
|
)
|
U.S. tax reform: change in deferred rate
|
|
|
—
|
|
|
|
(9.3
|
)
|
Research and development tax credit
|
|
|
9.4
|
|
|
|
(2.5
|
)
|
Non-controlling interest
|
|
|
6.7
|
|
|
|
(5.6
|
)
|
Uncertain tax positions
|
|
|
(2.3
|
)
|
|
|
2.1
|
|
Stock based compensation
|
|
|
(0.7
|
)
|
|
|
1.7
|
|
Other
|
|
|
(0.8
|
)
|
|
|
(0.6
|
)
|
|
|
|
37.9
|
%
|
|
|
11.7
|
%
|
45
The components of deferred tax (liabilities) assets were as follows (thousands of dollars):
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Unrecognized pension and postretirement benefit
plan liabilities
|
|
$
|
701
|
|
|
$
|
6,887
|
|
Accrued warranty
|
|
|
446
|
|
|
|
517
|
|
Payroll-related accruals
|
|
|
2,180
|
|
|
|
1,959
|
|
Stock-based compensation
|
|
|
470
|
|
|
|
727
|
|
Inventory reserve
|
|
|
834
|
|
|
|
799
|
|
Environmental reserve
|
|
|
300
|
|
|
|
303
|
|
Repair and maintenance supply parts reserve
|
|
|
229
|
|
|
|
212
|
|
Allowance for doubtful accounts
|
|
|
118
|
|
|
|
118
|
|
Credit carry-forwards
|
|
|
1,990
|
|
|
|
248
|
|
Postretirement obligations
|
|
|
(416
|
)
|
|
|
(375
|
)
|
Accumulated depreciation
|
|
|
(5,023
|
)
|
|
|
(4,902
|
)
|
Accrued pension obligations
|
|
|
(1,578
|
)
|
|
|
(9,235
|
)
|
Non-cash compensation expense
|
|
|
986
|
|
|
|
—
|
|
Joint ventures
|
|
|
968
|
|
|
|
814
|
|
Other
|
|
|
728
|
|
|
|
967
|
|
|
|
$
|
2,933
|
|
|
$
|
(961
|
)
|
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered.
Federal credit carry-forwards at June 30, 2019 resulted in future benefits of approximately $1.8 million and expire between 2033 and 2034. We currently anticipate having sufficient Federal taxable income to offset these credit carry-forwards. State credit carry-forwards at June 30, 2019 resulted in future benefits of approximately $199,000 and expire at varying times between 2025 and 2034. A valuation allowance of $120,000 has been recorded as of June 30, 2019, due to our assessment of the future realization of certain credit carry-forward benefits. We do not currently anticipate having sufficient state taxable income to offset these credit carry-forwards.
Foreign income before the provision for income taxes was $4.0 million in 2019 and $1.1 million in 2018.
The total liability for unrecognized tax benefits was $1.2 million as of June 30, 2019 and $796,000 as of July 1, 2018 and was included in Other Long-term Liabilities in the accompanying Consolidated Balance Sheets. This liability includes approximately $1.1 million of unrecognized tax benefits at June 30, 2019 and $741,000 at July 1, 2018 and approximately $93,000 of accrued interest at June 30, 2019 and $55,000 at July 1, 2018. This liability does not include an amount for accrued penalties. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was approximately $854,000 at June 30, 2019 and $375,000 at July 1, 2018. We recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows for the years ended June 30, 2019 and July 1, 2018 (thousands of dollars):
|
|
Years Ended
|
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Unrecognized tax benefits, beginning of year
|
|
$
|
741
|
|
|
$
|
571
|
|
Gross increases – tax positions in prior years
|
|
|
229
|
|
|
|
101
|
|
Gross increases – current period tax positions
|
|
|
238
|
|
|
|
126
|
|
Tax years closed
|
|
|
(70
|
)
|
|
|
(57
|
)
|
Unrecognized tax benefits, end of year
|
|
$
|
1,138
|
|
|
$
|
741
|
|
We or one of our subsidiaries files income tax returns in the United States (Federal), Wisconsin (state), Michigan (state) and various other states, Mexico and other foreign jurisdictions. We are currently subject to a Wisconsin income tax examination for fiscal 2014 through 2017. Tax years open to examination by tax authorities under the statute of limitations include fiscal 2016 through 2019 for Federal, fiscal 2015 through 2019 for most states and calendar 2014 through 2018 for foreign jurisdictions.
46
RETIREMENT PLANS AND POSTRETIREMENT COSTS
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. 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 subsequently approved to proceed with the termination of the Qualified Pension Plan. During the quarter ended December 30, 2018, we completed a substantial portion of terminating the Qualified Pension Plan. In connection with the termination of the Qualified Pension Plan, distributions from the Qualified Pension Plan trust were made during the three month period ended December 30, 2018 to participants who elected lump-sum distributions. Additionally, during the three months ended December 30, 2018, we entered into an agreement with an insurance company to purchase from us, through a series of annuity contracts, our remaining obligations under the Qualified Pension Plan and, as a result, we settled the remaining obligations under the plan for the remaining participants utilizing funds available in the Qualified Pension Plan trust. No additional cash contributions to the trust were required to settle the pension obligations. As a result of these actions, a non-cash pre-tax settlement charge of $31.9 million was recorded during fiscal 2019. A non-cash compensation expense charge of $4.2 million was also recorded during fiscal 2019 related to the future transfer of the excess assets in the Qualified Pension Plan to a STRATTEC defined contribution plan for subsequent pay-out to eligible STRATTEC employees based on a plan approved by the Board of Directors in June 2019. It is expected that an additional $4.3 million in non-cash compensation expense will be recorded in the six month period ending December 2019 related to this future transfer and pay-out of the excess Qualified Pension Plan assets.
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 $2.9 million at June 30, 2019 and $2.8 million at July 1, 2018, and are included in Other Long-Term Assets in the accompanying Consolidated Balance Sheets. The projected benefit obligation under the amended SERP was $2.2 million at June 30, 2019 and $1.9 million at July 1, 2018. The SERP liabilities are included in the pension tables below. However, the Rabbi Trust assets are excluded from the tables as they do not qualify as plan assets.
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.
Amounts included in accumulated other comprehensive loss, net of tax, at June 30, 2019, which have not yet been recognized in net periodic benefit cost were as follows (thousands of dollars):
|
|
SERP
|
|
|
Postretirement
|
|
Prior service credit
|
|
$
|
—
|
|
|
$
|
(28
|
)
|
Net actuarial loss
|
|
|
225
|
|
|
|
2,054
|
|
|
|
$
|
225
|
|
|
$
|
2,026
|
|
Prior service cost (credit) and unrecognized net actuarial losses included in accumulated other comprehensive loss at June 30, 2019 which are expected to be recognized in net periodic benefit cost (credit) in fiscal 2020, net of tax, for the pension, SERP and postretirement plans are as follows (thousands of dollars):
|
|
SERP
|
|
|
Postretirement
|
|
Prior service credit
|
|
$
|
—
|
|
|
$
|
(22
|
)
|
Net actuarial loss
|
|
|
9
|
|
|
|
304
|
|
|
|
$
|
9
|
|
|
$
|
282
|
|
47
The following tables summarize the pension, SERP and postretirement plans’ income and expense, funded status and actuarial assumptions for the years indicated (thousands of dollars). We use a June 30 measurement date for our pension and postretirement plans.
|
|
Pension and SERP Benefits
|
|
|
Postretirement Benefits
|
|
|
|
Years Ended
|
|
|
Years Ended
|
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
COMPONENTS OF NET PERIODIC BENEFIT
COST (CREDIT):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
62
|
|
|
$
|
66
|
|
|
$
|
11
|
|
|
$
|
13
|
|
Interest cost
|
|
|
2,101
|
|
|
|
3,857
|
|
|
|
40
|
|
|
|
45
|
|
Expected return on plan assets
|
|
|
(2,275
|
)
|
|
|
(6,111
|
)
|
|
|
—
|
|
|
|
—
|
|
Plan settlements
|
|
|
31,878
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Amortization of prior service cost (credit)
|
|
|
—
|
|
|
|
12
|
|
|
|
(439
|
)
|
|
|
(764
|
)
|
Amortization of unrecognized net loss
|
|
|
831
|
|
|
|
2,035
|
|
|
|
431
|
|
|
|
479
|
|
Net periodic benefit cost (credit)
|
|
$
|
32,597
|
|
|
$
|
(141
|
)
|
|
$
|
43
|
|
|
$
|
(227
|
)
|
|
|
Pension and SERP Benefits
|
|
|
Postretirement Benefits
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
WEIGHTED-AVERAGE ASSUMPTIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.17
|
%
|
|
|
4.30
|
%
|
|
|
3.17
|
%
|
|
|
4.30
|
%
|
Rate of compensation increases – SERP
|
|
|
3.0
|
%
|
|
|
3.0
|
%
|
|
n/a
|
|
|
n/a
|
|
Net Periodic Benefit Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.30
|
%
|
|
|
3.91
|
%
|
|
|
4.30
|
%
|
|
|
3.91
|
%
|
Expected return on plan assets
|
|
n/a
|
|
|
|
5.45
|
%
|
|
n/a
|
|
|
n/a
|
|
Rate of compensation increases – SERP
|
|
|
3.0
|
%
|
|
|
3.0
|
%
|
|
n/a
|
|
|
n/a
|
|
CHANGE IN PROJECTED BENEFIT
OBLIGATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
98,835
|
|
|
$
|
101,266
|
|
|
$
|
1,041
|
|
|
$
|
1,268
|
|
Service cost
|
|
|
62
|
|
|
|
66
|
|
|
|
11
|
|
|
|
13
|
|
Interest cost
|
|
|
2,101
|
|
|
|
3,857
|
|
|
|
40
|
|
|
|
45
|
|
Plan settlements
|
|
|
(72,400
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Actuarial gain
|
|
|
5,143
|
|
|
|
(1,392
|
)
|
|
|
39
|
|
|
|
(8
|
)
|
Benefits paid
|
|
|
(31,512
|
)
|
|
|
(4,962
|
)
|
|
|
(217
|
)
|
|
|
(277
|
)
|
Benefit obligation at end of year
|
|
$
|
2,229
|
|
|
$
|
98,835
|
|
|
$
|
914
|
|
|
$
|
1,041
|
|
CHANGE IN PLAN ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
111,466
|
|
|
$
|
112,524
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Actual return on plan assets
|
|
|
1,077
|
|
|
|
3,890
|
|
|
|
—
|
|
|
|
—
|
|
Employer contribution
|
|
|
14
|
|
|
|
14
|
|
|
|
217
|
|
|
|
277
|
|
Plan settlements
|
|
|
(72,400
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Benefits paid
|
|
|
(31,512
|
)
|
|
|
(4,962
|
)
|
|
|
(217
|
)
|
|
|
(277
|
)
|
Fair value of plan assets at end of year
|
|
$
|
8,645
|
|
|
$
|
111,466
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Funded status – prepaid (accrued) benefit obligations
|
|
$
|
6,416
|
|
|
$
|
12,631
|
|
|
$
|
(914
|
)
|
|
$
|
(1,041
|
)
|
AMOUNTS RECOGNIZED IN CONSOLIDATED
BALANCE SHEETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term assets
|
|
$
|
8,585
|
|
|
$
|
14,547
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Accrued payroll and benefits (current liabilities)
|
|
|
(506
|
)
|
|
|
(363
|
)
|
|
|
(152
|
)
|
|
|
(215
|
)
|
Accrued benefit obligations (long-term liabilities)
|
|
|
(1,663
|
)
|
|
|
(1,553
|
)
|
|
|
(762
|
)
|
|
|
(826
|
)
|
Net amount recognized
|
|
$
|
6,416
|
|
|
$
|
12,631
|
|
|
$
|
(914
|
)
|
|
$
|
(1,041
|
)
|
48
|
|
Pension and SERP Benefits
|
|
|
Postretirement Benefits
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
CHANGES IN PLAN ASSETS AND BENEFIT
OBLIGATIONS RECOGNIZED IN OTHER
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit (credit) cost
|
|
$
|
32,597
|
|
|
$
|
(141
|
)
|
|
$
|
43
|
|
|
$
|
(227
|
)
|
|
Net actuarial loss (gain)
|
|
|
(57,414
|
)
|
|
|
828
|
|
|
|
39
|
|
|
|
(8
|
)
|
|
Plan settlements
|
|
|
31,878
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Amortization of prior service (cost) credits
|
|
|
—
|
|
|
|
(12
|
)
|
|
|
439
|
|
|
|
764
|
|
|
Amortization of unrecognized net loss
|
|
|
(831
|
)
|
|
|
(2,035
|
)
|
|
|
(431
|
)
|
|
|
(479
|
)
|
|
Total recognized in other comprehensive
(income) loss, before tax
|
|
|
(26,367
|
)
|
|
|
(1,219
|
)
|
|
|
47
|
|
|
|
277
|
|
|
Total recognized in net periodic benefit
cost and other comprehensive (income) loss,
before tax
|
|
$
|
6,230
|
|
|
$
|
(1,360
|
)
|
|
$
|
90
|
|
|
$
|
50
|
|
|
The pension benefits have a separately determined accumulated benefit obligation, which is the actuarial present value of benefits based on service rendered and current and past compensation levels. This differs from the projected benefit obligation in that it includes no assumptions about future compensation levels. The following table summarizes the accumulated benefit obligations and projected benefit obligations for the pension and SERP (thousands of dollars):
|
|
Pension
|
|
|
SERP
|
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Accumulated benefit obligation
|
|
$
|
60
|
|
|
$
|
96,919
|
|
|
$
|
1,981
|
|
|
$
|
1,749
|
|
Projected benefit obligation
|
|
$
|
60
|
|
|
$
|
96,919
|
|
|
$
|
2,169
|
|
|
$
|
1,916
|
|
For measurement purposes as it pertains to the estimated obligation associated with retirees prior to January 1, 2010, a 7.1 percent annual rate increase in the per capita cost of covered health care benefits was assumed for fiscal 2020; the rate was assumed to decrease gradually to 3.0 percent by the year 2025 and remain at that level thereafter.
The health care cost trend assumption has a minimal effect on our postretirement benefit amounts reported. A 1% change in the health care cost trend rates would have the following effects (thousands of dollars):
|
|
1% Increase
|
|
|
1% Decrease
|
|
Effect on total of service and interest cost components
in fiscal 2019
|
|
$
|
—
|
|
|
$
|
—
|
|
Effect on postretirement benefit obligation as of
June 30, 2019
|
|
$
|
3
|
|
|
$
|
(3
|
)
|
The pension plan weighted-average asset allocations by asset category were as follows for 2019 and 2018:
|
|
Target Allocation
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Equity investments
|
|
0-50%
|
|
|
|
0
|
%
|
|
|
13
|
%
|
Fixed-income investments / cash
|
|
50-100
|
|
|
|
100
|
|
|
|
87
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
49
The following is a summary, by asset category, of the fair value of pension plan assets at the June 30, 2019 and June 30, 2018 measurement dates (thousands of dollars):
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
Asset Category
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
8,645
|
|
|
$
|
—
|
|
|
$
|
8,645
|
|
|
$
|
—
|
|
|
$
|
7,617
|
|
|
$
|
—
|
|
|
$
|
7,617
|
|
Equity securities/funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small cap
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Mid cap
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,953
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,953
|
|
Large cap
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,945
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,945
|
|
International
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,443
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,443
|
|
Fixed income:
Bond funds/bonds
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
89,508
|
|
|
|
—
|
|
|
|
89,508
|
|
Total
|
|
$
|
—
|
|
|
$
|
8,645
|
|
|
$
|
—
|
|
|
$
|
8,645
|
|
|
$
|
14,341
|
|
|
$
|
97,125
|
|
|
$
|
—
|
|
|
$
|
111,466
|
|
There were no transfers in or out of Level 3 investments during the measurement year ended June 30, 2019.
We expect to contribute $509,000 to our SERP and $152,000 to our postretirement health care plan in fiscal 2020. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid during the fiscal years noted below (thousands of dollars):
|
|
SERP
Benefits
|
|
|
Postretirement
Benefits
|
|
2020
|
|
$
|
569
|
|
|
$
|
152
|
|
2021
|
|
$
|
510
|
|
|
$
|
135
|
|
2022
|
|
$
|
403
|
|
|
$
|
127
|
|
2023
|
|
$
|
14
|
|
|
$
|
108
|
|
2024
|
|
$
|
14
|
|
|
$
|
93
|
|
2025-2029
|
|
$
|
550
|
|
|
$
|
221
|
|
All U.S. associates may participate in our 401(k) Plan. We contribute 100 percent up to the first 5 percent of eligible compensation that a participant contributes to the plan. Our contributions to the 401(k) Plan were as follows (thousands of dollars):
|
|
Years Ended
|
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Company contributions
|
|
$
|
1,903
|
|
|
$
|
1,793
|
|
SHAREHOLDERS’ EQUITY
We have 12,000,000 shares of authorized common stock, par value $.01 per share, with 3,691,555 and 3,635,203 shares outstanding at June 30, 2019 and July 1, 2018, respectively. Holders of our common stock are entitled to one vote for each share on all matters voted on by shareholders.
Our Board of Directors authorized a stock repurchase program to buy back up to 3,839,395 outstanding shares of our common stock as of June 30, 2019. As of June 30, 2019, 3,655,322 shares have been repurchased under this program at a cost of approximately $136.4 million. No shares were repurchased under this program during 2019 or 2018.
(LOSS) EARNINGS PER SHARE (“EPS”)
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 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):
50
|
|
Years Ended
|
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Net (loss) income attributable to STRATTEC
|
|
$
|
(17,029
|
)
|
|
$
|
12,283
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
|
|
3,676
|
|
|
|
3,628
|
|
Incremental shares – stock based compensation
|
|
|
—
|
|
|
|
75
|
|
Diluted weighted average shares of common stock
Outstanding
|
|
|
3,676
|
|
|
|
3,703
|
|
Basic earnings per share
|
|
$
|
(4.63
|
)
|
|
$
|
3.39
|
|
Diluted earnings per share
|
|
$
|
(4.63
|
)
|
|
$
|
3.32
|
|
Options to purchase shares of common stock that were excluded from the calculation of diluted earnings per share because their inclusion would have been antidilutive were as follows:
Years Ended
|
|
Number of Options
Excluded
|
|
June 30, 2019
|
|
|
181,117
|
|
July 1, 2018
|
|
|
41,200
|
|
STOCK OPTION AND PURCHASE PLANS
A summary of stock option activity under our stock incentive plan was as follows:
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted Average
Remaining
Contractual
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Term (in years)
|
|
|
(in thousands)
|
|
Balance at July 2, 2017
|
|
|
138,508
|
|
|
$
|
29.23
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(5,434
|
)
|
|
$
|
25.64
|
|
|
|
|
|
|
|
|
|
Balance at July 1, 2018
|
|
|
133,074
|
|
|
$
|
29.37
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(15,714
|
)
|
|
$
|
10.92
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2019
|
|
|
117,360
|
|
|
$
|
31.85
|
|
|
|
2.7
|
|
|
$
|
162
|
|
Exercisable as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
|
117,360
|
|
|
$
|
31.85
|
|
|
|
2.7
|
|
|
$
|
162
|
|
July 1, 2018
|
|
|
133,074
|
|
|
$
|
29.37
|
|
|
|
3.4
|
|
|
$
|
862
|
|
No options were granted during fiscal 2019 or 2018.
A summary of restricted stock activity under our stock incentive plan was as follows:
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Nonvested Balance at July 2, 2017
|
|
|
75,850
|
|
|
$
|
60.61
|
|
Granted
|
|
|
27,950
|
|
|
$
|
33.30
|
|
Vested
|
|
|
(30,400
|
)
|
|
$
|
62.99
|
|
Forfeited
|
|
|
(4,275
|
)
|
|
$
|
52.47
|
|
Nonvested Balance at July 1, 2018
|
|
|
69,125
|
|
|
$
|
49.02
|
|
Granted
|
|
|
34,050
|
|
|
$
|
37.25
|
|
Vested
|
|
|
(37,343
|
)
|
|
$
|
54.93
|
|
Forfeited
|
|
|
(2,075
|
)
|
|
$
|
43.52
|
|
Nonvested Balance at June 30, 2019
|
|
|
63,757
|
|
|
$
|
39.47
|
|
We have an Employee Stock Purchase Plan to provide substantially all U.S. full-time associates an opportunity to purchase shares of STRATTEC common stock through payroll deductions. A participant may contribute a maximum of $5,200 per calendar year to the plan. On the last day of each month or if such date is not a trading day on the most recent previous trading day, participant account balances are used to purchase shares of our common stock at the average of the highest and lowest reported sales prices of a share of STRATTEC common stock on the NASDAQ Global Market on such date. A total of 100,000 shares may be issued under the
51
plan. Shares issued from treasury stock under the plan totaled 3,295 at an average price of $30.13 during 2019 and 2,753 at an average price of $37.06 during 2018. A total of 58,117 shares remain available for purchase under the plan as of June 30, 2019.
EXPORT SALES
Total export sales, sales from the United States to locations outside of the United States, are summarized as follows (thousands of dollars and percent of total net sales):
|
|
Years Ended
|
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
|
|
Net Sales
|
|
|
%
|
|
|
Net Sales
|
|
|
%
|
|
Export sales
|
|
$
|
160,771
|
|
|
33%
|
|
|
$
|
157,862
|
|
|
36%
|
|
Countries for which customer sales account for ten percent or more of total net sales are summarized as follows (thousands of dollars and percent of total net sales):
|
|
Years Ended
|
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
|
|
Net Sales
|
|
|
%
|
|
|
Net Sales
|
|
|
%
|
|
Export sales into Canada
|
|
$
|
67,516
|
|
|
14%
|
|
|
$
|
70,920
|
|
|
16%
|
|
PRODUCT SALES
Sales by product group were as follows (thousands of dollars and percent of total net sales):
|
|
Years Ended
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
|
Net Sales
|
|
|
%
|
|
|
Net Sales
|
|
|
%
|
|
Keys & locksets
|
|
$
|
135,413
|
|
|
|
28
|
%
|
|
$
|
118,256
|
|
|
|
27
|
%
|
Door handles & exterior trim
|
|
|
116,977
|
|
|
|
24
|
|
|
|
88,788
|
|
|
|
20
|
|
Power access
|
|
|
92,744
|
|
|
|
19
|
|
|
|
86,380
|
|
|
|
20
|
|
Latches
|
|
|
49,147
|
|
|
|
10
|
|
|
|
42,381
|
|
|
|
9
|
|
Aftermarket & OE service
|
|
|
44,254
|
|
|
|
9
|
|
|
|
43,311
|
|
|
|
10
|
|
Driver controls
|
|
|
40,942
|
|
|
|
8
|
|
|
|
51,817
|
|
|
|
12
|
|
Other
|
|
|
7,529
|
|
|
|
2
|
|
|
|
8,262
|
|
|
|
2
|
|
|
|
$
|
487,006
|
|
|
|
100
|
%
|
|
$
|
439,195
|
|
|
|
100
|
%
|
SALES AND RECEIVABLE CONCENTRATION
Sales to our largest customers were as follows (thousands of dollars and percent of total net sales):
|
|
Years Ended
|
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
|
|
Net Sales
|
|
|
%
|
|
|
Net Sales
|
|
|
%
|
|
Fiat Chrysler Automobiles
|
|
$
|
115,304
|
|
|
|
24
|
%
|
|
$
|
110,650
|
|
|
|
25
|
%
|
General Motors Company
|
|
|
112,719
|
|
|
|
23
|
|
|
|
85,827
|
|
|
|
20
|
|
Ford Motor Company
|
|
|
63,333
|
|
|
|
13
|
|
|
|
64,427
|
|
|
|
14
|
|
|
|
$
|
291,356
|
|
|
|
60
|
%
|
|
$
|
260,904
|
|
|
|
59
|
%
|
Receivables from our largest customers were as follows (thousands of dollars and percent of gross receivables):
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
|
|
Receivables
|
|
|
%
|
|
|
Receivables
|
|
|
%
|
|
Fiat Chrysler Automobiles
|
|
$
|
19,151
|
|
|
|
23
|
%
|
|
$
|
19,908
|
|
|
|
27
|
%
|
General Motors Company
|
|
|
12,754
|
|
|
|
15
|
|
|
|
16,366
|
|
|
|
22
|
|
Ford Motor Company
|
|
|
9,991
|
|
|
|
12
|
|
|
|
7,537
|
|
|
|
10
|
|
|
|
$
|
41,896
|
|
|
|
50
|
%
|
|
$
|
43,811
|
|
|
|
59
|
%
|
52
Selected Quarterly Financial Data (unaudited)
The following data are in thousands of dollars except per share amounts.
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
Attributable to
|
|
|
Earnings (Loss)
per Share
|
|
|
|
Quarter
|
|
Net Sales
|
|
|
Gross Profit
|
|
|
STRATTEC
|
|
|
Basic
|
|
|
Diluted
|
|
2019
|
|
First
|
|
$
|
117,159
|
|
|
$
|
15,183
|
|
|
$
|
3,467
|
|
|
$
|
0.95
|
|
|
$
|
0.93
|
|
|
|
Second
|
|
|
112,913
|
|
|
|
12,736
|
|
|
|
(22,164
|
)
|
|
|
(6.03
|
)
|
|
|
(5.96
|
)
|
|
|
Third
|
|
|
128,230
|
|
|
|
15,682
|
|
|
|
1,730
|
|
|
|
0.47
|
|
|
|
0.46
|
|
|
|
Fourth
|
|
|
128,704
|
|
|
|
14,199
|
|
|
|
(62
|
)
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
TOTAL
|
|
$
|
487,006
|
|
|
$
|
57,800
|
|
|
$
|
(17,029
|
)
|
|
$
|
(4.63
|
)
|
|
$
|
(4.63
|
)
|
2018
|
|
First
|
|
$
|
102,460
|
|
|
$
|
13,463
|
|
|
$
|
2,456
|
|
|
$
|
0.68
|
|
|
$
|
0.67
|
|
|
|
Second
|
|
|
103,182
|
|
|
|
12,646
|
|
|
|
2,882
|
|
|
|
0.79
|
|
|
|
0.78
|
|
|
|
Third
|
|
|
116,823
|
|
|
|
15,197
|
|
|
|
2,969
|
|
|
|
0.82
|
|
|
|
0.80
|
|
|
|
Fourth
|
|
|
116,730
|
|
|
|
13,137
|
|
|
|
3,976
|
|
|
|
1.09
|
|
|
|
1.07
|
|
|
|
TOTAL
|
|
$
|
439,195
|
|
|
$
|
54,443
|
|
|
$
|
12,283
|
|
|
$
|
3.39
|
|
|
$
|
3.32
|
|