# Strattec Security Corp: Form 10-Q for the period ended Dec 30, 2012

- Company: [Strattec Security Corp](/companies/strt.md) (CIK 933034)
- Form: 10-Q
- Filed: 2013-02-07
- Accepted by EDGAR: Feb 7, 2013, 16:29 ET
- Period: 2012-12-30
- Accession: 0001193125-13-043556
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/933034/000119312513043556/d445587d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/933034/000119312513043556/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-12-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-10-01 to 2012-12-30 | $72.2m | us-gaap:SalesRevenueGoodsNet |
| Revenue | 6 months, 2012-07-02 to 2012-12-30 | $143.1m | us-gaap:SalesRevenueGoodsNet |
| Cost of revenue | 3 months, 2012-10-01 to 2012-12-30 | $59.9m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2012-07-02 to 2012-12-30 | $117.0m | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2012-10-01 to 2012-12-30 | $12.3m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2012-07-02 to 2012-12-30 | $26.0m | us-gaap:GrossProfit |
| Operating income | 3 months, 2012-10-01 to 2012-12-30 | $3.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2012-07-02 to 2012-12-30 | $8.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2012-10-01 to 2012-12-30 | $10.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2012-07-02 to 2012-12-30 | $15.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2012-10-01 to 2012-12-30 | $1.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2012-07-02 to 2012-12-30 | $2.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2012-10-01 to 2012-12-30 | $2.4m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2012-07-02 to 2012-12-30 | $5.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-10-01 to 2012-12-30 | $0.70 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2012-07-02 to 2012-12-30 | $1.48 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2012-10-01 to 2012-12-30 | $0.71 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2012-07-02 to 2012-12-30 | $1.50 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2012-10-01 to 2012-12-30 | 3,353,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2012-07-02 to 2012-12-30 | 3,346,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2012-07-02 to 2012-12-30 | $6.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2012-07-02 to 2012-12-30 | $5.2m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 6 months, 2012-07-02 to 2012-12-30 | $688.0k | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2012-12-30 | $18.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-12-30 | $102.0m | us-gaap:AssetsCurrent |
| Total assets | at 2012-12-30 | $168.9m | us-gaap:Assets |
| Current liabilities | at 2012-12-30 | $55.5m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2012-12-30 | $85.5m | us-gaap:StockholdersEquity |
| Shares outstanding | at 2012-12-30 | 3,318,640 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 31,688 characters.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis should be read in conjunction with STRATTEC SECURITY CORPORATION’s accompanying Condensed Consolidated Financial Statements and Notes thereto and its 2012 Annual Report which was filed with the Securities and Exchange Commission as an exhibit to its Form 10-K on September 6, 2012. Unless otherwise indicated, all references to years refer to fiscal years.

### Analysis of Results of Operations

#### Three months ended December 30, 2012 compared to the three months ended January 1, 2012

|  | Three Months Ended December 30, 2012 | January 1, 2012 |
| --- | ---: | ---: |
| Net Sales (in millions) | $72.2 | $65.9 |

Net sales to each of our customers or customer groups in the current year quarter and prior year quarter were as follows (in millions):

|  | Three Months Ended December 30, 2012 | January 1, 2012 |
| --- | ---: | ---: |
| Chrysler Group LLC | $23.0 | $22.4 |
| General Motors Company | 13.5 | 14.4 |
| Ford Motor Company | 10.5 | 8.1 |
| Tier 1 Customers | 15.0 | 11.4 |
| Commercial and Other OEM Customers | 7.7 | 5.9 |
| Hyundai / Kia | 2.5 | 3.7 |
| Total | $72.2 | $65.9 |

Increased sales to Chrysler Group LLC and Ford Motor Company in the current quarter were primarily due to increased customer vehicle production volumes on models for which we supply components. New product content also contributed to the increased sales to Ford Motor Company. The reduction in sales to General Motors Company in the current quarter was primarily attributed to business we lost to other suppliers during the latter half of the 2012 model year, partially offset by higher production on other General Motors vehicles for which we continue to supply components. Increased sales to Tier 1, Commercial and Other OEM customers during the current quarter relates to market growth and the increasing impact of other vehicle access control products such as latches, fobs, and driver controls that have been developed in recent years to complement our historic core business of locks and keys. The reduction in sales to Hyundai / Kia in the current quarter was principally due to lower customer vehicle production volume and the discontinuation of a vehicle model for which we had been supplying components.

|  | Three Months Ended December 30, 2012 | January 1, 2012 |
| --- | ---: | ---: |
| Gross Profit as a Percentage of Net Sales | 17.0% | 17.1% |

The benefits of higher volumes on gross profit margin in the current quarter were negatively impacted by a less favorable product sales mix, an unfavorable Mexico Peso to U.S. Dollar exchange rate which negatively affected the U.S. dollar cost of our Mexican operations in the current year quarter, and higher expense provisions for our pension plan and for the accrual of bonuses earned under our incentive bonus plan. We froze our Defined Benefit Pension Plan for future benefit accruals effective January 1, 2010. Therefore, the increase in pension expense during the current year is attributed to a lower discount rate and the corresponding lower expected return on invested assets that are measured at the end of fiscal year 2012. The average U.S. dollar/Mexican peso exchange rate decreased to approximately 13.00 pesos to the dollar in the current year quarter from approximately 13.70 pesos to the dollar in the prior year quarter. This resulted in increased U.S. dollar costs related to our Mexican operations of approximately $458,000 in the current year quarter compared to the prior year quarter.

Engineering, selling and administrative expenses as a percent of net sales in the current quarter decreased to 11.7 percent from 12.1 percent in comparison to the prior year quarter. These expenses as a percent of net sales would have declined further except for increased costs primarily for our pension and incentive bonus plans as discussed above. During our fiscal 2013 third quarter, it is anticipated that SERP benefits of approximately $5.7 million will be cash settled using primarily Rabbi trust assets and current cash balances. We currently estimate that we will incur a related settlement charge to operations of approximately $2.1 million pre-tax in our third quarter as a result of the requirement to expense a portion of the unrealized actuarial losses due to the settlement of the SERP obligation. The charge will have no effect on equity because the unrealized actuarial losses are already recognized in accumulated other comprehensive loss. Accordingly, the effect on retained earnings will be offset by a corresponding reduction in accumulated other comprehensive loss.

Income from operations in the current year quarter was $3.8 million compared to $3.3 million in the prior year quarter. This change was the result of the increase in sales, which was partially offset by lower gross profit margins in the current year quarter over the prior year quarter as discussed above.

Equity loss of joint ventures was $99,000 during the current year quarter compared $192,000 in the prior year quarter. During the prior fiscal year our joint ventures in China and Brazil continued to incur relocation costs associated with moves to new facilities and start-up costs associated with a new product line. These relocation costs and start-up costs continued for VAST China in the current quarter. These costs resulted in STRATTEC incurring an equity loss from joint ventures in both the current year and prior year quarters. The facility moves have been completed, but we anticipate the start-up costs and related losses to continue for VAST China over the remainder of the 2013 fiscal year.

Included in other income (expense), net in the current year quarter and prior year quarter were the following items (in thousands):

|  | Three Months Ended December 30, 2012 | January 1, 2012 |
| --- | ---: | ---: |
| Foreign Currency Transaction Gain (Loss) | $142 | $(95) |
| Rabbi Trust (Loss) Gain | (11) | 144 |
| Unrealized Gain on Mexican Peso Option Contracts | 38 | 589 |
| Realized Loss on Mexican Peso Option Contracts, net | — | (192) |
| Other | 18 | 57 |
|  | $187 | $503 |

Foreign currency transaction gains and losses resulted from foreign currency transactions entered into by our Mexican subsidiaries and fluctuations in foreign currency cash balances. In September of the prior fiscal year, the Mexican peso devalued significantly to the U.S. dollar creating unrealized losses on our Mexican peso currency option contracts. In the prior year December quarter, realized losses were generated on the weekly commitments due under the contracts. Our objective in entering into these currency option contracts was to minimize our earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. Unrealized losses recognized as a result of mark-to-market adjustments as of December 30, 2012 totaled approximately $47,000, all of which may or may not be realized, depending upon the actual Mexican peso to U.S. dollar exchange rates experienced during the balance of the option contract period. Our Rabbi Trust assets fund our supplemental executive retirement plan. The investments held in the Trust are considered trading securities.

Our income tax provision for each of the three month periods ended December 30, 2012 and January 1, 2012 was affected by the non-controlling interest portion of our pre-tax income and a lower statutory tax rate for income subject to tax in Mexico as compared to the statutory tax rate for income subject to tax in the U.S.

#### Six months ended December 30, 2012 compared to the six months ended January 1, 2012

|  | Six Months Ended December 30, 2012 | January 1, 2012 |
| --- | ---: | ---: |
| Net Sales (in millions) | $143.0 | $132.2 |

15

Net Sales to each of our customers or customer groups in the current year period and prior year period were as follows (in millions):

|  | Six Months Ended December 30, 2012 | January 1, 2012 |
| --- | ---: | ---: |
| Chrysler Group LLC | $45.4 | $42.2 |
| General Motors Company | 28.6 | 30.4 |
| Ford Motor Company | 20.1 | 16.4 |
| Tier 1 Customers | 28.9 | 22.8 |
| Commercial and Other OEM Customers | 14.7 | 12.9 |
| Hyundai / Kia | 5.3 | 7.5 |
| Total | $143.0 | $132.2 |

Increased sales to Chrysler Group LLC and Ford Motor Company in the current year period were primarily due to increased customer vehicle production volumes on models for which we supply components. New product content also contributed to the increased sales to Ford Motor Company. The reduction in sales to General Motors Company in the current year period was primarily attributed to business we lost to other suppliers during the latter half of the 2012 model year, partially offset by higher production on other General Motors vehicles for which we continue to supply components. Increased sales to Tier 1, Commercial and Other OEM customers in the current year period relates to market growth and the increasing impact of other vehicle access control products such as latches, fobs and driver controls that have been developed in recent years to complement our historic core business of locks and keys. The reduction in sales to Hyundai / Kia in the current year period was principally due to lower customer vehicle production volume and the discontinuation of a vehicle model for which we had been supplying components.

|  | Six Months Ended December 30, 2012 | January 1, 2012 |
| --- | ---: | ---: |
| Gross Profit as a Percentage of Net Sales | 18.2% | 17.2% |

The higher gross profit margin in the current year period was primarily the result of favorable increased overhead absorption of our fixed manufacturing costs resulting from favorable customer production volumes of most of the vehicles for which we supply components. This was partially offset by a less favorable product content sales mix and higher expense provisions for our pension plan and for the accrual of bonuses earned under our incentive bonus plans. We froze our Defined Benefit Pension Plan for future benefit accruals effective January 1, 2010. Therefore, the increase in pension expense during the current year period was attributable to a lower discount rate and the corresponding lower expected return on invested assets that are measured at the end of fiscal year 2012.

Engineering, selling and administrative expenses as a percent of net sales were 12.3 percent in the current year period compared to 12.2 percent in the prior year period. These expenses as a percent of net sales would have declined except for increased costs for product development, higher medical costs, and increased costs for our pension and incentive bonus plans as discussed above. During our fiscal 2013 third quarter, it is anticipated that SERP benefits of approximately $5.7 million will be cash settled using primarily Rabbi trust assets and current cash balances. We currently estimate that we will incur a related settlement charge to operations of approximately $2.1 million pre-tax in our third quarter as a result of the requirement to expense a portion of the unrealized actuarial losses due to the settlement of the SERP obligation. The charge will have no effect on equity because the unrealized actuarial losses are already recognized in accumulated other comprehensive loss. Accordingly, the effect on retained earnings will be offset by a corresponding reduction in accumulated other comprehensive loss.

Income from operations in the current year-to-date period was $8.4 million compared to $6.6 million in the prior year-to-date period. This change was the result of the increase in sales and gross profit margin in the current year-to-date period over the same period in the prior year as discussed above.

Equity loss of joint ventures was $111,000 during the current year-to-date period compared to $312,000 in the prior year-to-date period. During the prior fiscal year our joint ventures in China and Brazil continued to incur relocation costs associated with moves to new facilities and start-up costs associated with a new product line. These relocation costs and start-up costs continued for VAST China in the current period. These costs resulted in STRATTEC incurring an equity loss from joint ventures in both the current year-to-date and prior year-to-date periods. The facility moves have been completed, but we anticipate the start-up costs and related losses to continue for VAST China over the remainder of the 2013 fiscal year.

Included in net other income (expense) in the current year-to-date period and prior year-to-date period were the following items (in thousands):

|  | Six Months Ended December 30, 2012 | January 1, 2012 |
| --- | ---: | ---: |
| Foreign Currency Transaction (Loss) Gain | $(313) | $1,605 |
| Rabbi Trust Gain (Loss) | 53 | (97) |
| Unrealized Gain (Loss) on Mexican Peso Option Contracts | 348 | (1,716) |
| Realized Loss on Mexican Peso Option Option Contracts | (34) | (188) |
| Other | 115 | 31 |
|  | $169 | $(365) |

Foreign currency transaction gains and losses resulted from foreign currency transactions entered into by our Mexican subsidiaries and fluctuations in foreign currency cash balances. Our Rabbi Trust assets fund our supplemental executive retirement plan. The investments held in the Trust are considered trading securities. In September of the prior fiscal year, the Mexican peso devalued significantly to the U.S. dollar creating both foreign currency transaction gains and unrealized losses on our Mexican peso currency option contracts. Our objective in entering into these currency option contracts was to minimize our earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. Unrealized losses recognized as a result of mark-to-market adjustments as of December 30, 2012 totaled approximately $47,000 all of which may or may not be realized, depending upon the actual Mexican peso to U.S. dollar exchange rates experienced during the balance of the option contract period.

Our income tax provision for each of the six month periods ended December 30, 2012 and January 1, 2012 was affected by the non-controlling interest portion of our pre-tax income and a lower effective and statutory tax rate for income subject to tax in Mexico as compared to the effective and statutory tax rate for income subject to tax in the U.S.

### Liquidity and Capital Resources

Our primary source of cash flow is from our major customers, which include Chrysler Group LLC, General Motors Company and Ford Motor Company. As of the date of filing this Form 10-Q with the Securities and Exchange Commission, all of our customers are making payments on their outstanding accounts receivable in accordance with the payment terms included on their purchase orders. A summary of our outstanding receivable balances from our major customers as of December 30, 2012 was as follows (in thousands of dollars):

|  |  |
| --- | ---: |
| Chrysler | $13,320 |
| General Motors | $7,282 |
| Ford | $5,826 |

We earn a portion of our operating income in Mexico, which is deemed to be permanently reinvested. As of December 30, 2012, $9.3 million of our $18.6 million cash and cash equivalents balance was held by our foreign subsidiaries in Mexico. We currently do not intend nor foresee a need to repatriate these funds. We expect existing domestic cash and cash equivalents and cash flows from operations to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities, such as regular quarterly dividends and capital expenditures, for at least the next 12 months and thereafter for the foreseeable future. Should we require more capital in the U.S. than is generated by our operations domestically, for example to fund significant discretionary activities, such as acquisitions of businesses and share repurchases, we could elect to repatriate future earnings from foreign jurisdictions or raise capital in the U.S. through borrowings under our revolving credit facility. These alternatives could result in higher effective tax rates, increased interest expense, or other dilution of our earnings.

Cash flow provided by operating activities was $6.0 million during the six months ended December 30, 2012, compared to $5.2 million during the six months ended January 1, 2012. Cash flows from operating activities increased in the current year-to-date period compared to the prior year-to-date period primarily due to an improvement in our overall financial results. This increase was partially reduced by increased working capital requirements in the current year-to-date period as compared to the prior year-to-date period. Net income adjusted for non-cash items such as depreciation, unrealized gains and losses on foreign currency contracts and foreign currency transaction gains and losses increased approximately $1.8 million in the current year-to-date period as compared to the prior year-to-date period. Cash used for working capital requirements increased approximately $1.0 million in the current year-to-date period as compared to the prior year-to-date period. Our working capital requirements during the current period were impacted by a significant increase in inventory. During our fiscal 2013 first quarter we increased inventory levels in support of production shipment requirements for new model year launches. Toward the end of our fiscal 2013 second quarter, customer sales weakened as our customers, primarily General Motors and Chrysler, reduced their production build schedules for certain models we supply to work off excess dealer vehicle inventory. This resulted in a further increase in our inventory levels as of the end of our 2013 fiscal second quarter. During the current year quarter, the other current assets balance was reduced by approximately $1.5 million as a result of billings made for customer tooling balances. Current year-to-date operating cash flow was also impacted by an August 2012 payment of approximately $5.2 million in bonuses, which were earned during fiscal 2012 under our incentive bonus plans. Bonus payments totaled approximately $4.3 million in the prior year-to-date period. Contributions made to our qualified pension plan totaled $1,750,000 during the current year-to-date period and $1 million during the prior year-to-date period.

During our fiscal 2013 third quarter, it is anticipated that SERP benefits of approximately $5.7 million will be cash settled using primarily Rabbi trust assets and current cash balances. We currently estimate that we will incur a related settlement charge to operations of approximately $2.1 million pre-tax in our third quarter as a result of the requirement to expense a portion of the unrealized actuarial losses due to the settlement of the SERP obligation. The charge will have no effect on equity because the unrealized actuarial losses are already recognized in accumulated other comprehensive loss. Accordingly, the effect on retained earnings will be offset by a corresponding reduction in accumulated other comprehensive loss.

During the six months ended December 30, 2012, our portion of capital contributions made to VAST LLC in support of general operating expenses totaled $200,000. During both the current year-to-date and prior year-to-date periods the VAST joint venture in China incurred relocation costs associated with moves to new facilities and start-up costs associated with a new product line. These relocation costs and start-up costs have been financed internally by VAST LLC. We anticipate these transition costs and related losses to continue for VAST China over the remainder of the 2013 fiscal year. In addition, we anticipate that VAST China capital expenditures will total approximately $7 million during calendar year 2013 in support of the new product line and new programs. As a result, we estimate that our portion of additional capital contributions to VAST LLC could be $1 million to $3 million during calendar year 2013.

Capital expenditures during the current year-to-date period totaled $5.2 million compared to $6.3 million in the prior year-to-date period. We anticipate that capital expenditures will be approximately $10 million in fiscal 2013, primarily relating to expenditures in support of requirements for new product programs and the upgrade and replacement of existing equipment.

Our Board of Directors has authorized a stock repurchase program to buy back outstanding shares of our common stock. Shares authorized for buy back under the program totaled 3,839,395 at December 30, 2012. A total of 3,655,322 shares have been repurchased over the life of the program through December 30, 2012, at a cost of approximately $136.4 million. No shares were repurchased during the six month period ended December 30, 2012. Additional repurchases may occur from time to time and are expected to continue to be funded by cash flow from operations and current cash balances. Based on the current economic environment and our preference to conserve cash for other uses, we anticipate modest or no stock repurchase activity for the remainder of fiscal year 2013.

We have a $25 million secured revolving credit facility (the “STRATTEC Credit Facility”) with BMO Harris Bank N.A. The STRATTEC Credit Facility expires August 1, 2014. As of September 30, 2012, ADAC-STRATTEC LLC had a $5 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 expires June 28, 2015. Any borrowings under the credit facilities will be secured by our U.S. cash balances, accounts receivable, inventory and fixed assets located in the U.S. Interest on borrowings under these credit facilities is at varying rates based, at our option, on the London Interbank Offering Rate plus 1.0 to 1.75 percent or the bank’s prime rate. Both credit facilities contain a restrictive financial covenant that requires the maintenance of 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. There were no outstanding borrowings under the STRATTEC Credit Facility at December 30, 2012 or July 1, 2012. There were no borrowings under the STRATTEC Credit Facility during fiscal 2013 to date or during fiscal 2012. Borrowings under the ADAC-STRATTEC Credit Facility totaled $2,250,000 at December 30, 2012. The average outstanding borrowings and weighted average interest rate on the ADAC-STRATTEC Credit Facility loans were approximately $1.9 million and 2.0 percent, respectively, during the six months ended December 30, 2012. There were no borrowings under the ADAC-STRATTEC Credit Facility during fiscal 2012. We believe that these credit facilities 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.

Over the past several years, we have been impacted by rising health care costs, which have increased our cost of associate medical coverage. A portion of these increases have been offset by plan design changes and associate wellness initiatives. We have also been impacted by increases in the market price of zinc and brass and inflation in Mexico, which impacts the U. S. dollar costs of our Mexican operations. We have negotiated raw material price adjustment clauses with certain, but not all, of our customers to offset some of the market price fluctuations in the cost of zinc. Moreover, in January 2011 and August 2011, we entered into agreements with Bank of Montreal that provide for two weekly Mexican peso currency option contracts for a portion of our estimated peso denominated operating costs. Current contracts with Bank of Montreal extend through June 28, 2013. The two weekly option contracts are for equivalent notional amounts. The contracts that were effective in fiscal 2012 and expired on July 6, 2012 provided for the purchase of Mexican pesos at a U.S. dollar / Mexican peso exchange rate of 11.85 if the spot rate at the weekly expiry date was below 11.85 or for the purchase of Mexican pesos at a U.S. dollar / Mexican peso exchange rate of 12.85 if the spot rate at the weekly expiry date was above 12.85. Contracts that are effective during the period July 6, 2012 through June 28, 2013 provide for the purchase of Mexican pesos at an average U.S. dollar / Mexican peso exchange rate of 12.40 if the spot rate at the weekly expiry date is below an average of 12.40 or for the purchase of Mexican pesos at an average U.S. dollar / Mexican peso exchange rate of 13.40 if the spot rate at the weekly expiry date is above an average of 13.40. Our objective in entering into these currency option 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 option contracts are not used for speculative purposes and are not designated as hedges. As a result, all currency option contracts are recognized in our accompanying condensed consolidated financial statements at fair value and changes in the fair value of the currency option contracts are reported in current earnings as part of Other Income (Expense), net. The premiums to be paid and received under the weekly Mexican peso currency option contracts net to zero. As a result, premiums related to the contracts did not impact our earnings during the periods presented herein.

The following table quantifies the outstanding Mexican peso currency option contracts as of December 30, 2012 (thousands of dollars):

| Contracts Effective July 6, 2012 – June 28, 2013 | Notional Amount | Average Option Contractual Exchange Rate | Fair Value | Foreign Exchange Gain/(Loss) From: 10% Appreciation of U.S. Dollar | 10% Depreciation of U.S. Dollar |
| --- | ---: | ---: | ---: | ---: | ---: |
| Buy MXP/Sell USD | $5,400 | 12.40 | $20 | $(20) | $268 |
| Buy MXP/Sell USD | $5,400 | 13.40 | $(67) | $(321) | $64 |

19

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

| Not Designated as Hedging Instruments: Other Current Liabilities: | December 30, 2012 | July 1, 2012 |
| --- | ---: | ---: |
| Mexican Peso Option Contracts | $(47) | $(395) |

The pre-tax effects of the Mexican peso option contracts on the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended December 30, 2012 and January 1, 2012 consisted of the following (thousands of dollars):

| Not Designated as Hedging Instruments: | Other Income (Expense), net Three Months Ended December 30, 2012 | January 1, 2012 | Six Months Ended December 30, 2012 | January 1, 2012 |
| --- | ---: | ---: | ---: | ---: |
| Realized Gain | $— | $— | $— | $18 |
| Realized (Loss) | $— | $(192) | $(34) | $(206) |
| Unrealized Gain (Loss) | $38 | $589 | $348 | $(1,716) |

### Joint Ventures

We participate in certain Alliance Agreements with WITTE Automotive (“WITTE”) and ADAC Automotive (“ADAC”). WITTE, of Velbert, Germany, is a privately held automotive supplier. WITTE designs, manufactures and markets automotive components, including locks and keys, hood latches, rear compartment latches, seat back latches, door handles and specialty fasteners. WITTE’s primary market for these products has been Europe. ADAC, of Grand Rapids, Michigan, is a privately held automotive supplier and manufactures engineered products, including door handles and other automotive trim parts, utilizing plastic injection molding, automated painting and various assembly processes.

The Alliance Agreements include a set of cross-licensing agreements for the manufacture, distribution and sale of WITTE products by STRATTEC and ADAC in North America, and the manufacture, distribution and sale of STRATTEC and ADAC products by WITTE in Europe. Additionally, a joint venture company, Vehicle Access Systems Technology LLC (“VAST LLC”), in which WITTE, STRATTEC and ADAC each hold a one-third interest, exists to seek opportunities to manufacture and sell the companies’ products in areas of the world outside of North America and Europe.

VAST do Brasil, a joint venture between VAST LLC and Ifer do Brasil Ltda., services customers in South America. VAST Fuzhou, VAST Great Shanghai and VAST Shanghai Co. (collectively known as VAST China), provides a base of operations to service our automotive customers in the Asian market. 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. The activities related to the VAST LLC joint ventures resulted in equity loss of joint ventures to STRATTEC of approximately $111,000 during the six months ended December 30, 2012 and equity loss of joint ventures to STRATTEC of approximately $312,000 during the six months ended January 1, 2012. During the prior fiscal year our joint ventures in China and Brazil continued to incur relocation costs associated with moves to new facilities and start-up costs associated with a new product line. These relocation costs and start-up costs continued for VAST China in the current period-to-date. These items resulted in STRATTEC incurring an equity loss from joint ventures in both the current year-to-date and prior year-to-date periods. We anticipate these transition costs and related losses to continue for VAST China over the remainder of the 2013 fiscal year. During the six months ended December 30, 2012, cash capital contributions totaling $600,000 were made to VAST LLC in support of general operating expenses. STRATTEC’s portion of the cash capital contributions totaled $200,000. During the six months ended January 1, 2012, capital contributions totaling $600,000 were made to VAST LLC in support of general operating expenses. STRATTEC’s portion of these capital contributions also totaled $200,000.

In fiscal year 2007, we entered into a joint venture with ADAC forming ADAC-STRATTEC LLC, a Delaware limited liability company. The joint venture was created to establish injection molding and door handle assembly operations in Mexico. STRATTEC originally held a 50.1 percent interest in ADAC-STRATTEC LLC. Effective June 28, 2010, STRATTEC purchased an additional .9 percent interest from ADAC and now owns 51 percent. A Mexican entity, ADAC-STRATTEC de Mexico, exists and 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 $620,000 during the six months ended December 30, 2012 and approximately $696,000 during the six months ended January 1, 2012.

Effective November 30, 2008, STRATTEC established a new entity, STRATTEC POWER ACCESS LLC (“SPA”), which is 80 percent owned by STRATTEC and 20 percent owned by WITTE. SPA operates the North American portion of the Power Products business which was acquired from Delphi Corporation. The financial results of SPA are consolidated with the financial results of STRATTEC and resulted in increased net income to STRATTEC of approximately $657,000 during the six months ended December 30, 2012 and approximately $1.1 million during the six months ended January 1, 2012.

## Market risk

As filed, 6,013 characters.

Our exposure to market risk is limited to fluctuations in raw material commodity prices, interest rate fluctuations on borrowings under our secured revolving credit facilities and foreign currency exchange rate risk associated with STRATTEC’s foreign operations. We do not utilize financial instruments for trading purposes.

Interest Rates: We are subject to interest rate fluctuations on borrowings under our revolving credit facilities. At December 30, 2012, we had $2,250,000 of outstanding borrowings under our credit facilities. The interest expense related to borrowings under the credit facilities during the six months ended December 30, 2012 was $15,000. A 10% increase or decrease in the interest rate on borrowings would not have a material effect on our financial position, results of operations or cash flows.

Foreign Currency: We are subject to foreign currency exchange rate exposure related to the U.S. dollar costs of our manufacturing operations in Mexico. A portion of our manufacturing costs are incurred in Mexican pesos. Our earnings and cash flows are subject to fluctuations as a result of changes in the U.S. dollar / Mexican peso exchange rate. In January 2011 and August 2011, we entered into agreements with Bank of Montreal that provide for two weekly Mexican peso currency option contracts for a portion of our estimated peso denominated operating costs. Current contracts with Bank of Montreal extend through June 28, 2013. The two weekly option contracts are for equivalent notional amounts. The contracts that were effective in fiscal 2012 and expired on July 6, 2012 provided for the purchase of Mexican pesos at a U.S. dollar / Mexican peso exchange rate of 11.85 if the spot rate at the weekly expiry date was below 11.85 or for the purchase of Mexican pesos at a U.S. dollar / Mexican peso exchange rate of 12.85 if the spot rate at the weekly expiry date was above 12.85. Contracts that are effective during the period July 6, 2012 through June 28, 2013 provide for the purchase of Mexican pesos at an average U.S. dollar / Mexican peso exchange rate of 12.40 if the spot rate at the weekly expiry date is below an average of 12.40 or for the purchase of Mexican pesos at an average U.S. dollar / Mexican peso exchange rate of 13.40 if the spot rate at the weekly expiry date is above an average of 13.40. Our objective in entering into these currency option 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 option contracts are not used for speculative purposes and are not designated as hedges. As a result, all currency option contracts are recognized in our accompanying condensed consolidated financial statements at fair value and changes in the fair value of the currency option contracts are reported in current earnings as part of Other Income (Expense), net. The premiums to be paid and received under the weekly Mexican peso currency option contracts net to zero. As a result, premiums related to the contracts did not impact our earnings during the periods presented herein.

The following table quantifies the outstanding Mexican peso currency option contracts as of December 30, 2012 (thousands of dollars):

|  | Effective Dates | Notional Amount | Average Option Contractual Exchange Rate | Fair Value |
| --- | --- | ---: | ---: | ---: |
| Buy MXP/Sell USD | July 6, 2012 – June 28, 2013 | $5,400 | 12.40 | $20 |
| Buy MXP/Sell USD | July 6, 2012 – June 28, 2013 | $5,400 | 13.40 | $(67) |

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

| Not Designated as Hedging Instruments: Other Current Liabilities: | December 30, 2012 | July 1, 2012 |
| --- | ---: | ---: |
| Mexican Peso Option Contracts | $(47) | $(395) |

22

The pre-tax effects of the Mexican peso option contracts on the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended December 30, 2012 and January 1, 2012 consisted of the following (thousands of dollars):

| Not Designated as Hedging Instruments: | Other Income (Expense), net Three Months Ended December 30, 2012 | January 1, 2012 | Six Months Ended December 30, 2012 | January 1, 2012 |
| --- | ---: | ---: | ---: | ---: |
| Realized Gain | $— | $— | $— | $18 |
| Realized (Loss) | $— | $(192) | $(34) | $(206) |
| Unrealized Gain (Loss) | $38 | $589 | $348 | $(1,716) |

Raw Materials Commodity Prices: Our primary raw materials are high-grade zinc, brass, nickel silver, aluminum, steel and plastic resins. These materials are generally available from a number of suppliers, but we have chosen to concentrate our sourcing with one primary vendor for each commodity or purchased component. We believe our sources of raw materials are reliable and adequate for our needs. However, the development of future sourcing issues related to using existing or alternative raw materials and the global availability of these materials as well as significant fluctuations in the market prices of these materials may have an adverse effect on our financial results if the increased raw material costs cannot be recovered from our customers. Given the significant financial impact on us relating to changes in the cost of our primary raw materials, commencing with fiscal 2008, we began quoting quarterly material price adjustments for changes in our zinc costs in our negotiations with our customers. Our success in obtaining these quarterly price adjustments in our customer contracts is dependent on separate negotiations with each customer. It is not a standard practice for our customers to include such price adjustments in their contracts. We have been successful in obtaining quarterly price adjustments in some of our customer contracts. However, we have not been successful in obtaining the adjustments with all of our customers.

## Controls and procedures

As filed, 2,198 characters.

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act, are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act are accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures were effective at reaching a level of reasonable assurance. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures. We have designed our disclosure controls and procedures to reach a level of reasonable assurance of achieving the desired control objectives.

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II

Other Information

## Risk factors

As filed, 157 characters.

There have been no material changes to the risk factors disclosed in our Form 10-K as filed with the Securities and Exchange Commission on September 6, 2012.

Filed Feb 7, 2013.
Source: SEC EDGAR, the filing index for accession 0001193125-13-043556. Last ingested by Listed: Nov 6, 2026, 02:27 ET. No prices; not investment advice.