Strattec Security Corp: Form 10-Q for the period ended Mar 29, 2020

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

Refer to discussion of Risks and Uncertainties included in the Notes to Condensed Consolidated Financial Statements beginning on page 6 of this Form 10-Q.

The outlook over our next fiscal quarter ending June 28, 2020 will be severely impacted by OEM customer plant shutdowns within their North American operations due to the coronavirus (COVID-19) pandemic. During April 2020, the majority of our OEM customer assembly plant operations were completely closed including the majority of the supply chain. Additionally, during April 2020, STRATTEC’s Mexico facilities were closed as a result of the Mexico government’s shutdown of non-essential businesses. Initial re-opening of our OEM customer facilities for operations is scheduled to begin in May 2020, but there is no certainty this will occur on that timeline. Based on information available, our current estimates indicate our net sales for the upcoming fourth fiscal quarter could be down 50 percent or more compared to our quarter ended March 29, 2020 depending on how long the COVID-19 virus will require the industry to remain idle. Fourth fiscal quarter sales could be more severely impacted if the initial re-opening of our customer facilities is delayed past May 2020. We are currently adjusting the cost structure of our business with temporary and permanent layoffs at our U.S. and Mexico locations, reductions in pay for our officers, reductions in working hours for all associates, a reduction in our U.S. salaried workforce, and reductions in capital spending to reflect the anticipated changes in lower customer vehicle production and operating cash flow going forward. We anticipate our fourth fiscal quarter of 2020 will be the worst or trough quarter and that thereafter the automotive industry can restart and ramp back up production again during our fiscal 2021. The impact on our overall cash liquidity will most likely occur at the beginning of our fiscal year 2021 with a reduction in payments from customers resulting from lower fourth quarter fiscal 2020 net sales as previously discussed. The lower cash liquidity will cause us to utilize our credit facilities to fund our increased working capital requirements.

As described in “Pension and Postretirement Benefits” in the Notes to Condensed Consolidated Financial Statements in this Form 10-Q, our Board of Directors 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. With these final actions, we completed the full termination of the qualified pension plan as of December 29, 2019.

Analysis of Results of Operations

Three months ended March 29, 2020 compared to the three months ended March 31, 2019

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

During the latter part of March 2020, our OEM customers started reducing production schedules and closed their assembly plants due to the COVID-19 outbreak. The impact of these reductions reduced our net sales in the current year quarter by approximately $6.7 million dollars. Sales to Fiat Chrysler Automobiles decreased in the current year quarter as compared to the prior year quarter due to lower vehicle production volumes 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 sales content on models for which we supply components, in particular power access products and latches. 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 vehicles for which we supply components. The decrease in sales to Tier 1 customers in the current year quarter as compared to the prior year quarter was due to lower sales of our driver control steering column lock products. Sales to Commercial and Other OEM Customers during the current year quarter decreased in comparison to the prior year quarter mainly due to decreases in sales related to key fobs sold to Harley Davidson and related to reductions in sales of door handle and power access products to Honda of America Manufacturing, Inc. These Commercial and Other OEM Customers, along with the Tier 1 Customers, primarily represent purchasers of vehicle access control products, such as latches, key fobs, driver controls, steering column locks 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.

Direct material costs are the most significant component of our cost of goods sold and comprised $65.6 million or 65.7 percent of our cost of goods sold in the current year quarter compared to $74.5 million or 66.2 percent of our cost of goods sold in the prior year quarter. The decrease in our direct material costs between these quarters of $8.9 million or 11.9 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 decreased sales of power access products between periods, which products have a higher purchased content percentage as compared to our other products.

The remaining components of our cost of goods sold consist of labor and overhead costs which decreased $3.7 million or 9.7 percent to $34.3 million in the current year quarter from $38.0 million in the prior year quarter as the variable portion of these costs decreased due to the decrease in sales volumes between the three month periods. Additionally, current year quarter costs reflect the impact of improved manufacturing efficiencies both at our Milwaukee and Mexico production facilities in the current year quarter as compared to the prior year quarter 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 $360,000 in the current year quarter as compared to the prior year quarter due to a favorable Mexican peso to U.S. dollar exchange rate between these quarterly periods. The average U.S. dollar / Mexican peso exchange rate increased to approximately 19.78 pesos to the dollar in the current year quarter from approximately 19.28 pesos to the dollar in the prior year quarter.

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Gross profit dollars increased in the current year quarter as compared to the prior year quarter as a result of a decrease in cost of goods sold partially offset by a decrease in sales, as discussed above. Gross profit as a percentage of net sales increased between periods. The increase was due to improved manufacturing efficiencies both at our Milwaukee and Mexico production facilities in the current year quarter as compared to the prior year quarter and a favorable Mexican peso to U.S. dollar exchange rate affecting our operations in Mexico 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 in the current year quarter decreased in comparison to the prior year quarter as a result of lower expenditures on new product development costs, for which we utilize third party vendors for a portion of our development work.

Income from operations was $6.3 million in the current year quarter compared to income from operations of $4.0 million in the prior year quarter due to an increase in gross profit margin dollars and a decrease in engineering, selling and administrative expenses between quarters, all as discussed above.

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

Lower profitability from our Vehicle Access Systems Technology LLC (“VAST LLC”) joint ventures is due to lower profitability in our VAST China operation related to extended OEM customer plant shutdowns associated with the COVID-19 outbreak and 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 ventures in India and Brazil continue to report losses due to our limited amount of business in both regions. 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):

Foreign currency transaction gains and 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. Unrealized gains and losses on the peso forward contracts recognized as a result of mark-to-market adjustments as of March 29, 2020 may or may not be realized in future periods, depending on at actual Mexican peso to U.S. dollar exchange rates experienced during the balance of the contract period. 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.

Our effective tax rate was 20.8% and 20.6% for the three months ended March 29, 2020 and March 31, 2019, respectively. Our effective tax rate differs from the statutory tax rate due to the impact of global intangible low-taxed income (GILTI) provisions, 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.

Nine months ended March 29, 2020 compared to the nine months ended March 31, 2019

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

During the latter part of March 2020, our OEM customers started reducing production schedules and closed their assembly plants due to COVID-19. The impact of these reductions reduced our net sales in the current year period by approximately $6.7 million dollars. 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 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, in particular power access products and latches. As discussed in our prior filings, we were impacted in fiscal 2020 by the General Motors UAW strike, which reduced our net sales by approximately $10 million in the current year period. Sale to Ford Motor Company decreased in the current year period as compared to the prior year period due to lower production volumes on the vehicles for which we supply components. 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 of our driver control steering column lock products. Sales to Commercial and Other OEM Customers during the current year period decreased in comparison to the prior year period mainly due to decreases in sales related to key fobs sold to Harley Davidson and related to reductions in sales of door handle and power access products to Honda of America Manufacturing, Inc. These Commercial and Other OEM Customers, along with the Tier 1 Customers, primarily represent purchasers of vehicle access control products, such as latches, key fobs, driver controls, steering column locks 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 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.

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Direct material costs are the most significant component of our cost of goods sold and comprised $193.7 million or 64.6 percent of our cost of goods sold in the current year period compared to $207.7 million or 66.0 percent of our cost of goods sold in the prior year period. The decrease in our direct material costs between these quarters of $14.0 million or 6.7 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 65.2 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 decreased $700,000 or 0.7 percent to $106.3 million in the current year period from $107.0 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, and an increase in the Mexican minimum wage for our Mexican workforce, which was effective January 1, 2019 and resulted in higher costs during the six month period ended December 2019 as compared to the prior year period. These increased expenses were offset by decreased labor and overhead costs 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 nine-month periods, improvements in our operations for the nine month period at our paint and assembly facility in Leon, Mexico, improved manufacturing efficiencies both at our Milwaukee and Mexico production facilities during our fiscal 2020 third quarter as compared to our fiscal 2019 third quarter 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 $469,000 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 nine-month periods. The average U.S. dollar / Mexican peso exchange rate increased to approximately 19.57 pesos to the dollar in the current year period from approximately 19.36 pesos to the dollar in the prior year period.

Gross profit dollars decreased in the current year period as compared to the prior year period as a result of a decrease in sales mostly offset by a decrease in cost of goods sold, as discussed above. Gross profit as a percentage of net sales increased between periods. The increase was due to improvements in our operations for the nine month period at our paint and assembly facility in Leon, Mexico, improved manufacturing efficiencies both at our Milwaukee and Mexico production facilities during our fiscal 2020 third quarter as compared to our fiscal 2019 third quarter and the impact of a favorable Mexican peso to U.S. dollar exchange rate affecting our operations in Mexico. These favorable impacts were partially offset by 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, 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 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 $7.5 million in the current year period compared to $10.4 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 (loss) earnings of joint ventures was comprised of the following in the current year period and prior year period (in thousands):

Lower profitability from our Vehicle Access Systems Technology LLC (“VAST LLC”) joint ventures is due to lower profitability in our VAST China operation related to extended OEM customer plant shutdowns associated with the COVID-19 outbreak and 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 ventures in India and Brazil continue to report losses due to our limited amount of business in both regions. 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):

Foreign currency transaction gains and 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. Unrealized gains and losses on the peso forward contracts recognized as a result of mark-to-market adjustments as of March 29, 2020 may or may not be realized in future periods, depending on actual Mexican peso to U.S. dollar exchange rates experienced during the balance of the contract period. 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.

Our effective tax rate was 15.5% and 33.1% for the nine months ended March 29, 2020 and March 31, 2019, respectively. During the nine month period ended March 29, 2020, our effective tax rate was impacted by the discrete impact of the non-cash compensation expense, as discussed under Pension and Postretirement Benefits above. During the period ended March 31, 2019, our effective tax rate was impacted by the discrete impact of the pension termination settlement charge, as discussed under Pension and Postretirement Benefits above, 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 10.7 percent for the nine month period ended March 31, 2019 to 18.3 percent for the nine month period ended March 29, 2020 due to a larger tax benefit in the nine month period ended March 31, 2020 resulting from the carry-back of forecasted losses for our fiscal 2020, which are the result of forecasted losses in our fiscal 2020 fourth quarter resulting from the COVID-19 outbreak, to tax years with a higher statutory rate. Our effective tax rate differs from the statutory tax rate due to the GILTI provisions, our available R&D tax credit, the forecasted carry-back of losses to tax years with a higher statutory rate 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

Working Capital (in millions)

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 March 29, 2020 was as follows (in millions):

Cash Balances in Mexico

We earn a portion of our operating income in Mexico. As of March 29, 2020, $2.6 million of our $10.2 million cash and cash equivalents balance was held in Mexico. These funds are available for repatriation as deemed necessary.

Cash Flow Analysis (in millions)

The increase in cash provided by operating activities between periods is due to the improvement in our financial results between periods prior to non-cash items such as depreciation, foreign currency transaction gains and losses, equity earnings and losses of joint ventures, unrealized gains and losses on peso forward contracts, pension settlement charges, and non-cash compensation expense. Cash provided by operating activities reflected a net decrease in our working capital requirements between periods of approximately $1.6 million, with the net decrease in our working capital requirements being made up of the following working capital changes (in millions):

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The period over period change in the accounts receivable balances is the result of the amount and timing of sales during each period. The reduction in accounts receivable balances during the current year-to-date period reflected reduced sales levels toward the end of our March 2020 period as compared to the end of our June 2019 period, which reduction was primarily due to our OEM customers reducing production schedules and closing their assembly plants due to the COVID-19 outbreak. The increase in accounts receivable balances during the prior year-to-date period reflected increased sales levels toward the end of our March 2019 period as compared to the end of our June 2018 period. The period over period change in inventory reflected an increase in inventory balances during the current year-to-date period due to an inventory build-up resulting from our OEM customers reducing production schedules and closing their assembly plants due to COVID-19. The period over period change in other assets was primarily the result of a reduction in customer tooling balances during the prior year-to-date period. 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. The prior year-to-date change in customer tooling balances 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 was primarily the result of an increase accounts payable balances during the prior year-to-date 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 $10.3 million during the current year period and $13.7 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 $17.0 million included repayments of borrowings under credit facilities of $15.0 million, $1.6 million of regular quarterly dividend payments to shareholders and $980,000 of dividend payments to non-controlling interests in our subsidiaries, partially offset by $543,000 received for the exercise of stock options under our stock incentive plan and purchases under our employee stock purchase plan. Net cash used in financing activities of $9.7 million during the prior year period included repayments of borrowings under credit facilities of $9.0 million, $1.5 million of regular quarterly dividend payments to shareholders and $1.4 million 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 VAST China has adequate debt facilities in place over the next fiscal year to cover the future operating and capital requirements of its business. No capital contributions were made to VAST LLC during the nine months ended March 29, 2020. During the nine months ended March 31, 2019, capital contributions totaling $600,000 were made to VAST LLC collectively by all VAST LLC partners. STRATTEC’s portion of these capital contributions totaled $200,000. During the nine months ended March 29, 2020 and March 31, 2019, VAST LLC made capital contributions to Sistema de Acesso Veicular Ltda totaling $200,000 and $975,000, 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 calendar year 2020. STRATTEC’s portion of the capital contributions is anticipated to be $100,000. During the nine months ended March 29, 2020, VAST LLC made no capital contributions to Minda-VAST Access Systems. Due to Minda-VAST Access System recently experiencing losses and currently being shut-down due to the COVID-19 outbreak, future capital contributions may be required.

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 for the remainder of fiscal year 2020.

Future Capital Expenditures

We anticipate capital expenditures will be approximately $14 million to $15 million in total in fiscal 2020, of which $10.3 million has been made through March 29, 2020, 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 March 29, 2020. A total of 3,655,322 shares have been repurchased over the life of the program through March 29, 2020, at a cost of approximately $136.4 million. No shares were repurchased during the nine month periods ended March 29, 2020 or March 31, 2019. 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. As of March 29, 2020, we were in compliance with all financial covenants required by these credit facilities. 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 $12 million at March 29, 2020 and $18 million at June 30, 2019. The average outstanding borrowings and weighted average interest rate on the STRATTEC Credit Facility loans were approximately $13.8 million and 2.9 percent, respectively, during the nine months ended March 29, 2020. Outstanding borrowings under the ADAC-STRATTEC Credit Facility totaled $15 million at March 29, 2020 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 $20.1 million and 3.2 percent, respectively, during the nine months ended March 29, 2020.

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 $36,000 during the nine months ended March 29, 2020 and $2.4 million during the nine months ended March 31, 2019. During the nine months ended March 29, 2020, no capital contributions were made to VAST LLC. During the nine months ended March 31, 2019, capital contributions totaling $600,000 were made to VAST LLC collectively by all VAST LLC partners. STRATTEC’s portion of these capital contributions totaled $200,000.

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 $2.6 million during the nine months ended March 29, 2020 and approximately $1.7 million during the nine months ended March 31, 2019.

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 $167,000 during the nine months ended March 29, 2020 and increased net income to STRATTEC of approximately $2.8 million during the nine months ended March 31, 2019.

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 income of joint ventures to STRATTEC of approximately $19,000 during the nine months ended March 29, 2020 and approximately $24,000 during the nine months ended March 31, 2019. 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 (Loss) Earnings of Joint Ventures in the accompanying Condensed Consolidated Statements of Income (Loss) and Comprehensive (Loss) Income. The business of SAL LLC has been wound down to sell only commercial biometric locks.

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

The following is an addition to the risk factors disclosed in our Form 10-K as filed with the Securities and Exchange Commission on September 5, 2019.

We have significant international operations and face the risk that the Coronavirus or other health epidemics could disrupt our operations or the operations of our suppliers.

The Coronavirus (COVID-19) pandemic is adversely affecting, and is expected to continue to adversely affect, our operations and supply chains and we have experienced and expect to continue to experience reductions in demand for certain of our products and services. Because we manufacture our products in facilities around the world, including in Mexico and through our joint venture partners in Europe, China and India, we are and will continue to be vulnerable to an outbreak of COVID-19 or other contagious diseases in those regions as well as in the United States. The effects of COVID-19 and other contagious diseases have included and may continue to include disruptions or restrictions on our ability to travel, our ability to manufacture our affected products and our ability to ship these affected products to customers as well as disruptions that have and may continue to affect our suppliers, including those in these regions or other affected regions of the world, including in China and neighboring countries. Current and future disruption of our ability to manufacture or distribute our products or of the ability of our suppliers to deliver key raw materials on a timely basis has had and could continue to have a material adverse effect on our sales and operating results. In addition, the COVID-19 outbreak and future outbreaks of contagious diseases in the human population has resulted in and could continue to result in a widespread health crisis that adversely affects the economies and financial markets of many countries (including those where we operate or where our products are ultimately used), resulting in an economic downturn that has and could continue to affect demand for our products and impact our operating results.

We have been adhering to guidelines and mandates from governmental and health organizations in the territories that we have locations and production facilities, and have implemented various risk mitigation plans to reduce the risk of spreading COVID-19. To that end, we have encouraged working remotely where applicable, adopted social distancing where appropriate, implemented travel restrictions, and we are taking actions to ensure that locations and facilities are cleaned and sanitized regularly. All of these actions may impact our operations and profitability. Further, we have complied with and may be required to comply with additional foreign, national, state or local governmental authority recommendations, guidelines, and/or mandates, which have resulted in and may result in additional temporary reduction in or suspension in work at certain of our locations and production facilities. All of these additional actions have and will continue to adversely impact our operating results.