# Strattec Security Corp: Form 10-Q for the period ended Dec 29, 2019

- Company: [Strattec Security Corp](/companies/strt.md) (CIK 933034)
- Form: 10-Q
- Filed: 2020-02-06
- Accepted by EDGAR: Feb 6, 2020, 06:03 ET
- Period: 2019-12-29
- Accession: 0001564590-20-003566
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/933034/000156459020003566/strt-10q_20191229.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/933034/000156459020003566/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-12-29.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-09-30 to 2019-12-29 | $106.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2019-07-01 to 2019-12-29 | $226.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2019-09-30 to 2019-12-29 | $96.0m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2019-07-01 to 2019-12-29 | $200.0m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2019-09-30 to 2019-12-29 | $10.3m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2019-07-01 to 2019-12-29 | $26.2m | us-gaap:GrossProfit |
| Operating income | 3 months, 2019-09-30 to 2019-12-29 | −$1.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2019-07-01 to 2019-12-29 | $1.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-09-30 to 2019-12-29 | $248.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2019-07-01 to 2019-12-29 | $588.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-09-30 to 2019-12-29 | −$399.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2019-07-01 to 2019-12-29 | −$100.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-09-30 to 2019-12-29 | −$1.3m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2019-07-01 to 2019-12-29 | −$97.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-09-30 to 2019-12-29 | −$0.36 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2019-07-01 to 2019-12-29 | −$0.03 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-09-30 to 2019-12-29 | −$0.36 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2019-07-01 to 2019-12-29 | −$0.03 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-09-30 to 2019-12-29 | 3,741,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2019-07-01 to 2019-12-29 | 3,725,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2019-07-01 to 2019-12-29 | $20.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2019-07-01 to 2019-12-29 | $7.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2019-07-01 to 2019-12-29 | $1.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2019-12-29 | $9.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-12-29 | $143.5m | us-gaap:AssetsCurrent |
| Total assets | at 2019-12-29 | $293.6m | us-gaap:Assets |
| Current liabilities | at 2019-12-29 | $65.4m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2019-12-29 | $163.5m | us-gaap:StockholdersEquity |
| Shares outstanding | at 2019-12-30 | 3,820,192 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 41,674 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 2019 Form 10-K, which was filed with the Securities and Exchange Commission on September 5, 2019. Unless otherwise indicated, all references to quarters and years refer to fiscal quarters and fiscal years.

### Outlook

During the fiscal years ended June 30, 2019 and July 1, 2018, we experienced stronger sales demand for our components from our major North American automotive customers, Fiat Chrysler Automobiles, General Motors Company and Ford Motor Company, as it relates to light trucks and both sport and car based utility vehicles in comparison to passenger cars, which was likely influenced by both lower gas prices and consumer preferences. If gas prices continue to remain flat or slightly higher over the next few years, we anticipate this consumer buying trend will continue. As we look out in calendar 2020, the current sales projections from our third party forecasting service indicate that North American light vehicle production will remain flat or slightly lower than the levels experienced during calendar year 2019. The estimated impact of the General Motors UAW strike, which has reduced sales in our fiscal first and second quarters to date, may result in reduced sales in our entire fiscal year 2020 by approximately $10 million if these orders are not replenished later during fiscal 2020.

As described in “Pension and Postretirement Benefits” in the Notes to Condensed Consolidated Financial Statements in this Form 10-Q, our Board of Directors has approved the termination of the STRATTEC qualified, noncontributory defined benefit pension plan. During our fiscal 2019, we completed a substantial portion of the termination by (1) making distributions from the qualified pension plan trust to participants electing lump sum distributions and (2) entering into an agreement with an insurance company whereby we sold, through a series of annuity contracts, our remaining obligations under the qualified pension plan and, therefore, settled the remaining obligations under this plan with use of funds remaining in the plan. No additional cash contributions to the pension trust were required from STRATTEC to settle these pension obligations. In connection with those actions, we incurred a pre-tax settlement charge of $31.9 million during fiscal 2019. We also incurred a $4.2 million noncash compensation charge during fiscal 2019 related to the future transfer of the remaining excess pension plan assets to a STRATTEC defined contribution plan for subsequent pay-out to eligible participating STRATTEC employees based on a plan approved by the Board of Directors in June 2019. An additional $4.5 million non-cash compensation expense charge related to the final transfer and pay-out of the excess Qualified Pension Plan assets was recorded during the six month period ended December 29, 2019, of which $2.2 million was recorded during the three month period ended September 29, 2019 and $2.3 million was recorded during the three month period ended December 29, 2019. With these final actions during the quarter ended December 29, 2019, we have completed the full termination of the qualified pension plan.

### Analysis of Results of Operations

#### Three months ended September 29, 2019 compared to the three months ended September 30, 2018

|  | Three Months Ended December 29, 2019 | December 30, 2018 |
| --- | ---: | ---: |
| Net Sales (in millions) | $106.3 | $112.9 |

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 29, 2019 | December 30, 2018 |
| --- | ---: | ---: |
| Fiat Chrysler Automobiles | $27.2 | $25.7 |
| General Motors Company | 25.4 | 23.8 |
| Ford Motor Company | 15.3 | 16.1 |
| Tier 1 Customers | 14.7 | 18.5 |
| Commercial and Other OEM Customers | 21.4 | 21.4 |
| Hyundai / Kia | 2.3 | 7.4 |
|  | $106.3 | $112.9 |

20

Sales to Fiat Chrysler Automobiles increased in the current year quarter as compared to the prior year quarter due to higher product content on the FCA vehicles for which we supply components. The increase in sales to General Motors Company in the current year quarter as compared to the prior year quarter was attributed to higher content on products we supply to their business. As discussed under Outlook above, the impact of the General Motors UAW strike reduced our net sales by approximately $7 million in the current year quarter. Sales to Ford Motor Company decreased in the current year quarter as compared to the prior year quarter due to lower production volumes on the F-series pickup trucks for which we supply various components. The decrease in sales to Tier 1 customers in the current quarter as compared to the prior year quarter was due to lower sales volumes on our driver controls steering column used on passenger car type vehicles. Sales to Commercial and Other OEM Customers in the current quarter were flat in comparison to the prior year quarter. These Commercial and Other OEM Customers, along with our Tier 1 Customers, represent purchasers of vehicle access control products, such as latches, fobs, driver controls and door handles, that we have developed in recent years to complement our historic core business of locks and keys. The decreased sales to Hyundai / Kia in the current year quarter as compared to the prior year quarter were due to lower levels of production of the Kia Sedona minivan for which we primarily supply power sliding door components.

|  | Three Months Ended December 29, 2019 | December 30, 2018 |
| --- | ---: | ---: |
| Cost of Goods Sold (in millions) | $96.0 | $100.2 |

Direct material costs are the most significant component of our cost of goods sold and comprised $59.7 million or 62.2 percent of our cost of goods sold in the current year quarter compared to $65.4 million or 65.3 percent of our cost of goods sold in the prior year quarter. The decrease in our direct material costs between these quarters of $5.7 million or 8.7 percent was due to decreased sales volumes in the current year quarter as compared to the prior year quarter and reduced scrap costs resulting from efforts to reduce nonconforming costs resulting from internal manufacturing process quality issues. The reduction in our direct material costs as a percentage of our cost of goods sold in the current year quarter as compared to the prior year quarter was due to a $1.4 million increase in our cost of goods sold due to a non-cash compensation expense charge incurred in the current year quarter and due to decreased sales of power access products in the current year quarter as compared to the prior year quarter. The non-cash compensation expense charge in the current year quarter related to the December 2019 transfer of excess Qualified Pension Plan assets, resulting from the termination of the Qualified Pension Plan, to a STRATTEC defined contribution plan for pay-out to eligible STRATTEC employees. Without this non-cash compensation expense charge, the direct material costs as a percentage of our cost of goods sold in the current year quarter would have been 63.1 percent. Power access products have a higher purchased content percentage as compared to our other products. The decreased sales of power access products between periods further reduced our direct material costs as a percentage of our cost of goods sold.

The remaining components of our cost of goods sold consist of labor and overhead costs which increased $1.5 million or 4.3 percent to $36.3 million in the current year quarter from $34.8 million in the prior year quarter. Current year quarter costs include a $1.4 million non-cash compensation expense charge related to the transfer of excess Qualified Pension Plan assets as described above. Additionally, labor and overhead costs decreased in the current year quarter as compared to the prior year quarter due to a decrease in the variable portion of these costs resulting from the decrease in sales between the three month periods and improvements in our operations at our paint and assembly facility in Leon, Mexico. These cost decreases were offset by an increase in the Mexican minimum wage for our Mexican workforce effective January 1, 2019 and the impact of an unfavorable Mexican peso to U.S. dollar exchange rate affecting our operations in Mexico. The U.S. dollar value of our Mexican operations was unfavorably impacted by approximately $415,000 in the current year quarter as compared to the prior year quarter due to a unfavorable Mexican peso to U.S. dollar exchange rate between these quarterly periods. The average U.S. dollar / Mexican peso exchange rate increased to approximately 19.31 pesos to the dollar in the current year quarter from approximately 19.85 pesos to the dollar in the prior year quarter.

|  | Three Months Ended December 29, 2019 | December 30, 2018 |
| --- | ---: | ---: |
| Gross Profit (in millions) | $10.3 | $12.7 |
| Gross Profit as a percentage of net sales | 9.7% | 11.3% |

Gross profit dollars decreased in the current year quarter as compared to the prior year quarter as a result of a decrease in sales partially offset by a decrease in cost of goods sold, as discussed above. Gross profit as a percentage of net sales decreased between periods. The reduction was due a $1.4 million non-cash compensation expense charge related to the December 2019 transfer of excess Qualified Pension Plan assets to a STRATTEC defined contribution plan, an increase in the Mexican minimum wage for our Mexican workforce effective January 1, 2019, and the impact of an unfavorable Mexican peso to U.S. dollar exchange rate affecting our operations in Mexico. These unfavorable impacts were partially offset by improvements in our operations at our paint and assembly facility in Leon, Mexico, all as discussed above.

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

|  | Three Months Ended December 29, 2019 | December 30, 2018 |
| --- | ---: | ---: |
| Expenses (in millions) | $12.1 | $10.5 |
| Expenses as a percentage of net sales | 11.4% | 9.3% |

Engineering, selling and administrative expenses in the current year quarter increased in comparison to the prior year quarter as a result of a $869,000 non-cash compensation expense charge related to the transfer of excess Qualified Pension Plan assets, as discussed above, and higher outside expenditures on new product development costs for power access products, for which we utilize third party vendors for a portion of our development work.

Loss from operations was $1.8 million in the current year quarter compared to income from operations of $2.3 million in the prior year quarter due to a reduction in gross profit margin dollars and an increase in engineering, selling and administrative expenses between quarters, all as discussed above.

The equity earnings (loss) of joint ventures was comprised of the following in the current year quarter and prior year quarter (in thousands):

|  | Three Months Ended December 29, 2019 | December 30, 2018 |
| --- | ---: | ---: |
| Vehicle Access Systems Technology LLC | $496 | $1,487 |
| STRATTEC Advanced Logic, LLC | (4) | (11) |
|  | $492 | $1,476 |

Lower profitability from our Vehicle Access Systems Technology LLC (“VAST LLC”) joint ventures is due to lower profitability in our VAST China operation resulting from higher development costs for new programs and startup costs associated with a new plant in Jingzhou, China, which we believe will give VAST added capacity, efficiencies, and a broader geographic footprint in the China market going forward. Our VAST LLC joint venture in Brazil continues to report losses due to our limited amount of business in that region. The business of SAL LLC has been wound down to sell only commercial biometric locks.

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 29, 2019 | December 30, 2018 |
| --- | ---: | ---: |
| Foreign Currency Transaction (Loss) Gain | $(363) | $359 |
| Unrealized Loss on Peso Forward Contracts | - | (132) |
| Realized Gain on Peso Forward Contracts | - | 50 |
| Pension and Postretirement Plans Cost | (117) | (317) |
| Rabbi Trust Gain (Loss) | 187 | (279) |
| Other | 316 | 57 |
|  | $23 | $(262) |

Foreign currency transaction losses during the current year quarter and prior year quarter resulted from activity associated with foreign denominated assets held by our Mexican subsidiaries. We entered into the Mexican peso currency forward contracts to minimize earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. Pension and postretirement plan impacts include the components of net periodic benefit cost other than the service cost component. Our Rabbi Trust assets fund our amended and restated supplemental executive retirement plan. The investments held in the Trust are considered trading securities.

### Income Taxes

Our effective tax rate was 26.7% and 26.4% for the three months ended December 29, 2019 and December 30, 2018, respectively. During the period ended December 29, 2019, our effective tax rate was impacted by the discrete impact of the non-cash compensation expense, as discussed under Pension and Postretirement Benefits below. During the period ended December 30, 2018, our effective tax rate was impacted by the discrete impact of the pension termination settlement charge, as discussed under Pension and Postretirement Benefits below. Our effective tax rate prior to discrete impacts increased from 5.1 percent for the period ended December 30, 2018 to 15.6 percent for the period ended December 29, 2019 due to a larger tax benefit in 2018 related to the impact of the global intangible low-taxed income (“GILTI”) provisions. Our effective tax rate differs from the statutory tax rate due the GILTI provisions each period, our available R&D tax credit and the non-controlling interest portion of our pre-tax income. The non-controlling interest impacts the effective tax rate as ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entities are taxed as partnerships for U.S. tax purposes.

#### Six months ended December 29, 2019 compared to the six months ended December 30, 2018

|  | Six Months Ended December 29, 2019 | December 30, 2018 |
| --- | ---: | ---: |
| Net Sales (in millions) | $226.2 | $230.1 |

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 29, 2019 | December 30, 2018 |
| --- | ---: | ---: |
| Fiat Chrysler Automobiles | $52.6 | $56.0 |
| General Motors Company | 59.2 | 49.1 |
| Ford Motor Company | 31.1 | 31.6 |
| Tier 1 Customers | 32.5 | 36.3 |
| Commercial and Other OEM Customers | 42.8 | 42.4 |
| Hyundai / Kia | 8.0 | 14.7 |
|  | $226.2 | $230.1 |

Sales to Fiat Chrysler Automobiles decreased in the current year period as compared to the prior year period due to lower vehicle production volumes on the FCA minivans for which we supply multiple components, which decrease was partially offset by higher product content on other FCA vehicles for which we supply components. The increase in sales to General Motors Company in the current year period as compared to the prior year period was attributed to higher production volumes and higher content on products we supply to their business. As discussed under Outlook above, the estimated impact of the General Motors UAW strike reduced our net sales by approximately $10 million in the current year period. Sales to Ford Motor Company and Commercial and Other OEM Customers were flat in the current year period compared to the prior year period. The Commercial and Other OEM Customers, along with our Tier 1 Customers, represent purchasers of vehicle access control products, such as latches, fobs, driver controls and door handles, that we have developed in recent years to complement our historic core business of locks and keys. The decrease in sales to Tier 1 customers in the current year period as compared to the prior year period was due to lower sales volumes on our driver controls steering column used on passenger car type vehicles. The decreased sales to Hyundai / Kia in the current year period as compared to the prior year period were due to lower levels of production of the Kia Sedona minivan for which we primarily supply power sliding door components.

|  | Six Months Ended December 29, 2019 | December 30, 2018 |
| --- | ---: | ---: |
| Cost of Goods Sold (in millions) | $200.0 | $202.2 |

23

Direct material costs are the most significant component of our cost of goods sold and comprised $128.2 million or 64.1 percent of our cost of goods sold in the current year period compared to $133.2 million or 65.9 percent of our cost of goods sold in the prior year period. The decrease in our direct material costs between these quarters of $5.0 million or 3.8 percent was due to decreased sales volumes in the current year period as compared to the prior year period and reduced scrap costs resulting from efforts to reduce nonconforming costs resulting from internal manufacturing process quality issues. The reduction in our direct material costs as a percentage of our cost of goods sold in the current year period as compared to the prior year period was, in part, due to a $2.7 million increase in our cost of goods sold from a non-cash compensation expense charge incurred in the current year period and as a result of decreased sales of power access products in the current year period as compared to the prior year period. The non-cash compensation expense charge in the current year period related to the December 2019 transfer of excess Qualified Pension Plan assets, resulting from the termination of the Qualified Pension Plan, to a STRATTEC defined contribution plan for pay-out to eligible STRATTEC employees. Without this non-cash compensation expense charge, the direct material costs as a percentage of our cost of goods sold in the current year period would have been 65.0 percent. Power access products have a higher purchased content percentage as compared to our other products. The decreased sales of power access products between periods further reduced our direct material costs as a percentage of our cost of goods sold.

The remaining components of our cost of goods sold consist of labor and overhead costs which increased $2.8 million or 4.1 percent to $71.8 million in the current year period from $69.0 million in the prior year period. Current year period costs included a $2.7 million non-cash compensation expense charge related to the December 2019 transfer of excess Qualified Pension Plan assets as described above. Additionally, labor and overhead costs decreased in the current year period as compared to the prior year period due to a decrease in the variable portion of these costs resulting from the decrease in sales between the six-month periods, improvements in our operations at our paint and assembly facility in Leon, Mexico, and the impact of a favorable Mexican peso to U.S. dollar exchange rate affecting our operations in Mexico. The U.S. dollar value of our Mexican operations was favorably impacted by approximately $110,000 in the current year period as compared to the prior year period due to a favorable Mexican peso to U.S. dollar exchange rate between these six-month periods. The average U.S. dollar / Mexican peso exchange rate increased to approximately 19.46 pesos to the dollar in the current year period from approximately 19.41 pesos to the dollar in the prior year period. These cost decreases were offset by an increase in the Mexican minimum wage for our Mexican workforce effective January 1, 2019.

|  | Six Months Ended December 29, 2019 | December 30, 2018 |
| --- | ---: | ---: |
| Gross Profit (in millions) | $26.2 | $27.9 |
| Gross Profit as a percentage of net sales | 11.6% | 12.1% |

Gross profit dollars decreased in the current year period as compared to the prior year period as a result of a decrease in sales partially offset by a decrease in cost of goods sold, as discussed above. Gross profit as a percentage of net sales decreased between periods. The reduction was due to a $2.7 million non-cash compensation expense charge related to the December 2019 transfer of excess Qualified Pension Plan assets and an increase in the Mexican minimum wage for our Mexican workforce effective January 1, 2019. These unfavorable impacts were partially offset by improvements in our operations at our paint and assembly facility in Leon, Mexico and the impact of a favorable Mexican peso to U.S. dollar exchange rate affecting our operations in Mexico, all as discussed above.

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

|  | Six Months Ended December 29, 2019 | December 30, 2018 |
| --- | ---: | ---: |
| Expenses (in millions) | $25.0 | $21.5 |
| Expenses as a percentage of net sales | 11.1% | 9.3% |

Engineering, selling and administrative expenses in the current year period increased in comparison to the prior year period as a result of a $1.7 million non-cash compensation expense charge related to the transfer of excess Qualified Pension Plan assets, as discussed above, and higher outside expenditures on new product development costs associated with utilizing third party vendors for a portion of our development work.

Income from operations was $1.2 million in the current year period compared to $6.4 million in the prior year period due to a reduction in gross profit margin dollars and an increase in engineering, selling and administrative expenses, all as discussed above.

The equity earnings (loss) of joint ventures was comprised of the following in the current year period and prior year period (in thousands):

|  | Six Months Ended December 29, 2019 | December 30, 2018 |
| --- | ---: | ---: |
| Vehicle Access Systems Technology LLC | $983 | $2,402 |
| STRATTEC Advanced Logic, LLC | (7) | (17) |
|  | $976 | $2,385 |

Lower profitability from our Vehicle Access Systems Technology LLC (“VAST LLC”) joint ventures is due to lower profitability in our VAST China operation resulting from higher development costs for new programs and costs associated with breaking ground for a new plant in Jingzhou, China, which we believe will give VAST added capacity, efficiencies, and a broader geographic footprint in the China market going forward. Our VAST LLC joint venture in Brazil continues to report losses due to our limited amount of business in that region. The business of SAL LLC has been wound down to sell only commercial biometric locks.

Included in Other Income (Expense), net in the current year period and prior year period were the following items (in thousands):

|  | Six Months Ended December 29, 2019 | December 30, 2018 |
| --- | ---: | ---: |
| Foreign Currency Transaction Loss | $(448) | $(69) |
| Unrealized Gain on Peso Forward Contracts | - | 93 |
| Realized Gain on Peso Forward Contracts | - | 222 |
| Pension and Postretirement Plans Cost | (234) | (635) |
| Rabbi Trust Gain (Loss) | 185 | (200) |
| Other | 423 | 82 |
|  | $(74) | $(507) |

Foreign currency transaction losses during the current year period and prior year period resulted from activity associated with foreign denominated assets held by our Mexican subsidiaries. We entered into the Mexican peso currency forward contracts to minimize earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. Pension and postretirement plan impacts include the components of net periodic benefit cost other than the service cost component. Our Rabbi Trust assets fund our amended and restated supplemental executive retirement plan. The investments held in the Trust are considered trading securities.

### Income Taxes

Our effective tax rate was (6.7)% and 31.2% for the six months ended December 29, 2019 and December 30, 2018, respectively. During the period ended December 29, 2019, our effective tax rate was impacted by the discrete impact of the non-cash compensation expense, as discussed under Pension and Postretirement Benefits below. During the period ended December 30, 2018, our effective tax rate was impacted by the discrete impact of the pension termination settlement charge, as discussed under Pension and Postretirement Benefits below, and by a discrete tax benefit of $372,000, which represents measurement period adjustments to the one-time transition tax on non-previously taxed post 1986 accumulated foreign earnings occurring as a result of the enactment of the Tax Cuts and Jobs Act of 2017. Our effective tax rate prior to discrete impacts increased from 5.1 percent for the period ended December 30, 2018 to 15.6 percent for the period ended December 29, 2019 due to a larger tax benefit in 2018 related to the impact of the global intangible low-taxed income (“GILTI”) provisions. Our effective tax rate differs from the statutory tax rate due the GILTI provisions each period, our available R&D tax credit and the non-controlling interest portion of our pre-tax income. The non-controlling interest impacts the effective tax rate as ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entities are taxed as partnerships for U.S. tax purposes.

### Liquidity and Capital Resources

### Outstanding Receivable Balances from Major Customers

Our primary source of cash flow is from our major customers, which include Fiat Chrysler Automobiles, 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 December 29, 2019 was as follows (in millions):

|  |  |
| --- | ---: |
| Fiat Chrysler Automobiles | $15.3 |
| General Motors Company | $20.9 |
| Ford Motor Company | $7.4 |

### Cash Balances in Mexico

We earn a portion of our operating income in Mexico. As of December 29, 2019, $3.6 million of our $9.3 million cash and cash equivalents balance was held in Mexico. These funds are available for repatriation as deemed necessary.

### Cash Flow Analysis

| Cash Flows from (in millions): | Six Months Ended December 29, 2019 | December 30, 2018 |
| --- | ---: | ---: |
| Operating Activities | $20.6 | $19.7 |
| Investing Activities | $(7.4) | $(9.4) |
| Financing Activities | $(11.5) | $(6.9) |

The increase in cash provided by operating activities between periods reflected a net increase in our working capital requirements between periods of $1.0 million, with the increase in our working capital requirements being made up of the following working capital changes (in millions):

|  | Increase (Decrease) in Working Capital Requirements Six Months Ended December 29, 2019 | December 30, 2018 | Change |
| --- | ---: | ---: | ---: |
| Accounts Receivable | $(18.4) | $(7.3) | $(11.1) |
| Inventory | $5.2 | $1.3 | $3.9 |
| Other Assets | $(1.4) | $(3.7) | $2.3 |
| Accounts Payable and Accrued Liabilities | $9.1 | $3.2 | $5.9 |

The period over period change in the accounts receivable balances is the result of the amount and timing of sales during each quarter. The reduction in accounts receivable balances during each year-to-date period reflected reduced sales levels toward the end of each of our December periods as compared to the end of the previous June periods. The period over period change in inventory reflected larger increase in inventory balances during the current year-to-date period as compared to the prior-year-to-date period due to an inventory build-up of General Motors components stemming from the impacts of the General Motors strike. The period over period change in other assets reflected a reduction in our other assets balances in both the current year period and the prior year period. During both periods, the reductions were driven by lower customer tooling balances. Customer tooling balances consisted of costs incurred for the development of tooling that will be directly reimbursed by our customer whose parts are produced from the tool. Changes in customer tooling balances during each period was the result of the timing of tooling development spending required to meet customer production requirements and related customer billing for tooling cost reimbursement. The period over period change in accounts payable and accrued liability balances reflected an increase in working capital requirements during each period. The increases in working capital requirements were the result of decreases in accounts payable balances each period, which resulted from the timing of purchases and payments with our vendors based on normal payment terms.

Net cash used by investing activities of $7.4 million during the current year period and $9.4 million during the prior year period were the result of capital expenditures made in support of requirements for new product programs and the upgrade and replacement of existing equipment.

Net cash used in financing activities during the current year period of $11.5 million included repayments of borrowings under credit facilities of $10.0 million, $1.0 million of regular quarterly dividend payments to shareholders and $980,000 of dividend payments to non-controlling interests in our subsidiaries, partially offset by $519,000 received for the exercise of stock options under our stock incentive plan and our employee stock purchase plan. Net cash used in financing activities of $6.9 million during the prior year period included repayments of borrowings under credit facilities of $7.0 million, $1.0 million of regular quarterly dividend payments to shareholders and $984,000 of dividend payments to non-controlling interests in our subsidiaries, partially offset by $2 million in additional borrowings under credit facilities.

### VAST LLC Cash Requirements

We currently anticipate that both VAST China and Minda-VAST Access Systems have adequate debt facilities in place over the next fiscal year to cover the future operating and capital requirements of each business. No capital contributions were made to VAST LLC during the six months ended December 29, 2019 or December 30, 2018. During the six months ended December 29, 2019 and December 30, 2018, VAST LLC made capital contributions to Sistema de Acesso Veicular Ltda totaling $200,000 and $300,000, respectively. Due to economic conditions in Brazil, we anticipate Sistema de Acesso Veicular Ltda will require a capital contribution of approximately $300,000 collectively by all VAST LLC partners to fund operations during the remainder of fiscal 2020. STRATTEC’s portion of the capital contributions is anticipated to be $100,000.

### STRATTEC Advanced Logic, LLC Cash Requirements

During all periods presented in this report, STRATTEC provided 100 percent of the financial support to fund the start-up operating losses of SAL LLC through loans due to our joint venture partner’s inability to contribute capital to this joint venture. The business of SAL LLC has been wound down to sell only commercial biometric locks. We anticipate STRATTEC will provide minimal to no funding for SAL LLC in fiscal year 2020.

### Future Capital Expenditures

We anticipate capital expenditures will be approximately $15 million in fiscal 2020, of which $7.4 million has already been made through December 29, 2019, in support of requirements for new product programs and the upgrade and replacement of existing equipment.

### 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 December 29, 2019. A total of 3,655,322 shares have been repurchased over the life of the program through December 29, 2019, at a cost of approximately $136.4 million. No shares were repurchased during the six month periods ended December 29, 2019 or December 30, 2018. 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 2020.

### Credit Facilities

STRATTEC has a $40 million secured revolving credit facility (the “STRATTEC Credit Facility”) with BMO Harris Bank N.A. ADAC-STRATTEC LLC has a $25 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, 2022. 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 STRATTEC Credit Facility and interest on borrowings under the ADAC-STRATTEC Credit Facility prior to December 31, 2018 were at varying rates based, at our option, on the London Interbank Offering Rate (“LIBOR”) plus 1.0 percent or the bank’s prime rate. Effective December 31, 2018 and thereafter, interest on borrowings under the ADAC-STRATTEC Credit Facility is at varying rates based, at our option, on LIBOR plus 1.25 percent or the bank’s prime rate. Both credit facilities contain a restrictive financial covenant that requires the applicable borrower to maintain a minimum net worth level. The ADAC-STRATTEC Credit Facility includes an additional restrictive financial covenant that requires the maintenance of a minimum fixed charge coverage ratio. Outstanding borrowings under the STRATTEC Credit Facility totaled $13 million at December 29, 2019 and $18 million at June 30, 2019. The average outstanding borrowings and weighted average interest rate on the STRATTEC Credit Facility loans were approximately $14.6 million and 3.1 percent, respectively, during the six months ended December 29, 2019. Outstanding borrowings under the ADAC-STRATTEC Credit Facility totaled $19 million at December 29, 2019 and $24.0 million at June 30, 2019. The average outstanding borrowings and weighted average interest rate on the ADAC-STRATTEC Credit Facility loans were approximately $21.5 million and 3.3 percent, respectively, during the six months ended December 29, 2019.

### 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. We have from time to time entered into contracts with Bank of Montreal that provide for bi-weekly and monthly Mexican peso currency forward contracts for a portion of our estimated peso denominated operating costs to minimize our earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. Refer to discussion under Notes to Condensed Consolidated Financial Statements: Derivative Instruments included herein.

### 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 each company’s products in areas of the world outside of North America and Europe.

VAST LLC has investments in Sistema de Acesso Veicular Ltda, VAST Fuzhou, VAST Great Shanghai, VAST Shanghai Co., VAST Jingzhou Co. Ltd., and Minda-VAST Access Systems. Sistema de Acesso Veicular Ltda is located in Brazil and services customers in South America. VAST Fuzhou, VAST Great Shanghai, VAST Shanghai Co., and VAST Jingzhou Co. Ltd. (collectively known as VAST China), provide a base of operations to service our automotive customers in the Asian market. Minda-VAST Access Systems is based in Pune, India and is a 50:50 joint venture with Minda Management Services Limited, an affiliate of both Minda Corporation Limited and Spark Minda, Ashok Minda Group of New Delhi, India (collectively “Minda”). Minda and its affiliates cater to the needs of all major car, motorcycle, commercial vehicle, tractor and off-road vehicle manufacturers in India. They are a leading manufacturer in the Indian marketplace of security & access products, handles, automotive safety, restraint systems, driver information and telematics systems for both OEMs and the aftermarket. VAST LLC also maintains branch offices in South Korea and Japan in support of customer sales and engineering requirements.

The VAST LLC investments are accounted for using the equity method of accounting and the results of the VAST LLC foreign subsidiaries and joint venture are reported on a one-month lag basis. The activities related to the VAST LLC joint ventures resulted in equity earnings of joint ventures to STRATTEC of $983,000 during the six months ended December 29, 2019 and $2.4 million during the six months ended December 30, 2018. During the six months ended December 29, 2019 and December 30, 2018, no capital contributions were made to VAST LLC.

ADAC-STRATTEC LLC, a Delaware limited liability company, was formed in fiscal year 2007 to support injection molding and door handle assembly operations in Mexico. ADAC-STRATTEC LLC was 51 percent owned by STRATTEC and 49 percent owned by ADAC for all periods presented in this report. An additional Mexican entity, ADAC-STRATTEC de Mexico, is wholly owned by ADAC-STRATTEC LLC. ADAC-STRATTEC LLC’s financial results are consolidated with the financial results of STRATTEC and resulted in increased net income to STRATTEC of approximately $1.3 million during the six months ended December 29, 2019 and approximately $940,000 during the six months ended December 30, 2018.

STRATTEC POWER ACCESS LLC (“SPA”) was formed in fiscal year 2009 to supply the North American portion of the power sliding door, lift gate and deck lid system access control products which were acquired from Delphi Corporation. SPA was 80 percent owned by STRATTEC and 20 percent owned by WITTE for all periods presented in this report. The financial results of SPA are consolidated with the financial results of STRATTEC and resulted in decreased net income to STRATTEC of approximately $353,000 during the six months ended December 29, 2019 and increased net income to STRATTEC of approximately $1.9 million during the six months ended December 30, 2018.

SAL LLC was formed in fiscal 2013 to introduce a new generation of biometric security products based upon the designs of Actuator Systems LLC, our partner and the owner of the remaining ownership interest. SAL LLC was 51 percent owned by STRATTEC for all periods presented in this report. Our investment in SAL LLC, for which we exercise significant influence but do not control and are not the primary beneficiary, is accounted for using the equity method. The activities related to SAL LLC resulted in equity loss of joint ventures to STRATTEC of approximately $7,000 during the six months ended December 29, 2019 and approximately $17,000 during the six months ended December 30, 2018. During all periods presented in this report, 100 percent of the funding for SAL LLC was being made through loans from STRATTEC to SAL LLC. Therefore, for all periods presented in this report, even though STRATTEC maintains a 51 percent ownership interest in SAL LLC, STRATTEC recognized 100 percent of the losses of SAL LLC up to our committed financial support through Equity Earnings (Loss) of Joint Ventures in the accompanying Condensed Consolidated Statements of Loss and Comprehensive (Loss) Income. The business of SAL LLC has been wound down to sell only commercial biometric locks.

## Controls and procedures

As filed, 2,199 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 5, 2019.

Filed Feb 6, 2020.
Source: SEC EDGAR, the filing index for accession 0001564590-20-003566. Last ingested by Listed: Nov 6, 2026, 02:27 ET. No prices; not investment advice.