UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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
(Exact Name of Registrant as Specified in Its Charter)
|
||
(State of Incorporation) |
|
(I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices)
(
(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 |
|
|
The |
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.
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).
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 |
|
☐ |
|
|
☒ |
|
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:
STRATTEC SECURITY CORPORATION
FORM 10-Q
December 31, 2023
INDEX
|
|
Page |
Part I - FINANCIAL INFORMATION |
|
|
Item 1 |
|
|
|
Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) (Unaudited) |
3 |
|
Condensed Consolidated Balance Sheets (Unaudited) |
4 |
|
Condensed Consolidated Statements of Cash Flows (Unaudited) |
5 |
|
Notes to Condensed Consolidated Financial Statements (Unaudited) |
6-20 |
Item 2 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
21-29 |
Item 3 |
30 |
|
Item 4 |
30 |
|
|
|
|
Part II - OTHER INFORMATION |
|
|
Item 1 |
31 |
|
Item 1A |
31 |
|
Item 2 |
Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities |
31 |
Item 3 |
31 |
|
Item 4 |
31 |
|
Item 5 |
31 |
|
Item 6 |
32 |
|
PROSPECTIVE INFORMATION
A number of the matters and subject areas discussed in this Form 10-Q contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as “anticipate,” “believe,” “could,” “expect,” “intend,” “may,” “planned,” “potential,” “should,” “will,” and “would,” or the negative of these terms or words of similar meaning. These statements include 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, delays and restrictions impacting the import of goods and components stemming from heightened security procedures implemented by the U.S. Government related to U.S.-Mexico border crossings, the volume and scope of product returns or customer cost reimbursement actions, changes in the costs of operations, warranty claims, adverse business and operational issues resulting from any material global supply chain and logistics disruption, the ongoing and lingering effects of the semiconductor chip supply shortages and the Coronavirus (COVID-19) pandemic, matters adversely impacting the timing, availability and cost of material component parts and raw materials for the production of our products and the products of our customers, or the continuation or worsening thereof, matters related to pricing actions implemented by the Company and customer responses and concessions related to same, and other matters described in the section titled “Risk Factors” in the Company’s Form 10-K report filed on September 7, 2023 with the Securities and Exchange Commission for the year ended July 2, 2023.
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 Income (Loss)
(In Thousands, Except Per Share Amounts)
(Unaudited)
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
December 31, |
|
|
January 1, |
|
|
December 31, |
|
|
January 1, |
|
||||
Net sales |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Cost of goods sold |
|
|
|
|
|
|
|
|
|
|
|
||||
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
||||
Engineering, selling and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
||||
Income (loss) from operations |
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Equity (loss) earnings of joint ventures |
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Interest expense |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Interest income |
|
|
|
|
|
|
|
|
|
|
|
||||
Other income (expense), net |
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Income (loss) before provision for |
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Provision (benefit) for income taxes |
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Net income (loss) |
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Net (loss) income attributable to non- |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Net income (loss) attributable to STRATTEC |
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) |
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Pension and postretirement plans, net of tax |
|
|
|
|
|
|
|
|
|
|
|
||||
Currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Comprehensive income (loss) |
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Comprehensive income (loss) attributable to |
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Comprehensive income (loss) attributable to |
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings (loss) per share attributable to |
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Diluted |
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted Average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted |
|
|
|
|
|
|
|
|
|
|
|
||||
The accompanying notes are an integral part of these Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss).
3
STRATTEC SECURITY CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
(Unaudited)
|
December 31, |
|
|
July 2, |
|
||
ASSETS |
|
|
|
|
|
||
Current Assets: |
|
|
|
|
|
||
Cash and cash equivalents |
$ |
|
|
$ |
|
||
Receivables, net |
|
|
|
|
|
||
Inventories: |
|
|
|
|
|
||
Finished products |
|
|
|
|
|
||
Work in process |
|
|
|
|
|
||
Purchased materials |
|
|
|
|
|
||
Excess and obsolete reserve |
|
( |
) |
|
|
( |
) |
Inventories, net |
|
|
|
|
|
||
Customer tooling in progress, net |
|
|
|
|
|
||
Value-added tax recoverable |
|
|
|
|
|
||
Other current assets |
|
|
|
|
|
||
Total current assets |
|
|
|
|
|
||
Deferred income taxes |
|
|
|
|
|
||
Other long-term assets |
|
|
|
|
|
||
Property, plant and equipment |
|
|
|
|
|
||
Less: accumulated depreciation |
|
( |
) |
|
|
( |
) |
Net property, plant and equipment |
|
|
|
|
|
||
|
$ |
|
|
$ |
|
||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
||
Current Liabilities: |
|
|
|
|
|
||
Accounts payable |
$ |
|
|
$ |
|
||
Accrued Liabilities: |
|
|
|
|
|
||
Payroll and benefits |
|
|
|
|
|
||
Value-added tax payable |
|
|
|
|
|
||
Environmental |
|
|
|
|
|
||
Warranty |
|
|
|
|
|
||
Other |
|
|
|
|
|
||
Total accrued liabilities |
|
|
|
|
|
||
Borrowings under credit facilities – current |
|
|
|
|
— |
|
|
Total current liabilities |
|
|
|
|
|
||
Borrowings under credit facilities – long-term |
|
— |
|
|
|
|
|
Accrued pension obligations |
|
|
|
|
|
||
Accrued postretirement obligations |
|
|
|
|
|
||
Other long-term liabilities |
|
|
|
|
|
||
Shareholders’ Equity: |
|
|
|
|
|
||
Common stock, authorized |
|
|
|
|
|
||
Capital in excess of par value |
|
|
|
|
|
||
Retained earnings |
|
|
|
|
|
||
Accumulated other comprehensive loss |
|
( |
) |
|
|
( |
) |
Less: treasury stock, at cost ( |
|
( |
) |
|
|
( |
) |
Total STRATTEC SECURITY CORPORATION shareholders’ equity |
|
|
|
|
|
||
Non-controlling interest |
|
|
|
|
|
||
Total shareholders’ equity |
|
|
|
|
|
||
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these Condensed Consolidated Balance Sheets.
4
STRATTEC SECURITY CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
|
Six Months Ended |
|
|||||
|
December 31, |
|
|
January 1, |
|
||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
||
Net income (loss) |
$ |
|
|
$ |
( |
) |
|
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: |
|
|
|
|
|
||
Depreciation |
|
|
|
|
|
||
Foreign currency transaction (gain) loss |
|
( |
) |
|
|
|
|
Unrealized (gain) loss on peso forward contracts |
|
( |
) |
|
|
|
|
Stock-based compensation expense |
|
|
|
|
|
||
Equity loss (earnings) of joint ventures |
|
|
|
|
( |
) |
|
Change in operating assets and liabilities: |
|
|
|
|
|
||
Receivables |
|
|
|
|
|
||
Inventories |
|
( |
) |
|
|
|
|
Other assets |
|
( |
) |
|
|
( |
) |
Accounts payable and accrued liabilities |
|
( |
) |
|
|
( |
) |
Other, net |
|
|
|
|
|
||
Net cash (used in) provided by operating activities |
|
( |
) |
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
||
Proceeds from sale of interest in VAST LLC |
|
|
|
|
— |
|
|
Investment in joint ventures |
|
— |
|
|
|
( |
) |
Purchase of property, plant and equipment |
|
( |
) |
|
|
( |
) |
Proceeds received on sale of property, plant and equipment |
|
— |
|
|
|
|
|
Net cash used in investing activities |
|
( |
) |
|
|
( |
) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
||
Borrowings under credit facilities |
|
|
|
|
|
||
Repayment of borrowings under credit facilities |
|
( |
) |
|
|
( |
) |
Dividends paid to non-controlling interests of subsidiaries |
|
— |
|
|
|
( |
) |
Exercise of stock options and employee stock purchases |
|
|
|
|
|
||
Net cash provided by financing activities |
|
|
|
|
|
||
Foreign currency impact on cash |
|
|
|
|
|
||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
|
( |
) |
|
|
|
|
|
|
|
|
|
|
||
CASH AND CASH EQUIVALENTS |
|
|
|
|
|
||
Beginning of period |
|
|
|
|
|
||
End of period |
$ |
|
|
$ |
|
||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
||
Cash paid during the period for: |
|
|
|
|
|
||
Income taxes |
$ |
|
|
$ |
|
||
Interest |
$ |
|
|
$ |
|
||
Non-cash investing activities: |
|
|
|
|
|
||
Change in capital expenditures in accounts payable |
$ |
( |
) |
|
$ |
( |
) |
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, fobs, passive entry passive start systems (PEPS), steering column and instrument panel ignition lock housings, latches, power sliding door systems, power tailgate systems, power lift gate systems, power deck lid systems, door handles and related products for primarily North American automotive customers. We also supply global automotive manufacturers through a unique strategic relationship with WITTE Automotive (“WITTE”) of Velbert, Germany, and ADAC Automotive (“ADAC”) of Grand Rapids, Michigan, which has been restructured effective as of June 30, 2023 as described elsewhere herein. Under this relationship, STRATTEC, WITTE and ADAC market the products of each company to global customers as cooperating partners of the “VAST Automotive Group” brand name (as more fully described herein). STRATTEC products are shipped to customer locations in the United States, Canada, Mexico, Europe, South America, Korea, China and India, and we, along with WITTE and ADAC, provide full service and aftermarket support for each VAST Automotive Group partner’s products. As noted below, effective as of June 30, 2023, we sold our one-third ownership interest in Vehicle Access Systems Technologies LLC ("VAST LLC") to WITTE and entered into a cooperation framework agreement with WITTE related to VAST LLC which provides an ongoing framework for the parties to collaborate on global programs related to product development and manufacturing.
The accompanying condensed consolidated financial statements reflect the consolidated results of STRATTEC SECURITY CORPORATION, its wholly owned subsidiaries STRATTEC de Mexico and STRATTEC POWER ACCESS LLC ("SPA"), and its majority owned subsidiary, ADAC-STRATTEC, LLC. Effective June 30, 2023, SPA became a wholly owned subsidiary of STRATTEC as a result of the purchase of its remaining non-controlling interest. Prior to June 30, 2023, STRATTEC owned 80 percent of SPA. STRATTEC is headquartered in Milwaukee, Wisconsin. STRATTEC de Mexico is located in Juarez, Mexico. ADAC-STRATTEC, LLC and SPA have operations in El Paso, Texas and Juarez and Leon, Mexico. Effective June 30, 2023, we sold our equity investment in VAST LLC to WITTE. Prior to the sale, our equity investment in VAST LLC, for which we exercised significant influence but did not control and was not a variable interest entity of STRATTEC, was accounted for using the equity method. VAST LLC consisted primarily of
In the opinion of management, the accompanying condensed consolidated balance sheets as of December 31, 2023 and July 2, 2023, 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 2023 Form 10-K, which was filed with the Securities and Exchange Commission on September 7, 2023.
During December 2022, management determined that a previously unrecorded liability for postretirement death benefits was required to be recognized in accordance with ASC 715. Eligible participants for this death benefit include all salaried retirees who retired prior to October 1, 2001 and all hourly retirees who were hired prior to June 27, 2005 and retired prior to January 1, 2010. As such, prior period amounts have been corrected to include the actuarially calculated liability and the unrecognized actuarial losses impacting Accumulated Other Comprehensive Loss in the Condensed Consolidated Balance Sheets.
Additionally, management identified a correction to the previously reported Investment in Joint Ventures amount reported in the Condensed Consolidated Balance Sheets. While prior period amounts have been corrected for comparability, the corrections, both individually and in total, were not material to the previously reported condensed consolidated financial statements.
6
The impact of the prior period corrections on the components of Stockholders’ Equity and the related components of Accumulated Other Comprehensive Loss was as follows (thousands of dollars):
|
July 3, 2022 |
|
|
October 2, 2022 |
|
||||||||||||||
|
Previously Reported |
|
Adjustment |
|
As Reported |
|
|
Previously Reported |
|
Adjustment |
|
As Reported |
|
||||||
Retained earnings |
$ |
|
$ |
( |
) |
$ |
|
|
$ |
|
$ |
( |
) |
$ |
|
||||
Accumulated other comprehensive loss |
|
( |
) |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
||
Total STRATTEC SECURITY |
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
||||
Total shareholders' equity |
$ |
|
$ |
( |
) |
$ |
|
|
$ |
|
$ |
( |
) |
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Accumulated other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Foreign currency translation adjustments |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
Retirement and postretirement benefit |
|
( |
) |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
||
Accumulated other comprehensive loss |
$ |
( |
) |
$ |
|
$ |
( |
) |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
||
The correction of prior period amounts had no impact on amounts previously reported in the Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) or in the Condensed Consolidated Statements of Cash Flows during the three-month and six-month periods ended January 1, 2023. In conjunction with the correction of the prior period amounts, the Shareholders’ Equity and Accumulated Other Comprehensive Loss footnotes were impacted by the above adjustments.
Risks and Uncertainties
STRATTEC’s operating performance is subject to global economic conditions, inflationary pressures and levels of consumer spending specifically within the automotive industry. In our fiscal year 2023, the inflationary pressures negatively affected the areas of raw materials, purchased materials and wage rates in Mexico, resulting in increased raw material and purchase part costs in the year. While our results for the six-month period ended December 2023 reflect reduced raw material costs as compared to prior year period, inflationary pressures on purchased materials and wage rates in Mexico persist, thus continuing to negatively impact our operating results for fiscal 2024.
Additionally, unforeseen global economic conditions may adversely impact our supply chain and operations, including impacting our customers, workforce and suppliers, any of which may disrupt and limit sourcing of critical supply chain components needed by us and our customers to meet expected production schedules. Moreover, these events may create added inflationary pressures on our operations, including further increases in wages and the prices of raw materials and purchased parts. All of these foregoing matters, including their scope and duration, are uncertain and cannot be predicted as to timing and cost impacts upon our operations. These changing conditions may also affect the estimates and assumptions made by our management in our financial statements. Such estimates and assumptions affect, among other things, our long-lived asset valuations, assessment of our annual effective tax rate, valuation of deferred income taxes, assessment of excess and obsolete inventory reserves, and assessment of collectability of trade receivables.
New Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. The update revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. Originally, the update was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. In November 2019, FASB issued ASU 2019-10, Financial Instruments – Credit Losses, Derivatives and Hedging, and Leases. This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements - Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative. The update incorporates into the Codification several disclosures and presentation requirements currently residing in SEC Regulations S-X and S-K. The effective date of ASU 2023-06 will be the date that the SEC eliminates the corresponding disclosure requirement from Regulation S-X and Regulation S-K. All amendments must be applied prospectively. The adoption of this pronouncement is not expected to have a material impact on our consolidated financial statements.
7
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures. The update enhances annual and interim reportable segment disclosures primarily by requiring disclosures about significant reportable segment expenses and provides new segment disclosure requirements for entities with a single reportable segment. ASU 2023-07 is effective for public business entities for fiscal years beginning after December 15, 2023 and for interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. This update is to be applied retrospectively to all periods presented in the financial statements. As a result of this update, we will be required to provide single reportable segment disclosure. Annual reporting under this update becomes effective for us in our fiscal 2025. Interim reporting under this update becomes effective for us in our fiscal 2026. We are currently assessing the required disclosure impacts of this update.
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures. The update requires greater disaggregation of income tax disclosures related to the income tax rate reconciliation and income taxes paid. ASU 2023-09 is effective for public business entities for annual periods beginning after December 15, 2024, with early adoption permitted. This update is to be applied on a prospective basis. Retrospective application is permitted. Annual reporting under this update becomes effective for us in our fiscal 2026. We are currently assessing the required disclosure impacts of this update.
Value-Added Tax
Our Mexican entities are subject to value-added tax ("VAT"). VAT is paid on goods and services and collected on sales. A VAT certification generally allows for relief from VAT tax for temporarily imported goods. Our VAT recoverable and payable balances were increased as of July 2, 2023 due to several monthly tax periods being open to audit by the Mexican tax authority. As of December 31, 2023, the audits for periods prior to July 2023 have been closed. VAT recoverable balances increased $
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 fiscal 2024, we entered into monthly Mexican peso currency forward contracts with Bank of Montreal for a portion of our estimated peso denominated operating costs during the period January 2024 through June 2024. We also 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 during our fiscal 2023. 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 December 31, 2023 (thousands of dollars, except with respect to the average forward contractual exchange rate):
|
|
Effective Dates |
|
Notional Amount |
|
|
Average Forward Contractual Exchange Rate |
|
|
Fair Value |
|
|||
Buy MXP/Sell USD |
|
|
$ |
|
|
|
|
|
$ |
|
||||
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):
|
December 31, |
|
|
July 2, |
|
||
Not designated as hedging instruments: |
|
|
|
|
|
||
Other current assets: |
|
|
|
|
|
||
Mexican peso forward contracts |
$ |
|
|
$ |
— |
|
|
8
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 Income (Loss) and consisted of the following for the periods indicated below (thousands of dollars):
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
December 31, |
|
|
January 1, |
|
|
December 31, |
|
|
January 1, |
|
||||
Not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
||||
Realized and unrealized gain, net |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
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 December 31, 2023 and July 2, 2023. Fair value is defined as the exchange price that would be received for an asset or paid for a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date.
The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2023 (in thousands):
|
Fair Value Inputs |
|
|||||||||
|
Level 1 Assets: |
|
|
Level 2 Assets: |
|
|
Level 3 Assets: |
|
|||
Assets: |
|
|
|
|
|
|
|
|
|||
Rabbi trust assets: |
|
|
|
|
|
|
|
|
|||
Stock Index Funds: |
|
|
|
|
|
|
|
|
|||
Small cap |
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
Mid cap |
|
|
|
|
— |
|
|
|
— |
|
|
Large cap |
|
|
|
|
— |
|
|
|
— |
|
|
International |
|
|
|
|
— |
|
|
|
— |
|
|
Fixed income funds |
|
|
|
|
— |
|
|
|
— |
|
|
Cash and cash equivalents |
|
— |
|
|
|
|
|
|
— |
|
|
Mexican peso forward contracts |
|
— |
|
|
|
|
|
|
— |
|
|
Total assets at fair value |
$ |
|
|
$ |
|
|
$ |
— |
|
||
The Rabbi Trust assets fund our Amended and Restated Supplemental Executive Retirement Plan. As of December 31, 2023, $
Investment in Joint Ventures and Majority Owned Subsidiaries
Prior to June 30, 2023, we participated 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 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.
9
The Alliance Agreements included 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 held a equity interest, existed to seek opportunities to manufacture and sell each company’s products in areas of the world outside of North America and Europe. As a result of these relationships, the entities involved purchased component products from each other for use in end products assembled and sold in their respective home markets. STRATTEC purchased such component parts from WITTE. These purchases totaled $
VAST LLC had investments in Sistema de Acesso Veicular Ltda, VAST China (Taicang), VAST Jingzhou Co. Ltd., VAST Shanghai Co., VAST Fuzhou and Minda-VAST Access Systems. The operations under VAST Fuzhou closed during our fiscal 2021. Sistema de Acesso Veicular Ltda was located in Brazil and serviced customers in South America. VAST LLC disposed of Sistema de Acesso Veicular Ltda in June 2023. VAST China (Taicang), VAST Jingzhou Co. Ltd, and VAST Shanghai Co. (collectively known as VAST China), provided 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:
Effective June 30, 2023, we entered into and completed transactions contemplated by an Equity Restructuring Agreement ("Restructuring Agreement") between STRATTEC and WITTE. Pursuant to the terms of the Restructuring Agreement, STRATTEC sold its one-third interest in VAST LLC to WITTE and STRATTEC purchased WITTE's
Prior to the restructuring agreement, VAST LLC investments were accounted for using the equity method of accounting. Results of the VAST LLC foreign subsidiaries and joint venture were reported on a one-month lag basis. The activities of the VAST LLC foreign subsidiaries and joint ventures resulted in equity loss of joint ventures of $
STRATTEC POWER ACCESS LLC (“SPA”) was formed in fiscal year 2009 to supply the North American portion of the power sliding door, lift gate, tail gate and deck lid system access control products which were acquired from Delphi Corporation. Prior to the Restructuring Agreement, SPA was
10
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
ADAC charges ADAC STRATTEC LLC an engineering, research and design fee as well as a sales fee. Such fees are calculated as a percentage of net sales and are included in the consolidated results of STRATTEC. Additionally, ADAC-STRATTEC LLC sells production parts to ADAC. Sales to ADAC are included in the consolidated results of STRATTEC.
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
December 31, |
|
|
January 1, |
|
|
December 31, |
|
|
January 1, |
|
||||
Engineering, research and design fee charged to |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Sales to ADAC |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Equity (Loss) Earnings of Joint Ventures
As discussed above within Investment in Joint Ventures and Majority Owned Subsidiaries, effective June 30, 2023, we sold our ownership interest in VAST LLC, for which we exercised significant influence but did not control. VAST LLC was not a variable interest entity of STRATTEC. Until the effective date of the sale, our investment in VAST LLC was accounted for using the equity method. Prior to the effective date of the sale, the results of the VAST LLC foreign subsidiaries and joint venture were reported on a one-month lag basis.
The following are summarized statements of operations for VAST LLC (in thousands):
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
December 31, |
|
|
January 1, |
|
|
December 31, |
|
|
January 1, |
|
||||
Net sales |
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
Cost of goods sold |
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Gross profit |
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Engineering, selling and administrative expenses |
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Income from operations |
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Other income, net |
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Income before provision for income taxes |
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Provision for income taxes |
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Net income |
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
STRATTEC's share of VAST LLC net income |
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Intercompany profit elimination |
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
STRATTEC’s equity earnings of VAST LLC |
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Loss on sale of VAST LLC |
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
STRATTEC’s equity (loss) earnings of VAST LLC |
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
11
We had sales of component parts to VAST LLC, purchases of component parts from VAST LLC, expenses charged to VAST LLC for engineering and accounting services and expenses charged to us from VAST LLC for general headquarters expenses. As a result of the sales of our VAST LLC ownership interest to WITTE, VAST LLC was no longer a related party as of June 30, 2023.
|
Three Months Ended |
|
|
Six Months Ended |
|
|
||||||||||
|
December 31, |
|
|
January 1, |
|
|
December 31, |
|
|
January 1, |
|
|
||||
Sales to VAST LLC |
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
||
Purchases from VAST LLC |
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
||
Expenses charged to VAST LLC |
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
||
Expenses charged from VAST LLC |
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
||
Leases
Our right-of-use operating lease assets are recorded at the present value of future minimum lease payments, net of amortization. We have an operating lease for our El Paso, Texas finished goods and service parts distribution warehouse. This lease has a current lease term through
As the leases do not provide an implicit rate, we used our incremental borrowing rate at lease commencement to determine the present value of our lease payments. The incremental borrowing rate is an entity-specific rate which represents the rate of interest we would pay to borrow over a similar term with similar payments.
|
December 31, |
|
|
Right-of use asset under operating lease: |
|
|
|
$ |
|
||
Lease obligation under operating lease: |
|
|
|
Current liabilities: |
$ |
|
|
|
|
||
|
$ |
|
|
Future minimum lease payments, by our fiscal year, including options to extend that are reasonably certain to be exercised, under these non-cancelable leases are as follows as of December 31, 2023 (in thousands):
2024 (for the remaining six months) |
$ |
|
|
2025 |
|
|
|
2026 |
|
|
|
2027 |
|
|
|
2028 |
|
|
|
Thereafter |
|
|
|
Total future minimum lease payments |
|
|
|
Less: Imputed interest |
|
( |
) |
Total lease obligations |
$ |
|
Cash flow information related to the operating lease is shown below (in thousands):
|
Six Months Ended |
|
|||||
|
December 31, |
|
|
January 1, |
|
||
Operating cash flows: |
|
|
|
|
|
||
Cash paid related to operating lease obligation |
$ |
|
|
$ |
|
||
12
The weighted average lease term and discount rate for our operating leases are shown below:
|
December 31, |
|
|
Weighted average remaining lease term (in years) |
|
|
|
Weighted average discount rate |
|
% |
|
Operating lease expense was as follows for the periods presented below (in thousands):
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
December 31, |
|
|
January 1, |
|
|
December 31, |
|
|
January 1, |
|
||||
Operating lease expense |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Credit Facilities
STRATTEC has a $
Outstanding borrowings under the credit facilities were as follows (in thousands):
|
December 31, |
|
|
July 2, |
|
||
STRATTEC Credit Facility |
$ |
— |
|
|
$ |
— |
|
ADAC-STRATTEC Credit Facility |
|
|
|
|
|
||
|
$ |
|
|
$ |
|
||
Average outstanding borrowings and the weighted average interest rate under each credit facility referenced above were as follows for each period presented (in thousands):
|
Six Months Ended |
|
|||||||||||||
|
Average Outstanding Borrowings |
|
|
Weighted Average Interest Rate |
|
||||||||||
|
December 31, |
|
|
January 1, |
|
|
December 31, |
|
|
January 1, |
|
||||
STRATTEC Credit Facility |
$ |
|
|
$ |
|
|
|
% |
|
|
% |
||||
ADAC-STRATTEC Credit Facility |
$ |
|
|
$ |
|
|
|
% |
|
|
% |
||||
Commitments and Contingencies
We are from time to time subject to various legal actions and claims incidental to our business, including those arising out of alleged defects, alleged breaches of contracts, product warranties, intellectual property matters and employment related matters. It is our opinion that the outcome of such matters will not have a material adverse impact on our consolidated financial position, results of operations or cash flows. With respect to warranty matters, although we cannot ensure that future costs of warranty claims by customers will not be material, we believe our established reserves are adequate to cover potential warranty settlements.
13
In 1995, we recorded a provision for estimated costs to remediate an environmental contamination site at our Milwaukee facility. The facility was contaminated by a solvent spill, which occurred in 1985, from a former above ground solvent storage tank located on the east side of the facility. The reserve was originally established based on third party estimates to adequately cover the cost for active remediation of the contamination. Due to changing technology and related costs associated with active remediation of the contamination, in fiscal years 2010, 2016, and 2021, we obtained updated third party estimates of projected costs to adequately cover the cost for active remediation of this contamination and adjusted the reserve as needed. We monitor and evaluate the site with the use of groundwater monitoring wells. An environmental consultant samples these wells one or two times a year to determine the status of the contamination and the potential for remediation of the contamination by natural attenuation, the dissipation of the contamination over time to concentrations below applicable standards. If such sampling evidences a sufficient degree of and trend toward natural attenuation of the contamination at the site, we may be able to obtain a closure letter from the regulatory authorities resolving the issue without the need for active remediation. If a sufficient degree and trend toward natural attenuation is not evidenced by sampling, a more active form of remediation beyond natural attenuation may be required. The sampling has not yet satisfied all of the requirements for closure by natural attenuation. As a result, sampling continues and the reserve remains at an amount to reflect our estimated cost of active remediation. The reserve is not measured on a discounted basis. We believe, based on findings-to-date and known environmental regulations, that the environmental reserve of $
Shareholders’ Equity
A summary of activity impacting shareholders’ equity for the three- and six-month periods ended December 31, 2023 and January 1, 2023 were as follows (in thousands):
|
Three months ended December 31, 2023 |
|
|||||||||||||||||||||||||
|
Total |
|
|
Common Stock |
|
|
Capital in Excess of Par Value |
|
|
Retained Earnings |
|
|
Accumulated Other Comprehensive Loss |
|
|
Treasury Stock |
|
|
Non-Controlling Interest |
|
|||||||
Balance, October 1, 2023 |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|||||
Net income |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
||
Translation adjustments |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|||
Stock based compensation |
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
||
Pension and postretirement |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Employee stock purchases |
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|||
Balance, December 31, 2023 |
$ |
||||||||||||||||||||||||||