Strattec Security Corp: Form 10-Q for the period ended Mar 29, 2015

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 2014 Annual Report which was filed with the Securities and Exchange Commission as an exhibit to its Form 10-K on September 5, 2014. Unless otherwise indicated, all references to years refer to fiscal years.

Outlook

Chrysler commenced their planned shutdown of their Windsor, Canada Assembly Plant effective February 9, 2015 in preparation of their changeover to the production of the new Chrysler minivan. The impact to STRATTEC’s current year quarter and nine month period ended March 29, 2015 were lost sales of approximately $8 million. This Windsor, Canada Assembly Plant shutdown is scheduled to continue through May 24, 2015. In the event this shutdown does continue through the above time period, we estimate this will result in lost power access and lockset product sales of approximately $8 million to $9 million during our fiscal 2015 fourth quarter.

Analysis of Results of Operations

Three months ended March 29, 2015 compared to the three months ended March 30, 2014

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

The decrease in sales to Chrysler Group LLC in the current year quarter was due to Chrysler’s temporary shutdown of its Windsor, Canada assembly plant to re-tool the facility for the production of the new Chrysler minivan. The negative effect of the shutdown was partially offset by increased service sales to Chrysler in the current year quarter over the prior year quarter. The decrease in sales to General Motors Company in the current year quarter related to a $3.3 million sales concession that we granted to General Motors during the current year quarter, which decrease was partially offset by higher vehicle production volumes and greater product content on vehicle models for which we supply components that were introduced for the 2015 model year. Decreased sales to Ford Motor Company in the current year quarter were attributed to lower vehicle production volumes on models for which we supply components and in particular for components we supply on the F-150 pick-up trucks, which decrease was partially offset by higher latch product sales in the current year quarter. Sales to Tier 1 Customers during the current year quarter increased in comparison to the prior year quarter. These customers primarily represent purchasers of vehicle access control products, such as latches, fobs, and driver controls, that we have developed in recent years to complement our historic core business of locks and keys. The increase in sales to Hyundai / Kia in the current year quarter was due to the continued ramp-up of the new Kia Sedona minivan for which we supply components.

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Direct material costs are the most significant component of our cost of goods sold and comprised $47.9 million or 65.6 percent of cost of goods sold in the current year quarter compared to $45.6 million or 64.8 percent of cost of goods sold in the prior year quarter. The increase in material costs of $2.3 million, or 5.0 percent, was due to increased sales volumes in the current year quarter over the prior year quarter as discussed above. The increase in material costs as a percent of cost of goods sold is the result of the increased sales of product with higher purchased part content in the current year quarter as compared to the prior year quarter.

The remaining components of our cost of goods sold consist of labor and overhead costs which increased $400,000 or 1.6 percent in the current year quarter over the prior year quarter as the variable portion of these costs increased due to the increase in sales volumes during the current year quarter over the prior year quarter. The impact of the increase in the variable portion of these costs was partially offset by the benefits of favorable absorption of the fixed portion of our labor and overhead costs resulting from increased sales volumes between periods, a reduction of $780,000 in expense provisions for the accrual of bonuses under our incentive bonus plans for the current year quarter as compared to the prior year quarter and a favorable Mexican Peso to U.S. dollar exchange rate affecting the U.S. dollar cost of our Mexican operations. The average U.S. dollar/Mexican Peso exchange rate increased to approximately 14.96 in the current year quarter from approximately 13.22 in the prior year quarter, which resulted in decreased U.S. dollar costs related to our Mexican operations of approximately $1.3 million in the current year quarter compared to the prior year quarter.

The improvement in gross profit in the current year quarter over the prior year quarter was the result of the increase in sales, partially offset by the increase in cost of goods sold as discussed above. Gross profit as a percentage of net sales in the current year quarter was relatively consistent with the prior year quarter as the unfavorable impacts of increased sales of products with higher purchased part content, which have lower overall profit margins, and a General Motors sales concession that we agreed to provide in the current year quarter were offset by the favorable impacts of increased customer production volumes resulting in more favorable absorption of our fixed manufacturing costs, a reduction in expense provisions for the accrual of bonuses under our incentive bonus plans for the current year quarter as compared to the prior year quarter and a favorable Mexican Peso to U.S. dollar exchange rate affecting the U.S. dollar cost of our Mexican operations, all as discussed above.

Engineering, selling and administrative expenses in the current year quarter and prior year quarter were as follows:

Engineering, selling and administrative expenses remained consistent between periods while decreasing as a percentage of net sales. Higher costs in support of our new Auburn Hills, Michigan sales and engineering facility and higher engineering and selling costs associated with current product programs as well as new product programs under development were offset by a reduction of $630,000 in expense provisions for the accrual of bonuses for the current year quarter as compared to the prior year quarter under our incentive bonus plans.

Income from operations in the current year quarter was $5.9 million compared to $5.1 million in the prior year quarter. This increase was the result of the increased sales in the current year quarter over the prior year quarter, partially offset by an increase in cost of goods sold, all as discussed above.

Equity loss of joint ventures was $207,000 during the current year quarter compared to equity earnings of joint ventures of $267,000 in the prior year quarter. The activities related to the STRATTEC Advanced Logic, LLC joint venture are included in equity (loss) earnings of joint ventures and resulted in equity loss of joint ventures to STRATTEC of $508,000 in the current year quarter and $98,000 in the prior year quarter. The equity loss of joint ventures for the current year quarter included a loss of $367,000 related to STRATTEC’s guarantee of the STRATTEC Advanced Logic, LLC revolving credit facility. Our joint venture partner did not guarantee their proportionate share of the STRATTEC Advanced Logic credit facility. As a result, we recorded a loss equal to our partner’s proportionate share, based on their ownership percentage, of the fair value of the STRATTEC guarantee. The activities related to the VAST LLC joint venture are also included in equity (loss) earnings of joint ventures and resulted in equity earnings of joint ventures of $301,000 in the current year quarter and $365,000 in the prior year quarter.

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

Foreign currency transaction gains during the current year quarter resulted from activity associated with foreign denominated assets held by our Mexican subsidiaries. Our Rabbi Trust assets fund our amended and restated 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 March 29, 2015 and March 30, 2014 was affected by the non-controlling interest portion of our pre-tax income and a lower effective 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. Moreover, our income tax provision included a reduction in our liability for unrecognized tax benefits and related interest of approximately $936,000 for the three month period ended March 29, 2015 and $307,000 for the three month period ended March 30, 2014 due to tax years that closed during these periods. Our effective tax rate was 16.5 percent for the current year quarter as compared to 23.4 percent for the prior year quarter. The reduction in the effective rate between quarters was the result of a larger reduction in the liability for unrecognized tax benefits in the current year quarter as compared to the prior year quarter.

Nine months ended March 29, 2015 compared to the nine months ended March 30, 2014

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

The increase in sales to General Motors Company in the current year period was attributed to incremental service parts sales during the six months ended December 28, 2014 of $34.0 million related to a recall campaign. The incremental sales adjusted to more normal levels during the quarter ended March 29, 2015 and are expected to remain at normal levels going forward. Sales to General Motors were also impacted by higher vehicle production volumes and greater product content on vehicle models for which we supply components that were introduced for the 2015 model year and a $3.3 million sales concession we granted to General Motors which negatively impacted the quarter ended March 29, 2015. Increased sales to Chrysler Group LLC in the current year period were the result of higher customer vehicle production volumes and increased content on models for which we supply components and increased service sales to Chrysler during the quarter ended March 29, 2015, which were partially offset by decreased sales resulting from Chrysler’s temporary shutdown of its Windsor, Canada assembly plant, which began in February 2015, to re-tool the facility for the production of the new Chrysler minivan. Decreased sales to Ford Motor Company in the current year period were attributed lower vehicle production volumes on models for which we supply components and in particular for components we supply on the F-150 pick-up trucks, which were partially offset by higher latch product sales in the current year period. Sales to Tier 1 Customers during the current year period increased in comparison to the prior year period. These customers primarily represent purchasers of vehicle access control products, such as latches, fobs, and driver controls, that we have developed in recent years to complement our historic core business of locks and keys. The increase in sales to Hyundai / Kia in the current year period was due to the ramp-up of the new Kia Sedona minivan for which we supply components.

Direct material costs are the most significant component of our cost of goods sold and comprised $163.7 million or 65.3 percent of cost of goods sold in the current year period compared to $131.5 million or 65.4 percent of cost of goods sold in the prior year period. The increase in material costs of $32.2 million, or 24.5 percent, was due to increased sales volumes in the current year period over the prior year period as discussed above. While material costs as a percent of cost of goods sold was relatively consistent between periods, the favorable impact to material costs resulting from increased sales of service parts as discussed above, which typically have lower material cost percentages as compared to parts sold for new vehicle production, was offset by the impact of increased sales of product with higher purchased part content in the current year period as compared to the prior year period.

The remaining components of cost of goods sold consist of labor and overhead costs which increased $17.6 million or 25.3 percent in the current year period over the prior year period as the variable portion of these costs increased due to the increase in sales volumes during the current year period over the prior year period. In addition, the current year period includes benefits from the favorable absorption of the fixed portion of our labor and overhead costs resulting from increased sales volumes between periods and a favorable Mexican Peso to U.S. dollar exchange rate affecting the U.S. dollar cost of our Mexican operations, which were partially offset by higher costs associated with new product launches, higher costs to meet expedited customer timelines, an increase of $2.6 million in expense provisions for the accrual of bonuses under our incentive bonus plans as a result of improved financial results for fiscal 2015 to date and a lump sum bonus totaling $311,000 paid to the Company’s Milwaukee represented hourly workers resulting from a new 4-year labor contract ratified on September 18, 2014. The average U.S. dollar/Mexican Peso exchange rate increased to approximately 13.97 in the current year period from approximately 13.11 in the prior year period, which resulted in decreased U.S. dollar costs related to our Mexican operations of approximately $2.1 million in the current year period compared to the prior year period.

The improvement in gross profit in the current year period over the prior year period was the result of the increase in sales, which was partially offset by the increase in cost of goods sold as discussed above. The improvement in gross profit as a percentage of net sales in the current year period as compared to the prior year period was the result of increased sales of service parts related to the General Motors recall campaign described above, which sales typically have higher gross profit margins as compared to gross profit margins on parts sold for new vehicle production, increased customer production volumes resulting in more favorable absorption of our fixed manufacturing costs and a favorable Mexican Peso to U.S. dollar exchange rate affecting the U.S. dollar cost of our Mexican operations. These favorable impacts to the gross profit margin as a percentage of net sales were partially offset by increased sales of product with higher purchased part content in the current year period as compared to the prior year period, higher costs associated with new product launches, higher costs to meet expedited customer timelines, the General Motors sales concession that we granted in fiscal 2015, an increase in expense provisions for the accrual of bonuses under our incentive bonus plans as a result of improved financial results for fiscal 2015 to date and a lump sum bonus paid to the Company’s Milwaukee represented hourly workers resulting from the ratification of a new 4-year labor contract, all as discussed above.

Engineering, selling and administrative expenses in the current year period and prior year period were as follows:

Engineering, selling and administrative increased approximately $5.0 million between periods while decreasing as a percentage of net sales. The increase in these costs in the current year period over the prior year period was due to an increase of $2.1 million in expense provisions for the accrual of bonuses under our incentive bonus plans as a result of improved financial results for fiscal 2015 to date, higher outside service costs to support sales and engineering activities for current product programs as well as new product programs under development and higher outside service costs in support of our new Auburn Hills, Michigan sales and engineering facility.

Income from operations in the current year period was $28.7 million compared to $16.9 million in the prior year period. This increase was the result of the increased sales and improved gross profit margins in the current year period over the prior year period, partially offset by an increase in engineering, selling and administrative expenses between periods, all as discussed above.

Equity loss of joint ventures was $138,000 during the current year period compared to equity earnings of joint ventures of $858,000 in the prior year period. The activities related to the STRATTEC Advanced Logic, LLC joint venture are included in equity loss and earnings of joint ventures and resulted in equity loss of joint ventures to STRATTEC of $957,000 in the current year period and $249,000 in the prior year period. The equity loss of joint ventures for the current year period included a loss of $367,000 related to STRATTEC’s guarantee of the STRATTEC Advanced Logic, LLC revolving credit facility. Our joint venture partner did not guarantee their proportionate share of the STRATTEC Advanced Logic credit facility. As a result, we recorded a loss equal to our partner’s proportionate share, based on their ownership percentage, of the fair value of the STRATTEC guarantee. The activities related to the VAST LLC joint venture are also included in equity (loss) earnings of joint ventures and resulted in equity earnings of joint ventures of $819,000 in the current year period and $1.1 million in the prior year period.

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

Foreign currency transaction gains resulted from activity associated with foreign denominated assets held by our Mexican subsidiaries. Our Rabbi Trust assets fund our amended and restated supplemental executive retirement plan. The investments held in the Trust are considered trading securities.

Our income tax provision for each of the nine month periods ended March 29, 2015 and March 30, 2014 was affected by the non-controlling interest portion of our pre-tax income and a lower effective 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. Moreover, our income tax provision included a reduction in our liability for unrecognized tax benefits and related interest of approximately $936,000 for the nine month period ended March 29, 2015 and $307,000 for the nine month period ended March 30, 2014 due to tax years that closed during these periods. Our effective tax rate was 29.3 percent for the current year period as compared to 29.4 percent for the prior year period.

Liquidity and Capital Resources

Outstanding Receivable Balances from Major Customers

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 major 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 March 29, 2015 was as follows (in millions):

Cash Balances in Mexico

We earn a portion of our operating income in Mexico, which is deemed to be permanently reinvested. As of March 29, 2015, $16.9 million of our $28.0 million cash and cash equivalents balance was held by our foreign subsidiaries in Mexico. Cash balances in Mexico will be used for future capital expenditures and future plant expansion 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 Analysis

Net cash provided by operating activities was $23.6 million during the current year period compared to $9.3 million during the prior year period. The change in operating cash flow between periods was due to improvement in our operating results in the current year period as compared to the prior year period as discussed above under Analysis of Results of Operations as well as a net decrease in working capital requirements between periods of $5.9 million, with the major contributors to the decrease being as follows (in millions):

The change in working capital requirements between periods related to changes in the accounts receivable balances reflected a reduction in accounts receivable balances during the current year period as compared to an increase in accounts receivable balances during the prior year period. The June 2014 quarter included incremental service parts sales of $11 million related to the General Motors recall campaign described above. The reduction in incremental service parts sales between the June 2014 quarter and the current year quarter resulted in a reduction in the accounts receivable balances related to these sales during the current year period. The change in working capital requirements between periods related to changes in inventory balances reflected a larger investment in inventories during the current year period as compared to the prior year period as a result of a planned build-up of inventories in the current year period due to shipping slowdowns at U.S. west coast ports, which was settled in March 2015. The change in working capital requirements between periods related to changes in the other assets balances reflected a reduction in our investment in customer tooling asset balances during the current year period compared to an increase in our investment in customer tooling asset balances during the prior year period. Customer tooling asset balances consist of costs incurred for the development of tooling that will be directly reimbursed by the customer whose parts are produced from the tools. Increases and decreases in these balances resulted from the timing of tooling development spending required to meet customer production requirements and related customer reimbursements. The change in working capital requirements between periods related to changes in the accounts payable and accrued liabilities balances reflected a reduction in accounts payable balances in the current year period as compared to an increase in accounts payable balances in the prior year period. Changes in accounts payable balances each period are the result of the timing of purchases and payments based on normal payment terms with our suppliers.

Significant cash payments impacting net cash provided by operating activities during both the current year period and prior year period included cash payments made under our incentive bonus plans, cash payments for Federal, state and foreign income taxes and cash contributions made to our qualified pension plan. Cash payments made under our incentive bonus plans totaled $7.3 million in the current year period compared to $4.0 million during the prior year period. Cash payments made for Federal, state and foreign income taxes totaled $12.3 million during the current year period compared to $3.2 during the prior year period. No cash contributions were made to our qualified pension plan during the nine months ended March 29, 2015. Cash contributions made to our qualified pension plan totaled $1.5 million during the nine months ended March 30, 2014. We anticipate making a $3 million cash contribution to our qualified pension plan during the fourth quarter of our 2015 fiscal year.

Net cash used in investing activities of $22.3 million during the current year period and $9.6 million during the prior year period included capital expenditures of $21.7 million and $9.4 million, respectively. Capital expenditures during each period were made in support of requirements for new product programs and the upgrade and replacement of existing equipment. Current year period capital expenditures of $2.1 million and $4.5 million were also made for the purchase of additional facilities in Juarez, Mexico and Auburn Hills, Michigan, respectively. The Michigan building is being used as a sales and engineering office and replaced two current leased facilities in Michigan. The Juarez, Mexico building is being used as an additional facility to support current operations and in anticipation of both new and potential business awards in Mexico. Loans were made by each partner, STRATTEC, WITTE and ADAC to our joint venture, VAST LLC, totaling $215,000 for each partner in the current year period and $285,000 for each partner in the prior year period. The loans were made in support of VAST LLC’s purchase of the non-controlling interest in VAST do Brasil and in support of funding operating costs of the Brazil entity.

Net cash provided by financing activities of $7.1 million during the current year period included $9.0 million of additional borrowings under credit facilities and $734,000 of proceeds received from stock option exercises and related excess tax benefits, which amounts were partially offset by $1.3 million for regular quarterly dividend payments to shareholders, $882,000 for dividend payments to non-controlling interests in our subsidiaries and repayments of borrowings under credit facilities of $500,000. Net cash provided by financing activities during the prior year period of $542,000 included $1.2 million for regular quarterly dividend payments to shareholders, $984,000 for dividend payments to non-controlling interests in our subsidiaries and $1.0 million in repayments of loans under credit facilities, which amounts were partially offset by $1.3 million of additional borrowings under credit facilities and $2.4 million of proceeds received from stock option exercises and related excess tax benefits.

VAST LLC Cash Requirements

During the current year period, cash capital contributions totaling $384,000 were made by each partner to VAST LLC to support current operating expenses. No cash capital contributions were made to VAST LLC during the prior year period. VAST China operational costs have been financed internally by VAST LLC along with external financing secured from three local Chinese banks. We currently anticipate VAST China has adequate debt facilities in place over the next twelve month period to cover future operating and capital requirements. Additionally, loans were made by each partner, STRATTEC, WITTE and ADAC to VAST LLC totaling $215,000 for each partner in the current year period and $285,000 for each partner in the prior year period in support of VAST LLC’s purchase of the non-controlling interest in VAST do Brasil and in support of funding operating costs of the Brazil entity.

Future Capital Expenditures

Capital expenditures during the current year period totaled $21.7 million compared to $9.4 million in the prior year period. We anticipate that capital expenditures will be approximately $24 million to $25 million during all of fiscal 2015 in support of requirements for new product programs, the upgrade and replacement of existing equipment and the purchase of two buildings, one of which is located in Michigan and the other is located in Juarez, Mexico. The Michigan building is being used as a sales and engineering office and replaced two current leased facilities in Michigan. The Juarez, Mexico building is being used as an additional facility to support current operations and in anticipation of both new and potential business awards in Mexico.

Stock Repurchase Program

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 March 29, 2015. A total of 3,655,322 shares have been repurchased over the life of the program through March 29, 2015, at a cost of approximately $136.4 million. No shares were repurchased during the three or nine month periods ended March 29, 2015 or March 30, 2014. 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 2015.

Credit Facilities

STRATTEC has a $25 million secured revolving credit facility (the “STRATTEC Credit Facility”) with BMO Harris Bank N.A. ADAC-STRATTEC LLC has a $5 million secured revolving credit facility (the “ADAC-STRATTEC Credit Facility”) with BMO Harris Bank N.A, which is guaranteed by STRATTEC. The credit facilities both expire August 1, 2016. Borrowings under either credit facility are secured by our U.S. cash balances, accounts receivable, inventory and fixed assets located in the U.S. Interest on borrowings under the ADAC-STRATTEC Credit Facility for periods prior to January 22, 2014 was at varying rates based, at our option, on LIBOR plus 1.75 percent or the bank’s prime rate. Interest on borrowings under the STRATTEC credit facility and effective on or after January 22, 2014 under the ADAC-STRATTEC Credit Facility is at varying rates based, at our option, on LIBOR plus 1.0 percent or the bank’s prime rate. Both credit facilities contain a restrictive financial covenant that requires the applicable borrower to maintain a minimum net worth level. The ADAC-STRATTEC Credit Facility includes an additional restrictive financial covenant that requires the maintenance of a minimum fixed charge coverage ratio. Outstanding borrowings under the STRATTEC Credit Facility totaled $7.0 million at March 29, 2015. There were no borrowings under the STRATTEC Credit Facility during fiscal 2014. The average outstanding borrowings and weighted average interest rate on the STRATTEC Credit Facility loans were approximately $718,000 and 1.2 percent, respectively, during the nine months ended March 29, 2015. Outstanding borrowings under the ADAC-STRATTEC Credit Facility totaled $4.0 million at March 29, 2015 and $2.5 million at June 29, 2014. The average outstanding borrowings and weighted average interest rate on the ADAC-STRATTEC Credit Facility loans were approximately $3.7 million and 1.2 percent, respectively, during the nine months ended March 29, 2015. The average outstanding borrowings and weighted average interest rate on the ADAC-STRATTEC Credit Facility loans were approximately $2.7 million and 1.8 percent, respectively, during the nine months ended March 30, 2014.

Effective February 16, 2015, STRATTEC Advanced Logic, LLC entered into a $1.5 million revolving credit facility (the “STRATTEC Advanced Logic Credit Facility’) with BMO Harris Bank N.A., which is fully guaranteed by STRATTEC. Interest on borrowings under the STRATTEC Advanced Logic Credit Facility is at varying rates based, at STRATTEC Advanced Logic, LLC’s option, on LIBOR plus 1.0 percent or the bank’s prime rate. The STRATTEC Advanced Logic Credit Facility currently has a maturity date of February 16, 2016. Outstanding borrowings under the STRATTEC Advanced Logic Credit Facility as of March 29, 2015 totaled $750,000. STRATTEC Advanced Logic, LLC is considered a variable interest entity based on the STRATTEC guarantee. STRATTEC is not the primary beneficiary and does not control the entity. Accordingly, our investment in STRATTEC Advanced Logic, LLC is accounted for using the equity method. As of March 29, 2015, STRATTEC has recorded a liability related to the guarantee of $750,000, which amount is equal to the outstanding borrowings on the STRATTEC Advanced Logic Credit Facility as of March 29, 2015, and which amount is also equal to the estimated fair value of the guarantee as of the March 29, 2015 balance sheet date. The liability is included in Other Current Liabilities in the accompanying Condensed Consolidated Balance Sheets. STRATTEC’s proportionate share of the guarantee based on our ownership percentage in STRATTEC Advanced Logic, LLC totals $383,000, and accordingly, we have increased our investment in STRATTEC Advanced Logic, LLC as of March 29, 2015 by this amount. Our joint venture partner did not guarantee their proportionate share of the STRATTEC Advanced Logic Credit Facility. As a result, STRATTEC recorded a loss of $367,000 which is equal to our partner’s proportionate share, based upon their ownership percentage in the joint venture, of the fair value of the STRATTEC guarantee. This loss is included in Equity Loss (Earnings) of Joint Ventures for the three and nine month periods ended March 29, 2015 in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income.

Inflation and Other Changes in Prices

Inflation Related Items: 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.

Joint Ventures and Majority Owned Subsidiaries

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

The Alliance Agreements include a set of cross-licensing agreements for the manufacture, distribution and sale of WITTE products by STRATTEC and ADAC in North America, and the manufacture, distribution and sale of STRATTEC and ADAC products by WITTE in Europe. Additionally, a joint venture company, Vehicle Access Systems Technology LLC (“VAST LLC”), in which WITTE, STRATTEC and ADAC each hold a one-third 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 services customers in South America. Effective March 21, 2014, VAST LLC purchased the remaining non-controlling interest in VAST do Brasil. 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 earnings of joint ventures to STRATTEC of approximately $819,000 during the nine months ended March 29, 2015 and approximately $1.1 million during the nine months ended March 30, 2014. During the nine month period ended March 29, 2015, cash contributions of $384,000 were made to VAST LLC by each partner in support of current operating expenses. No cash capital contributions were made to VAST LLC during the nine month period ended March 30, 2014. Loans were made by each partner, STRATTEC, WITTE and ADAC to our joint venture, VAST LLC, totaling $215,000 for each partner in the current year period and $285,000 for each partner in the prior year period. The loans were made in support of VAST LLC’s purchase of the non-controlling interest in VAST do Brasil and in support of funding operating costs of the Brazil entity.

Effective April 30, 2015, VAST LLC executed an agreement to become a 50:50 Joint Venture partner with Minda Management Services Limited an affiliate of both Minda Corporation Limited and Spark Minda, Ashok Minda Group of New Delhi, India (collectively “Minda”). VAST acquired a fifty percent equity interest in the former Minda-Valeo Security Systems joint venture entity, based in Pune, India for approximately $12 million. This joint venture entity will be renamed Minda-VAST Access Systems (“Minda-VAST”). The portion of the purchase price paid by each VAST LLC partner, STRATTEC, WITTE and ADAC, totaled $4 million. Minda-VAST will have operations in Pune and Delhi and is expected to have annual sales in excess of approximately $40 million. Minda and its affiliates cater to the needs of all major car, motorcycle, commercial vehicle, tractor and off-road vehicle manufacturers in India. They are a leading manufacturer in the Indian marketplace of security & access products, handles, automotive safety, restraint systems, driver information and telematics systems for both OEMs and the aftermarket.

In fiscal year 2007, we established a new entity with ADAC forming ADAC-STRATTEC LLC, a Delaware limited liability company. The new entity was created to establish injection molding and door handle assembly operations in Mexico. STRATTEC holds a 51 percent interest in ADAC-STRATTEC LLC. 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 $1.8 million during the nine months ended March 29, 2015 and approximately $1.0 million during the nine months ended March 30, 2014.

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 supplies the North American portion of the power sliding door, lift gate and deck lid system access control products which were 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 $946,000 during the nine months ended March 29, 2015 and $1.2 million during the nine months ended March 30, 2014.

On April 5, 2013, we acquired a 51 percent ownership interest in STRATTEC Advanced Logic, LLC (formerly known as NextLock, LLC), a newly formed joint venture which was formed to introduce a new generation of biometric security products based upon the designs of Actuator Systems LLC, our partner and the owner of the remaining ownership interest. The initial capitalization of the STRATTEC Advanced Logic, LLC joint venture totaled $1.5 million. STRATTEC’s portion of the initial capitalization totaled $765,000. Our investment in STRATTEC Advanced Logic, LLC, for which we exercise significant influence but do not control and are not the primary beneficiary, is accounted for using the equity method. The activities related to the STRATTEC Advanced Logic, LLC joint venture resulted in equity loss of joint ventures to STRATTEC of approximately $957,000 during the nine months ended March 29, 2015 and approximately $249,000 during the nine months ended March 30, 2014. The equity loss of joint ventures for the nine months ended March 29, 2015 included a loss of $367,000 related to STRATTEC’s guarantee of the STRATTEC Advanced Logic, LLC revolving credit facility. Our joint venture partner did not guarantee their proportionate share of the STRATTEC Advanced Logic credit facility. As a result, we recorded a loss equal to our partner’s proportionate share, based on their ownership percentage, of the fair value of the STRATTEC guarantee. Effective November 1, 2014, a license agreement was signed with Westinghouse allowing STRATTEC Advanced Logic, LLC to do business as Westinghouse Security.

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 March 29, 2015, we had $11.0 million of outstanding borrowings under our credit facilities. The interest expense related to borrowings under the credit facilities during the nine months ended March 29, 2015 was $39,000. A 10% increase or decrease in the interest rate on our 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.

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, we now attempt to quote 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.

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

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 5, 2014.