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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549  

 

FORM 10-Q

 

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

For the quarterly period ended March 29, 2020 

or

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

For the transition period from                      to                     

Commission File Number 0-25150

 

STRATTEC SECURITY CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

Wisconsin

 

39-1804239

(State of Incorporation)

 

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

3333 West Good Hope Road, Milwaukee, WI 53209

(Address of Principal Executive Offices)

(414) 247-3333

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading Symbol

 

Name of exchange on which registered

Common stock, $.01 par value

 

STRT

 

The Nasdaq Global Stock Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

Smaller Reporting Company

 

Emerging growth company

 

  

 

 

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Common stock, par value $0.01 per share: 3,818,520 shares outstanding as of March 30, 2020 (which number includes all restricted shares previously awarded that have not vested as of such date).

 

 

 

 

 


STRATTEC SECURITY CORPORATION

FORM 10-Q

March 29, 2020

INDEX

 

 

 

Page

Part I - FINANCIAL INFORMATION

 

Item 1

Financial Statements

 

 

Condensed Consolidated Statements of Income (Loss) and Comprehensive (Loss) Income

3

 

Condensed Consolidated Balance Sheets

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Condensed Consolidated Financial Statements

6-21

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22-31

Item 3

Quantitative and Qualitative Disclosures About Market Risk

32

Item 4

Controls and Procedures

32

 

 

 

Part II - OTHER INFORMATION

 

Item 1

Legal Proceedings

33

Item 1A  

Risk Factors

33

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 3

Defaults Upon Senior Securities

33

Item 4

Mine Safety Disclosures

33

Item 5

Other Information

33

Item 6

Exhibits

34

PROSPECTIVE INFORMATION

A number of the matters and subject areas discussed in this Form 10-Q contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as “anticipate,” “believe,” “would,” “expect,” “intend,” “may,” “planned,” “potential,” “should,” “will,” and “could,” or the negative of these terms or words of similar meaning. These statements include statements regarding expected future financial results, product offerings, global expansion, liquidity needs, financing ability, planned capital expenditures, management’s or the Company’s expectations and beliefs, and similar matters discussed in this Form 10-Q. The discussion of such matters and subject areas contained herein is qualified by the inherent risks and uncertainties surrounding future expectations generally, and also may materially differ from the Company’s actual future experience.

 

The Company’s business, operations and financial performance are subject to certain risks and uncertainties, which could result in material differences in actual results from the Company’s current expectations. These risks and uncertainties include, but are not limited to, general economic conditions, in particular relating to the automotive industry, consumer demand for the Company’s and its customers’ products, competitive and technological developments, customer purchasing actions, changes in warranty provisions and customers’ product recall policies,  work stoppages at the Company or at the location of its key customers as a result of labor disputes, foreign currency fluctuations, uncertainties stemming from U.S. trade policies, tariffs and reactions to same from foreign countries, changes in the costs of operations, changes in the volume and scope of product returns and warranty claims, adverse business and operational issues resulting from the Coronavirus (COVID-19) pandemic and other matters described in the section titled “Risk Factors” in the Company’s Form 10-K report filed on September 5, 2019 with the Securities and Exchange Commission for the year ended June 30, 2019 and in Part II Item IA in this Form 10-Q.

Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this Form 10-Q and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances occurring after the date of this Form 10-Q.

 

 

 

 


 

Item 1 Financial Statements

STRATTEC SECURITY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Income (Loss) and Comprehensive (Loss) Income

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 29,

2020

 

 

March 31,

2019

 

 

March 29,

2020

 

 

March 31,

2019

 

Net sales

 

$

116,938

 

 

$

128,230

 

 

$

343,183

 

 

$

358,302

 

Cost of goods sold

 

 

99,928

 

 

 

112,548

 

 

 

299,954

 

 

 

314,701

 

Gross profit

 

 

17,010

 

 

 

15,682

 

 

 

43,229

 

 

 

43,601

 

Engineering, selling and administrative expenses

 

 

10,727

 

 

 

11,721

 

 

 

35,775

 

 

 

33,222

 

Income from operations

 

 

6,283

 

 

 

3,961

 

 

 

7,454

 

 

 

10,379

 

Equity (loss) earnings of joint ventures

 

 

(921

)

 

 

66

 

 

 

55

 

 

 

2,451

 

Interest expense

 

 

(204

)

 

 

(413

)

 

 

(792

)

 

 

(1,224

)

Pension termination settlement charge

 

 

 

 

 

 

 

 

 

 

 

(32,434

)

Other income (expense), net

 

 

1,049

 

 

 

209

 

 

 

975

 

 

 

(298

)

Income (loss) before provision for income

      taxes and non-controlling interest

 

 

6,207

 

 

 

3,823

 

 

 

7,692

 

 

 

(21,126

)

Provision (benefit) for income taxes

 

 

1,294

 

 

 

786

 

 

 

1,194

 

 

 

(6,994

)

Net income (loss)

 

 

4,913

 

 

 

3,037

 

 

 

6,498

 

 

 

(14,132

)

Net income attributable to non-controlling

      Interest

 

 

1,919

 

 

 

1,307

 

 

 

3,601

 

 

 

2,835

 

Net income (loss) attributable to STRATTEC

      SECURITY CORPORATION

 

$

2,994

 

 

$

1,730

 

 

$

2,897

 

 

$

(16,967

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

4,913

 

 

$

3,037

 

 

$

6,498

 

 

$

(14,132

)

Pension and postretirement plans, net of tax

 

 

74

 

 

 

(1

)

 

 

220

 

 

 

19,992

 

Currency translation adjustments

 

 

(6,245

)

 

 

1,037

 

 

 

(6,059

)

 

 

39

 

Other comprehensive (loss) income, net of tax

 

 

(6,171

)

 

 

1,036

 

 

 

(5,839

)

 

 

20,031

 

Comprehensive (loss) income

 

 

(1,258

)

 

 

4,073

 

 

 

659

 

 

 

5,899

 

Comprehensive (loss) income attributable to

       non-controlling interest

 

 

(468

)

 

 

1,432

 

 

 

1,464

 

 

 

3,117

 

Comprehensive (loss) income attributable to

      STRATTEC SECURITY CORPORATION

 

$

(790

)

 

$

2,641

 

 

$

(805

)

 

$

2,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share attributable to

      STRATTEC SECURITY CORPORATION:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.80

 

 

$

0.47

 

 

$

0.78

 

 

$

(4.62

)

Diluted

 

$

0.79

 

 

$

0.46

 

 

$

0.77

 

 

$

(4.62

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

3,748

 

 

 

3,684

 

 

 

3,733

 

 

 

3,670

 

Diluted

 

 

3,768

 

 

 

3,728

 

 

 

3,752

 

 

 

3,670

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

 

$

0.14

 

 

$

0.14

 

 

$

0.42

 

 

$

0.42

 

 

 

 

 

 

 

 

 

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

3


 

STRATTEC SECURITY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In Thousands, Except Share Amounts)

 

 

 

March 29,

2020

 

 

June 30,

2019

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,173

 

 

$

7,809

 

Receivables, net

 

 

72,805

 

 

 

84,230

 

Inventories:

 

 

 

 

 

 

 

 

Finished products

 

 

18,531

 

 

 

11,582

 

Work in process

 

 

11,775

 

 

 

10,529

 

Purchased materials

 

 

32,357

 

 

 

29,376

 

Excess and obsolete reserve

 

 

(4,315

)

 

 

(4,225

)

Inventories, net

 

 

58,348

 

 

 

47,262

 

Other current assets

 

 

15,216

 

 

 

17,331

 

Total current assets

 

 

156,542

 

 

 

156,632

 

Investment in joint ventures

 

 

23,190

 

 

 

23,528

 

Deferred Income Taxes

 

 

3,952

 

 

 

2,933

 

Other long-term assets

 

 

6,411

 

 

 

11,523

 

Property, plant and equipment

 

 

287,071

 

 

 

287,421

 

Less: accumulated depreciation

 

 

(179,655

)

 

 

(169,301

)

Net property, plant and equipment

 

 

107,416

 

 

 

118,120

 

 

 

$

297,511

 

 

$

312,736

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

43,104

 

 

$

41,889

 

Accrued Liabilities:

 

 

 

 

 

 

 

 

Payroll and benefits

 

 

13,549

 

 

 

17,339

 

Environmental

 

 

1,263

 

 

 

1,278

 

Warranty

 

 

7,850

 

 

 

7,900

 

Other

 

 

10,306

 

 

 

10,857

 

Total current liabilities

 

 

76,072

 

 

 

79,263

 

Borrowings under credit facilities

 

 

27,000

 

 

 

42,000

 

Accrued pension obligations

 

 

1,754

 

 

 

1,663

 

Accrued postretirement obligations

 

 

649

 

 

 

762

 

Other long-term liabilities

 

 

4,781

 

 

 

1,232

 

Shareholders’ Equity:

 

 

 

 

 

 

 

 

Common stock, authorized 12,000,000 shares, $.01 par value,  7,358,812

   issued shares at March 29, 2020 and 7,304,994 issued shares at

   June 30, 2019

 

 

74

 

 

 

73

 

Capital in excess of par value

 

 

97,773

 

 

 

96,491

 

Retained earnings

 

 

222,442

 

 

 

221,117

 

Accumulated other comprehensive loss

 

 

(22,270

)

 

 

(18,568

)

Less: treasury stock, at cost (3,610,411 shares at March 29, 2020 and

   3,613,439 shares at June 30, 2019)

 

 

(135,676

)

 

 

(135,725

)

Total STRATTEC SECURITY CORPORATION shareholders’ equity

 

 

162,343

 

 

 

163,388

 

Non-controlling interest

 

 

24,912

 

 

 

24,428

 

Total shareholders’ equity

 

 

187,255

 

 

 

187,816

 

 

 

$

297,511

 

 

$

312,736

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Balance Sheets.

 


4


 

STRATTEC SECURITY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

March 29,

2020

 

 

March 31,

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

6,498

 

 

$

(14,132

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

14,349

 

 

 

12,543

 

Foreign currency transaction (gain) loss

 

 

(2,067

)

 

 

261

 

Unrealized loss (gain) on peso forward contracts

 

 

1,048

 

 

 

(116

)

Stock based compensation expense

 

 

789

 

 

 

867

 

Equity loss (earnings) of joint ventures

 

 

(55

)

 

 

(2,451

)

Pension termination settlement charge

 

 

 

 

 

32,434

 

Non-cash compensation expense

 

 

4,473

 

 

 

 

Deferred income taxes

 

 

(1,032

)

 

 

(8,131

)

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

11,014

 

 

 

(14,411

)

Inventories

 

 

(11,086

)

 

 

(168

)

Other assets

 

 

1,798

 

 

 

7,553

 

Accounts payable and accrued liabilities

 

 

3,683

 

 

 

10,753

 

Other, net

 

 

522

 

 

 

(281

)

Net cash provided by operating activities

 

 

29,934

 

 

 

24,721

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Investment in joint ventures

 

 

 

 

 

(200

)

Purchase of property, plant and equipment

 

 

(10,307

)

 

 

(13,550

)

Proceeds received on sale of property, plant and equipment

 

 

29

 

 

 

12

 

Net cash used in investing activities

 

 

(10,278

)

 

 

(13,738

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Borrowings under credit facility

 

 

 

 

 

2,000

 

Repayment of borrowings under credit facility

 

 

(15,000

)

 

 

(9,000

)

Dividends paid to non-controlling interests of subsidiaries

 

 

(980

)

 

 

(1,384

)

Dividends paid

 

 

(1,572

)

 

 

(1,546

)

Exercise of stock options and employee stock purchases

 

 

543

 

 

 

244

 

Net cash used in financing activities

 

 

(17,009

)

 

 

(9,686

)

Foreign currency impact on cash

 

 

(283

)

 

 

(185

)

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

 

2,364

 

 

 

1,112

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS

 

 

 

 

 

 

 

 

Beginning of period

 

 

7,809

 

 

 

8,090

 

End of period

 

$

10,173

 

 

$

9,202

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Income taxes

 

$

768

 

 

$

230

 

Interest

 

$

838

 

 

$

1,229

 

Non-cash investing activities:

 

 

 

 

 

 

 

 

Change in capital expenditures in accounts payable

 

$

(1,318

)

 

$

(405

)

 

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Statements of Cash Flows.


5


 

STRATTEC SECURITY CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Basis of Financial Statements

STRATTEC SECURITY CORPORATION designs, develops, manufactures and markets automotive access control products including mechanical locks and keys, electronically enhanced locks and keys, steering column and instrument panel ignition lock housings, latches, power sliding door systems, power lift gate systems, power deck lid systems, door handles and related products for primarily North American automotive customers. We also supply global automotive manufacturers through a unique strategic relationship with WITTE Automotive (“WITTE”) of Velbert, Germany, and ADAC Automotive (“ADAC”) of Grand Rapids, Michigan. Under this relationship, STRATTEC, WITTE and ADAC market the products of each company to global customers under the “VAST 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 exists to introduce a new generation of biometric security products based on the designs of Actuator Systems, our partner and the owner of the remaining ownership interest. The business of SAL LLC has been wound down to sell only commercial biometric locks.

The accompanying condensed consolidated financial statements reflect the consolidated results of STRATTEC SECURITY CORPORATION, its wholly owned Mexican subsidiary, STRATTEC de Mexico, and its majority owned subsidiaries, ADAC-STRATTEC, LLC and STRATTEC POWER ACCESS LLC. STRATTEC SECURITY CORPORATION is located in Milwaukee, Wisconsin. STRATTEC de Mexico is located in Juarez, Mexico. ADAC-STRATTEC, LLC and STRATTEC POWER ACCESS LLC have operations in El Paso, Texas and Juarez and Leon, Mexico. Equity investments in Vehicle Access Systems Technology LLC (“VAST LLC”) and SAL LLC, for which we exercise significant influence but do not control and are not the primary beneficiary, are accounted for using the equity method. VAST LLC consists primarily of 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.

In the opinion of management, the accompanying condensed consolidated balance sheets as of March 29, 2020 and June 30, 2019, which have been derived from our audited financial statements, and the related unaudited interim condensed consolidated financial statements included herein contain all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and in accordance with Rule 10-01 of Regulation S-X. All significant intercompany transactions have been eliminated.

Interim financial results are not necessarily indicative of operating results for an entire year. The information included in this Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the STRATTEC SECURITY CORPORATION 2019 Form 10-K, which was filed with the Securities and Exchange Commission on September 5, 2019.

 

Risks and Uncertainties

In December 2019, a novel strain of coronavirus (COVID-19) was reported in Wuhan, China. The coronavirus has since spread, and infections have been found in multiple countries around the world, including the United States. In March 2020, the World Health Organization recognized the COVID-19 outbreak as a pandemic based on the global spread of the disease, the severity of illnesses it causes and its effects on society. In response to the COVID-19 outbreak, the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes. Accordingly, the COVID-19 outbreak has severely restricted the level of economic activity in many countries, and continues to adversely impact global economic activity.

STRATTEC’s operating performance is subject to global economic conditions and levels of consumer spending specifically within the automotive industry. During the three months ended March 29, 2020, the impact of the COVID-19 outbreak on our operating results has not been significant. However, the extent of the impact of the COVID-19 outbreak on our future operating results will depend on certain developments, including the duration, intensity and continued spread of the outbreak, regulatory and private sector responses, which may be precautionary, and the impact to our customers, workforce and suppliers, all of which are uncertain and cannot be predicted. These changing conditions may also affect the estimates and assumptions made by management. Such estimates and assumptions affect, among other things, our long-lived asset valuations, equity investment valuation, assessment of our annual effective tax rate, valuation of deferred income taxes, assessment of excess and obsolete inventory reserves, and assessment of collectability of trade receivables. Events and changes in circumstances arising after March 29, 2020, including those resulting from the impacts of COVID-19, will be reflected in management’s estimates for future periods.

6


 

During April 2020, the majority of our OEM customer assembly plant operations were completely closed including the majority of the supply chain. Additionally, during April 2020, STRATTEC’s Mexico facilities were closed as a result of the Mexico government’s shutdown of non-essential businesses. Initial re-opening of our OEM customer facilities for operations is scheduled to begin in May 2020, but there is no certainty this will occur on that timeline. Timing of the reopening of our Mexico facilities and the potential for designation of our Mexico facilities as essential is also uncertain. Based on information available, our current estimates indicate our net sales for the upcoming fourth fiscal quarter could be down 50 percent or more compared to our quarter ended March 29, 2020 depending on how long the COVID-19 virus will require the industry to remain idle. Fourth fiscal quarter sales could be more severely impacted if the initial re-opening of our customer facilities is delayed past May 2020. We anticipate our fourth fiscal quarter of 2020 will be the worst or trough quarter and that thereafter the automotive industry can restart and ramp back up production again during our fiscal 2021. The impact on our overall cash liquidity will most likely occur at the beginning of our fiscal year 2021 with a reduction in payments from customers resulting from lower fourth quarter fiscal 2020 net sales as previously discussed. The lower cash liquidity will cause us to utilize our credit facilities to fund our increased working capital requirements.

 

Subsequent Event

As a result of the impacts of the COVID-19 outbreak, during our fiscal 2020 fourth quarter, we are adjusting the cost structure of our business with temporary and permanent layoffs at our U.S. and Mexico locations, reductions in pay for our officers, reductions in working hours for most salaried associates, and a reduction in our U.S. salaried workforce. We expect the cost structure changes for U.S. salaried associates will save approximately $4.0 million in salary and benefit costs on an annualized pre-tax basis. However, these savings will be partially offset during our  fourth fiscal 2020 quarter with a pre-tax charge to earnings of approximately $250,000 for severance and outplacement costs.

 

 

New Accounting Standards

 

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. We implemented the new guidance effective July 1, 2019, the first day of our 2020 fiscal year, by applying the modified retrospective method without restatement of comparative periods’ financial information, as permitted by the transition guidance. The adoption of the new guidance had an impact on our balance sheet, but did not have an impact on either our consolidated operating results or our cash flows. Adoption of the new guidance resulted in the recognition of a right-of-use asset of $4.1 million and related lease obligation of $4.1 million for an operating lease as of July 1, 2019. We had no finance leases as of July 1, 2019. As noted above, the adoption of the new guidance did not have a significant impact on our operating results or cash flows. See “Leases” below for additional information.

 

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 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. Our July 1, 2019 adoption of the new guidance had no impact to our financial statements.

 

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 is fixed at the date of grant. Our July 1, 2019 adoption of the new guidance had no impact to our financial statements.

 

In December 2019, the FASB issued an update to accounting for income taxes. The update enhances and simplifies various aspects of income tax accounting including hybrid tax regimes, tax basis step-up in goodwill obtained in a transaction that is not a business combination, separate financial statements of entities not subject to tax, the intraperiod tax allocation exception to the incremental approach, investment ownership changes from a subsidiary to an equity method investment and vice versa, interim-period accounting for enacted changes in tax law, and the year-to-date loss limitation in interim-period tax accounting. This accounting update is effective for annual and interim periods beginning after December 15, 2020, with early adoption permitted. We do not expect that the adoption of this pronouncement will have a material impact on our consolidated financial statements.

 

 


7


 

Derivative Instruments

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

The following table quantifies the outstanding Mexican peso forward contracts as of March 29, 2020 (thousands of dollars, except with respect to the average forward contractual exchange rate):

 

 

Effective Dates

 

Notional Amount

 

 

Average Forward Contractual Exchange Rate

 

 

Fair Value

 

Buy MXP/Sell USD

 

April 15, 2020 - June 17, 2020

 

$

4,500

 

 

 

21.30

 

 

$

(414

)

Buy MXP/Sell USD

 

July 15, 2020 - December 16, 2020

 

$

6,000

 

 

 

21.40

 

 

$

(634

)

 

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

 

 

March 29,

2020

 

 

June 30,

2019

 

Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

Other Current Liabilities:

 

 

 

 

 

 

 

 

Mexican Peso Forward Contracts

 

$

1,048

 

 

$

 

 

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

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 29,

2020

 

 

March 31,

2019

 

 

March 29,

2020

 

 

March 31,

2019

 

Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized Gain

 

$

 

 

$

122

 

 

$

 

 

$

344

 

Unrealized (Loss) Gain

 

$

(1,048

)

 

$

23

 

 

$

(1,048

)

 

$

116

 

 

 

 

Fair Value of Financial Instruments

The fair value of our cash and cash equivalents, accounts receivable, accounts payable and borrowings under our credit facilities approximated book value as of March 29, 2020 and June 30, 2019. Fair value is defined as the exchange price that would be received for an asset or paid for a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date.

8


 

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of March 29, 2020 (in thousands):  

 

 

Fair Value Inputs

 

 

 

Level 1 Assets:

Quoted Prices

In Active Markets

 

 

Level 2 Assets:

Observable

Inputs Other

Than Market

Prices

 

 

Level 3 Assets:

Unobservable

Inputs

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Rabbi Trust Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Stock Index Funds:

 

 

 

 

 

 

 

 

 

 

 

 

Small Cap

 

$

204

 

 

$

 

 

$

 

Mid Cap

 

 

234

 

 

 

 

 

 

 

Large Cap

 

 

517

 

 

 

 

 

 

 

International

 

 

694

 

 

 

 

 

 

 

Fixed Income Funds

 

 

920

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

 

 

 

 

4

 

 

 

 

Total Assets at Fair Value

 

$

2,569

 

 

$

4

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Mexican Peso Forward Contracts

 

$

 

 

$

(1,048

)

 

$

 

 

The Rabbi Trust assets fund our amended and restated supplemental executive retirement plan and are included in Other Long-term Assets in the accompanying Condensed Consolidated Balance Sheets. Refer to discussion of Mexican peso forward contracts under Derivative Instruments above. The fair value of the Mexican peso forward contracts considers the remaining term, current exchange rate, and interest rate differentials between the Mexican peso and the U.S. dollar.

 

 

Equity (Loss) Earnings of Joint Ventures

We hold a one-third interest in a joint venture company, VAST LLC. VAST LLC exists to seek opportunities to manufacture and sell all three companies’ products in areas of the world outside of North America and Europe. Our investment in VAST LLC, for which we exercise significant influence but do not control and are not the primary beneficiary, is accounted for using the equity method. We assess the impairment of equity investments whenever events or changes in circumstances indicate that a decrease in value of the investment has occurred that is other than temporary.

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 29,

2020

 

 

March 31,

2019

 

 

March 29,

2020

 

 

March 31,

2019

 

Net Sales

 

$

30,490

 

 

$

35,771

 

 

$

117,537

 

 

$

123,546

 

Cost of Goods Sold

 

 

25,679

 

 

 

29,303

 

 

 

96,131

 

 

 

98,173

 

Gross Profit

 

 

4,811

 

 

 

6,468

 

 

 

21,406

 

 

 

25,373

 

Engineering, Selling and Administrative Expenses

 

 

7,524

 

 

 

7,377

 

 

 

21,528

 

 

 

20,246

 

(Loss) Income From Operations

 

 

(2,713

)

 

 

(909

)

 

 

(122

)

 

 

5,127

 

Other (Expense) Income, net

 

 

(424

)

 

 

882

 

 

 

1,079

 

 

 

3,186

 

(Loss) Income before Provision for Income Taxes

 

 

(3,137

)