2 0 1 7 A n n u a l R e p o r t
R E A DY F O R T H E R O A D A H E A D.
READY FOR THE ROAD AHEAD.
EXPANDING OUR PRODUCT FAMILY WITH A
NEW FACILITY IN LEON, MEXICO.
STRATTEC STRATEGIC FOCUS
EFFICIENT USE OF CAPITAL
This annual report contains a significant
amount of information about the activity
and results of our efforts. It is valuable to
clearly articulate the guiding principles
which drive the thinking behind our day-to-
day decisions and the establishment of our
long term strategic direction.
COLLABORATION
For nearly two decades, we have
successfully partnered with Witte Automotive
and ADAC Automotive under the brand name
of VAST, which is an acronym for Vehicle
Access System Technology. We share ideas,
expenses, and product development and
support each other with manufacturing
capabilities. It has resulted in a family of
related products and worldwide support to
better serve our customers. To better
describe our partnership, we are now in the
process of re-branding the name to VAST
Automotive Group.
GLOBALIZATION
To service our customers in the
automotive industry, we must be able to offer
global support. In addition to STRATTEC’s
production facilities in the USA and Mexico,
through our VAST partnership, our global
footprint to support customer needs includes
China, India, Germany, Czech Republic,
Bulgaria, Brazil, Japan and Korea.
Economic Value Added (EVA®) is
fundamental to our decision making. Not only
are we looking at opportunities to grow our
profitability, but we also place significant
consideration on the amount of assets needed
to achieve our goals. We are mindful of our
true cost of capital, not just the prevailing
interest rate. Our focus typically has a five year
time horizon, which is consistent with the
expected life of many vehicle platforms. While
we may suffer less than desirable returns in the
early years of the investment, we plan for an
attractive return over the life of the project.
SHARING SUCCESS
STRATTEC associates have an
opportunity to earn a bonus primarily based
on corporate performance. Rewards are
calculated using EVA® principles of continuous
improvement and generating returns in excess
of our cost of capital. In acting like owners,
there are years when bonuses are paid and
years when bonuses are not paid.
ACT LIKE OWNERS
STRATTEC is organized with business
units featuring clear bottom line responsibility.
Each has their own advisory board of
directors. We try to duplicate customer/
supplier relationships between departments.
2 0 1 7 A N N U A L R E P O R T
STRATTEC SECURITY CORPORATION (“STRATTEC” or the “Company”) designs,
develops, manufactures and markets automotive access control products including mechanical
locks and keys, electronically enhanced locks and keys, steering column and instrument panel
ignition lock housings, latches, power sliding side door systems, power lift gate systems,
power deck lid systems, door handles and related products for North American automotive
customers. We also supply global automotive manufacturers through a unique strategic
relationship with WITTE Automotive of Velbert, Germany and ADAC Automotive of Grand
Rapids, Michigan. Under this relationship STRATTEC, WITTE and ADAC market each
company’s products to global customers under the “VAST” brand name. Our products are
shipped to customer locations in the United States, Canada, Mexico, Europe, South America,
Korea, China and India, and we provide full service and aftermarket support.
C O N T E N T S
LETTER TO THE SHAREHOLDERS
2
FINANCIAL HIGHLIGHTS 4
COMPANY DESCRIPTION 5
STRATTEC EQUIPPED VEHICLE LIST 13
MANAGEMENT’S DISCUSSION AND ANALYSIS
14
FINANCIAL STATEMENTS 34
REPORT OF MANAGEMENT
59
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 60
FINANCIAL SUMMARY
PERFORMANCE GRAPH
62
64
DIRECTORS / OFFICERS / SHAREHOLDERS’ INFORMATION 65
P R O S P E C T I V E I N F O R M AT I O N
A number of the matters and subject areas discussed in this Annual Report (see above
“Contents” section) contain “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements may be identified by the use of
forward-looking words or phrases such as “anticipate,” “believe,” “would,” “expect,” “intend,”
“may,” “planned,” “potential,” “should,” “will,” and “could.” These include statements regarding
expected future financial results, product offerings, global expansion, liquidity needs, financing
ability, planned capital expenditures, management's or the Company’s expectations and beliefs,
and similar matters discussed in the Letter to the Shareholders, Company’s Management’s
Discussion and Analysis, and other sections of this Annual Report. The discussions of such
matters and subject areas are qualified by the inherent risks and uncertainties surrounding future
expectations generally, and also may materially differ from the Company’s actual future experience.
The Company’s business, operations and financial performance are subject to certain risks
and uncertainties, which could result in material differences in actual results from the Company’s
current expectations. These risks and uncertainties include, but are not limited to, general
economic conditions, in particular relating to the automotive industry, customer demand for the
Company’s and its customers’ products, competitive and technological developments, customer
purchasing actions, changes in warranty provisions and customers’ product recall policies, foreign
currency fluctuations, costs of operations and other matters described under “Risk Factors” in the
Management’s Discussion and Analysis section of this report. In addition, such uncertainties and
other operational matters are discussed further in the Company’s quarterly and annual report filings
with the Securities and Exchange Commission.
Shareholders, potential investors and other readers are urged to consider these factors
carefully in evaluating the forward-looking statements and are cautioned not to place undue
reliance on such forward-looking statements. The forward-looking statements made herein are only
made as of the date of this Annual Report and the Company undertakes no obligation to publicly
update such forward-looking statements to reflect subsequent events or circumstances occurring
after the date of this Annual Report.
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L E T T E R T O T H E S H A R E H O L D E R S
Dear STRATTEC Shareholders,
As a company, we were not satisfied with Fiscal 2017’s performance, both from an
earnings and an EVA® perspective. While making progress in certain areas, it was not
reflected in our scorecard. Because our financial operating results did not reach satisfactory
hurdle rates this past year, we are committed to doing better next year and there are good
reasons why this should happen.
Fiscal 2017’s profits were reduced due to sizable investments in product engineering
that we were making for upcoming production releases. Other impacts came from
situations where we could have done better or initiatives which didn’t materialize due to
factors beyond our control. For example, our 2015 investment in India was based on
aggressive growth plans by our customers. Now General Motors and Ford are either pulling
out or cutting back in India.
Our efforts toward diversification of technology and markets have not been
successful. We originally invested in STRATTEC Advanced Logic to bring new technology
to the automotive market while at the same time leveraging our aftermarket distribution
system into new non-automotive markets. Fingerprint recognition technology is still
promising, but the path to profitability has proved to be much more costly than planned.
The business suffered from higher expenses, delayed product launches and slower than
expected market acceptance. Without the impact of STRATTEC Advanced Logic, our
Earnings Per Share would have been improved by over 20%.
Capital expenditures were above normal because of the construction of our new joint
venture facility in Leon, Mexico plus the need for new equipment throughout our operations
to support additional capacity and new product programs. We are excited about the recent
completion of the construction phase of the Leon plant. It is designed to manufacture
painted door handles for both existing and future customers currently in, or moving to that
region. The start-up costs of building a new factory impacted us throughout Fiscal 2017.
We expect these costs to continue over the next two fiscal years, but at a declining rate as
we ramp up production. There has been a significant migration of automotive assembly to
the central part of Mexico. Ultimately, our investment there will result in a significant
increase in sales for ADAC-STRATTEC de Mexico.
A C T I O N S
For Fiscal 2018, we are focused on efficiently launching new business already won, fine
tuning processes, cutting marginally profitable business, reducing costs and making capital
investments to insure quality and improve efficiency. We have already taken a number of
actions which will have predictable and positive impacts on our profitability in 2018.
Effective July 1, we are no longer funding the losses of STRATTEC Advanced Logic.
The burden of funding has been shifted to our joint venture partners who are actively trying
to move the business forward.
A program is now in place to help us better understand the soft costs related to
managing and producing some older products. As a result, an initiative is currently
underway to phase out and/or institute substantial price increases for products which
require inordinate amounts of support.
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L E T T E R T O T H E S H A R E H O L D E R S
We have recently reduced salaried headcount to better align our organization with
current strategies. While it is always difficult to separate loyal and talented Associates from
the company, it is an action that needed to be taken.
By realigning priorities, we have freed up talented people to work on more critical
projects. A new corporate team has been created to focus on cost reduction and process
improvement. It is expected to ultimately generate significant benefits to our bottom line.
After winning record amounts of new business in Fiscal Year 2016, this year we were
faced with very challenging timelines for design and production. I want to thank our
Associates for their efforts to satisfy our customers’ needs and expectations. However, as
part of this effort, we were faced with unusually high costs of external engineering services
to execute on the new business. Those high engineering costs will not have to be repeated
this year as we shift from a design phase to a production phase. Instead of costing money,
production will begin to benefit us with additional sales and margin.
Lastly, we restructured our organization to ensure that our design and manufacturing
processes meet stricter quality standards. A comprehensive Quality Improvement Plan was
developed and is currently being implemented. The benefits of those changes are now just
beginning to be realized.
VA S T
VAST (Vehicle Access System Technology) is a unique partnership between STRATTEC
and two privately owned companies, WITTE Automotive of Velbert Germany and ADAC
Automotive of Grand Rapids, Michigan. We are now in the process of re-branding ourselves
as the VAST Automotive Group, which is a better description of our partnership and our
global business. Our jointly owned business in China remains strong and is showing good
results. We are also seeing the benefits from better coordination between VAST China and
the other VAST locations throughout the world. We are pleased with the progress made by
our organizations in leveraging our collective strengths, technologies and global footprint.
S U M M A RY
We have already taken actions to grow our business, focus our strategies and find
ways to be more cost efficient and become more profitable. I appreciate the efforts of
nearly 4000 STRATTEC Associates for working hard and taking steps to create a bright
future for all of us. We are committed to make Fiscal 2018 a better year and to position
ourselves for continued growth in profitability.
On behalf of your Board of Directors, your management team and myself, thank you,
our fellow shareholders, for your continuing support during a year of less favorable results.
Sincerely,
Frank J. Krejci
President & Chief Executive Officer
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F I N A N C I A L H I G H L I G H T S
( I N M I L L I O N S )
Net Sales
Gross Profit
Income from Operations
Net Income Attributable to STRATTEC
Total Assets
Total Debt
STRATTEC Shareholders’ Equity
2017
$417.3
60.2
13.7
7.2
2016 2015
$411.5
$401.4
64.8 72.7
20.9 31.1
20.7
273.7 242.2 230.8
20.0 10.0
140.3
30.0
151.1
139.3
9.1
E C O N O M I C VA L U E A D D E D ( E VA ®)
We believe that EVA® represents an accurate measure of STRATTEC’s overall performance
and shareholder value. All U.S. associates and many of our Mexico-based salaried associates
participate in incentive plans that are based upon our ability to add economic value to the
enterprise. The EVA® performance for 2017 was a negative $2.4 million which represents a $4.5
million reduction from 2016. (For further explanation of our EVA® Plan, see our 2017 definitive
Proxy Statement.)
Net Operating Profit After Cash-Basis Taxes
Average Monthly Net Capital Employed
Cost of Capital
Capital Charge
Economic Value Added
$129.1
__10%
$ 10.5
12.9
$ (2.4)
EVA® is not a traditional financial measurement under U.S. GAAP and may not be similar to
EVA® calculations used by other companies. However, STRATTEC believes the reporting of EVA®
provides investors with greater visibility of economic profit. The following is a reconciliation of the
relevant GAAP financial measures to the non-GAAP measures used in the calculation of
STRATTEC’s EVA®.
Net Operating Profit After Cash-Basis Taxes:
2017 Net Income Attributable to STRATTEC as Reported
Deferred Tax Provision
Other
Net Operating Profit After Cash-Basis Taxes
$ 7.2
1.9
1.4
$ 10.5
Average Monthly Net Capital Employed:
Total STRATTEC Shareholders’ Equity as Reported at July 2, 2017 $151.1
Long-Term Liabilities
33.1
Long-Term Assets – Other than Property, Plant and Equipment (33.1)
(22.6)
Other
$128.5
Net Capital Employed At July 2, 2017
_ 0.6
Impact of 12 Month Average
$129.1
Average Monthly Net Capital Employed
EVA® is a registered trademark of Stern, Stewart & Co.
C O M PA N Y D E S C R I P T I O N
5
B A S I C B U S I N E S S
STRATTEC SECURITY CORPORATION designs, develops, manufactures and markets
automotive access control products including mechanical locks and keys, electronically
enhanced locks and keys, steering column and instrument panel ignition lock housings,
latches, power sliding side door systems, power lift gate systems, power deck lid systems,
door handles and related products for North American automotive customers. We also supply
global automotive manufacturers through a unique strategic joint venture relationship with
WITTE Automotive of Velbert, Germany and ADAC Automotive of Grand Rapids, Michigan
called VAST Automotove Group (“VAST”). Under this relationship STRATTEC, WITTE and
ADAC market each company’s products to global customers under the VAST brand name.
Our products are shipped to customer locations in the United
States, Canada, Mexico, Europe, South America, Korea, China
and India, and we provide full service and aftermarket support.
ADAC-STRATTEC
de Mexico received
a 2017 World
Excellence Award
from the Ford
Motor Company
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Harley-Davidson
Motorcycle Key
H I S T O RY
The product line that became STRATTEC was part of
Briggs & Stratton Corporation’s founding business in 1908. In
1995, STRATTEC was spun off from Briggs & Stratton through
a tax-free distribution to the then-existing Briggs & Stratton
shareholders and has been an independent public company
for over twenty-two years.
Our history in the automotive security business spans
almost 110 years. STRATTEC has been the world’s largest producer of automotive locks and
keys since the late 1920s, and we currently maintain a dominant share of the North American
markets for these products.
P R O D U C T S
Lock Cylinder
Our traditional products are lock sets (locks and keys) for cars
and light trucks. Typically, two keys are provided with each vehicle
lockset. Most of the vehicles we currently supply are using keys
with sophisticated radio frequency identification technology for
additional theft prevention. Keys with remote entry devices integrated
into a single unit and bladeless electronic keys have been added to our
product line and are gaining in popularity.
Ignition lock housings represent a growing access
control product for us. These housings are the mating part for
our ignition locks and typically are part of the steering column
structure, although there are instrument panel-mounted versions
for certain vehicle applications. These housings are either die cast
Key Fob
from zinc or injection molded plastic and may include electronic
components for theft deterrent systems.
We are also developing additional access control
products, including trunk latches, lift gate latches,
tailgate latches, hood latches, side door latches and
related hardware. With our acquisition of Delphi
Corporation’s Power Products Group in fiscal 2009,
we are now supplying power access devices for
sliding side doors, lift gates and trunk lids. Through
Steering Column
Locking Mechanism
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a joint venture formed with ADAC Automotive during fiscal 2007, we also
supply door handle components and related vehicle access hardware.
To maintain a strong focus on each of these access control products,
we have Product Business Managers who oversee the product’s entire
life cycle, including product concept, application, manufacturing,
warranty analysis, service/aftermarket, and financial/commercial
Key Fob
issues. The Product Business Managers work
closely with our sales organization, our engineering
group, and our manufacturing operations to assure
their products are receiving the right amount of quality
attention so that their value to STRATTEC and the
market place is enhanced.
Trunk Latch
M A R K E T S
We are a direct supplier to OEM automotive
and light truck manufacturers as well as other
transportation-related manufacturers. Our largest
customers are Fiat Chrysler Automobiles,
General Motors Company and Ford Motor
Company. Our access control product
mix varies by customer, but generally
our overall sales tend to be highest in lock and key, followed by power access (produced
by STRATTEC Power Access), ignition lock housings, the door handle and trim
components produced by ADAC-STRATTEC de Mexico and latch mechanisms.
Power Sliding Door
Direct sales to various OEMs represented approximately 74% of our total sales for
fiscal 2017. The remainder of our revenue is received primarily through sales to the OEM
service channels, the aftermarket and Tier 1 automotive supplier customers, and sales of
certain products to non-automotive commercial customers.
Sales to our major automotive customers, both OEM and Tier 1, are coordinated
through direct sales personnel located in our Detroit-area office. Sales are also facilitated
through daily interaction between our Program Managers, Application Engineers and other
product engineering personnel. Sales to other OEM customers are accomplished through
a combination of our sales personnel located in Detroit and personnel in our Milwaukee
headquarters office.
The majority of our OEM products are sold in North America. While some exporting is
done to Tier 1 and automotive assembly plants in Europe, Asia and South America, we are in
the process of expanding our presence in these markets and elsewhere through the Vehicle
El Paso Distribution Service Warehouse
Access Systems Technology LLC (VAST LLC) joint venture we
jointly own with WITTE Automotive and ADAC Automotive.
VAST is described in more detail on pages 8 and 9.
OEM service and replacement parts are sold to the
OEM’s own service operations. In addition, we distribute
our components and security products to the automotive
aftermarket through approximately 50 authorized wholesale
distributors, as well as other marketers and users of
component parts, including export customers. Increasingly,
our products find their way into the retail channel, specifically the hardware store channel.
Our ability to provide a full line of keys to that channel has been accomplished through
the introduction of the STRATTEC “XL” key line. This extension to our line includes keys
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C O M PA N Y D E S C R I P T I O N
that we currently do not supply on an OEM basis, including keys for Toyota, Honda and
other popular domestic and import vehicles. This extended line of keys enables
automotive repair specialists to satisfy consumer needs for repair or replacement parts.
Our aftermarket activities are serviced through a warehousing operation in El Paso, Texas.
C U S T O M E R S A L E S F O C U S
To bring the proper focus to the relationships with our major
Trunk Latch
customers, we have seven customer-focused teams, each with a Director
of Sales, one or two Engineering Program Managers and various
Customer Application Engineers. In addition to customer teams for General
Motors, Ford and Fiat Chrysler, we currently have teams for New Domestic
Vehicle Manufacturers (primarily the Japanese and Korean automotive
manufactures), Driver Control/Ignition Lock Housing customers,
Tier 1 customers, and Service and Aftermarket customers.
Sales and engineering for ADAC-STRATTEC LLC
are supported by our partner in this joint
venture, ADAC Automotive.
Each Sales Director is responsible for
the overall relationship between STRATTEC and
a specific customer group. Program Managers are responsible for
coordinating cross functional activities while managing new product
programs for their customers.
Push
Button
Start
P R O D U C T E N G I N E E R I N G F O C U S
To best serve our customers’ product needs, STRATTEC’s
engineering resources are organized into groups which focus on
specific access control applications. We currently have six engineering
groups: Locks and Keys, Aftermarket, Latches, Power Access Devices,
Driver Control/Ignition Lock Housings and Electrical. Each group has a
Product Business Manager, an Engineering Manager and a complement
of skilled engineers who design and develop products for specific
applications. In doing this, each engineering group works closely with the
Customer teams, Engineering Program Managers, and Application Engineers.
STRATTEC
manufactures this
Maserati electronic
key fob.
Underlying this organization is a formalized product development process to identify and
meet customer needs in the shortest possible time. By following this streamlined development
system, we shorten product lead times, tighten our response to market changes and provide
our customers with the optimum value solution to their security/access control
requirements. STRATTEC is also ISO/TS 16949 and ISO 14001 certified. This
means we embrace the philosophy that quality should exist not only in the finished
product, but in every step of our processes as well.
Aston Martin vehicles
use an electronic key
fob and mating docking
station developed by
STRATTEC exclusively
for Aston Martin.
C O M PA N Y D E S C R I P T I O N
8
O P E R AT I O N S
A significant number of the components that go into our products are manufactured at
our headquarters in Milwaukee, Wisconsin. This facility produces zinc die cast components,
Milwaukee Headquarters and
Manufacturing Facility
stampings and milled key blades. We have three
owned production facilities currently in operation in
Juarez, Mexico operating as STRATTEC de
Mexico. Plant No. 1 houses assembly operations
for locksets and ignition lock housings. Plant No. 2
was built during fiscal 2009 to replace a leased
facility. It houses our key finishing and plastic
injection molding operations, as well as dedicated
space for the assembly operations of ADAC-
STRATTEC de Mexico. Plant No. 3 was purchased
in fiscal 2015 and houses both latch and power access assembly operations for STRATTEC
Power Access de Mexico. Plant No. 4 is currently under construction in Leon, Mexico and
will house our custom paint system for
door handles and assembly for ADAC-
STRATTEC de Mexico. This facility is
planned to be operational during the first
quarter of fiscal year 2018.
STRATTEC de Mexico (Plant 1) - Assembly Facility
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A D VA N C E D D E V E L O P M E N T
Research and development activities
are centered around a dedicated research
engineering staff we call our Advanced
Development Group. This group has the
responsibility for developing future products
that will keep us in the forefront of the
markets we serve. We primarily focus on
electronic and mechanical access control
products and modularization of related
access/security control components. Once
our Advanced Development Group
establishes a proof-of-concept product
utilizing new technology, any further
product development is then shifted to our
engineering groups for commercialization
and product applications.
V E H I C L E A C C E S S S Y S T E M S
T E C H N O L O G Y L L C ( VA S T )
STRATTEC de Mexico (Plant 2) - Key Finishing and Injection
Molding Assembly Facility ADAC-STRATTEC de Mexico
STRATTEC de Mexico (Plant 3) - Latch and Power Access Assembly
STRATTEC POWER ACCESS de Mexico
In fiscal 2001, we entered into a formal alliance with WITTE-Velbert GmbH, an automotive
supplier based in Germany which designs, develops, manufactures and markets automotive
access control products for European-based customers. This alliance consisted of two
initiatives. The first was a set of legal agreements which allowed STRATTEC to manufacture and
market WITTE’s core products in North America, and WITTE to manufacture and market
STRATTEC’s core products in Europe. The second initiative was a 50:50 joint venture,
C O M PA N Y D E S C R I P T I O N
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ADAC-STRATTEC de Mexico (Plant 4) - Painted Door Handle
and Assembly Facility
VAST Auburn Hills, Michigan Facility
WITTE-STRATTEC LLC, to invest in
operations with local partners in strategic
markets outside of Europe and North America.
In February of 2006, we announced the
expansion of this alliance and related joint
venture with the addition of a third partner, ADAC
Plastics, Inc. ADAC, of Grand Rapids, Michigan,
adds North American expertise in door handles, a
part of WITTE’s core product line that STRATTEC
did not support, and an expertise in color-
matched painting of these components.
With the expansion of the alliance, we
can offer a full range of access control
related products available on a global basis
to support customer programs. To identify
this powerful combination of independent
companies focused on working together, we
renamed the joint venture Vehicle Access Systems Technology LLC (VAST LLC). We now refer
to the combination of the alliance structure and joint venture as “VAST Automotive Group”
(VAST). WITTE is now called WITTE Automotive, and ADAC is now doing business as ADAC
Automotive. We have adopted a common graphic image in which we share a logo mark and
colors, and a specific VAST logo used on the partners’ printed and electronic presentation
materials. What is now VAST made investments with a local partner in Brazil in September, 2001,
and local partners in China in March, 2002. However, during fiscal 2010, VAST LLC purchased
the remaining 40 percent interest of its local partners in the China venture. VAST China is now
wholly owned by VAST LLC and had annual net sales of approximately $128 million during
fiscal 2017. This was an important step which gives STRATTEC a one-third interest in VAST
China’s activities in the important growing Chinese/Asian market. In March, 2014, VAST LLC
Seat-back Latches
Glove Box Lock Cylinders
Rear Compartment
Lock Cylinders
Ignition Lock Cylinders,
Keys, Fobs and Push
Button Start Options
Ignition Lock Housings
Hood Latches
Power
Liftgates and
Trunk Lids
Power and
Manual Rear
Compartment
Latches
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Door Handles
Door Latches
Door Lock Cylinders
Power Sliding Doors
VAST partner products
STRATTEC and
STRATTEC POWER ACCESS products
C O M PA N Y D E S C R I P T I O N
purchased the remaining 49 percent interest of its local partner in Brazil, which had annual net sales
of approximately $1 million during fiscal 2017.
On April 30, 2015 VAST LLC executed a purchase agreement to become a 50:50 Joint
Venture partner with Minda Management Services Limited, an affiliate of both Minda
Corporation Limited and Spark Minda, Ashok Minda Group of New Delhi, India (collectively,
“Minda”). VAST acquired a fifty percent equity interest in the former Minda-Valeo Security
Systems joint venture entity, based in Pune, India, for approximately $12 million. This joint
venture entity was renamed Minda-VAST Access Systems (“Minda-VAST”). Minda-VAST has
operations in Pune and Delhi and had annual sales of approximately $34 million during fiscal
year 2017. Minda is a leading manufacturer of security & access products and handles, for both
OEMs and the aftermarket in India.
VAST is the embodiment of STRATTEC’s, WITTE’s and ADAC’s globalization strategy. We
are developing VAST as a global brand with which we are jointly pursuing business with
identified global customers. Those identified customers are General Motors, Ford, Fiat/Chrysler,
Volkswagen, Honda, Toyota, Renault/Nissan and Hyundai/Kia.
To manage our customer relationships and coordinate global ventures and activities, we
have established a VAST Management Group led by a President. The Management Group
includes three Vice Presidents, one each from WITTE, STRATTEC and ADAC. With the focus
provided by this Management Group, VAST is able to manage global programs with a single
point of contact for customers, with the added advantage of providing regional support from
the partners’ operating entities. Combined with VAST LLC’s ventures in China and Brazil, and
sales/engineering offices in Japan and Korea, this structure establishes our global footprint.
G L O B A L P R E S E N C E
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C O M PA N Y D E S C R I P T I O N
S T R AT T E C L E G A L O W N E R S H I P S T R U C T U R E I N C L U D I N G VA S T
STRATTEC
Advanced Logic
(Delaware LLC)
49%
(B)
Actuator
Systems
STRATTEC
Power Access
LLC
(Delaware LLC)
20%
(A)
80%
51%
ADAC
STRATTEC LLC
(Delaware LLC)
(A)
51%
49%
WITTE Velbert GmbH
& Co. Kg
(E. Witte, WITTE-Velbert)
STRATTEC SECURITY
CORPORATION
(Wisconsin Corporation)
ADAC Plastic Inc.
(DBA ADAC Automotive)
(Michigan Corporation)
331/3 %
331/3 %
331/3 %
Vehicle Access Systems Technology LLC
(Delaware LLC)
100%
100%
100%
100%
50%
(B)
(A) STRATTEC Entities consolidated with a non-controlling interest.
(B) Entities recorded by STRATTEC on the equity method of accounting via “Equity Earnings (Loss)”
A D A C - S T R AT T E C d e M E X I C O
During fiscal 2007, we formed a new entity with ADAC
Automotive called ADAC-STRATTEC LLC including a wholly owned
Mexican subsidiary ADAC-STRATTEC de Mexico (ASdM). The
purpose of this joint venture is to produce certain ADAC and
STRATTEC products utilizing ADAC’s plastic molding injection
expertise and STRATTEC’s assembly capability. ASdM currently
operates out of defined space in STRATTEC de Mexico Plant No. 2
located in Juarez, Mexico. Products from this joint venture include
non-painted door handle components and exterior trim components
for OEM customers producing in North America. STRATTEC owns
51% of this joint venture and its financial results are consolidated
into STRATTEC’s financial statements. In our fiscal years ending
2017 and 2016, ASdM was profitable and represented $67.7 and
$61.4 million, respectively, of our consolidated net sales.
STRATTEC de Mexico Plant No. 4 is currently under
construction in Leon, Mexico and will house our
custom paint system for door handles and
assembly for ADAC-STRATTEC
de Mexico. This facility is
planned to be
operational during
the first quarter of
fiscal year 2018.
STRATTEC has introduced
the BOLT line of products,
the world’s first codeable
padlock. In a simple one-
step process, users can
code the padlock to their
vehicle key. This provides
significant convenience by
reducing the number of
keys users need to secure
their lockers, storage
sheds and vehicle
accessories such as tool
boxes, trailer hitches, etc.
You can buy this product
direct at www.boltlock.com.
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S T R AT T E C P O W E R A C C E S S L L C
During fiscal year 2009, we formed a new subsidiary with WITTE Automotive called
STRATTEC POWER ACCESS LLC (SPA) to acquire the North American business of the
Delphi Power Products Group. WITTE is a 20 percent minority owner. SPA in turn owns a
Mexican subsidiary, STRATTEC POWER ACCESS de Mexico. The purpose of this subsidiary
is to produce power access devices for sliding side doors, lift gates and trunk lids.
STRATTEC POWER ACCESS de Mexico currently operates out of defined space in
STRATTEC de Mexico Plant No. 3 located in Juarez, Mexico. Financial results for SPA are
consolidated in STRATTEC’s financial statements. For fiscal years ending 2017 and 2016,
SPA was profitable and represented $84.5 and $83.7 million, respectively, of our
consolidated net sales.
S T R AT T E C A D VA N C E D L O G I C L L C
During the fourth quarter of fiscal year 2013, we formed a new joint venture with
Actuator Systems LLC called NextLock LLC subsequently renamed STRATTEC Advanced
Logic. The initial capitalization of the joint venture was $1.5 million. The purpose of this joint
venture is to assemble and sell the next generation of biometric security products based
upon the residential and commercial designs of Actuator Systems. This joint venture had
minimal sales activity in both fiscal 2017 and 2016. During fiscal year 2015, STRATTEC
Advanced Logic signed a marketing agreement with Westinghouse Security Products to sell
under the Westinghouse brand name (see also www.westinghousesecurity.com). STRATTEC
owns 51% of this joint venture and its financial results are accounted for on the equity
method of accounting. During fiscal 2018, we, along with our joint venture partner, intend to
wind down and discontinue operating the business of STRATTEC Advanced Logic.
S E A S O N A L N AT U R E O F T H E B U S I N E S S
The manufacturing of components used in automobiles is driven by the normal peaks
and valleys associated with the automotive industry. Typically, the months of July and August
are relatively slow as summer vacation shutdowns and model year changeovers occur at the
automotive assembly plants. September volumes increase rapidly as each new model year
begins. This volume strength continues through October and into early November. As the
holiday and winter seasons approach, the demand for automobiles slows, as does production.
March usually brings a major sales and production increase, which then continues through
most of June. This results in our first fiscal quarter sales and operating results typically being
our weakest, with the remaining quarters being more consistent.
E C O N O M I C VA L U E C O M M I T M E N T
The underlying philosophy of our business and the means by which we measure our
performance is Economic Value Added (EVA®). Simply stated, economic value is created
when our business enterprise yields a return greater than the cost of capital we and our
shareholders have invested in STRATTEC. The amount by which our return exceeds the
cost of our capital is EVA®. In line with this philosophy, EVA® bonus plans are in effect for
all of our U.S. associates, outside directors and many of our Mexico-based salaried
associates as an incentive to help positively drive the economic value of our business.
STRATTEC’s significant market presence is the result of over a 100-year
commitment to creating quality products and systems that are responsive to changing
needs. As technologies advance and markets grow, STRATTEC retains that commitment
to meeting and exceeding the expectations of our customers, and providing economic
value to our shareholders.
V E H I C L E L I S T
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We are proud to be associated with many of the quality vehicles produced in North
America and elsewhere. The following model year 2018 cars and light trucks are equipped
with STRATTEC products.
PA S S E N G E R C A R S
Acura NSX
Acura TLX
Aston Martin DB 11*
Aston Martin Rapide *
Aston Martin Vantage *
Buick Excelle *
Buick GL8 *
Buick LaCrosse *
Buick Verano
Buick Regal *
Cadillac ATS *
Cadillac CT6*
Cadillac CTS
Cadillac XTS *
Chevrolet Bolt
Chevrolet Camaro
Chevrolet Corvette
Chevrolet Cruze *
Chevrolet Impala
Chevrolet Malibu
Chevrolet Sonic *
Chevrolet Spin *
Chevrolet Volt
Chrysler 300
Dodge Challenger
Dodge Charger
Dodge Viper SRT
Ford Fiesta
Ford Focus
Ford Fusion
Ford GT
Ford Ka *
Ford Mustang
Ford Taurus
Honda Civic
Lincoln MKS
Lincoln MKZ
Maserati Ghibli *
Maserati Quattroporte *
Opel Astra *
Opel BEV
Opel Cascada *
Opel Insignia *
Opel Meriva *
Opel Zafira *
Tesla Model S
Tesla Model X
Tesla Model 3
Volkswagon Jetta
L I G H T T R U C K S , VA N S A N D S P O R T U T I L I T Y V E H I C L E S
Acura MDX
Acura RDX
Buick Enclave
Buick Encore*
Buick Envision*
Cadillac Escalade
Cadillac Escalade ESV
Cadillac XT5
Chevrolet Bolt EV
Chevrolet Captiva *
Chevrolet Colorado *
Chevrolet Equinox
Chevrolet Express Van
Chevrolet Silverado Pickup
Chevrolet Suburban
Chevrolet Tahoe
Chevrolet Trail Blazer *
Chevrolet Trax *
Chevrolet Traverse
Chrysler Pacifica
Dodge Durango
Dodge Grand Caravan
Dodge Journey
Fiat Freemont
Ford C-Max *
Ford Ecosport
Ford Edge
Ford Escape
Ford Expedition
Ford Explorer
Ford Flex
Ford F-Series Pickup
Ford F-Series Super Duty
Pickup
Ford Transit *
GMC Acadia
GMC Terrain
GMC Canyon *
GMC Savana
GMC Sierra Pickup
GMC Yukon and Yukon XL
Honda CRV
Honda Odyssey
Jeep Cherokee
Jeep Compass
Jeep Grand Cherokee
Jeep Wrangler/Wrangler
Unlimited
Kia Sedona *
Lincoln MKC
Lincoln MKT
Lincoln MKX
Lincoln Navigator
Maserati Levante
Ram 1500/2500/3500
Pickup
Volkswagon Tiguan
* Vehicles produced outside of North America, or both in and outside North America.
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M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
The following Discussion and Analysis should be read in conjunction with STRATTEC SECURITY
CORPORATION’s accompanying Financial Statements and Notes thereto. Unless otherwise indicated,
all references to years or quarters refer to fiscal years or fiscal quarters of STRATTEC.
E X E C U T I V E O V E R V I E W
Historically, a significant portion of our total net sales are to domestic automotive OEMs
(General Motors, Ford and Fiat Chrysler). During the past two decades these customers lost North
American market share to the New Domestic automotive manufacturers (primarily the Japanese
and Korean automotive manufacturers). In addition to our dependence on our customers’
maintaining their market share, our financial performance depends in large part on conditions in
the overall automotive industry, which in turn, are dependent upon the U.S. and global economies.
During fiscal years 2017, 2016 and 2015, the above domestic automotive OEMs together
represented 60 percent, 63 percent and 65 percent, respectively, of our total net sales.
During fiscal years 2017 and 2016, we experienced stronger sales demand for our
components from our major North American customers noted above as it relates to light trucks
and both sport utility and car based utility vehicles in comparison to passenger cars, which was
likely influenced by lower gas prices. If gas prices continue to remain low over the next year, we
anticipate this consumer buying trend will continue.
Fiscal 2017 net sales were $417 million compared to $401 million in 2016 and $411 million in
2015. Net income attributable to STRATTEC for fiscal 2017 was $7.2 million compared to $9.1
million in 2016 and $20.7 million in 2015. The financial health of our three largest customers
continues to improve. General Motors, Ford and Fiat Chrysler continued to report profitable results
after implementing significant restructuring plans that modified their cost structures by closing
manufacturing facilities, reducing benefits and wages and eliminating certain models and brands
in 2009 and 2010. With the new United Auto Workers contracts signed in the United States during
November 2015, our major customers will be migrating passenger car production from the United
States into Mexico over the next 3-5 years to improve their overall profitability on these vehicles.
STRATTEC and our joint venture partner ADAC Automotive are currently building a new
production facility in Leon, Mexico to capture these new opportunities as it relates to painted door
handles and assemblies in the Mexican market.
As we look out into the future, the July 2017 projections from our third-party forecasting
service indicate that North American light vehicle production will show steady to flat improvement
for the next five years. By model year, based on these projections we are expecting a 2017 build
of 17.8 million vehicles, 17.7 million vehicles for 2018, 17.5 million vehicles for 2019, 18.2 million
vehicles for 2020 and 18.7 million vehicles for 2021. As part of this third party projection, General
Motors Company and the Ford Motor Company are expected to experience flat vehicle
production volumes in their production levels during this time period. Fiat Chrysler, however, is
expected to slightly decrease production as they eliminate or reduce passenger car production on
certain models during this time horizon. Of course, all of these forecasts are subject to variability
based on what happens in the overall North American and global economies, especially as it
relates to the current levels of employment, availability of consumer credit, home equity values,
fluctuating fuel prices, changes in customer preferences regarding product quality issues,
including related to recall and product warranty coverage issues, and other key factors that we
believe could determine whether consumers can or will purchase new vehicles.
Focus and Strategy Going Forward
STRATTEC’s long-term strategy is focused on maximizing long-term shareholder value by
driving profitable growth. Our management believes productivity improvements and cost reductions
are critical to our competitiveness, while enhancing the value we deliver to our customers. In order
to accomplish this, we have been pursuing, and we intend to continue to pursue over the
foreseeable future, the following objectives as summarized below:
• Streamline and standardize processes to increase productivity and improve the quality of our products
• Maintain a disciplined and flexible cost structure to leverage scale and optimize asset
utilization and procurement
• Maintain our strong financial position by deploying capital spending targeted for growth and
productivity improvement
• Leverage the “VAST Brand” with customer relationships to generate organic growth from
global programs
• Offer our customers innovative products and cost savings solutions to meet their changing demands
• Explore and execute targeted mergers and acquisitions with a disciplined due diligence
approach and critical financial analysis to drive shareholder value
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We use several key performance indicators to gauge progress toward achieving these
objectives. These indicators include net sales growth, operating margin improvement, return on
capital employed and cash flow from operations.
R E S U LT S O F O P E R AT I O N S
2017 Compared to 2016
Years Ended
July 2, 2017
$417.3
July 3, 2016
$401.4
Net Sales (millions of dollars)
Net Sales to each of our customers or customer groups in the current year and prior year
were as follows (millions of dollars):
Years Ended
Fiat Chrysler Automobiles
General Motors Company
Ford Motor Company
Tier 1 Customers
Commercial and Other OEM Customers
Hyundai / Kia
Total
July 2, 2017
$100.6
88.6
62.3
72.4
60.3
33.1
$417.3
July 3, 2016
$115.9
79.9
57.3
67.3
49.3
31.7
$401.4
Net sales were $417.3 million in 2017 compared to $401.4 million in 2016. Our 2017 fiscal year
was the typical 52 weeks while our 2016 fiscal year was 53 weeks. The impact of the additional week
of customer shipments during the prior year increased 2016 sales by approximately $7.5 million. Sales
to Fiat Chrysler Automobiles in the current year decreased in comparison to the prior year due to
lower customer vehicle production volume and lower content on components we supply, in particular
on the Chrysler 200, which was discontinued in December 2016, and lower volume during 2017 on
the new Chrysler Pacifica Minivan. Increased sales to General Motors Company in the current year
over the prior year was attributed to higher customer production volumes and content on vehicles for
which we supply components, partially offset by agreed upon price reductions that became effective
as of the start of the 2016 calendar year. Increased sales to Ford Motor Company in the current year
as compared to the prior year were attributed to increased product content on locksets and latches,
in particular for the F-150 pick-up truck. Sales to Tier 1 Customers and Commercial and other OEM
Customers during the current year increased in comparison to the prior year as a result of higher
electronic content and volume. These customers primarily represent purchasers of vehicle access
control products, such as latches, fobs, driver controls, and door handles and related components
that have been developed in recent years to complement our historic core business of locks and
keys. The increased sales to Hyundai / Kia in the current year over the prior year were due to higher
levels of production on the Kia Sedona minivan for which we supply components.
Cost of Goods Sold (millions of dollars) $357.2
July 2, 2017
Years Ended
July 3, 2016
$336.6
Direct material costs are the most significant component of our cost of goods sold and
comprised $236.1 million or 66.1 percent of cost of goods sold in the current year compared to
$224.9 million or 66.8 percent of cost of goods sold in the prior year. This increase in our direct
material costs of $20.6 million or 6.1 percent was due to increased sales volumes in the current year
as compared to the prior year and increased scrap and sorting costs resulting from internal
manufacturing process quality issues incurred in the current year as compared to the prior year as
well as current year obsolescence costs related to inventory intended for STRATTEC Advanced
Logic, LLC (“SAL LLC”), our biometric joint venture.
The remaining components of cost of goods sold consist of labor and overhead costs which
increased $9.4 million or 8.4 percent to $121.1 million in the current year from $111.7 million in the
prior year as the variable portion of these costs increased due to the increase in sales volumes
between years. Additionally, the current year as compared to the prior year included higher payroll,
benefit, outside service, and maintenance costs related to quality improvement initiatives undertaken
during the current year, higher than expected production and expediting costs to meet certain
customer schedules, higher royalty costs associated with sales of service parts to aftermarket
customers, higher wage costs for our Mexico operations resulting from wage increases implemented
to encourage work force retention in consideration of the peso devaluation, and start-up costs
related to our new Leon, Mexico facility. These costs were partially offset by a reduction of
approximately $5.8 million in the U.S. dollar value of our Mexican operations due to a favorable
Mexican peso to U.S. dollar exchange rate between these years as well as a reduction in warranty
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expense provisions. The average U.S. dollar/Mexican peso exchange rate increased to
approximately 19.29 pesos to the dollar in the current year from approximately 17.22 pesos to
the dollar in the prior year. Warranty recoveries and expense provision reversals in the current
year totaled $843,000 compared to expense provisions of $583,000 in the prior year.
Gross Profit (millions of dollars)
Gross Profit as a percentage of net sales
Years Ended
July 2, 2017
$60.2
14.4%
July 3, 2016
$64.8
16.1%
The reduction in gross profit and gross profit as a percentage of net sales in the current year as
compared to the prior year were the result of agreed upon customer price reductions that became
effective at the start of the 2016 calendar year, a less favorable sales mix in the current year as
compared to the prior year, which current year included a lower percentage of sales in the power
access and OEM service product lines as compared to the prior year period reducing gross profit
margins in the current year period, increased costs related to quality improvement initiatives
undertaken during the current year, higher than expected production and expediting costs to meet
certain customer schedules, higher royalty costs associated with sales of service parts to aftermarket
customers, higher wage costs for our Mexican operations, and start-up costs incurred related to our
new Leon, Mexico facility, all of which were partially offset by a favorable Mexican peso to U.S. dollar
exchange rate affecting the cost of our Mexican operations and a reduction in warranty expense
provisions during the current year as compared to the prior year, all as discussed above.
Engineering, Selling and Administrative Expenses in the current year and prior year were as follows:
Expenses (millions of dollars)
Expenses as a percentage of net sales
Years Ended
July 2, 2017
$46.5
11.1%
July 3, 2016
$43.9
10.9%
Engineering, selling and administrative expenses increased approximately $2.6 million between
years while the prior year included an additional week of expense as a result of the 53 week fiscal
year. The increase in these costs in the current year as compared to the prior year was due to higher
new product program development costs for which we are utilizing third party vendors for a portion of
the development work.
Income from operations in the current year was $13.7 million compared to $20.9 million in the
prior year. This decrease was the result of reduced gross profit margins during 2017 as well as an
increase in engineering, selling and administrative expenses in the current year as compared to the
prior year, all as discussed above.
The equity earnings (loss) of joint ventures was comprised of the following in the current year
and prior year (thousands of dollars):
Vehicle Access Systems
Technology LLC
STRATTEC Advanced Logic, LLC
Years Ended
July 2, 2017
July 3, 2016
$ 2,593
(1,927)
$
666
$
(639)
(1,596)
$(2,235)
Our Vehicle Access Systems Technology LLC (“VAST LLC”) joint ventures in China and
India continue to report profitable operating results while our joint venture in Brazil continues to
report losses due to the weak automotive build in that region. The 2016 equity loss of joint
ventures for VAST LLC included a $6 million impairment charge related to its Minda-VAST
Access Systems joint venture in India. STRATTEC’s portion of this impairment charge totaled $2
million. STRATTEC is not the primary beneficiary and does not control SAL LLC. Accordingly, our
investment in SAL LLC is accounted for using the equity method. Even though we maintain a 51
percent ownership interest in SAL LLC, effective with our fiscal 2015 fourth quarter, 100 percent
of the funding for SAL LLC was being made through loans from STRATTEC to SAL LLC.
Therefore, STRATTEC began recognizing 100 percent of the losses of SAL LLC up to our
committed financial support. During fiscal 2018, we, along with our joint venture partner, intend
to wind down and discontinue operating the business of SAL LLC.
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Included in other income, net in the current year and prior year were the following items
(thousands of dollars):
Foreign Currency Transaction Gain
Unrealized Gain (Loss) on Mexican
Peso Forward Contracts
Realized Loss on Mexican Peso
Forward Contracts
Rabbi Trust Gain (Loss)
Other
Years Ended
July 2, 2017
$1,128
July 3, 2016
$2,559
2,010
(1,650)
296
523
$2,307
(889)
(1,196)
(41)
235
$ 668
Foreign currency transaction gains and losses resulted from activity associated with foreign
denominated assets held by our Mexican subsidiaries. We entered into the Mexican peso currency
forward contracts during fiscal 2016 and 2017 to minimize earnings volatility resulting from
changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. Unrealized
gains and losses recognized as a result of mark-to-market adjustments as of July 2, 2017 may or
may not be realized, depending upon the actual Mexican peso to U.S. dollar exchange rates
experienced during the balance of the contract period. The Rabbi Trust assets fund our amended
and restated supplemental executive retirement plan. The investments held in the Trust are
considered trading securities.
Our effective income tax rate for 2017 was 26.1 percent compared to 26.4 percent in 2016.
Our income tax provision for each of 2017 and 2016 was affected by the non-controlling interest
portion of our pre-tax income. The non-controlling interest impacts the effective tax rate as our
ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entities are taxed as partnerships
for U.S. tax purposes.
2016 Compared to 2015
Net Sales (millions of dollars)
Years Ended
July 3, 2016
$401.4
June 28, 2015
$411.5
Net Sales to each of our customers or customer groups in 2016 and 2015 were as follows
(millions of dollars):
Years Ended
Fiat Chrysler Automobiles
General Motors Company
Ford Motor Company
Tier 1 Customers
Commercial and Other OEM Customers
Hyundai / Kia
Total
July 3, 2016
$115.9
79.9
57.3
67.3
49.3
31.7
$401.4
June 28, 2015
$116.9
105.8
45.5
71.3
41.7
30.3
$411.5
Net sales were $401.4 million in 2016 compared to $411.5 million in 2015. Our 2016 fiscal year
was 53 weeks while our 2015 fiscal year was the typical 52 weeks. The impact of the additional
week of customer shipments during 2016 increased sales by approximately $7.5 million. The overall
reduction in sales in 2016 as compared to 2015 was due to increased service parts sales to General
Motors during 2015, as well as 2016 customer vehicle production volume reductions on models for
which we supply components, temporary shut-downs at customer production facilities, and agreed
upon customer price reductions. The decreased sales to Fiat Chrysler Automobiles in 2016 were
due to reduced product content on certain vehicle models for which we supply components.
Additionally, during 2016, Fiat Chrysler Automobiles temporarily shutdown production at its Sterling
Heights, Michigan and Toluca, Mexico assembly plants which are primarily responsible for the
production of the Chrysler 200 and Dodge Journey due to reduced sales demand for these vehicles.
This shutdown reduced our sales by $8.9 million during 2016. These impacts were mostly offset by
an increase in 2016 in Chrysler Pacifica minivan production volumes for which we supply
components. During 2015, Fiat Chrysler implemented a temporary shutdown at its Windsor, Canada
assembly plant to re-tool for production of the new Chrysler Pacifica minivan, which shutdown
decreased our sales to Fiat Chrysler by $18 million. The negative effect of that shutdown was
partially offset by increased service sales during 2015 in comparison to 2016. The decrease in sales
to General Motors Company in 2016 was attributed to incremental service parts sales of $34 million
shipped in 2015 for parts used to support a recall campaign. Those incremental sales did not
continue during 2016. In addition, 2016 included $2.0 million of agreed upon price reductions, which
began January 1, 2016 while 2015 included a $3.3 million sales concession that we granted to
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General Motors during 2015. Increased sales to Ford Motor Company in 2016 were attributed to
higher vehicle production volumes and content on models for which we supply components, in
particular for components we supply for F-150 pick-up trucks. Sales to Tier 1 Customers during
2016 decreased in comparison to 2015 due to lower production volume on passenger cars for
which we supply driver control and door handle components. Sales to commercial and other OEM
Customers during 2016 increased in comparison to 2015. These customers represent purchasers of
vehicle access control products, such as latches, fobs, driver controls, and door handles and related
components that we have developed in recent years to complement our historic core business of
locks and keys. The increase in sales to Hyundai / Kia in 2016 was principally due to higher levels of
sales on the Kia Sedona minivan for which we supply components.
Cost of Goods Sold
(millions of dollars)
Years Ended
July 3, 2016
June 28, 2015
$336.6
$338.8
Direct material costs are the most significant component of our cost of goods sold and
comprised $224.9 million or 66.8 percent of cost of goods sold in 2016 compared to $217.1
million or 64.1 percent of cost of goods sold in 2015. The increase in material costs year over
year of $7.8 million or 3.6 percent was impacted by our product sales mix in 2016 as compared
to 2015. 2016 included increased sales of power access products as compared to 2015. Power
access products typically have a higher purchased content percentage as compared to our
other access control products. In addition, increased scrap costs in 2016 associated with new
product launches contributed to the year over year increase in material costs.
The remaining components of cost of goods sold consist of labor and overhead costs
which decreased $10.0 million or 8.2 percent in 2016 as compared to 2015 as the variable
portion of these costs decreased due to the reduced sales volumes in 2016. In addition, 2016
included a year-over-year decrease in customer warranty provisions of $8.4 million as 2015
included provisions for expected warranty payments to be settled in future periods, a reduction
of approximately $8.7 million in the U.S. dollar value of our Mexican operations due to a
favorable Mexican peso to U.S. dollar exchange rate and a reduction of approximately $2.4
million in expense provisions for the accrual of bonuses under our incentive bonus plans
between years. Additionally, during 2015, a lump sum bonus totaling $311,000 was paid to our
Milwaukee represented hourly workers resulting from the ratification of a new 4-year labor
contract. The average U.S. dollar/Mexican peso exchange rate increased to approximately
17.22 pesos to the dollar in 2016 from approximately 14.34 pesos to the dollar in 2015. These
favorable impacts were partially offset by higher depreciation expense in 2016, increased 2016
manufacturing start-up costs associated with new product launches, and higher costs during
2016 associated with diversifying our products portfolio.
Gross Profit (millions of dollars)
Gross Profit as a percentage of net sales
$64.8
16.1%
July 3, 2016
June 28, 2015
$72.7
17.7%
Years Ended
The reduction in gross profit in 2016 as compared to 2015 was the result of the reduction in
sales partially offset by the reduction in cost of goods sold as discussed above. The reduction in
gross profit as a percentage of net sales in 2016 as compared to 2015 was the result of reduced
sales of service parts related to the General Motors customer recall campaign noted above,
which typically have higher gross profit margins as compared to gross profit margins on parts
sold for new vehicle production, agreed upon customer price reductions that became effective at
the start of the 2016 calendar year, reduced customer production volumes resulting in less
favorable absorption of our fixed manufacturing costs, higher depreciation expense, increased
2016 manufacturing start-up costs associated with new product launches and higher costs
associated with diversifying our products portfolio. These unfavorable impacts to the gross profit
margin as a percentage of net sales were partially offset by a decrease in expense provisions for
the accrual of bonuses under our incentive bonus plans, a reduction in the U.S. dollar value of
the cost of our Mexican operations due to a favorable Mexican peso to U.S. dollar exchange rate
between these years and a lump sum bonus paid to our Milwaukee represented hourly workers
during 2015 resulting from the ratification of a new 4-year labor contract, all as discussed above.
Engineering, Selling and Administrative Expenses in 2016 and 2015 were as follows:
Expenses (millions of dollars)
Expenses as a percentage of net sales
Years Ended
July 3, 2016
$43.9
10.9%
June 28, 2015
$41.5
10.1%
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Engineering, selling and administrative expenses increased approximately $2.4 million
between periods. Higher selling and engineering costs associated with current product programs,
an additional week of expense during 2016 as a result of the 53 week fiscal year and higher
engineering costs for new programs for which we are utilizing third party vendors for a portion of
the development work were partially offset by a reduction of $1.9 million in expense provisions for
the accrual of bonuses under our incentive bonus plans in 2016 as compared to 2015.
Income from operations in 2016 was $20.9 million compared to $31.1 million in 2015. This
decrease was the result of reduced sales and reduced gross profit margins during 2016 as well as
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 2016 and 2015
(thousands of dollars):
Years Ended
July 3, 2016
June 28, 2015
Vehicle Access Systems Technology LLC
STRATTEC Advanced Logic, LLC
$ (639)
(1,596)
$ (2,235)
$1,251
(2,039)
$ (788)
The 2016 equity loss of joint ventures for Vehicle Access Systems Technology LLC included a
$6 million impairment charge related to its Minda-VAST Access Systems joint venture in India.
STRATTEC’s portion of this impairment charge totaled $2 million. STRATTEC is not the primary
beneficiary and does not control STRATTEC Advanced Logic, LLC (“SAL LLC”). Accordingly, our
investment in SAL LLC is accounted for using the equity method. Even though we maintain a 51
percent ownership interest in SAL LLC, effective with our fiscal 2015 fourth quarter, 100 percent of
the funding for SAL LLC was being made through loans from STRATTEC to SAL LLC. Therefore,
STRATTEC began recognizing 100 percent of the losses of SAL LLC up to our committed financial
support, which losses included write-offs of fixed assets and inventory totaling $381,000 in 2015. In
addition, the following losses were included in our 2016 and 2015 Equity (Loss) Earnings of Joint
Ventures for SAL LLC (thousands of dollars):
Loss on Guarnantee of SAL LLC
Vendor Contract
Loss on Loan to SAL LLC
Loss on Guarantee of SAL LLC
Credit Facility
Years Ended
July 3, 2016
June 28, 2015
$
-
225
247
$ 472
$ 123
100
488
$ 711
Effective November 1, 2014, a license agreement was signed with Westinghouse allowing SAL
LLC to do business as Westinghouse Security. Payments required under this license agreement were
guaranteed by STRATTEC. As of July 3, 2016 and June 28, 2015, STRATTEC had recorded a liability
equal to the estimated fair value of the guarantee of these payments of $250,000, which amount was
equal to the future payments required to be made under the license agreement as of these dates.
STRATTEC’s proportionate share of the guarantee of these payments based on our ownership
percentage in SAL LLC totaled $127,000, and accordingly, our investment in SAL LLC was increased
by this amount as of July 3, 2016 and June 28, 2015. Our joint venture partner did not guarantee
their proportionate share of the payments required under the license agreement. As a result, in 2015,
STRATTEC recorded a loss of $123,000 which was equal to our partner’s proportionate share, based
upon their ownership interest in the joint venture, of the fair value of the STRATTEC guarantee.
During the fourth quarter of 2015, a loan was made from STRATTEC to SAL LLC in support of
operating expenses and working capital needs. As of June 28, 2015, the outstanding loan amount
totaled $100,000. A valuation reserve of $100,000 was recorded related to this loan as of June 28,
2015. During 2016, additional loans totaling $225,000 were made from STRATTEC to SAL LLC in
support of operating expenses and working capital needs. An additional valuation reserve of
$225,000 was recorded related to the additional loans during 2016. As of July 3, 2016, the
outstanding loan amount totaled $325,000, which was fully offset by a valuation reserve of $325,000.
SAL LLC had a $1.5 million revolving credit facility with BMO Harris Bank N.A. with a maturity
date of February 16, 2016 (the “SAL Credit Facility”), which was fully guaranteed by STRATTEC.
Outstanding borrowings under the SAL Credit Facility as of February 16, 2016 and June 28, 2015
totaled $1.5 million and $995,000, respectively. SAL LLC did not have cash available to pay the
outstanding debt balance as of the maturity date. Therefore, STRATTEC made a payment of $1.5
million on its guarantee on February 16, 2016. Prior to making the guarantee payment, STRATTEC
had a recorded liability related to the guarantee of $1.5 million and $995,000 at February 16, 2016
and June 28, 2015, respectively, which amounts were equal to the estimated fair value of the
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guarantee as of these dates. STRATTEC’s proportionate share of the guarantee based on our
ownership percentage in SAL LLC totaled $765,000 and $507,000, respectively, as of February 16,
2016 and June 28, 2015, and accordingly, our investment in SAL LLC included these amounts as of
these dates. Our joint venture partner did not guarantee their proportionate share of the SAL Credit
Facility. As a result, we recorded a loss equal to our partner’s proportionate share of the fair value of
the STRATTEC guarantee based upon our partner’s ownership interest in the joint venture of
$488,000 during fiscal 2015 and $247,000 during 2016.
Included in other income, net in 2016 and 2015 were the following items (thousands of dollars):
Foreign Currency Transaction Gain
Unrealized Loss on Peso
Forward Contracts
Realized Loss on Peso
Forward Contracts
Rabbi Trust (Loss) Gain
Other
Years Ended
July 3, 2016
$2,559
June 28, 2015
$3,075
(889)
(1,196)
(41)
235
$ 668
-
-
96
_ 310
$3,481
Foreign currency transaction gains resulted from activity associated with foreign denominated
assets held by our Mexican subsidiaries. We entered into the Mexican peso currency forward
contracts during fiscal 2016 to minimize earnings volatility resulting from changes in exchange rates
affecting the U.S. dollar cost of our Mexican operations. Unrealized losses recognized as a result of
mark-to-market adjustments as of July 3, 2016 may or may not be realized, depending upon the
actual Mexican peso to U.S. dollar exchange rates experienced during the balance of the contract
period. The Rabbi Trust assets fund our amended and restated supplemental executive retirement
plan. The investments held in the Trust are considered trading securities.
Our effective income tax rate for 2016 was 26.4 percent compared to 27.6 percent in 2015. Our
income tax provision for 2015 was affected by a lower statutory tax rate for income subject to tax in
Mexico as compared to the statutory tax rate for income subject to tax in the U.S. as well as a net
reduction in our liability for unrecognized tax benefits of approximately $852,000. Our income tax
provision for each of 2016 and 2015 was affected by the non-controlling interest portion of our pre-tax
income. The decrease in the effective tax rate between periods was the result of a year-over-year
increase in the non-controlling interest percentage 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.
L I Q U I D I T Y A N D C A P I TA L R E S O U R C E S
Outstanding Receivable Balances from Major Customers
Our primary source of cash flow is from our major customers, which include Fiat Chrysler
Automobiles LLC, General Motors Company and Ford Motor Company. As of the date of filing this
Annual Report with the Securities and Exchange Commission, all of our customers are making
payments on their outstanding accounts receivable in accordance with the payment terms included
on their purchase orders. A summary of our outstanding receivable balances from our major
customers as of July 2, 2017 was as follows (millions of dollars):
Fiat Chrysler Automobiles $ 17.1
General Motors Company $ 13.4
$ 8.6
Ford Motor Company
Cash Balances in Mexico
We earn a portion of our operating income in Mexico. During 2017, we changed our assertion
regarding the permanent reinvestment of earnings from two of our Mexican subsidiaries. Prior to
2017, the accumulated undistributed earnings from such subsidiaries were considered to be
permanently reinvested in Mexico. During 2017, the strength of the U.S. dollar to the Mexican peso
significantly decreased the U.S. tax cost associated with a distribution from the Mexican subsidiaries
as compared to the U.S. tax cost associated with such a distribution in prior periods. Consequently,
we changed our assertion regarding the permanent reinvestment of earnings from these Mexican
subsidiaries. Such earnings are no longer considered permanently reinvested. We repatriated $15.8
million from Mexico to the U.S. during 2017. As of July 2, 2017, $948,000 of our $8.4 million cash
and cash equivalents balance was held in Mexico. These funds, with some restrictions and tax
implications, are available for repatriation as deemed necessary.
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
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Cash Flow Analysis
Cash Flows from (millions of dollars):
Operating Activities
Investing Activities
Financing Activities
July 2, 2017
$ 23.1
$ (39.5)
9.2
$
Years Ended
July 3, 2016
$
8.2
$ (25.3)
$ 7.2
June 28, 2015
$ 31.5
$ (30.8)
$ 5.8
The increase in cash provided by operating activities between 2016 and 2017 reflected a net
decrease in working capital requirements between the two years of $21.7 million, with the net decrease in
our working capital requirements being made up of the following working capital changes (millions of
dollars):
Accounts Receivable
Inventories
Customer Tooling
Other Assets
Accounts Payable and
Other Liabilities
Increase (Decrease) in Working Capital Requirements
Change
2016
2017
$ (3.4)
$ 5.1
$ 1.7
$ (7.1)
$ 3.9
$ (3.2)
$ 1.1
$ 3.5
$ 4.6
$ (4.1)
$ 6.0
$ 1.9
$ (5.2)
$ 3.0
$ (8.2)
The year over year change in the accounts receivable balances reflected a larger increase in
accounts receivable balances during 2016 as compared to 2017. Higher sales during the fourth
quarter of 2016 as compared to the fourth quarter of 2015 caused receivable balances to increase
during fiscal 2016. The increase in the receivable balance during 2017 was the result of sales being
more heavily weighted to the end of the fourth quarter of 2017 as compared to the fourth quarter of
2016. The year over year change in inventory reflected an increase in inventory balances as of July 3,
2016, which was the result of lower sales of parts we supply for certain customer vehicle programs
towards the end of fiscal 2016. The year over year change in customer tooling balances, which
consisted of costs incurred for the development of tooling that will be directly reimbursed by the
customer whose parts are produced from the tool, was the result of the timing of tooling development
spending required to meet customer production requirements and related customer reimbursements.
The year over year change in other assets was the result of a reduction in the income tax recoverable
balance in 2017 as compared to an increase in the income tax recoverable balance in 2016, which
changes were based on the required income tax provision and the timing and amounts of Federal and
state tax payments made. The year over year change in the accounts payable and other liability
balances was impacted by changes in accounts payable balances, accrued salaries and benefits
balances and warranty reserve balances. The year over year change in accounts payable and accrued
liability balances reflected a decrease in working capital requirements in 2017 compared to an increase
in working capital requirements in 2016. 2017 included an increase in accounts payable balances of
$7.2 million, due to obtaining a change in payment terms from 30 days to 45 days with several large
vendors and the timing of purchases and payments with our vendors based on normal payment
terms, and an increase of $1.8 million in accrued payroll and benefit liabilities mostly due to an
increase in wages and benefits in Mexico, as discussed above under Analysis of Results of
Operations. These impacts were partially offset by $2.8 million of customer warranty payments during
2017, which were previously accrued, as well as $843,000 of reversals during 2017 of previously
accrued customer warranty accruals. 2016 included cash payments made under our incentive bonus
plans of $5.2 million and $3.2 million of customer warranty payments, which were previously accrued,
partially offset by an increase in accounts payable balances of $4.6 million as a result of the timing of
purchases and payments with our vendors based on normal payment terms.
Other significant cash payments impacting net cash provided by operating activities during both
the current year and prior year periods included cash contributions made to our qualified pension plan
and cash payments made for Federal, state and foreign income taxes. Cash contributions made to our
qualified pension plan totaled $5.0 million during 2017 compared to $3.0 million during 2016. Net cash
payments and recoveries for Federal, state and foreign income taxes totaled $318,000 during 2017
compared to $4.7 million during 2016.
The decrease in cash provided by operating activities between 2015 and 2016 reflected a net
increase in working capital requirements between the two years of $23.4 million, with the increase in
our working capital requirements being made up of the following working capital changes (millions of
dollars):
Accounts Receivable
Inventories
Customer Tooling
Other Assets
Accounts Payable and Other Liabilities
Increase (Decrease) in Working Capital Requirements
Change
2015
$ 14.3
$ (9.2)
$ (0.4)
$ 4.3
$ 5.3
$ (1.8)
$ 2.7
$ 3.3
$ 1.5
$ 1.5
2016
$ 5.1
$ 3.9
$ 3.5
$ 6.0
$ 3.0
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The year over year change in the accounts receivable balances reflected an increase in accounts
receivable balances during 2016 compared to a reduction in accounts receivable balances during 2015.
Receivable balances were increased at the start of the 2015 fiscal year as a result of $11 million of
additional service parts sales in conjunction with General Motors’ recall campaign during the fourth
quarter of 2014. The receivable balances related to the additional service parts sales were collected
during 2015 reducing the accounts receivable balances during fiscal 2015. Additionally, higher sales
during the fourth quarter of 2016 as compared to the fourth quarter of 2015 caused receivable
balances to increase during fiscal 2016. The year over year change in customer tooling balances, which
consisted of costs incurred for the development of tooling that will be directly reimbursed by the
customer whose parts are produced from the tool, was the result of the timing of tooling development
spending required to meet customer production requirements and related customer reimbursements.
The year over year change in other assets was the result of a larger increase in the income tax
recoverable balance in 2016 as compared to 2015, which was based on the required income tax
provision and the timing and amounts of Federal and state tax payments made. The year over year
change in the accounts payable and other liability balances was impacted by changes in accounts
payable balances, accrued salaries and benefits balances and warranty reserve balances. The year
over year change in accounts payable balances decreased working capital requirements $12.8 million
between years. The changes in the accounts payable balances during each of the 2016 and 2015
years resulted from the timing of purchases and payments with our vendors based on normal payment
terms. Additionally, increased accounts payable balances at June 2014 related to the General Motors’
recall campaign which were paid during 2015 increased the 2015 working capital requirements. The
year over year change in accrued payroll and benefits balances increased working capital requirements
$2.9 million between years as the accrual of bonuses under our incentive bonus program decreased
between years. The provision for bonuses under our incentive bonus plans decreased $4.2 million
between years while actual cash payments made decreased $2.1 million between years. The year over
year change in warranty reserve balances increased working capital requirements $11.4 million
between years. Warranty provisions decreased $8.4 million between years while warranty payments
increased $2.6 million between years.
Other significant cash payments impacting net cash provided by operating activities during both
2016 and 2015 included cash contributions made to our qualified pension plan and cash payments
made for Federal, state and foreign income taxes. Cash contributions made to our qualified pension
plan totaled $3.0 million during both 2016 and 2015. Cash payments made for Federal, state and
foreign income taxes totaled $4.7 million during 2016 compared to $14.8 million during 2015.
Net cash used by investing activities of $39.5 million during 2017, $25.3 million during 2016 and
$30.8 million during 2015 included capital expenditures of $37.0 million, $23.5 million and $26.1 million,
respectively. Capital expenditures during each year were made in support of requirements for new
product programs and the upgrade and replacement of existing equipment. The 2017 and 2016 capital
expenditures included $12.8 million and $7.0 million, respectively for the purchase of land, equipment
and the construction of a new facility in Leon, Mexico, which is expected to be used primarily to paint
and assemble door handle products by ADAC-STRATTEC LLC. See further discussion related to this
new facility under Future Capital Expenditures below. The 2015 capital expenditures included $2.1
million and $4.5 million for the purchase of additional facilities in Juarez, Mexico and Auburn Hills,
Michigan, respectively. The Michigan building is being used as a sales and engineering office and
replaced two then leased facilities in Michigan. The Juarez, Mexico building is being used as an
additional facility to support current operations and was acquired in anticipation of both new and
potential business awards in Mexico. Net cash used by investing activities during 2017, 2016 and 2015
also included an investment in our VAST LLC joint venture of $400,000, $220,000 and $4.4 million,
respectively. The 2017 and 2016 investments were made for the purpose of funding general operating
expenses for Sistema de Acesso Veicular Ltda (formerly known as VAST do Brasil). The 2015
investment was made in support of the acquisition of a fifty percent equity interest in a joint venture
entity, Minda VAST Access Systems, based in Pune, India, and in support of general operating
expenses for the Brazilian entity. Additionally, during 2016, a $1.5 million investment in SAL LLC was
made as the result of the payment on a guarantee of their debt facility. Loans were made by each
partner, STRATTEC, WITTE and ADAC to our joint venture, VAST LLC, totaling $215,000 for each
partner in 2015. The loans were made in support of VAST LLC’s purchase of the non-controlling
interest in the Brazilian entity and in support of funding general operating expenses of the Brazilian
entity. Repayments of this outstanding loan balance totaling $100,000 were made from VAST LLC to
each partner during both 2017 and 2016. Loans were made from STRATTEC to SAL LLC totaling $2.2
million during 2017, $225,000 during 2016 and $100,000 during 2015 in support of operating expenses
and working capital needs.
Net cash provided by financing activities of $9.2 million during 2017 included $36.0 million of
borrowings under credit facilities, $241,000 of proceeds from stock purchases and option plan
exercises, $21,000 in excess tax benefits from option plan exercises, and $2.9 million in non-controlling
interest contributions to ADAC-STRATTEC LLC in accordance with the ADAC-STRATTEC debt facility
provisions, partially offset by $26 million for repayments of borrowings under credit facilities, $2.0
million for regular quarterly dividend payments to shareholders and $2.0 million for dividend payments
to non-controlling interests in our subsidiaries. Net cash provided by financing activities of $7.2 million
during 2016 included $26.5 million of borrowings under credit facilities, $473,000 of proceeds from
stock purchases and option plan exercises and $170,000 in excess tax benefits from option plan
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exercises, partially offset by $16.5 million for repayments of borrowings under credit facilities, $1.9
million for regular quarterly dividend payments to shareholders and $1.6 million for dividend payments
to non-controlling interests in our subsidiaries. Net cash provided by financing activities of $5.8 million
during 2015 included $9.0 million of borrowings under credit facilities, $553,000 of proceeds from stock
purchases and option plan exercises and $367,000 in excess tax benefits from option plan exercises,
partially offset by $1.5 million for repayments of borrowings under credit facilities, $1.7 million for
regular quarterly dividend payments to shareholders and $882,000 for dividend payments to non-
controlling interests in our subsidiaries.
Qualified Defined Benefit Pension Plan
Our qualified defined benefit pension plan balance, included in other long-term assets in our
accompanying Consolidated Balance Sheets, totaled $13.1 million at July 2, 2017 and $72,000 at July 3,
2016. The change in the other long-term assets balance related to this plan during 2017 was the result
of the net impact of pension contributions, the actuarially calculated pension expense, reclassification
adjustments from accumulated other comprehensive loss and the impact of the change in the year-end
funded status of the plan, which was impacted by excess asset returns and contributions. The 2017
pre-tax changes in plan assets and benefit obligations related to this plan recognized in other
comprehensive income increased our other long-term asset balance by approximately $9.2 million at
July 2, 2017 compared to July 3, 2016. The resulting tax impact decreased our deferred income tax
asset balance by $3.4 million at July 2, 2017 in comparison to the balance as of July 3, 2016.
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. During 2017 and 2016, capital contributions totaling $1.2 million and $660,000,
respectively were made to VAST LLC for purposes of funding operations in Brazil. STRATTEC’s portion of
the capital contributions totaled $400,000 in 2017 and $220,000 in 2016. During 2015, capital contributions
totaling $13.2 million were made to VAST LLC in support of the acquisition of a fifty percent equity interest
in a joint venture entity, Minda VAST Access Systems, based in Pune, India, and in support of general
operating expenses for Sistema de Acesso Veicular Ltda. STRATTEC’s portion of the capital contributions
totaled $4.4 million. Loans were made by each partner, STRATTEC, WITTE and ADAC, to VAST LLC
totaling $215,000 for each partner in 2015. The loans were made in support of VAST LLC’s purchase of
the non-controlling interest in the Brazilian entity and in support of funding operating costs of the Brazilian
entity. Additionally, we anticipate the Brazilian entity will require a capital contribution of approximately
$750,000 collectively by all VAST partners to fund operations during fiscal 2018. STRATTEC’s portion of
the capital contributions is anticipated to be $250,000.
ADAC-STRATTEC LLC Cash Requirements
As discussed under Future Capital Expenditures included herein, ADAC-STRATTEC de Mexico
(ASdM), a wholly owned subsidiary of ADAC-STRATTEC LLC, which is a joint venture between
STRATTEC SECURITY CORPORATION and ADAC Automotive, is in the process of constructing a new
manufacturing facility in Leon, Mexico. Total capital expenditures required for the land, facility, paint
system and assembly equipment is expected to total approximately $26 million. During 2017 and
2016, capital expenditures for the land, facility and equipment totaled $12.8 million and $7.0 million,
respectively. Financing of the required capital expenditures is being completed through a combination
of partner capital contributions, bank loans and current operating cash flow. As a result, effective April
27, 2016 the ADAC-STRATTEC Credit Facility was amended to increase the available borrowings
under this credit facility from $10 million to $20 million, which was subsequently further increased to
$25 million effective June 26, 2017. Under the terms of the amended credit agreement, a capital
contribution to ADAC-STRATTEC LLC of $6 million collectively from STRATTEC and ADAC was
completed during 2017. STRATTEC’s portion of the required capital contribution was $3.06 million.
STRATTEC Advanced Logic, LLC Cash Requirements
Beginning with the fourth quarter of fiscal year 2015, STRATTEC provided 100 percent of the
financial support to fund the start-up operating losses of SAL LLC due to our partner’s inability to
contribute capital to this joint venture. We anticipate STRATTEC will fund 100 percent of the
operating costs through the first quarter of fiscal year 2018, which will total approximately $250,000
prior to the anticipated closure of SAL LLC. During fiscal 2018, we, along with our joint venture
partner, intend to wind down and discontinue operating the business of SAL LLC.
Future Capital Expenditures
We anticipate capital expenditures will be approximately $27 million in fiscal 2018 in support of
requirements for new product programs, the upgrade and replacement of existing equipment and
the completion of the construction of the new facility in Leon, Mexico. On March 17, 2016, ASdM, a
wholly owned subsidiary of ADAC-STRATTEC LLC, which is a joint venture between STRATTEC
SECURITY CORPORATION and ADAC Automotive, purchased land in Leon, Mexico. ASdM is in the
process of constructing a new manufacturing facility on this land. This facility is expected to be used
primarily to paint and assemble door handle products and is expected to be completed during our
September 2017 fiscal quarter. Currently, the ADAC-STRATTEC LLC joint venture has net sales of
approximately $68 million. With newly awarded customer business, we anticipate net sales will
increase to approximately $110 million within the next two years. Total capital expenditures required
for the land, facility, paint system and assembly equipment is expected to total approximately $26
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million. During 2017, capital expenditures for the land, facility and equipment totaled $12.8 million. Capital
expenditures made through July 2, 2017 for the land, facility and equipment totaled $19.8 million.
Financing of the required capital expenditures is being completed through a combination of partner capital
contributions, bank loans and current operating cash flow.
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 July 2,
2017. A total of 3,655,322 shares have been repurchased over the life of the program through July 2,
2017, at a cost of approximately $136.4 million. No shares were repurchased during fiscal 2017 or 2016.
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. At this time, we anticipate minimal or no stock
repurchase activity in fiscal year 2018.
Credit Facilities and Guarantees
STRATTEC has a $30 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, 2020. 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 both credit facilities is at varying rates based, at our option, on LIBOR plus 1.0 percent or the bank’s
prime rate. Both credit facilities contain a restrictive financial covenant that requires the applicable
borrower to maintain a minimum net worth level. The ADAC-STRATTEC Credit Facility includes an
additional restrictive financial covenant that requires the maintenance of a minimum fixed charge coverage
ratio. The ADAC-STRATTEC Credit Facility also required that a capital contribution to ADAC-STRATTEC LLC
of $6 million collectively from STRATTEC and ADAC be completed by September 30, 2016. This capital
contribution was completed as required. As of July 2, 2017, we were in compliance with all financial
covenants required by these credit facilities. STRATTEC’s portion of this capital contribution totaled $3.06
million. Outstanding borrowings under the STRATTEC Credit Facility totaled $16.0 million at July 2, 2017
and $11.5 million at July 3, 2016. The average outstanding borrowings and weighted average interest rate
on the STRATTEC Credit Facility loans were approximately $12.5 million and 1.8 percent, respectively,
during 2017. The average outstanding borrowings and weighted average interest rate on the STRATTEC
Credit Facility loans were approximately $7.6 million and 1.5 percent, respectively, during 2016.
Outstanding borrowings under the ADAC-STRATTEC Credit Facility totaled $14.0 million at July 2, 2017
and $8.5 million at July 3, 2016. The average outstanding borrowings and weighted average interest rate
on the ADAC-STRATTEC Credit Facility loans were approximately $10.9 million and 1.8 percent,
respectively, during 2017. The average outstanding borrowings and weighted average interest rate on the
ADAC-STRATTEC Credit Facility loans were approximately $4.4 million and 1.3 percent, respectively,
during 2016. We believe that the credit facilities are adequate, along with existing cash flows from
operations, to meet our anticipated capital expenditure, working capital, dividend, and operating
expenditure requirements.
SAL LLC maintains a license agreement with Westinghouse allowing SAL LLC to do business as
Westinghouse Security. STRATTEC guaranteed all payments due to Westinghouse under this license
agreement. As of July 2, 2017, STRATTEC has a recorded liability related to this guarantee of $250,000,
which amount is equal to the amount of future payments required under the license agreement and the
estimated fair value of the guarantee as of July 2, 2017. See further discussion under Equity Earnings
(Loss) of Joint Ventures included in Notes to Condensed Consolidated Financial Statements herein.
Inflation and Other Changes in Prices
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, nickel silver, 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 own and operate
manufacturing operations in Mexico. As a result, a portion of our manufacturing costs are incurred in
Mexican pesos, which causes our earnings and cash flows to fluctuate due to changes in the U.S.
dollar/Mexican peso exchange rate. We executed 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. These peso currency forward contracts include settlement dates that began on October 16,
2015 and end on June 15, 2018. No forward contracts were in place during fiscal 2015. Our objective in
entering into these currency forward contracts is to minimize our earnings volatility resulting from changes in
exchange rates affecting the U.S. dollar cost of our Mexican operations. The Mexican peso forward
contracts are not used for speculative purposes and are not designated as hedges. As a result, all currency
forward contracts are recognized in our accompanying consolidated financial statements at fair value and
changes in the fair value are reported in current earnings as part of Other Income, net.
The following table quantifies the outstanding Mexican peso forward contracts as of July 2, 2017
(thousands of dollars, except average forward contractual exchange rates):
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Effective
Dates
Notional
Amount
July 15, 2017 - June 15, 2018 $12,000
Average
Forward Contractual
Exchange Rate
20.37
Fair
Value
$1,121
Buy MXP/Sell USD
The fair market value of all outstanding Mexican peso forward contracts in the accompanying
Consolidated Balance Sheets was as follows (thousands of dollars):
July 2, 2017
July 3, 2016
Not Designed as Hedging Instruments:
Other Current Assets:
Mexican Peso Forward Contracts
$1,121
Other Long-term Assets:
Mexican Peso Forward Contracts
Other Current Liabilities:
Mexican Peso Forward Contracts
$
$
-
-
$ -
$107
$996
The pre-tax effects of the Mexican peso forward contracts are included in Other Income, net
in the accompanying Consolidated Statements of Operations and Comprehensive Income and
consisted of the following (thousands of dollars):
Not Designated as Hedging Instruments:
Realized Loss
Unrealized Loss
Unrealized Gain
July 2, 2017
$1,650
$ -
$2,010
Years Ended
July 3, 2016
$ 1,196
889
$
-
$
June 28, 2015
$ -
$ -
$ -
C O N T R A C T U A L O B L I G AT I O N S A N D C O M M I T M E N T S
Contractual obligations were as follows as of July 2, 2017 (thousands of dollars):
Payments Due By Period
Contractual Obligation
Total
$ 1,680
Operating Leases
Other Purchase Obligations 30,009
Guarantees
250
Pension and Postretirement
Less Than
1 Year
$
884
17,413
250
Obligations (a)
Total
_ 3,598
$35,537
_ 3,598
$22,145
1-3 Years
3-5 Years
$ 796
12,596
-
_ -
$13,392
$ -
-
-
_ _ -
$ -
More Than
5 Years
$
-
-
-
_ __-
$ -
(a) As disclosed in our Notes to Financial Statements, estimated cash funding related to our pension and postretirement
benefit plans is expected to total $3.6 million in 2018. Because the timing of funding related to these plans beyond 2018 is
uncertain, and is dependent on future movements in interest rates and investment returns, changes in laws and regulations,
and other variables, pension and postretirement outflows beyond 2018 have not been included in the table above.
Refer to the discussion of Commitments and Contingencies included in Notes to Financial
Statements included within this 2017 Annual Report for further information related to purchase obligations.
Liabilities recognized for uncertain tax benefits of $610,000 are not presented in the table above due
to uncertainty as to amounts and timing regarding future payments.
STRATTEC has a $30 million secured revolving credit facility with BMO Harris Bank N. A. ADAC-
STRATTEC LLC has a $25 million secured revolving credit facility with BMO Harris Bank N.A., which is
guaranteed by STRATTEC. Borrowings under the STRATTEC credit facility totaled $16.0 million at July 2,
2017. Borrowings under the ADAC-STRATTEC credit facility totaled $14.0 million at July 2, 2017. The
credit facilities both expire on August 1, 2020.
J O I N T V E N T U R E S A N D M A J O R I T Y O W N E D S U B S I D I A R I E S
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 equity 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 Veicular Ltda, VAST Fuzhou, VAST Great Shanghai,
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VAST Shanghai Co. 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 and VAST
Shanghai Co. (collectively known as VAST China), provide a base of operations to service each
partner’s automotive customers in the Asian market. VAST LLC also maintains branch offices in
South Korea and Japan in support of customer sales and engineering requirements.
Effective April 30, 2015, VAST LLC executed an agreement with Minda Management
Services Limited to become a 50:50 joint venture partner in the former Minda-Valeo Security
Systems joint venture entity, based in Pune, India. This joint venture entity was renamed Minda-
VAST Access Systems (“Minda-VAST”). Minda Management Services Limited is 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 and access products, handles, automotive safety, restraint systems,
driver information and telematics systems for both OEMs and the aftermarket.
The VAST LLC investments are accounted for using the equity method of accounting. The
activities related to the VAST LLC joint ventures resulted in equity earnings of joint ventures to
STRATTEC of approximately $2.6 million during 2017, equity loss of joint ventures to STRATTEC of
approximately $639,000 during 2016 and equity earnings of joint ventures to STRATTEC of
approximately $1.3 million during 2015. The 2016 equity loss of joint ventures for VAST LLC
included a $6 million impairment charge related to its Minda-VAST Access Systems joint venture in
India. STRATTEC’s portion of this impairment charge for 2016 totaled $2 million. During 2017 and
2016, capital contributions totaling $1.2 million and $660,000, respectively, were made to VAST
LLC for purposes of funding operations in Brazil. STRATTEC’s portion of the capital contributions
totaled $400,000 in 2017 and $220,000 in 2016. During 2015, cash capital contributions totaling
$13.2 million were made to VAST LLC in support of the acquisition of the 50 percent joint venture
interest in Minda-VAST and in support of general operating expenses for the Brazilian entity.
STRATTEC’s portion of the cash capital contributions totaled $4.4 million.
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 $3.1 million in 2017, $2.9 million in 2016 and $2.6 million in 2015. In accordance
with the provisions of the ADAC-STRATTEC Credit Facility a capital contribution to ADAC-
STRATTEC LLC of $6 million collectively from STRATTEC and ADAC was completed during 2017.
STRATTEC’s portion of this capital contribution totaled $3.06 million. No capital contributions to
ADAC-STRATTEC LLC were made during 2016 or 2015.
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. An additional Mexican entity, STRATTEC
POWER ACCESS de Mexico, is wholly owned by SPA. The financial results of SPA are consolidated
with the financial results of STRATTEC and resulted in increased net income to STRATTEC of
approximately $2.6 million in 2017, increased net income to STRATTEC of approximately $2.0 million in
2016 and reduced net income to STRATTEC of approximately $269,000 in 2015.
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 an equity loss of joint ventures to STRATTEC of
approximately $1.9 million in 2017, $1.6 million in 2016 and $2.0 million in 2015. Effective with our
fiscal 2015 fourth quarter, 100 percent of the funding for SAL LLC was being made through loans
from STRATTEC to SAL LLC and through STRATTEC’s guarantee of the SAL Credit Facility which is
discussed herein. Therefore, effective with our fiscal 2015 fourth quarter, even though STRATTEC
maintains a 51 percent ownership interest in SAL LLC, STRATTEC began recognizing 100 percent
of the losses of SAL LLC up to our committed financial support through Equity Earnings (Loss) of
Joint Ventures in the accompanying Consolidated Statements of Income and Comprehensive
Income. In addition, the equity loss of joint ventures for SAL LLC included the following for the
periods presented (thousands of dollars):
Loss on Guarantee of SAL LLC
Vendor Contract
Loss on Loan to SAL LLC
Loss on Guarantee of SAL LLC
Credit Facility
Years Ended
July 2, 2017 July 3, 2016 June 28, 2015
$
$
-
-
$ -
$
-
$225
$123
$100
$247
$488
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During fiscal 2018, we, along with our joint venture partner, intend to wind down and
discontinue operating the business of SAL LLC.
See further discussion under Equity (Loss) Earnings of Joint Ventures included in Notes
to Financial Statements herein.
OTHER MATTERS
The Affordable Care Act (“ACA”), which was enacted in 2010 and is being phased in
over several years, significantly affects the provision of both health care services and
benefits in the United States. The ACA may impact our cost of providing our U.S. employees
and retirees with health insurance and/or benefits and may also impact various other
aspects of our business. The ACA did not have a material impact on our fiscal 2017, 2016 or
2015 financial results. However, we are continuing to assess the potential impact of the ACA
under the new administration in Washington DC on our health care benefit costs.
CRITICAL ACCOUNTING POLICIES
We believe the following represents our critical accounting policies:
Pension Benefits – Pension obligations and costs are developed from actuarial
valuations. The determination of the obligation and expense for pension benefits is
dependent on the selection of certain assumptions used by actuaries in calculating such
amounts. Those assumptions are described in the accompanying Notes to Financial
Statements and include, among others, the discount rate, expected long-term rate of return
on plan assets, retirement age and rates of increase in compensation. We evaluate and
update all of the assumptions annually on June 30, the measurement date. Refer to the
accompanying Notes to Financial Statements for the impact of the pension plans on our
financial statements.
We determine the discount rate used to measure plan liabilities using prevailing market
rates of a large population of high-quality, non-callable, corporate bonds currently available
that, if the obligation was settled at the measurement date, would provide the necessary
future cash flows to pay the benefit obligation when due. Using this methodology, we
determined a discount rate of 3.91 percent to be appropriate as of July 2, 2017, which is an
increase of 0.12 percentage points from the discount rate of 3.79 percent used at June 30,
2016. The impact of this change decreased our year-end 2017 projected pension benefit
obligations by approximately $2.0 million and the year-end 2017 accumulated pension
benefit obligations by approximately $2.0 million. This change is also expected to decrease
our 2018 pension expense by $142,000. Our pension expense increases as the discount rate
decreases. Lowering our 2017 discount rate assumption by 50 basis points would have
increased our 2017 pension expense by approximately $612,000.
A significant element in determining our pension expense is the expected return on
plan assets. Our assumption for the expected return on plan assets is based on historical
results for similar allocations among asset classes and was 6.5 percent for 2015, 5.45
percent for 2016 and 5.45 percent for 2017. This assumption remained at 5.45 percent for
2018. The changes to this assumption reduced the expected return on plan assets by
approximately $1.1 million in 2015 and resulted in no change in 2016 and 2017. Refer to the
accompanying Notes to Financial Statements for additional information on how this rate was
determined. Pension expense increases as the expected rate of return on plan assets
decreases. Lowering the 2017 expected rate of return assumption for our plan assets by 50
basis points would have increased our 2017 pension expense by approximately $561,000.
The difference between the expected return and actual return on plan assets is
deferred and, under certain circumstances, amortized over future years of service. Therefore,
the deferral of past asset gains and losses ultimately affects future pension expense. This is
also the case with changes to actuarial assumptions, including discount rate assumptions,
pay rate assumptions, mortality assumptions, turnover assumptions and other demographic
assumptions. As of June 30, 2017, we had $28 million of net unrecognized pension actuarial
losses, which included deferred asset losses of $2 million and unrecognized postretirement
actuarial losses of $4 million. These amounts represent potential future pension and
postretirement expenses that would be amortized over average future service periods. The
average remaining service period is about 8 years for the pension and postretirement plans.
As of June 30, 2015, we converted to the RP-2014 Blue Collared Mortality Table with
Improvement Scale MP-2014. This change increased our 2016 pension expense by
$715,000.
During fiscal years 2017, 2016 and 2015, we contributed $5 million, $3 million and $3
million, respectively, to our qualified pension plan. As discussed in the accompanying Notes
to Financial Statements, our Board of Directors approved a resolution to terminate the
qualified pension plan. The actual date of the termination of the qualified pension plan is
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subject to regulatory approvals, and, therefore, will not be known until we receive such
approvals. We will contribute to the Trust Fund for the Qualified Pension Plan as necessary
to ensure there are sufficient assets to provide all Qualified Pension Plan benefits as required
by the PBGC. The amount of future contributions has not yet been determined. We have
evaluated the potential impact of the Pension Protection Act (the “PPA”), which was passed
into law on August 17, 2006, including funding stabilization relief passed subsequent to the
PPA (collectively, the "Acts"), on our future pension plan funding requirements based on
current market conditions. The Acts have not had and are not anticipated to have in future
periods a material effect on our level of future funding requirements or on our liquidity and
capital resources.
While we believe that the assumptions used to determine our pension obligations and
expenses are appropriate, significant differences in the actual experience or significant
changes in the assumptions may materially affect the amounts of these obligations and our
related future expense for these obligations.
Liability for Uncertain Tax Positions – We are subject to income taxation in many
jurisdictions around the world. Significant management judgment is required in the accounting
for income tax contingencies because the outcomes are often difficult to determine. We are
required to measure and recognize uncertain tax positions that we have taken or expect to take
in our income tax returns. The benefit of an uncertain tax position can only be recognized in the
financial statements if management concludes that it is more likely than not that the position
will be sustained with the tax authorities. For a position that is likely to be sustained, the benefit
recognized in the financial statements is measured at the largest amount that is greater than 50
percent likely of being realized. A reserve is established for the difference between a position
taken in an income tax return and the amount recognized in the financial statements. Refer to
the discussion of Income Taxes included in the Notes to Financial Statements included within
this 2017 Annual Report.
Other Reserves – We have reserves such as an environmental reserve, a warranty
reserve and an excess and obsolete inventory reserve. These reserves require the use of
estimates and judgment with regard to risk exposure, ultimate liability and net realizable value.
Environmental Reserve – We have a liability recorded related to the estimated costs to
remediate a site at our Milwaukee facility, which was contaminated by a solvent spill from a
former above ground solvent storage tank occurring in 1985. The recorded environmental
liability balance involves judgment and estimates. Our reserve estimate is based on a third party
assessment of the costs to adequately cover the cost of active remediation of the
contamination at this site. Actual costs might vary from this estimate for a variety of reasons
including changes in laws and changes in the assessment of the level of remediation actually
required at this site. Therefore, future changes in laws or the assessment of the level of
remediation required could result in changes in our estimate of the required liability. Refer to the
discussion of Commitments and Contingencies included in the Notes to Financial Statements
included within this 2017 Annual Report.
Warranty Reserve – We have a warranty liability recorded related to our exposure to
warranty claims in the event our products fail to perform as expected, and we may be required
to participate in the repair costs incurred by our customers for such products. The recorded
warranty liability balance involves judgment and estimates. Our liability estimate is based on an
analysis of historical warranty data as well as current trends and information, including our
customers’ recent extension or expansion of their warranty programs. Actual warranty costs
might differ from estimates due to the level of actual claims varying from our claims experience
and estimates and final negotiations and settlements reached with our customers. Therefore,
future actual claims experience could result in changes in our estimates of the required liability.
Refer to the discussion of Warranty Reserve under Organization and Summary of Significant
Accounting Policies included in the Notes to Financial Statements included within this 2017
Annual Report.
Excess and Obsolete Inventory Reserve – We record a reserve for excess and obsolete
inventory based on historical and estimated future demand and market conditions. The reserve
level is determined by comparing inventory levels of individual materials and parts to historical
usage and estimated future sales by analyzing the age of the inventory in order to identify
specific material and parts that are unlikely to be sold. Technical obsolescence and other
known factors are also considered in evaluating the reserve level. Actual future write-offs of
inventory may differ from estimates and calculations used to determine reserve levels due to
changes in customer demand, changes in technology and other factors. Refer to the discussion
of Inventories under Organization and Summary of Significant Accounting Policies included in
the Notes to Financial Statements included within this 2017 Annual Report.
We believe the reserves discussed above are estimated using consistent and appropriate
methods. However, changes to the assumptions could materially affect the recorded reserves.
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NEW ACCOUNTING STANDARDS
In May 2014, the FASB issued an update to the accounting guidance for the
recognition of revenue arising from contracts with customers. The update supersedes
most current revenue recognition guidance and outlines a single comprehensive model
for revenue recognition based on the principle that an entity should recognize revenue in
an amount that reflects the expected consideration to be received in the exchange of
goods and services. The guidance update also requires additional disclosure about the
nature, amount, timing and uncertainty of revenue and cash flows arising from customer
contracts. The guidance permits two methods of adoption: the full retrospective
method, which requires retrospective restatement of each prior reporting period
presented, or the cumulative catch-up transition method, which requires the cumulative
effect of initially applying the guidance be recognized at the date of initial application.
We currently anticipate adopting the standard using the full retrospective method. The
guidance update is effective for annual reporting periods beginning after December 15,
2017 and becomes effective for us at the beginning of our 2019 fiscal year. We do not
anticipate early adoption. Our ability to adopt using the full retrospective method is
dependent on system readiness and the completion of our analysis of information
necessary to restate prior period financial statements. While we are continuing to assess
all potential impacts of the application of the standard to STRATTEC, we currently do
not expect that the adoption of this pronouncement will have a material impact on our
consolidated financial statements.
In August 2014, the FASB issued an update to the accounting guidance on
determining when and how to disclose going-concern uncertainties in the financial
statements. The new guidance requires management to perform interim and annual
assessments of an entity’s ability to continue as a going concern within one year of the
date the financial statements are issued. An entity must provide certain disclosures if
conditions or events raise substantial doubt about the entity’s ability to continue as a
going concern. This accounting update is effective for annual and interim periods
beginning on or after December 15, 2016, with early adoption permitted. We do not
expect that the adoption of this pronouncement will have a material impact on our
consolidated financial statements.
In July 2015, the FASB issued an accounting standard to simplify the measurement
of inventory by changing the subsequent measurement guidance from the lower of cost or
market to the lower of cost and net realizable value for inventory. The standard update is
effective for fiscal years beginning after December 15, 2016 and interim periods within
those years, and early adoption is permitted. The standard is to be applied prospectively.
We do not expect that the adoption of this pronouncement will have a material impact on
our consolidated financial statements.
In February 2016, the FASB issued an update to the accounting guidance for leases.
The update increases the transparency and comparability among organizations by
requiring lessees to recognize lease assets and lease liabilities on the balance sheet and
to disclose key information about leasing arrangements. The guidance is effective for
fiscal years beginning after December 15, 2018 and interim periods within those years. We
do not expect that the adoption of this pronouncement will have a material impact on our
consolidated financial statements.
In March 2016, the FASB issued an update to the accounting guidance for share-
based payments. The update simplifies several aspects of the accounting for employee
share-based payment transactions including the accounting for income taxes, forfeitures
and statutory tax withholding requirements, as well as classification of such items in the
statement of cash flows. The guidance is effective for fiscal years beginning after
December 15, 2016 and interim periods within those years. We do not expect that the
adoption of this pronouncement will have a material impact on our consolidated financial
statements.
In August 2016, the FASB issued an update to the accounting guidance on the
classification of certain cash receipts and cash payments. The update aims to eliminate
diversity in practice in how certain cash receipts and cash payments are presented and
classified in the statement of cash flows. The guidance is effective for fiscal years
beginning after December 15, 2017 and interim periods within those years. We do not
expect that the adoption of this pronouncement will have a material impact on our
consolidated financial statements.
In March 2017, the FASB issued an update to the accounting guidance for the
presentation of net periodic pension cost and net periodic postretirement benefit cost.
The update requires the service cost component of net periodic benefit cost be reported
in the same line items as other compensation costs arising from services rendered by the
pertinent employees during the applicable period. The remaining components of net
periodic benefit cost are required to be presented separately from the service cost
component outside a subtotal of income from operations. Additionally, the update allows
only the service cost component to be eligible for capitalization when applicable. The
guidance requires retrospective restatement for each period presented for the
presentation of the service cost component and the other components of net periodic
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benefit cost in the income statement and prospective application for the capitalization of the
service cost component of net periodic benefit cost. The guidance is effective for fiscal years
beginning after December 15, 2017 and interim periods within those years, with early adoption
permitted. We anticipate early adoption beginning with the interim periods of our fiscal 2018. We
anticipate the adoption of this guidance will result in the reclassification of expense within our
Consolidated Statements of income and Comprehensive Income for the years ended July 2,
2017 and July 3, 2016 from cost of goods sold and engineering, selling and administrative
expenses to other income, net of approximately $1.1 million and $1.3 million, respectively.
RISK FACTORS
We recognize we are subject to the following risk factors based on our operations and the
nature of the automotive industry in which we operate:
Loss of Significant Customers, Vehicle Content, Vehicle Models and Market
Share – Sales to General Motors Company, Ford Motor Company and Fiat Chrysler Automobiles
represented approximately 60 percent of our annual net sales (based on fiscal 2017 results) and,
accordingly, these customers account for a significant percentage of our outstanding accounts
receivable. The contracts with these customers provide for supplying the customer’s
requirements for a particular model. The contracts do not specify a specific quantity of parts.
The contracts typically cover the life of a model, which averages approximately four to five
years. Components for certain customer models may also be “market tested” annually.
Therefore, the loss of any one of these customers, the loss of a contract for a specific vehicle
model, a reduction in vehicle content, the early cancellation of a specific vehicle model,
technological changes or a significant reduction in demand for certain key models could occur,
and if so, could have a material adverse effect on our existing and future revenues and net
income.
Our major customers also have significant under-funded legacy liabilities related to pension
and postretirement health care obligations. The loss in our major customers’ North American
automotive market share to the New Domestic automotive manufacturers (primarily the Japanese
and Korean automotive manufacturers) and/or a significant decline in the overall market demand
for new vehicles may ultimately result in severe financial difficulty for these customers, including
bankruptcy. If our major customers cannot fund their operations, we may incur significant write-
offs of accounts receivable, incur impairment charges or require restructuring actions.
Production Slowdowns by Customers – Our major customers and many of their
suppliers were significantly impacted by the recession of 2008/2009. Many of our major
customers instituted production cuts during our fiscal 2009 and 2010. While production
subsequently increased after the cuts made in 2009, additional economic slowdowns could bring
about new production cuts which could have a material adverse effect on our existing and future
revenues and net income.
Financial Distress of Automotive Supply Base – During calendar years 2009 and 2010,
deteriorating automotive industry conditions adversely affected STRATTEC and our supply base.
Lower production levels at our major customers, volatility in certain raw material and energy
costs and the global credit market crisis resulted in severe financial distress among many
companies within the automotive supply base. During the above time frame, several automotive
suppliers filed for bankruptcy protection or ceased operations. The potential continuation or
renewal of financial distress within the supply base and suppliers’ inability to obtain credit from
lending institutions could lead to commercial disputes and possible supply chain interruptions. In
addition, the potential for future adverse industry conditions may require us to provide financial
assistance or other measures to ensure uninterrupted production. The continuation or renewal of
these industry conditions could have a material adverse effect on our existing and future
revenues and net income.
Shortage of Raw Materials or Components Supply – In the event of catastrophic acts
of nature such as fires, tsunamis, hurricanes and earthquakes or a rapid increase in production
demands, either we or our customers or other suppliers may experience supply shortages of raw
materials or components. This could be caused by a number of factors, including a lack of
production line capacity or manpower or working capital constraints. In order to manage and
reduce the costs of purchased goods and services, we and others within our industry have been
rationalizing and consolidating our supply base. As a result, there is greater dependence on
fewer sources of supply for certain components and materials used in our products, which could
increase the possibility of a supply shortage of any particular component. If any of our
customers experience a material supply shortage, either directly or as a result of supply
shortages at another supplier, that customer may halt or limit the purchase of our products.
Similarly, if we or one of our own suppliers experience a supply shortage, we may become
unable to produce the affected products if we cannot procure the components from another
source. Such production interruptions could impede a ramp-up in vehicle production and could
have a material adverse effect on our business, results of operations and financial condition.
We consider the production capacities and financial condition of suppliers in our selection
process, and expect that they will meet our delivery requirements. However, there can be no
assurance that strong demand, capacity limitations, shortages of raw materials, labor disputes or
other problems will not result in any shortages or delays in the supply of components to us.
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Cost Reduction – There is continuing pressure from our major customers to reduce
the prices we charge for our products. This requires us to generate cost reductions,
including reductions in the cost of components purchased from outside suppliers. If we
are unable to generate sufficient production cost savings in the future to offset pre-
programmed price reductions, our gross margin and profitability will be adversely affected.
Cyclicality and Seasonality in the Automotive Market – The automotive market
is cyclical and is dependent on consumer spending, on the availability of consumer credit
and to a certain extent, on customer sales incentives. Economic factors adversely
affecting consumer demand for automobiles and automotive production, such as rising
fuel costs, could adversely impact our net sales and net income. We typically experience
decreased sales and operating income during the first fiscal quarter of each year due to
the impact of scheduled customer plant shut-downs in July and new model changeovers
during that period.
Foreign Operations – We own and operate manufacturing operations in Mexico. As
discussed above under “Joint Ventures and Majority Owned Subsidiaries”, we also have
joint venture and majority owned investments in Mexico, Brazil, China and India. As these
operations continue to expand, their success will depend, in part, on our and our
partners’ ability to anticipate and effectively manage certain risks inherent in international
operations, including: enforcing agreements and collecting receivables through certain
foreign legal systems, payment cycles of foreign customers, compliance with foreign tax
laws, general economic and political conditions in these countries and compliance with
foreign laws and regulations. The success of these joint venture operations may be
impacted by our partners’ ability to influence business decisions and therefore the
operating results of the joint ventures could be adversely impacted. These influences, as
well as conflicts or disagreements with our joint venture partners, could negatively impact
the operations and financial results of our joint venture investments, which could have an
adverse impact on our financial results. In addition, failure of our partners to be able to
continue to fund their portion of the joint venture operations could have a material adverse
effect on the financial condition and financial results of our joint venture investments,
which could have a material adverse effect on our financial results. The joint venture
investments in China generated losses in 2012 and 2013 due to relocation costs
associated with moves to a new facility and start-up costs associated with a new product
line. These relocation costs and start-up costs have been financed internally and
externally by VAST China. Additionally, our VAST LLC joint venture in Brazil continues to
report losses due to the weak automotive build in that region. The impact of any future
planned capital expenditures or future expansion by VAST LLC in China, Brazil and India,
may result in the need for additional future capital contributions to fund the operations of
these joint venture investments.
Currency Exchange Rate Fluctuations – Our sales are denominated in U.S.
dollars. We have manufacturing operations in Mexico, and as a result, a portion of our
manufacturing costs are incurred in Mexican pesos. Therefore, fluctuations in the U.S.
dollar/Mexican peso exchange rate may have a material effect on our profitability, cash
flows, financial position, and may significantly affect the comparability of our results
between financial periods. Any depreciation in the value of the U.S. dollar in relation to the
value of the Mexican peso will adversely affect the cost of our Mexican operations when
translated into U.S. dollars. Similarly, any appreciation in the value of the U.S. dollar in
relation to the value of the Mexican peso will decrease the cost of our Mexican operations
when translated into U.S. dollars.
Sources of and Fluctuations in Market Prices of Raw Materials – Our primary
raw materials are high-grade zinc, brass, nickel silver, aluminum, steel and plastic resins.
These materials are generally available from a limited number of suppliers, but we have
chosen to concentrate our sourcing with one primary vendor for each commodity or
purchased component. We believe our sources of raw materials are reliable and adequate
for our needs. However, the development of future sourcing issues related to using
existing or alternative raw materials and the global availability of these materials as well as
significant fluctuations in the market prices of these materials may have an adverse effect
on our financial results if the increased raw material costs cannot be recovered from our
customers.
Given the significant financial impact on us relating to changes in the cost of our
primary raw materials, commencing with fiscal 2008 and thereafter, we began quoting
quarterly material price adjustments for changes in our zinc costs in our negotiations with
our customers. Our success in obtaining these quarterly price adjustments in our
customer contracts is dependent on separate negotiations with each customer. It is not a
standard practice for our customers to include such price adjustments in their contracts.
We have been successful in obtaining quarterly price adjustments in some of our
customer contracts. However, we have not been successful in obtaining the adjustments
with all of our customers.
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Disruptions Due to Work Stoppages and Other Labor Matters – Our major
customers and many of their suppliers have unionized work forces. Work stoppages or slow-
downs experienced by our customers or their suppliers could result in slow-downs or closures of
assembly plants where our products are included in assembled vehicles. For example, strikes by
a critical supplier called by the United Auto Workers led to extended shut-downs of most of
General Motors’ North American assembly plants in February 2008 and in 1998. A material work
stoppage experienced by one or more of our customers could have an adverse effect on our
business and our financial results. In addition, all production associates at our Milwaukee facility
are unionized. A sixteen-day strike by these associates in June 2001 resulted in increased costs
as all salaried associates worked with additional outside resources to produce the components
necessary to meet customer requirements. The current contract with our unionized associates is
effective through September 17, 2018. We may encounter further labor disruption and we may
also encounter unionization efforts in our other plants or other types of labor conflicts, any of
which could have an adverse effect on our business and our financial results. Labor contracts
between General Motors Company, Ford Motor Company and Fiat Chrysler Automobiles and
their unionized associates under the United Auto Workers union expire in October and November
2019. In addition, their respective labor agreements with the Canadian auto workers union expire
in September and October 2020. Labor disruptions encountered by our customers during the
contract period could have an adverse effect on our business and our financial results.
Compliance Related to Regulations Related to Conflict Minerals – We are required
to disclose the use of tin, tantalum, tungsten and gold (collectively, “conflict minerals”) mined
from the Democratic Republic of the Congo and adjoining countries (the “covered countries”) if a
conflict mineral(s) is necessary to the functionality of a product manufactured, or contracted to
be manufactured, by us. We may determine, as part of our compliance efforts, that certain
products or components we obtain from our suppliers could contain conflict minerals. If we are
unable to conclude that all our products are free from conflict minerals originating from covered
countries, this could have a negative impact on both our existing and future business, reputation
and/or results of operations. We may also encounter challenges to satisfy customers who require
that our products be certified as conflict free, which could place us at a competitive
disadvantage if we are unable to substantiate such a claim. Compliance with these rules could
also affect the sourcing and availability of some of the minerals used in the manufacture of
products or components we obtain from our suppliers, including our ability to obtain products or
components in sufficient quantities and/or at competitive prices to sell to our customers.
Environmental, Safety and Other Regulations – We are subject to Federal, state, local
and foreign laws and other legal requirements related to the generation, storage, transport,
treatment and disposal of materials as a result of our manufacturing and assembly operations.
These laws include, among others, the Resource Conservation and Recovery Act (as amended),
the Clean Air Act (as amended) and the Comprehensive Environmental Response, Compensation
and Liability Act (as amended). We have an environmental management system that is ISO-
14001 certified. We believe that our existing environmental management system is adequate for
current and anticipated operations and we have no current plans for substantial capital
expenditures in the environmental area. An environmental reserve was established in 1995 for
estimated costs to remediate a site at our Milwaukee facility. The site was contaminated from a
former above-ground solvent storage tank, located on the east side of the facility. The
contamination occurred in 1985 and is being monitored in accordance with Federal, state and
local requirements. We do not currently anticipate any material adverse impact on our results of
operations, financial condition or competitive position as a result of compliance with Federal,
state, local and foreign environmental laws or other related legal requirements. However, risk of
environmental liability and changes associated with maintaining compliance with environmental
laws is inherent in the nature of our business and there is no assurance that material liabilities or
changes could not arise.
Highly Competitive Automotive Supply Industry – The automotive component supply
industry is highly competitive. Some of our competitors are companies, or divisions or subsidiaries
of companies, that are larger than STRATTEC and have greater financial, global and technology
capabilities. Our products may not be able to compete successfully with the products of these
other companies, which could result in loss of customers and, as a result, decreased sales and
profitability. Some of our major customers have previously announced that they will be reducing
their supply base. This could potentially result in the loss of these customers and consolidation
within the supply base. The loss of any of our major customers could have a material adverse
effect on our existing and future net sales and net income.
In addition, our competitive position in the North American automotive component supply
industry could be adversely affected in the event that we are unsuccessful in making strategic
investments, acquisitions or alliances or in establishing joint ventures that would enable us to
expand globally, in particular, with the VAST Automotive Group and their ability to fund and service
global vehicle platforms. We principally compete for new business at the beginning of the
development of new models and upon the redesign of existing models by our major customers.
New model development generally begins two to five years prior to the marketing of such new
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models to the public. The failure to obtain new business on new models or to retain or increase
business on redesigned existing models could adversely affect our business and financial
results. In addition, as a result of relatively long lead times for many of our components, it may
be difficult in the short-term for us to obtain new sales to replace any unexpected decline in the
sale of existing products. Finally, we may incur significant product development expense in
preparing to meet anticipated customer requirements which may not be recovered.
Program Volume and Pricing Fluctuations – We incur costs and make capital
expenditures for new program awards based upon certain estimates of production
volumes over the anticipated program life for certain vehicles. While we attempt to
establish the price of our products for variances in production volumes, if the actual
production of certain vehicle models is significantly less than planned, our net sales and
net income may be adversely affected. We cannot predict our customers’ demands for the
products we supply either in the aggregate or for particular reporting periods.
Investments in Customer Program Specific Assets – We make investments in
machinery and equipment used exclusively to manufacture products for specific customer
programs. This machinery and equipment is capitalized and depreciated over the
expected useful life of each respective asset. Therefore, the loss of any one of our major
customers, the loss of specific vehicle models or the early cancellation of a vehicle model
could result in impairment in the value of these assets which may have a material adverse
effect on our financial results.
STRATTEC Advanced Logic, LLC Joint Venture – As discussed under Joint
Ventures and Majority Owned Subsidiaries herein, we maintain a 51 percent ownership
interest in a joint venture, STRATTEC Advanced Logic, LLC, which was formed to
introduce a new generation of biometric security products based upon the designs of
Actuator Systems LLC, our partner and the owner of the remaining ownership interest in
SAL LLC. The success of this joint venture operation has been impacted by the failure of
our partner to be able to continue to fund their portion of the joint venture operations,
which has had an adverse impact on our financial results. Furthermore, conflicts or
disagreements with our joint venture partner, could negatively impact the operations and
financial results of our joint venture investment, which could have an adverse impact on
our financial results. The biometric security business is highly competitive. Some of the
companies in the biometric security business are significantly larger than SAL LLC and
have greater financial and technology capabilities. Our products may not be able to
compete successfully both on price and technology features within our markets. As a
result of some of these factors, during fiscal 2018, we, along with our joint venture
partner, intend to wind down and discontinue operating the business of SAL LLC.
Warranty Claims – We are exposed to warranty claims in the event that our
products fail to perform as expected, and we may be required to participate in the repair
costs incurred by our customers for such products. Our largest customers have recently
extended and/or expanded their warranty protection for their vehicles. Other automotive
OEMs have similarly extended and/or expanded their warranty programs. We are engaged
in ongoing discussions with our customers regarding warranty information and potential
claims. The results of these discussions could result in additional warranty charges/claims
in future periods. Depending on the nature of and the volume of vehicles involved in the
potential warranty claims, these charges could be material to our financial statements. The
extended and/or expanded warranty trend may also result in higher cost recovery claims
by OEMs from suppliers whose products incur a higher rate of warranty claims above an
OEM derived nominal level. Prior to fiscal 2010, we had experienced relatively low
warranty charges from our customers due to our commercial arrangements and
improvements in the quality, reliability and durability of our products. Due to our largest
customers’ extension and/or expansion of their warranty protection programs and
demands for higher warranty cost sharing arrangements from their suppliers in their terms
and conditions of purchase, including STRATTEC, we increased our provision to cover
warranty exposures since fiscal year 2010. In 2015, our increased warranty provision was
the result of various known or expected customer warranty issues outstanding and
estimated future warranty costs to be incurred as of June 2015 for which amounts were
reasonably estimable. As additional information becomes available, actual results may
differ from recorded estimates. If our customers demand higher warranty-related cost
recoveries, or if our products fail to perform as expected, it could have a material adverse
impact on our results of operations and financial condition.
Cyber Vulnerability – Cyber attacks or security breaches could compromise
confidential, business critical information, cause a disruption in our operations or harm our
reputation. While we have a cyber security monitoring program, a significant cyber attack
could result in loss of critical business information and/or could negatively impact our
operations, any of which could have a negative impact on our financial results.
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C O N S O L I D AT E D S TAT E M E N T S O F I N C O M E A N D
C O M P R E H E N S I V E I N C O M E (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NET SALES
Cost of goods sold
GROSS PROFIT
Engineering, selling, and administrative expenses
INCOME FROM OPERATIONS
Interest income
Equity earnings (loss) of joint ventures
Interest expense
Other income, net
INCOME BEFORE PROVISION FOR INCOME
TAXES AND NON-CONTROLLING INTEREST
Provision for income taxes
NET INCOME
Net income attributable to non-controlling
interest
NET INCOME ATTRIBUTABLE TO
Years Ended
July 2, 2017
July 3, 2016
June 28, 2015
$417,325
357,163
60,162
46,460
13,702
136
666
(417)
2,307
16,394
4,284
12,110
$401,419
336,594
64,825
43,917
20,908
25
(2,235)
(176)
668
19,190
_ 5,068
14,122
$411,475
338,815
72,660
41,534
31,126
185
(788)
(71)
3,481
33,933
_ 9,382
24,551
4,913
4,973
3,897
STRATTEC SECURITY CORPORATION
$ 7,197
$ 9,149
$ 20,654
COMPREHENSIVE INCOME:
NET INCOME
Currency translation adjustments, net of tax
Pension and postretirement plan funded status
adjustment, net of tax
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
COMPREHENSIVE INCOME
Comprehensive income attributable to
$ 12,110
(426)
5,768
5,342
17,452
$ 14,122
(5,248)
(5,880)
(11,128)
2,994
$ 24,551
(5,133)
(1,851)
(6,984)
17,567
non-controlling interest
COMPREHENSIVE INCOME (LOSS)
ATTRIBUTABLE TO STRATTEC
SECURITY CORPORATION
5,470
4,659
3,574
$ 11,982
$ (1,665)
$ 13,993
EARNINGS PER SHARE ATTRIBUTABLE
TO STRATTEC SECURITY CORPORATION:
BASIC
DILUTED
AVERAGE SHARES OUTSTANDING:
BASIC
DILUTED
$
2.01
$ 1.96
$
$
2.55
2.51
$
$
5.80
5.66
3,588
3,670
3,559
3,621
3,515
3,604
The accompanying Notes to Financial Statements are an integral part of these Consolidated Statements of
Income and Comprehensive Income.
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C O N S O L I D AT E D B A L A N C E S H E E T S
( I N T H O U S A N D S , E X C E P T S H A R E A M O U N T S A N D P E R S H A R E A M O U N T S )
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Receivables, less allowance for doubtful accounts
of $500 at July 2, 2017 and July 3, 2016
Inventories, net
Customer tooling in progress, net
Income taxes recoverable
Other current assets
Total current assets
INVESTMENT IN JOINT VENTURES
DEFERRED INCOME TAXES
OTHER LONG-TERM ASSETS
PROPERTY, PLANT AND EQUIPMENT, NET
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
Accrued liabilities:
Payroll and benefits
Environmental
Warranty
Other
Total current liabilities
COMMITMENTS AND CONTINGENCIES – see note beginning on page 51
BORROWINGS UNDER CREDIT FACILITIES
ACCRUED PENSION OBLIGATIONS
ACCRUED POSTRETIREMENT OBLIGATIONS
OTHER LONG-TERM LIABILITIES
SHAREHOLDERS’ EQUITY:
Common stock, authorized 12,000,000 shares, $.01 par value,
issued 7,216,103 shares at July 2, 2017 and
7,188,363 shares at July 3, 2016
Capital in excess of par value
Retained earnings
Accumulated other comprehensive loss
Less: Treasury stock at cost (3,619,487 shares at
July 2, 2017 and 3,622,506 shares at July 3, 2016)
Total STRATTEC SECURITY CORPORATION shareholders’ equity
Non-controlling interest
Total shareholders’ equity
July 2, 2017
July 3, 2016
$ 8,361
$ 15,477
64,933
35,476
11,544
1,987
6,704
129,005
16,840
256
16,022
111,591
$273,714
63,726
38,683
6,971
3,826
_ 5,768
134,451
14,168
5,387
3,021
85,149
$242,176
$ 39,679
$ 32,416
13,055
1,308
5,550
8,303
67,895
30,000
1,492
1,003
610
72
93,813
225,913
(32,888)
(135,822)
151,088
21,626
172,714
$273,714
11,210
1,365
9,228
9,996
64,215
20,000
1,466
1,262
721
72
92,076
220,728
(37,673)
(135,871)
139,332
15,180
154,512
$242,176
The accompanying Notes to Financial Statements are an integral part of these Consolidated Balance Sheets.
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S H A R E H O L D E R S ’ E Q U I T Y (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total
Common
Stock
Capital in
Excess of
Par Value
Accumulated
Other
Retained Comprehensive
Earnings
Loss
Treasury Non-Controlling
Stock
Interest
BALANCE June 29, 2014
$134,903
$71
$87,054
$194,498
$ (20,198)
$ (135,919)
$ 9,397
Net income
Currency translation adjustments
Pension and postretirement
funded status adjustment,
net of tax of $1,087
Cash dividends declared
($0.48 per share)
Cash dividends paid to
non-controlling interests
of subsidiaries
Stock-based compensation and
24,551
(5,133)
(1,851)
(1,710)
(882)
-
-
-
-
-
-
-
-
-
-
20,654
-
-
(4,810)
-
(1,851)
(1,710)
-
-
-
-
-
-
-
-
3,897
(323)
-
-
(882)
shortfall tax benefit
Stock option exercises
Employee stock purchases
1,970
474
79
-
-
-
1,970
474
62
-
-
-
-
-
-
-
-
17
-
-
-
BALANCE June 28, 2015
$152,401
$71
$89,560
$213,442
$ (26,859)
$ (135,902) $12,089
Net income
14,122
Currency translation adjustments (5,248)
Pension and postretirement
funded status adjustment,
net of tax of $3,454
Cash dividends declared
(5,880)
($0.52 per share)
Cash dividends paid to
non-controlling interests
of subsidiaries
Stock-based compensation
and shortfall tax benefit
Stock option exercises
Employee stock purchases
BALANCE July 3, 2016
Net income
Currency translation adjustments
Pension and postretirement
funded status adjustment,
net of tax of $3,387
Cash dividends declared
($0.56 per share)
Cash dividends paid to
non-controlling interests of
subsidiaries
Contribution from
non-controlling interests of
subsidiaries
Stock-based compensation and
shortfall tax benefit
Stock option exercises
Employee stock purchases
BALANCE July 2, 2017
(1,863)
(1,568)
12,110
(426)
5,768
(2,012)
(1,964)
2,940
1,601
79
106
$172,714
-
-
-
-
-
-
-
-
-
-
9,149
-
-
(4,934)
-
(5,880)
(1,863)
-
-
-
-
-
-
-
-
4,973
(314)
-
-
(1,568)
2,075
364
109
$154,512
-
1
-
$72
2,075
363
78
-
-
-
-
-
-
-
-
31
-
-
-
$92,076
$220,728
$ (37,673)
$ (135,871) $15,180
-
-
-
-
-
-
-
-
-
$ 72
-
-
-
-
-
-
7,197
-
-
(983)
-
5,768
(2,012)
-
-
-
-
-
-
-
-
-
-
-
4,913
557
-
-
(1,964)
2,940
1,601
79
57
-
-
-
-
-
-
-
-
49
-
-
-
$93,813
$225,913
$ (32,888) $ (135,822) $21,626
The accompanying Notes to Financial Statements are an integral part of these Consolidated Statements
of Shareholders’ Equity.
C O N S O L I D AT E D S TAT E M E N T S O F C A S H F L O W S
( I N T H O U S A N D S )
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Years Ended
July 3, 2016
June 28, 2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity (earnings) loss of joint ventures
Depreciation and amortization
Foreign currency transaction (gain) loss
Unrealized (gain) loss on peso forward contracts
Loss (gain) on disposition of property, plant and equipment
Deferred income taxes
Stock based compensation expense
Change in operating assets and liabilities:
Receivables
Inventories
Other assets
Accounts payable and accrued liabilities
Other, net
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in joint ventures
Loan to joint ventures
Repayments from loan to joint ventures
Additions to property, plant and equipment
Proceeds received on sale of property,
plant and equipment
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under credit facilities
Repayments under credit facilities
Exercise of stock options and employee stock purchases
Excess tax benefits from stock-based compensation
Contribution from non-controlling interest of subsidiaries
Dividends paid to non-controlling interests of subsidiaries
Dividends paid
Net cash provided by financing activities
FOREIGN CURRENCY IMPACT ON CASH
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS
Beginning of year
End of year
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR:
Income taxes
Interest
NON-CASH INVESTING ACTIVITIES:
Change in capital expenditures in accounts payable
Guarantee of joint venture revolving credit facility
Guarantee of joint venture contract
$12,110
$14,122
$24,551
(666)
11,418
(1,128)
(2,010)
213
1,851
1,508
(1,707)
3,207
(6,499)
5,168
(323)
23,142
(400)
(2,230)
100
(37,010)
2
(39,538)
36,000
(26,000)
241
21
2,940
(1,964)
(2,012)
9,226
54
2,235
10,121
(2,559)
889
(17)
3,027
1,625
(5,129)
(3,897)
(9,481)
(3,003)
285
8,218
(1,720)
(225)
100
(23,496)
76
(25,265)
26,500
(16,500)
473
170
-
(1,568)
(1,865)
7,210
(381)
788
8,815
(3,075)
-
154
(3,330)
1,323
9,155
(4,284)
(1,482)
(1,463)
307
31,459
(4,384)
(315)
-
(26,097)
1
_ (30,795)
9,000
(1,500)
553
367
-
(882)
(1,711)
5,827
(552)
(7,116)
(10,218)
5,939
15,477
$ 8,361
25,695
$15,477
19,756
$25,695
$
$
318
350
$ (99)
-
$
-
$
$ 4,699
$ 157
$ 2,625
$ 505
-
$
$14,754
$ 47
$
$
$
136
995
250
The accompanying Notes to Financial Statements are an integral part of these Consolidated Statements of
Cash Flows.
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ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
STRATTEC SECURITY CORPORATION designs, develops, manufactures and markets automotive access
control products including mechanical locks and keys, electronically enhanced locks and keys, steering column
and instrument panel ignition lock housings, latches, power sliding side door systems, power lift gate systems,
power deck lid systems, door handles and related products for primarily North American automotive customers.
We also supply global automotive manufacturers through a unique strategic relationship with WITTE Automotive
(“WITTE”) of Velbert, Germany and ADAC Automotive (“ADAC”) of Grand Rapids, Michigan. Under this relationship,
STRATTEC, WITTE and ADAC market the products of each company to global customers under the “VAST” brand
name (as more fully described herein). STRATTEC products are shipped to customer locations in the United States,
Canada, Mexico, Europe, South America, Korea, China and India, and we provide full service and aftermarket
support for each partner’s products. We also maintain a 51 percent interest in a joint venture, STRATTEC Advanced
Logic, LLC (“SAL LLC”), which exists to introduce a new generation of biometric security products based on the
designs of Actuator Systems, our partner and the owner of the remaining ownership interest.
The accompanying consolidated financial statements reflect the consolidated results of STRATTEC
SECURITY CORPORATION, its wholly owned Mexican subsidiary, STRATTEC de Mexico, and its majority
owned subsidiaries, ADAC-STRATTEC, LLC and STRATTEC POWER ACCESS LLC. STRATTEC SECURITY
CORPORATION is located in Milwaukee, Wisconsin. STRATTEC de Mexico is located in Juarez, Mexico.
ADAC-STRATTEC, LLC and STRATTEC POWER ACCESS LLC have operations in El Paso, Texas and Juarez
and Leon, Mexico. Equity investments in Vehicle Access Systems Technology LLC (“VAST LLC”) and SAL LLC
for which we exercise significant influence but do not control and are not the primary beneficiary, are
accounted for using the equity method. VAST LLC consists primarily of three wholly owned subsidiaries in
China, one wholly owned subsidiary in Brazil and one joint venture entity in India. SAL LLC is located in El
Paso, Texas. We have only one reporting segment.
The significant accounting policies followed in the preparation of these financial statements, as
summarized in the following paragraphs, are in conformity with accounting principles generally accepted in the
United States of America (U.S. GAAP).
Principles of Consolidation and Presentation: The accompanying consolidated financial
statements include the accounts of STRATTEC SECURITY CORPORATION, its wholly owned Mexican
subsidiary and its majority owned subsidiaries. Equity investments for which STRATTEC exercises significant
influence but does not control and is not the primary beneficiary are accounted for using the equity method. All
significant inter-company transactions and balances have been eliminated.
New Accounting Standards: In May 2014, the FASB issued an update to the accounting guidance
for the recognition of revenue arising from contracts with customers. The update supersedes most current
revenue recognition guidance and outlines a single comprehensive model for revenue recognition based
on the principle that an entity should recognize revenue in an amount that reflects the expected
consideration to be received in the exchange of goods and services. The guidance update also requires
additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising
from customer contracts. The guidance permits two methods of adoption: the full retrospective method,
which requires retrospective restatement of each prior reporting period presented, or the cumulative
catch-up transition method, which requires the cumulative effect of initially applying the guidance be
recognized at the date of initial application. We currently anticipate adopting the standard using the full
retrospective method. The guidance update is effective for annual reporting periods beginning after
December 15, 2017 and becomes effective for us at the beginning of our 2019 fiscal year. We do not
anticipate early adoption. Our ability to adopt using the full retrospective method is dependent on system
readiness and the completion of our analysis of information necessary to restate prior period financial
statements. While we are continuing to assess all potential impacts of the application of the standard to
STRATTEC, we currently do not expect that the adoption of this pronouncement will have a material
impact on our consolidated financial statements.
In August 2014, the FASB issued an update to the accounting guidance on determining when and how
to disclose going-concern uncertainties in the financial statements. The new guidance requires management to
perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of
the date the financial statements are issued. An entity must provide certain disclosures if conditions or events
raise substantial doubt about the entity’s ability to continue as a going concern. This accounting update is
effective for annual and interim periods beginning on or after December 15, 2016, with early adoption
permitted. We do not expect that the adoption of this pronouncement will have a material impact on our
consolidated financial statements.
In July 2015, the FASB issued an accounting standard to simplify the measurement of inventory by
changing the subsequent measurement guidance from the lower of cost or market to the lower of cost and net
realizable value for inventory. The standard update is effective for fiscal years beginning after December 15,
2016 and interim periods within those years, and early adoption is permitted. The standard is to be applied
prospectively. We do not expect that the adoption of this pronouncement will have a material impact on our
consolidated financial statements.
In February 2016, the FASB issued an update to the accounting guidance for leases. The update increases
the transparency and comparability among organizations by requiring lessees to recognize lease assets and lease
liabilities on the balance sheet and to disclose key information about leasing arrangements. The guidance is
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effective for fiscal years beginning after December 15, 2018 and interim periods within those years. We do not
expect that the adoption of this pronouncement will have a material impact on our consolidated financial statements.
In March 2016, the FASB issued an update to the accounting guidance for share-based payments. The
update simplifies several aspects of the accounting for employee share-based payment transactions including the
accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification of
such items in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15,
2016 and interim periods within those years. We do not expect that the adoption of this pronouncement will have
a material impact on our consolidated financial statements.
In August 2016, the FASB issued an update to the accounting guidance on the classification of certain cash
receipts and cash payments. The update aims to eliminate diversity in practice in how certain cash receipts and
cash payments are presented and classified in the statement of cash flows. The guidance is effective for fiscal
years beginning after December 15, 2017 and interim periods within those years. We do not expect that the
adoption of this pronouncement will have a material impact on our consolidated financial statements.
In March 2017, the FASB issued an update to the accounting guidance for the presentation of net periodic
pension cost and net periodic postretirement benefit cost. The update requires the service cost component of net
periodic benefit cost be reported in the same line items as other compensation costs arising from services rendered by
the pertinent employees during the applicable period. The remaining components of net periodic benefit cost are
required to be presented separately from the service cost component outside a subtotal of income from operations.
Additionally, the update allows only the service cost component to be eligible for capitalization when applicable. The
guidance requires retrospective restatement for each period presented for the presentation of the service cost
component and the other components of net periodic benefit cost in the income statement and prospective application
for the capitalization of the service cost component of net periodic benefit cost. The guidance is effective for fiscal
years beginning after December 15, 2017 and interim periods within those years, with early adoption permitted. We
anticipate early adoption beginning with the interim periods of our fiscal 2018. We anticipate the adoption of this
guidance will result in the reclassification of expense within our Consolidated Statements of Income and
Comprehensive Income for the years ended July 2, 2017 and July 3, 2016 from cost of goods sold and engineering,
selling and administrative expenses to other income, net of approximately $1.1 million and $1.3 million, respectively.
Fiscal Year: Our fiscal year ends on the Sunday nearest June 30. The years ended July 2, 2017, July 3,
2016 and June 28, 2015 are comprised of 52, 53 and 52 weeks, respectively.
Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses for the periods presented. These estimates and assumptions could also affect the disclosure of
contingencies. Actual results and outcomes may differ from management’s estimates and assumptions.
Cash and Cash Equivalents: Cash and cash equivalents include all short-term investments with an
original maturity of three months or less due to the short-term nature of the instruments. Excess cash balances
are placed in short-term commercial paper.
Derivative Instruments: We own and operate manufacturing operations in Mexico. As a result, a portion
of our manufacturing costs are incurred in Mexican pesos, which causes our earnings and cash flows to fluctuate
due to changes in the U.S. dollar/Mexican peso exchange rate. We executed 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. These peso currency forward contracts include settlement dates that began
on October 16, 2015 and end on June 15, 2018. No forward contracts were in place during fiscal 2015. Our
objective in entering into these currency forward contracts is to minimize our earnings volatility resulting from
changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. The Mexican peso forward
contracts are not used for speculative purposes and are not designated as hedges. As a result, all currency
forward contracts are recognized in our accompanying consolidated financial statements at fair value and
changes in the fair value are reported in current earnings as part of Other Income, net.
The following table quantifies the outstanding Mexican peso forward contracts as of July 2, 2017
(thousands of dollars, except average forward contractual exchange rates):
Effective
Dates
Notional
Amount
July 15, 2017 - June 15, 2018 $12,000
Average
Forward Contractual
Exchange Rate
20.37
Fair
Value
$1,121
Buy MXP/Sell USD
The fair market value of all outstanding Mexican peso forward contracts in the accompanying
Consolidated Balance Sheets was as follows (thousands of dollars):
Not designated as hedging Instruments:
Other current assets:
Mexican peso forward contracts
Other long-term assets:
Mexican peso forward contracts
Other current liabilities:
Mexican peso forward contracts
July 2, 2017
July 3, 2016
$1,121
$
$
-
-
$ -
$107
$996
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The pre-tax effects of the Mexican peso forward contracts on the accompanying
Consolidated Statements of Income and Comprehensive Income consisted of the following
(thousands of dollars):
Not Designated as Hedging Instruments:
Realized loss
Unrealized loss
Unrealized gain
July 2, 2017
$1,650
$ -
$2,010
Other Income, net
Years Ended
July 3, 2016
$1,196
$ 889
-
$
June 28, 2015
$ -
$ -
$ -
Fair Value of Financial Instruments: The fair value of our cash and cash equivalents,
accounts receivable, accounts payable and borrowings under our credit facilities approximated their
book value as of July 2, 2017 and July 3, 2016. Fair Value is defined as the exchange price that would
be received for an asset or paid for a liability (an exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value must maximize the use of observable inputs and
minimize the use of unobservable inputs. There is an established fair value hierarchy based on three
levels of inputs, of which the first two are considered observable and the last unobservable. Level 1 –
Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-
time quotes for transactions in active exchange markets involving identical assets. Level 2 – Inputs,
other than quoted prices included within Level 1, which are observable for the asset or liability, either
directly or indirectly. These are typically obtained from readily-available pricing sources for comparable
instruments. Level 3 – Unobservable inputs, where there is little or no market activity for the asset or
liability. These inputs reflect the reporting entity’s own assumptions of the data that market participants
would use in pricing the asset or liability, based on the best information available in the circumstances.
The following table summarizes our financial assets and liabilities measured at fair value on a recurring
basis as of July 2, 2017 and July 3, 2016 (thousands of dollars):
July 2, 2017
Total
Level 1
Level 3
Level 2
July 3, 2016
Total
Level 1
Level 2
Level 3
Assets:
Rabbi Trust Assets:
Stock index funds:
Small cap
Mid cap
Large cap
International
Fixed income funds
Cash and cash
equivalents
Mexican peso forward
contracts
Total assets at fair
$ 382
391
519
541
763
-
$
-
-
-
-
-
3
$
$ - $ 382
391
-
519
-
-
541
- 763
$ 356
357
498
389
700
-
3
-
-
-
-
-
-
3
-
1,121
-
1,121
-
107
value
$2,596
$1,124
$ - $3,720
$2,300
$110
$ - $ 356
- 357
- 498
- 389
- 700
- 3
-
$ -
107
$2,410
Liabilities:
Mexico peso forward
contracts
$ -
$
-
$ - $
-
$ -
$996
$ -
$ 996
The Rabbi Trust assets fund our amended and restated supplemental executive retirement plan
and are included in Other Long-Term Assets in the accompanying Consolidated Balance Sheets. Refer
to discussion of Mexican peso forward contracts under Derivative Instruments above. The fair value of
the Mexican peso forward contracts considers the remaining term, current exchange rate and interest
rate differentials between the two currencies. There were no transfers between Level 1 and Level 2
assets during 2017 or 2016.
Receivables: Receivables consist primarily of trade receivables due from Original Equipment
Manufacturers in the automotive industry and locksmith distributors relating to our service and
aftermarket sales. We evaluate the collectability of receivables based on a number of factors. An
allowance for doubtful accounts is recorded for significant past due receivable balances based on a
review of the past due items, general economic conditions and the industry as a whole. Changes in
the allowance for doubtful accounts were as follows (thousands of dollars):
Year ended July 2, 2017
Year ended July 3, 2016
Year ended June 28, 2015
Balance,
Beginning
of Year
$500
$500
$500
Provision
for Doubtful
Accounts
-
$
$
-
$ -
Net
Write-Offs
$ -
$ -
-
$
Balance,
End of
Year
$500
$500
$500
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Inventories: Inventories are comprised of material, direct labor and manufacturing overhead,
and are stated at the lower of cost or market using the first-in, first-out (“FIFO”) cost method of
accounting. Inventories consisted of the following (thousands of dollars):
Finished products
Work in process
Purchased materials
Excess and obsolete reserve
Inventories, net
July 2, 2017
$ 9,976
9,328
20,682
39,986
(4,510)
$35,476
July 3, 2016
$10,137
8,291
23,055
41,483
(2,800)
$38,683
We record a reserve for excess and obsolete inventory based on historical and estimated
future demand and market conditions. The reserve level is determined by comparing inventory
levels of individual materials and parts to historical usage and estimated future sales by analyzing
the age of the inventory in order to identify specific materials and parts that are unlikely to be
sold. Technical obsolescence and other known factors are also considered in evaluating the
reserve level. The activity related to the excess and obsolete inventory reserve was as follows
(thousands of dollars):
Year ended July 2, 2017
Year ended July 3, 2016
Year ended June 28, 2015
Balance,
Beginning
of Year
$2,800
$2,300
$2,150
Provision
Charged to
Expense
$2,718
$ 844
$ 655
Amounts
Written Off
$1,008
$ 344
$ 505
Balance,
End of
Year
$4,510
$2,800
$2,300
Customer Tooling in Progress: We incur costs related to tooling used in component production
and assembly. Costs for development of certain tooling, which will be directly reimbursed by the
customer whose parts are produced from the tool, are accumulated on the balance sheet and are then
billed to the customer. The accumulated costs are billed upon formal acceptance by the customer of
products produced with the individual tool. Other tooling costs are not directly reimbursed by the
customer. These costs are capitalized and amortized over the life of the related product based on the fact
that the related tool will be used over the life of the supply arrangement. To the extent that estimated
costs exceed expected reimbursement from the customer we recognize a loss.
Repair and Maintenance Supply Parts: We maintain an inventory of repair and maintenance
supply parts in support of operations. This inventory includes critical repair parts for all production
equipment as well as general maintenance items. The inventory of critical repair parts is required to avoid
disruptions in our customers’ just-in-time production schedules due to a lack of spare parts when
equipment break-downs occur. All required critical repair parts are on hand when the related production
equipment is placed in service and maintained to satisfy the customer model life production and service
requirements, which may be 12 to 15 years. As repair parts are used, additional repair parts are
purchased to maintain a minimum level of spare parts inventory. Depending on maintenance requirements
during the life of the equipment, excess quantities of repair parts arise. Excess quantities are kept on
hand and are not disposed of until the equipment is no longer in service. A repair and maintenance
supply parts reserve is maintained to recognize the normal adjustment of inventory for obsolete and slow
moving supply and maintenance parts. The adequacy of the reserve is reviewed periodically in relation to
the repair parts inventory balances. The gross balance of the repair and maintenance supply parts
inventory was approximately $3.7 million at July 2, 2017 and $3.2 million at July 3, 2016. The repair and
maintenance supply parts inventory balance is included in Other Current Assets in the accompanying
Consolidated Balance Sheets. The activity related to the repair and maintenance supply parts reserve was
as follows (thousands of dollars):
Year ended July 2, 2017
Year ended July 3, 2016
Year ended June 28, 2015
Balance,
Beginning
of Year
$700
$620
$585
Provision
Charged to
Expense
$438
$366
$348
Amounts
Written Off
$238
$286
$313
Balance,
End of
Year
$900
$700
$620
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Intangibles: Intangible assets that have defined useful lives were acquired in the purchase of the
power sliding door, lift gate and deck lid system access control products from Delphi Corporation in 2009
and consist of patents, engineering drawings and software. The intangible assets balance is included in
Other Long-Term Assets in the accompanying Consolidated Balance Sheets. The carrying value and
accumulated amortization for these assets were as follows (thousands of dollars):
Patents, engineering drawings and software
Less: accumulated amortization
July 2, 2017
$ 890
(849)
$ 41
July 3, 2016
$ 890
(750)
$ 140
The remaining useful life of the intangible assets in the table above is approximately 0.4 years.
Intangible amortization expense was $99,000 for each of the years ended July 2, 2017, July 3, 2016
and June 28, 2015. Intangible amortization expense is expected to be $41,000 in fiscal year 2018 and
zero thereafter.
Property, Plant and Equipment: Property, plant and equipment are stated at cost. Property,
plant and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets
as follows:
Classification
Land improvements
Buildings and improvements
Machinery and equipment
Expected Useful Lives
20 years
15 to 35 years
3 to 15 years
Property, plant and equipment consisted of the following (thousands of dollars):
Land and improvements
Buildings and improvements
Machinery and equipment
Less: accumulated depreciation
July 2, 2017
$ 4,732
36,046
210,741
251,519
(139,928)
$111,591
$
July 3, 2016
4,686
29,361
182,812
216,859
(131,710)
$ 85,149
Depreciation expense was as follows for the periods indicated (thousands of dollars):
2017
2016
2015
Depreciation Expense
$11,319
$10,022
$ 8,716
The gross and net book value of property, plant and equipment located outside of the United
States, primarily in Mexico, were as follows (thousands of dollars):
Gross book value
Net book value
July 2, 2017
$130,166
$ 69,652
July 3, 2016
$ 97,537
$ 43,954
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows
expected to be generated by the asset. If an asset is considered to be impaired, the impairment recognized
is measured by the excess of the carrying amount of the asset over the fair value of the asset. Assets to be
disposed of are reported at the lower of the carrying amount or fair value, less estimated costs to sell. There
were no impairments recorded in the years ended July 2, 2017, July 3, 2016 or June 28, 2015.
Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for
major renewals and betterments, which significantly extend the useful lives of existing plant and
equipment, are capitalized and depreciated. Upon retirement or disposition of plant and equipment, the
cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is
recognized in income.
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Supplier Concentrations: The following inventory purchases were made from major suppliers
during each fiscal year noted:
Fiscal Year
2017
2016
2015
Percentage of
Inventory Purchases
39%
36%
27%
Number of
Suppliers
7
6
5
We have long-term contracts or arrangements with most of our suppliers to guarantee the availability
of raw materials and component parts.
Labor Concentrations: We had approximately 3,892 full-time associates of which approximately
275 or 7.1 percent were represented by a labor union at July 2, 2017. The associates represented by a labor
union account for all production associates at our Milwaukee facility. The current contract with the unionized
associates is effective through September 17, 2018.
Revenue Recognition: Revenue is recognized upon the shipment of products, which is when title
passes, payment terms are final, we have no remaining obligations and the customer is required to pay.
Revenue is recognized net of estimated returns and discounts, which is recognized as a deduction from
revenue at the time of the shipment. Price concessions agreed to with customers are recorded as a
reduction of sales at the later of when revenue related to the specific sales is recognized or the date at which
the price concessions are offered and committed to.
Research and Development Costs: Expenditures relating to the development of new products
and processes, including significant improvements and refinements to existing products, are expensed as
incurred. Research and development expenditures were approximately $4.6 million in 2017, $430,000 in
2016 and $280,000 in 2015.
Other Income, Net: Net other income included in the accompanying Consolidated Statements of
Income and Comprehensive Income primarily included foreign currency transaction gains and losses,
realized and unrealized gains and losses on our Mexican peso currency forward contracts and Rabbi Trust
gains. Foreign currency transaction gains and losses resulted from activity associated with foreign
denominated assets held by our Mexican subsidiaries. We entered into the Mexican peso currency forward
contracts during fiscal 2016 and 2017 to minimize earnings volatility resulting from changes in exchange
rates affecting the U.S. dollar cost of our Mexican operations. The Rabbi Trust assets fund our amended and
restated supplemental executive retirement plan. The investments held in the Trust are considered trading
securities. The impact of these items for the periods presented was as follows (thousands of dollars):
Foreign currency transaction gain
Rabbi Trust gain (loss)
Unrealized gain (loss) on Mexican peso
forward contracts
Realized loss on Mexican peso
forward contracts
Other
July 2, 2017
$ 1,128
296
2,010
(1,650)
523
$ 2,307
Years Ended
July 3, 2016
$2,559
(41)
(889)
(1,196)
235
$ 668
June 28, 2015
$3,075
96
-
-
310
$3,481
Self Insurance Plans: We have self-insured medical and dental plans covering all eligible U.S.
associates. The claims handling process for the self-insured plans are managed by a third-party
administrator. Stop-loss insurance coverage limits our liability on a per individual per calendar year basis.
The per individual per calendar year stop-loss limit was $150,000 in each calendar year 2014 through 2017.
Effective January 1, 2011, under Health Care Reform, there is no lifetime maximum for overall benefits.
The expected ultimate cost for claims incurred under the self-insured medical and dental plans as of
the applicable balance sheet date is not discounted and is recognized as an expense on our Consolidated
Statements of Income and Comprehensive Income. The expected ultimate cost of claims is estimated
based upon the aggregate liability for reported claims and an estimated liability for claims incurred but not
reported, which is based on an analysis of historical data, current health care trends and information
available from the third-party administrator. As additional information becomes available, actual results may
differ from recorded estimates, which may require us to adjust the amount of our estimated liability for
claims incurred but not reported. The expected ultimate cost for claims incurred under the self-insured
medical and dental plans that has not been paid as of the applicable balance sheet date is included in
Accrued Liabilities: Payroll and Benefits in our accompanying Consolidated Balance Sheets.
Changes in the balance sheet amounts for self-insured plans were as follows (thousands of dollars):
Year ended July 2, 2017
Year ended July 3, 2016
Year ended June 28, 2015
Balance,
Beginning
of Year
$420
$420
$420
Provision
Charged to
Expense
$5,796
$5,032
$4,756
Payments
$5,796
$5,032
$4,756
Balance,
End of
Year
$420
$420
$420
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Warranty Reserve: We have a warranty liability recorded related to our known and potential
exposure to warranty claims in the event our products fail to perform as expected, and in the event we may
be required to participate in the repair costs incurred by our customers for such products. The recorded
warranty liability balance involves judgment and estimates. Our liability estimate is based on an analysis of
historical warranty data as well as current trends and information, including our customers’ recent extension
and/or expansion of their warranty programs. In recent fiscal periods, our largest customers have extended
their warranty protection for their vehicles and have since demanded higher warranty cost sharing
arrangements from their suppliers in their terms and conditions to purchase, including from STRATTEC.
During 2017 and 2016, the warranty liability was reduced as a result of settlement payments of previously
accrued customer warranty issues. The 2015 warranty provision included various known or expected
customer warranty issues and estimated future warranty costs to be incurred as of June 2015 for which
amounts were reasonably estimable. As additional information becomes available, actual results may differ
from recorded estimates, which may require us to adjust the amount of our warranty provision.
Changes in the warranty reserve were as follows (thousands of dollars):
Year ended July 2, 2017
Year ended July 3, 2016
Year ended June 28, 2015
Balance,
Beginning
of Year
$ 9,228
$11,835
$ 3,462
(Recoveries)
Provision
Charged
to Expense
$ (843)
$ 583
$8,975
Payments
$ 2,835
$3,190
$ 602
Balance,
End of
Year
$ 5,550
$ 9,228
$11,835
Foreign Currency Translation: The financial statements of our foreign subsidiaries and equity
investees are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and
liabilities and the average exchange rate for each applicable period for sales, costs and expenses. Foreign
currency translation adjustments are included as a component of accumulated other comprehensive loss.
Foreign currency transaction gains and losses are included in other income, net in the accompanying
Consolidated Statements of Income and Comprehensive Income.
Accumulated Other Comprehensive Loss: Accumulated other comprehensive loss was
comprised of the following (thousands of dollars):
Unrecognized pension and postretirement
benefit liabilities, net of tax
Foreign currency translation, net of tax
July 2, 2017
July 3, 2016
June 28, 2015
$18,750
14,138
$32,888
$24,518
13,155
$37,673
$18,638
8,221
$26,859
The following tables summarize the changes in accumulated other comprehensive loss (“AOCL”)
for the years ended July 2, 2017 and July 3, 2016 (thousands of dollars):
Year Ended July 2, 2017
Foreign Currency
Translation
Adjustments
Retirement and
Postretirement
Plans
Balance July 3, 2016
Other comprehensive loss
before reclassifications
Income tax
Net other comprehensive loss
before reclassifications
Reclassifications:
Prior service credits (A)
Actuarial gains (A)
Total reclassifications before tax
Income Tax
Net reclassifications
Other comprehensive loss (income)
Other comprehensive income attributable
to non-controlling interest
Balance July 2, 2017
$13,155
534
(108)
426
-
-
-
-
-
426
(557)
$14,138
$24,518
(6,142)
2,272
(3,870)
753
(3,766)
(3,013)
1,115
(1,898)
(5,768)
-
$18,750
Total
$37,673
(5,608)
2,164
(3,444)
753
(3,766)
(3,013)
1,115
(1,898)
(5,342)
(557)
$32,888
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Year Ended July 3, 2016
Foreign Currency
Translation
Adjustments
Retirement and
Postretirement
Plans
Balance June 28, 2015
Other comprehensive loss
before reclassifications
Income Tax
Net other comprehensive loss
before reclassifications
Reclassifications:
Prior service credits (A)
Actuarial gains (A)
Total reclassifications before tax
Income Tax
Net reclassifications
Other comprehensive loss
Other comprehensive loss attributable
to non-controlling interest
Balance July 3, 2016
$ 8,221
5,248
_ ____-
5,248
-
-
-
-
-
5,248
314
$13,155
$18,638
11,640
(4,307)
7,333
753
(3,059)
(2,306)
853
(1,453)
5,880
-
$24,518
Total
$26,859
16,888
(4,307)
12,581
753
(3,059)
(2,306)
853
(1,453)
11,128
314
$37,673
(A) Amounts reclassified are included in the computation of net periodic benefit cost, which is included in Cost of Goods Sold
and Engineering, Selling and Administrative expenses in the accompanying Consolidated Statements of Income and
Comprehensive Income. See the Note Retirement Plans and Postretirement Costs in these notes to financial statements.
Accounting For Stock-Based Compensation: We maintain an omnibus stock incentive plan. This
plan provides for the granting of stock options, shares of restricted stock and stock appreciation rights. The
Board of Directors has designated 1,850,000 shares of common stock available for the grant of awards
under the plan. Remaining shares available to be granted under the plan as of July 2, 2017 were 204,939.
Awards that expire or are cancelled without delivery of shares become available for re-issuance under the
plan. We issue new shares of common stock to satisfy stock option exercises.
Nonqualified and incentive stock options and shares of restricted stock have been granted to our
officers, outside directors and specified associates under the stock incentive plan. Stock options granted
under the plan may not be issued with an exercise price less than the fair market value of the common stock
on the date the option is granted. Stock options become exercisable as determined at the date of grant by
the Compensation Committee of our Board of Directors. The options expire 10 years after the grant date
unless an earlier expiration date is set at the time of grant. The options vest 1 to 4 years after the date of
grant. Shares of restricted stock granted under the plan are subject to vesting criteria determined by the
Compensation Committee of our Board of Directors at the time the shares are granted and have a minimum
vesting period of one year from the date of grant. Restricted shares granted prior to August 2014 have voting
and dividend rights, regardless of whether the shares are vested or unvested. Restricted shares granted
during August 2014 and thereafter have voting rights, regardless of whether the shares are vested or
unvested, but only have the right to receive cash dividends after such shares become vested. Prior to
August 2016, the restricted stock grants issued vest or vested 3 to 5 years after the date of grant. As of
August 2016, restricted stock grants issued vest 1 to 5 years after the date of grant.
The fair value of each stock option grant was estimated as of the date of grant using the Black-
Scholes pricing model. The resulting compensation cost for fixed awards with graded vesting schedules is
amortized on a straight-line basis over the vesting period for the entire award. The expected term of awards
granted is determined based on historical experience with similar awards, giving consideration to the
contractual terms and vesting schedules. The expected volatility is determined based on our historical stock
prices over the most recent period commensurate with the expected term of the award. The risk-free interest
rate is based on U.S. Treasury zero-coupon issues with a remaining term commensurate with the expected
term of the award. Expected pre-vesting option forfeitures are based primarily on historical data. The fair
value of each restricted stock grant was based on the market price of the underlying common stock as of
the date of grant. The resulting compensation cost is amortized on a straight line basis over the vesting
period. We record stock based compensation only for those awards that are expected to vest.
Unrecognized compensation cost as of July 2, 2017 related to stock options and restricted stock
granted under the plan was as follows (thousands of dollars):
Stock options granted
Restricted stock granted
Compensation
Cost
$ 14
$1,461
Weighted Average Period
over which Cost is to be
Recognized (in years)
0.1
1.0
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Unrecognized compensation cost will be adjusted for any future changes in estimated and actual forfeitures.
Cash received from stock option exercises and the related income tax benefit were as follows
(thousands of dollars):
Fiscal Year
2017
2016
2015
Cash Received from
Stock Option Exercises
$ 136
$ 364
$ 474
Income Tax
Benefit
$ 25
$ 196
$ 458
The intrinsic value of stock options exercised and the fair value of stock options vested were as
follows (thousands of dollars):
Intrinsic value of options exercised
Fair value of stock options vested
July 2, 2017
$ 115
$ 566
Years Ended
July 3, 2016
$ 529
$ 331
June 28, 2015
$1,375
$ 382
The grant date fair values and assumptions used to determine compensation expense recorded in the
accompanying financial statements were as follows:
Options Granted During
Weighted average grant date fair value:
2015
Options issued at grant date market value
Options issued above grant date market value $ 34.93
n/a
Assumptions:
Risk free interest rates
Expected volatility
Expected dividend yield 0.62%
Expected term (in years)
1.90%
57.83%
6.0
No options were granted during the fiscal year ended July 2, 2017 and July 3, 2016.
The range of options outstanding as of July 2, 2017 was as follows:
Number of Options
Outstanding/Exercisable
Weighted Average Exercise
Price Outstanding/Exercisable
Weighted Average Remaining
Contractual Life Outstanding
(In Years)
$10.92-$18.49
$26.53-$38.71
$79.73
42,214/42,214
87,284/87,284
9,010/-
$15.36/$15.36
$30.72/$30.72
$79.73/$-
$29.23/$25.71
2.2
5.2
7.1
Income Taxes: Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of assets and liabilities and their respective tax
bases and operating loss carry-forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary
differences and operating loss carry-forwards are expected to be recovered, settled or utilized. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax
assets when it is more likely than not that a tax benefit will not be realized. We recognize the benefit of
an income tax position only if it is more likely than not (greater than 50 percent) that the tax position
will be sustained upon tax examination, based solely on the technical merits of the tax position.
Otherwise, no benefit is recognized. The tax benefits recognized are measured based on the largest
benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement.
Additionally, we accrue interest and related penalties, if applicable, on all tax exposures for which
reserves have been established consistent with jurisdictional tax laws. Interest and penalties on
uncertain tax positions are classified in the Provision for Income Taxes in the accompanying
Consolidated Statements of Income and Comprehensive Income.
INVESTMENT IN 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
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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 equity 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 Veicular Ltda, VAST Fuzhou, VAST Great
Shanghai, VAST Shanghai Co. 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 and VAST Shanghai Co. (collectively known as VAST China), provide a base of
operations to service our automotive customers in the Asian market. VAST LLC also maintains
branch offices in South Korea and Japan in support of customer sales and engineering
requirements.
Effective April 30, 2015, VAST LLC executed an agreement with Minda Management
Services Limited to become a 50:50 joint venture partner in the former Minda-Valeo Security
Systems joint venture entity, based in Pune, India. This joint venture entity was renamed
Minda-VAST Access Systems (“Minda-VAST”). Minda Management Services Limited is 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 and access products, handles,
automotive safety, restraint systems, driver information and telematics systems for both OEMs
and the aftermarket.
The VAST LLC investments are accounted for using the equity method of accounting. The
activities related to the VAST LLC joint ventures resulted in equity earnings of joint ventures to
STRATTEC of approximately $2.6 million during 2017, equity loss of joint ventures to
STRATTEC of approximately $639,000 during 2016 and equity earnings of joint ventures to
STRATTEC of approximately $1.3 million during 2015. The 2016 equity loss of joint ventures
for VAST LLC included a $6.0 million impairment charge related to its Minda-VAST Access
Systems joint venture in India. STRATTEC’s portion of this impairment charge for 2016 totaled
$2.0 million. During 2017 and 2016, capital contributions totaling $1.2 million and $660,000,
respectively, were made to VAST LLC for purposes of funding operations in Brazil.
STRATTEC’s portion of the capital contributions totaled $400,000 in 2017 and $220,000 in
2016. During 2015, cash capital contributions totaling $13.2 million were made to VAST LLC in
support of the acquisition of the 50 percent joint venture interest in Minda-VAST and in
support of general operating expenses for the Brazilian entity. STRATTEC’s portion of the cash
capital contributions totaled $4.4 million.
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 $3.1 million in 2017, $2.9 million in 2016 and $2.6 million in 2015.
In accordance with the provisions of the ADAC-STRATTEC Credit Facility a capital contribution
to ADAC-STRATTEC LLC of $6 million collectively from STRATTEC and ADAC was completed
during 2017. STRATTEC’s portion of this capital contribution totaled $3.06 million. No capital
contributions to ADAC-STRATTEC LLC were made during 2016 or 2015.
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. An
additional Mexican entity, STRATTEC POWER ACCESS de Mexico, is wholly owned by SPA.
The financial results of SPA are consolidated with the financial results of STRATTEC and
resulted in increased net income to STRATTEC of approximately $2.6 million in 2017,
increased net income to STRATTEC of approximately $2.0 million in 2016 and reduced net
income to STRATTEC of approximately $269,000 in 2015.
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 an equity loss of joint ventures to
STRATTEC of approximately $1.9 million in 2017, $1.6 million in 2016 and $2.0 million in 2015.
Effective with our fiscal 2015 fourth quarter, 100 percent of the funding for SAL LLC was being
made through loans from STRATTEC to SAL LLC and through STRATTEC’s guarantee of the
SAL Credit Facility which is discussed herein. Therefore, effective with our fiscal 2015 fourth
quarter, even though STRATTEC maintains a 51 percent ownership interest in SAL LLC,
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STRATTEC began recognizing 100 percent of the losses of SAL LLC up to our committed
financial support through Equity Earnings (Loss) of Joint Ventures in the accompanying
Consolidated Statements of Income and Comprehensive Income. In addition, the equity loss of
joint ventures for SAL LLC included the following for the periods presented (thousands of
dollars):
Loss on guarantee of SAL LLC
vendor contract
Loss on loan to SAL LLC
Loss on guarantee of SAL LLC
credit facility
July 2, 2017
Years Ended
July 3, 2016
June 28, 2015
$
$
$
-
-
-
-
$
$ 225
$ 247
$ 123
$ 100
$ 488
During fiscal 2018, we, along with our joint venture partner, intend to wind down and discontinue
operating the business of SAL LLC.
STRATTEC’s joint venture investments are included in the accompanying Consolidated Balance Sheets
as follows (thousands of dollars):
Investment in Joint Ventures:
Investment in VAST LLC
Other Current Liabilities:
Investment in SAL LLC
July 2, 2017
July 3, 2016
$16,840
$14,168
$
463
$ 1,265
EQUITY EARNINGS (LOSS) OF JOINT VENTURES
As discussed above under the note Investment in Joint Ventures and Majority Owned Subsidiaries, we
hold a one-third ownership interest in VAST LLC, for which we exercise significant influence but do not
control and are not the primary beneficiary. Our investment in VAST LLC is accounted for using the equity
method. The following are summarized statements of operations and summarized balance sheet data for
VAST LLC (thousands of dollars):
Net sales
Cost of goods sold
Gross profit
Engineering, selling and
administrative expense
Impairment charge
Income (loss) from operations
Other income (expense), net
Income (loss) before provision for
income taxes
Provision for income taxes
Net income (loss)
STRATTEC’s share of VAST LLC net
income (loss)
Intercompany profit eliminations
STRATTEC’s equity earnings (loss)
July 2, 2017
$128,963
101,910
27,053
19,710
-
7,343
1,662
9,005
1,235
$
7,770
$ 2,590
3
Years Ended
July 3, 2016
$114,338
94,060
20,278
15,866
6,000
(1,588)
(115)
(1,703)
168
$ (1,871)
$
(624)
(15)
June 28, 2015
$124,929
105,132
19,797
16,155
-
3,642
123
3,765
41
$ 3,724
$ 1,241
10
of VAST LLC
$ 2,593
$
(639)
$ 1,251
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Cash and cash equivalents
Receivables, net
Inventories, net
Other current assets
Total current assets
Property, plant and equipment, net
Other long-term assets
Total assets
Current liabilities
Long-term liabilities
Total liabilities
Net assets
July 2, 2017
$ 11,757
41,942
15,185
11,782
80,666
31,017
12,850
$124,533
July 3, 2016
$ 6,584
24,557
13,500
13,007
57,648
26,557
11,086
$95,291
$ 70,753
2,960
$ 73,713
$50,462
2,019
$52,481
$ 50,820
$42,810
STRATTEC’s share of VAST LLC net assets
$ 16,940
$14,270
The 2016 equity loss of joint ventures for VAST LLC included a $6 million impairment charge related to its
Minda-VAST Access Systems joint venture in India. STRATTEC’s portion of this impairment charge in 2016
totaled $2 million.
As discussed above under the note Investment in Joint Ventures and Majority Owned Subsidiaries, we
hold a 51 percent ownership interest in a joint venture company, SAL LLC, which exists to introduce a new
generation of biometric security products based upon the designs of Actuator Systems LLC, our partner. SAL
LLC had a $1.5 million revolving credit facility with BMO Harris Bank N.A. with a maturity date of February 16,
2016, which was fully guaranteed by STRATTEC. Outstanding borrowings under the SAL Credit Facility as of
February 16, 2016 totaled $1.5 million. SAL LLC did not have cash available to pay the outstanding debt
balance as of the maturity date. Therefore, STRATTEC made a payment of $1.5 million on its guarantee on
February 16, 2016. Prior to making the guarantee payment, STRATTEC had recorded a liability related to the
guarantee of $1.5 million at February 16, 2016. STRATTEC’s proportionate share of the guarantee based on our
ownership percentage in SAL LLC totaled $765,000 as of February 16, 2016, and accordingly, our investment
in SAL LLC included this amount as of this date. Our joint venture partner did not guarantee their proportionate
share of the SAL Credit Facility. As a result, we recorded a loss equal to our partner’s proportionate share of
the fair value of the STRATTEC guarantee based upon our partner’s ownership interest in the joint venture of
$488,000 during fiscal 2015 and $247,000 during 2016. This loss is included in Equity Earnings (Loss) of Joint
Ventures for 2016 and 2015, as applicable, in the accompanying Consolidated Statements of Income and
Comprehensive Income. SAL LLC is considered a variable interest entity based on the STRATTEC guarantee
and additional loans from STRATTEC as discussed below. STRATTEC is not the primary beneficiary and does
not control the entity. Accordingly, our investment in SAL LLC is accounted for using the equity method.
SAL LLC maintains a license agreement with Westinghouse allowing SAL LLC to do business as
Westinghouse Security. Payments due to Westinghouse under the license agreement were guaranteed by
STRATTEC. As of July 2, 2017 and July 3, 2016, STRATTEC had recorded a liability equal to the estimated fair
value of the future payments due under this guarantee of $250,000. This liability is included in the
accompanying Consolidated Balance Sheets in Accrued Liabilities: Other as of July 2, 2017 and in Other Long-
term Liabilities as of July 3, 2016. STRATTEC’s proportionate share of the guarantee of these payments based
on our ownership percentage in SAL LLC totals $127,000, and accordingly, our investment in SAL LLC was
increased by this amount as of July 2, 2017 and July 3, 2016. Our joint venture partner did not guarantee their
proportionate share of the payments required under the license agreement. As a result, STRATTEC recorded a
loss of $123,000 which is equal to our partner’s proportionate share, based upon their ownership interest in the
joint venture, of the fair value of the STRATTEC guarantee. This loss is included in Equity Earnings (Loss) of
Joint Ventures for 2015 in the accompanying Consolidated Statements of Income and Comprehensive Income.
Loans were made from STRATTEC to SAL LLC in support of operating expenses and working capital
needs. The outstanding loan amounts totaled $2.6 million and $325,000 as of July 2, 2017 and July 3, 2016,
respectively. As of July 2, 2017, the outstanding loan amount was eliminated against STRATTEC’s negative
investment in SAL LLC in the preparation of the consolidated financial statements.
Even though we maintain a 51 percent ownership interest in SAL LLC, effective with our fiscal 2015
fourth quarter, 100 percent of the funding for SAL LLC was being made by loans from STRATTEC to SAL LLC.
Therefore, STRATTEC began recognizing 100 percent of the losses of SAL LLC up to our committed financial
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support through Equity Earnings (Loss) of Joint Ventures in the accompanying Consolidated Statements of
Income and Comprehensive Income effective with our fiscal 2015 fourth quarter.
The following are summarized statements of operations and summarized balance sheet data for SAL LLC
(thousands of dollars):
Net sales
Cost of goods sold
Gross (loss) profit
Engineering, selling and administrative expense
Loss from operations
Other expense, net
Net loss
July 2, 2017
$ 369
610
(241)
1,534
(1,775)
(155)
$ (1,930)
STRATTEC’s share of SAL LLC loss
Loss on guarantee of SAL LLC vendor contract
Loss on loan to SAL LLC
Loss on guarantee of SAL LLC credit facility
STRATTEC’s equity loss of SAL LLC
$(1,927)
-
-
-
$(1,927)
Years Ended
July 3, 2016
$
603
382
221
1,311
(1,090)
(34)
$ (1,124)
$ (1,124)
-
(225)
(247)
$(1,596)
June 28, 2015
$ 49
450
(401)
1,492
(1,893)
(4)
$(1,897)
$(1,328)
(123)
(100)
(488)
$(2,039)
Cash and cash equivalents
Receivables, net
Inventories, net
Total assets
Current liabilities
Net liabilities
STRATTEC’s share of SAL LLC
net liabilities
July 2, 2017
$ 11
11
345
$ 367
$ 3,189
$ (2,822)
July 3, 2016
$
21
60
283
$
364
$ 1,256
(892)
$
$ (1,439)
$
(455)
During fiscal 2018, we, along with our joint venture partner, intend to wind down and discontinue
operating the business of SAL LLC.
We have sales of component parts to VAST LLC and SAL LLC, purchases of component parts from
VAST LLC, expenses charged to VAST LLC for engineering and accounting services and expenses charged
from VAST LLC to STRATTEC for general headquarter expenses. The following tables summarize the related
party transactions with VAST LLC and SAL LLC for the periods indicated (thousands of dollars):
Sales to VAST LLC
Sales to SAL LLC
Purchases from VAST LLC
Expenses charged to VAST LLC
Expenses charged from VAST LLC
Accounts receivable from VAST LLC
Accounts receivable from SAL LLC (A)
Current loan receivable from SAL LLC (A)
Long-term loan receivable from VAST LLC
Accounts payable to VAST LLC
July 2, 2017
$ 1,966
$ 234
$ 245
$ 843
$ 1,134
July 2, 2017
-
$
-
$
$
-
$ 300
-
$
Years Ended
July 3, 2016
304
$
$
363
$ 149
$ 1,034
$ 1,526
July 3, 2016
$
$
$
$
$
55
450
325
400
213
June 28, 2015
$2,298
$ 157
$ 164
$ 832
$1,825
(A) As of July 2, 2017, outstanding loan and accounts receivable balances due from SAL LLC to STRATTEC totaled $2.6 million and $185,000,
respectively. As of July 2, 2017, these outstanding balances have been offset against our investment in SAL LLC, which is included in Other
Current Liabilities in the Consolidated Balance Sheet. As of July 3, 2016, a valuation allowance was established for the full amount of the
outstanding loan balance of $325,000 due from SAL LLC to STRATTEC.
CREDIT FACILITIES
STRATTEC has a $30 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 on August 1, 2020. Borrowings under either credit facility are secured by our
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U.S. cash balances, accounts receivable, inventory and fixed assets located in the U.S. Interest on
borrowings under both credit facilities is at varying rates based at our option, on the LIBOR plus 1.0
percent or the bank’s prime rate. Both credit facilities contain a restrictive financial covenant that
requires the applicable borrower to maintain a minimum net worth level. The ADAC-STRATTEC Credit
Facility includes an additional restrictive financial covenant that requires the maintenance of a minimum
fixed charge coverage ratio. The ADAC-STRATTEC Credit Facility also required that a capital
contribution to ADAC-STRATTEC LLC of $6 million collectively from STRATTEC and ADAC be
completed by September 30, 2016. This capital contribution was completed as required. STRATTEC’s
portion of the capital contribution totaled $3.06 million. As of July 2, 2017, we were in compliance with
all financial covenants required by these credit facilities.
Outstanding borrowings under the credit facilities referenced in the above paragraph as of the end
of 2017 and 2016 were as follows (thousands of dollars):
STRATTEC Credit Facility
ADAC-STRATTEC Credit Facility
July 2, 2017
$16,000
$14,000
July 3, 2016
$11,500
$ 8,500
Average outstanding borrowings and the weighted average interest rate under each such credit
facility during 2017 and 2016 were as follows (thousands of dollars):
Average Outstanding
Borrowings
Weighted Average
Interest Rate
Years Ended Years Ended
July 3, 2016
July 2, 2017
1.5%
STRATTEC Credit Facility
$12,490
1.3%
ADAC-STRATTEC Credit Facility $10,865
July 2, 2017
1.8%
1.8%
July 3, 2016
$7,608
$4,443
We believe that the credit facilities referenced above are adequate, along with existing cash balances
and cash flow from operations, to meet our anticipated capital expenditure, working capital, dividend and
operating expenditure requirements.
COMMITMENTS AND CONTINGENCIES
We are from time to time subject to various legal actions and claims incidental to our business,
including those arising out of alleged defects, alleged breaches of contracts, product warranties, intellectual
property matters and employment related matters. It is our opinion that the outcome of such matters will not
have a material adverse impact on the consolidated financial position, results of operations or cash flows of
STRATTEC. With respect to warranty matters, although we cannot ensure that the future costs of warranty
claims by customers will not be material, we believe our established reserves are adequate to cover potential
warranty settlements.
We have a reserve for estimated costs to remediate an environmental contamination site at our
Milwaukee facility. The site was contaminated by a solvent spill, which occurred in 1985, from a former
above ground solvent storage tank located on the east side of the facility. The reserve was initially
established in 1995. Due to changing technology and related costs associated with active remediation of the
site, in fiscal 2010 the reserve was adjusted based on updated third party estimates to adequately cover the
cost for active remediation of the contamination. Additionally, in fiscal 2016, STRATTEC obtained updated
third party estimates for adequately covering the cost of active remediation of this contamination. Based
upon the updated estimates, no further adjustment to the reserve was required. From 1995 through July 2,
2017, costs of approximately $567,000 have been incurred related to the installation of monitoring wells on
the property and ongoing monitoring costs. We monitor and evaluate the site with the use of groundwater
monitoring wells that are installed on the property. An environmental consultant samples these wells one or
two times a year to determine the status of the contamination and the potential for remediation of the
contamination by natural attenuation, the dissipation of the contamination over time to concentrations below
applicable standards. If such sampling evidences a sufficient degree of and trend toward natural attenuation
of the contamination, we may be able to obtain a closure letter from the regulatory authorities resolving the
issue without the need for active remediation. If a sufficient degree and trend toward natural attenuation is
not evidenced by sampling, a more active form of remediation beyond natural attenuation may be required.
The sampling has not yet satisfied all of the requirements for closure by natural attenuation. As a result,
sampling continues and the reserve remains at an amount to reflect the estimated cost of active remediation.
The reserve is not measured on a discounted basis. We believe, based on findings-to-date and known
environmental regulations, that the environmental reserve of $1.3 million at July 2, 2017, is adequate.
At July 2, 2017, we had purchase commitments related to the construction of a new ADAC-STRATTEC
de Mexico manufacturing facility in Leon, Mexico, which is expected to be used primarily to paint and
assemble door handle products, paint equipment to be installed and used at this new facility, zinc, other
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purchased parts and natural gas. We also had minimum rental commitments under non-cancelable operating
leases with a term in excess of one year. The purchase and minimum rental commitments are payable as
follows (thousands of dollars):
Fiscal Year
2018
2019
2020
2021
2022
Rental expense under all non-cancelable operating leases was as follows (thousands of dollars):
Fiscal Year
2017
2016
2015
Rental Expense
$ 704
$ 691
993
$
Minimum Rental
Commitments
$884
$606
$190
$ -
-
$
Purchase
Commitments
$17,413
$ 8,699
$ 3,897
-
$
-
$
INCOME TAXES
The provision for income taxes consisted of the following (thousands of dollars):
Currently payable:
Federal
State
Foreign
Deferred tax provision (benefit)
July 2, 2017
Years Ended
July 3, 2016
June 28, 2015
$ 228
3
2,202
2,433
1,851
$ 4,284
$
18
130
1,893
2,041
3,027
$5,068
$9,891
657
2,164
12,712
(3,330)
$9,382
The items accounting for the difference between income taxes computed at the Federal statutory
tax rate and the provision for income taxes were as follows:
U.S. statutory rate
State taxes, net of Federal tax benefit
Foreign subsidiaries
U.S. taxation on non-U.S. earnings
Research and development tax credit
Non-controlling interest
Other
July 2, 2017
35.0%
1.2
(1.1)
3.8
(2.7)
(9.9)
(0.2)
26.1%
Years Ended
July 3, 2016
34.0%
1.3
0.6
-
-
(9.3)
(0.2)
26.4%
June 28, 2015
34.7%
0.7
(1.3)
-
-
(4.1)
(2.4)
27.6%
The components of deferred tax assets were as follows (thousands of dollars):
July 2, 2017
July 3, 2016
Unrecognized pension and postretirement
benefit plan liabilities
Accrued warranty
Payroll-related accruals
Stock-based compensation
Inventory reserve
Environmental reserve
Repair and maintenance supply parts reserve
Allowance for doubtful accounts
NOL/credit carry-forwards
Postretirement obligations
Accumulated depreciation
Accrued pension obligations
Joint Ventures
Other
$11,191
925
2,605
1,488
1,249
484
333
185
1,669
(405)
(6,034)
(14,483)
808
241
256
$
$14,579
1,376
2,108
1,258
873
505
259
185
145
(227)
(6,135)
(13,197)
1,706
1,952
$ 5,387
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Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of
assets and liabilities and their tax basis and are stated at enacted tax rates expected to be in effect when taxes
are actually paid or recovered.
Federal foreign tax credit carry-forwards at July 2, 2017 resulted in future benefits of approximately $1.4
million and expire in 2027. State operating loss and credit carry-forwards at July 2, 2017 resulted in future benefits of
approximately $269,000 and expire at varying times between 2024 and 2031. A valuation allowance of $267,000 has
been recorded as of July 2, 2017, due to our assessment of the future realization of certain credit carry-forward
benefits. We do not currently anticipate having sufficient state taxable income to offset these credit carry-forwards.
Foreign income before the provision for income taxes was $5.3 million in 2017, $6.0 million in 2016 and $5.9
million in 2015. The income tax provision for 2017 included $424,000 related to the recognition of a deferred tax liability
resulting from a change in assertion regarding the permanent reinvestment of earnings from two of our Mexican
subsidiaries. Prior to 2017, the accumulated undistributed earnings from such subsidiaries were considered to be
permanently reinvested in Mexico. Accordingly, we did not previously record deferred income taxes on these earnings
in our financial statements. During 2017, the strength of the U.S. dollar to the Mexican peso significantly decreased the
U.S. tax cost associated with a distribution from the Mexican entities as compared to the U.S. tax cost associated with
such a distribution in prior periods. Consequently, we changed our assertion regarding the permanent reinvestment of
earnings from these Mexican subsidiaries. Such earnings are no longer considered permanently reinvested. We
repatriated $15.8 million from Mexico to the U.S. during 2017, recognized the deferred tax liability resulting from the
change in assertion, and concluded that, with some restrictions and tax implications, the remaining current and future
accumulated undistributed earnings of these subsidiaries will be available for repatriation as deemed necessary.
The total liability for unrecognized tax benefits was $610,000 as of July 2, 2017 and $471,000 as of July 3, 2016
and was included in Other Long-term Liabilities in the accompanying Consolidated Balance Sheets. This liability
includes approximately $571,000 of unrecognized tax benefits at July 2, 2017 and $441,000 at July 3, 2016 and
approximately $39,000 of accrued interest at July 2, 2017 and $30,000 at July 3, 2016. This liability does not include
an amount for accrued penalties. The amount of unrecognized tax benefits that, if recognized, would affect the
effective tax rate was approximately $143,000 at July 2, 2017 and $20,000 at July 3, 2016. We recognize interest and
penalties related to unrecognized tax benefits in the provision for income taxes.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows for the years
ended July 2, 2017 and July 3, 2016 (thousands of dollars):
Unrecognized tax benefits, beginning of year
Gross increases – tax positions in prior years
Gross decreases – tax positions in prior years
Gross increases – current period tax positions
Tax years closed
Unrecognized tax benefits, end of year
Years Ended
July 2, 2017
$ 441
28
-
177
(75)
$ 571
July 3, 2016
$ 437
-
(3)
71
(64)
$ 441
We or one of our subsidiaries files income tax returns in the United States (Federal), Wisconsin (state),
Michigan (state) and various other states, Mexico and other foreign jurisdictions. Tax years open to examination
by tax authorities under the statute of limitations include fiscal 2014 through 2017 for Federal, fiscal 2011
through 2017 for most states and calendar 2012 through 2016 for foreign jurisdictions.
RETIREMENT PLANS AND POSTRETIREMENT COSTS
We have a qualified, noncontributory defined benefit pension plan (“Qualified Pension Plan”) covering
substantially all U.S. associates employed by us before January 1, 2010. Benefits under the Qualified Pension Plan
are based on credited years of service and final average compensation. Our policy is to fund the Qualified Pension
Plan with at least the minimum actuarially computed annual contribution required under the Employee Retirement
Income Security Act of 1974 (ERISA). Plan assets consist primarily of listed equity and fixed income securities.
Effective December 31, 2009, the Board of Directors amended the Qualified Pension Plan to freeze benefit accruals
and future eligibility. The Board of Directors has approved the termination of the Qualified Pension Plan with a
proposed termination date of December 31, 2017. The termination of the Qualified Pension Plan is contingent upon
receipt of an IRS determination letter that the Qualified Pension Plan was qualified upon termination and approval by
the Pension Benefit Guaranty Corporation (“PBGC”). The date the termination will be approved and benefits can be
distributed will not be known until we receive all required regulatory approvals. We intend to submit our request to
the IRS for a determination letter that the Qualified Pension Plan is qualified upon termination prior to the end of the
2017 calendar year. Depending on the time receipt of IRS and PBGC approval, we intend to distribute Qualified
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Pension Plan assets prior to the end of the 2018 calendar year. Additionally, in connection with preparing for the
termination of the Qualified Pension Plan, we have amended the plan to provide that participants are 100
percent vested in their accrued benefits as of the effective date of the plan termination, to adopt a new standard
for disability benefits that will apply when the plan’s assets are distributed due to the termination, to add a lump
sum distribution for employees and terminated vested participants who are not in payment status when
Qualified Pension Plan assets are distributed due to the termination and to make certain other conforming
amendments to the Qualified Pension Plan to comply with applicable laws that may be required by the IRS or
may be deemed necessary or advisable to improve the administration of the Qualified Pension Plan or facilitate
its termination and liquidation. We will contribute to the Trust Fund for the Qualified Pension Plan as necessary
to ensure there are sufficient assets to provide all Qualified Pension Plan benefits as required by the PBGC. The
financial impact of the Qualified Pension Plan termination will be recognized as a settlement of the Qualified
Pension Plan liabilities. The settlement date and related financial impact have not yet been determined.
We have historically had in place a noncontributory supplemental executive retirement plan (“SERP”),
which prior to January 1, 2014 was a nonqualified defined benefit plan that essentially mirrored the Qualified
Pension Plan, but provided benefits in excess of certain limits placed on our Qualified Pension Plan by the
Internal Revenue Code. As noted above, we froze our Qualified Pension Plan effective as of December 31,
2009 and the SERP provided benefits to participants as if the Qualified Pension Plan had not been frozen.
Because the Qualified Pension Plan was frozen and because new employees were not eligible to participate in
the Qualified Pension Plan, our Board of Directors adopted amendments to the SERP on October 8, 2013 that
were effective as of December 31, 2013 to simplify the SERP calculation. The SERP is funded through a Rabbi
Trust with BMO Harris Bank N.A. Under the amended SERP, participants received an accrued lump-sum
benefit as of December 31, 2013 which was credited to each participant’s account. Subsequent to December
31, 2013, each eligible participant receives a supplemental retirement benefit equal to the foregoing lump sum
benefit, plus an annual benefit accrual equal to 8 percent of the participant’s base salary and cash bonus, plus
annual credited interest on the participant’s account balance. All then current participants as of December 31,
2013 are fully vested in their account balances with any new individuals participating in the SERP effective on
or after January 1, 2014 being subject to a five year vesting period. The SERP, which is considered a defined
benefit plan under applicable rules and regulations of the Internal Revenue Code, will continue to be funded
through use of a Rabbi Trust to hold investment assets to be used in part to fund any future required lump sum
benefit payments to participants. The Rabbi Trust assets had a value of $2.6 million at July 2, 2017 and $2.3
million at July 3, 2016, and are included in Other Long-Term Assets in the accompanying Consolidated Balance
Sheets. The projected benefit obligation under the amended SERP was $1.8 million at both July 2, 2017 and
July 3, 2016. The SERP liabilities are included in the pension tables below. However, the Rabbi Trust assets are
excluded from the tables as they do not qualify as plan assets.
We also sponsor a postretirement health care plan for all U.S. associates hired prior to June 1, 2001. The
expected cost of retiree health care benefits is recognized during the years the associates who are covered
under the plan render service. Effective January 1, 2010, an amendment to the postretirement health care plan
limited the benefit for future eligible retirees to $4,000 per plan year and the benefit is further subject to a
maximum five year coverage period based on the associate’s retirement date and age. The postretirement
health care plan is unfunded.
Amounts included in accumulated other comprehensive loss, net of tax, at July 2, 2017, which have not
yet been recognized in net periodic benefit cost were as follows (thousands of dollars):
Prior service cost (credit)
Net actuarial loss
Pension and SERP
$
7
17,279
$ 17,286
Postretirement
$
(768)
2,232
$ 1,464
Prior service cost (credit) and unrecognized net actuarial losses included in accumulated other
comprehensive loss at July 2, 2017 which are expected to be recognized in net periodic benefit cost
(credit) in fiscal 2018, net of tax, for the pension, SERP and postretirement plans are as follows (thousands
of dollars):
Prior service cost (credit)
Net actuarial loss
Pension and SERP
7
$
1,282
$ 1,289
Postretirement
(481)
$
302
(179)
$
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The following tables summarize the pension, SERP and postretirement plans’ income and expense, funded
status and actuarial assumptions for the years indicated (thousands of dollars). We use a June 30 measurement
date for our pension and postretirement plans.
Pension and SERP Benefits
Years Ended
July 3, June 28,
2016
July 2,
2017
2015
Postretirement Benefits
Years Ended
July 3, June 28,
2015
2016
July 2,
2017
COMPONENTS OF NET PERIODIC
BENEFIT COST (CREDIT):
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost (credit)
Amortization of unrecognized net loss
Net periodic benefit cost (credit)
3,926
(5,854)
11
$ 54 $ 50 $ 64
4,173
4,387
(6,174)
(5,509)
11
11
3,228 2,443 2,775
$1,365 $1,382 $ 849
$
13 $ 12 $
55
-
(764)
14
114
-
(764)
538 616 693
57
$ (158) $
87
-
(764)
(49) $
Pension and SERP Benefits
2017
2016
Postretirement Benefits
2016
2017
WEIGHTED-AVERAGE ASSUMPTIONS:
Benefit Obligations:
Discount rate
Rate of compensation increases - SERP
Net Periodic Benefit Cost:
Discount rate
Expected return on plan assets
Rate of compensation increases - SERP
3.91%
3.0%
3.79%
5.45%
3.0%
CHANGE IN PROJECTED
BENEFIT OBLIGATION:
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Benefit obligation at end of year
$106,152
54
3,926
(4,342)
(4,524)
$101,266
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $104,460
7,574
5,014
(4,524)
$112,524
Actual return on plan assets
Employer contribution
Benefits paid
Fair value of plan assets at end of year
Funded status–prepaid (accrued)
3.79%
3.0%
4.53%
5.45%
3.0%
$ 99,329
50
4,387
6,783
(4,397)
$106,152
$105,472
371
3,014
(4,397)
$104,460
3.91%
n/a
3.79%
n/a
n/a
3.79%
n/a
4.53%
n/a
n/a
$ 1,602
13
55
(80)
(322)
$ 1,268
$
-
-
322
(322)
$ -
$ 2,179
12
87
(281)
(395)
$ 1,602
$
-
-
395
(395)
$ -
benefit obligations
$ 11,258
$ (1,692)
$ (1,268)
$ (1,602)
AMOUNTS RECOGNIZED IN
CONSOLIDATED BALANCE SHEETS:
Other long-term assets
Accrued payroll and benefits
(current liabilities)
Accrued benefit obligations
(long-term liabilities)
Net amount recognized
$ 13,082
$
72
$
-
$
-
(332)
(299)
(265)
(340)
(1,492)
$ 11,258
(1,465)
$ (1,692)
(1,003)
$ (1,268)
(1,262)
$ (1,602)
CHANGES IN PLAN ASSETS AND
BENEFIT OBLIGATIONS RECOGNIZED
IN OTHER COMPREHENSIVE INCOME:
Net periodic benefit cost (credit)
Net actuarial (gain) loss
Amortization of prior service (cost) credits
Amortization of unrecognized net loss
Total recognized in other comprehensive
(income) loss, before tax
Total recognized in net periodic benefit
cost and other comprehensive (income)
loss, before tax
$ 1,365
(6,063)
(11)
(3,228)
$ 1,382
11,921
(11)
(2,443)
$ (158)
(80)
764
(538)
$ (49)
(281)
764
(616)
(9,302)
9,467
146
(133)
$ (7,937)
$ 10,849
$
(12)
$
(182)
N O T E S T O F I N A N C I A L S TAT E M E N T S
The pension benefits have a separately determined accumulated benefit obligation, which is the
actuarial present value of benefits based on service rendered and current and past compensation levels.
This differs from the projected benefit obligation in that it includes no assumptions about future
compensation levels. The following table summarizes the accumulated benefit obligations and projected
benefit obligations for the pension and SERP (thousands of dollars):
Accumulated benefit obligation
Projected benefit obligation
Pension
SERP
July 2, 2017
$99,442
$99,442
July 3, 2016
$104,388
$104,388
July 2, 2017
$1,591
$1,824
July 3, 2016
$1,435
$1,764
For measurement purposes as it pertains to the estimated obligation associated with retirees prior to January 1,
2012, a 7.2 percent annual rate increase in the per capita cost of covered health care benefits was assumed for fiscal
2018; the rate was assumed to decrease gradually to 4.5 percent by the year 2025 and remain at that level thereafter.
The health care cost trend assumption has a minimal effect on our postretirement benefit amounts reported. A
1% change in the health care cost trend rates would have the following effects (thousands of dollars):
Effect on total of service and interest cost components in fiscal 2017
Effect on postretirement benefit obligation as of July 2, 2017
1% Increase
$ -
$ 7
1% Decrease
$ -
$ (7)
We employ a total return investment approach whereby a mix of equities and fixed income investments
are used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is
established through careful consideration of short and long-term plan liabilities, plan funded status and
corporate financial condition. The investment portfolio primarily contains a diversified blend of equity and fixed
income investments. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks, as well
as growth and value style managers, and small, mid and large market capitalizations. The investment portfolio
does not include any real estate holdings. The investment policy of the plan prohibits investment in STRATTEC
stock. Investment risk is measured and monitored on an ongoing basis through periodic investment portfolio
reviews, annual liability measurements and periodic asset/liability studies. The pension plan weighted-average
asset allocations by asset category were as follows for 2017 and 2016:
Equity investments
Fixed-income investments
Cash
Total
Target Allocation
35%
30
35
100%
July 2, 2017
38%
56
6
100%
July 3, 2016
38%
27
35
100%
The following is a summary, by asset category, of the fair value of pension plan assets at the June 30,
2017 and June 30, 2016 measurement dates (thousands of dollars):
June 30, 2017
Level 1
Level 2 Level 3
$ - $ 7,233 $
Asset Category
Cash and cash equivalents
Equity securities/funds:
Total
June 30, 2016
Level 1 Level 2
Level 3
Total
- $ 36,706
- $ 7,233 $ - $36,706 $
Small cap
Mid cap
Large cap
International
Fixed income:
1,008
12,414
19,961
8,941
-
-
-
-
- 1,008
- 12,414
- 19,961
- 8,941
1,714
12,341
18,678
7,132
-
-
-
-
- 1,714
- 12,341
- 18,678
- 7,132
Bond funds/bonds
Total
5,718 57,249 - 62,967 4,837 23,052 - 27,889
- $112,524 $ 44,702 $59,758 $ - $104,460
$ 48,042 $64,482 $
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There were no transfers in or out of Level 3 investments during the measurement year ended
June 30, 2017.
The expected long-term rate of return on U.S. pension plan assets used to calculate net periodic
benefit cost was 5.45 percent for 2018 and 2017. The target asset allocation is 35 percent public
equity and 65 percent fixed income/cash. The 5.45 percent is approximated by applying returns of 10
percent on public equity and 3 percent on fixed income/cash to the target allocation. The actual
historical returns are also relevant. Annualized returns for periods ended June 30, 2017 were 5.22
percent for 5 years, 3.71 percent for 10 years, 4.83 percent for 15 years, 4.96 percent for 20 years,
5.90 percent for 25 years and 6.33 percent for 30 years.
We expect to contribute approximately $3.0 million to our qualified pension plan, $333,000 to our
SERP and $265,000 to our postretirement health care plan in fiscal 2018. The following benefit
payments, which reflect expected future service, as appropriate, are expected to be paid during the
fiscal years noted below (thousands of dollars):
2018
2019
2020
2021
2022
2023-2027
Pension and SERP Benefits
$ 5,308
$ 5,304
$ 5,668
$ 6,239
$ 6,257
$29,998
Postretirement Benefits
$ 265
$ 217
$ 164
$ 146
$ 132
$ 315
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N O T E S T O F I N A N C I A L S TAT E M E N T S
All U.S. associates may participate in our 401(k) Plan. We contribute 100 percent up to the first 5 percent of eligible
compensation that a participant contributes to the plan. Our contributions to the 401(k) Plan were as follows (thousands of dollars):
Company contributions
SHAREHOLDERS’ EQUITY
July 2, 2017
$ 1,805
Years Ended
July 3, 2016
$ 1,783
June 28, 2015
$ 1,729
We have 12,000,000 shares of authorized common stock, par value $.01 per share, with 3,596,616 and 3,565,857
shares outstanding at July 2, 2017 and July 3, 2016, respectively. Holders of our common stock are entitled to one vote
for each share on all matters voted on by shareholders.
Our Board of Directors authorized a stock repurchase program to buy back up to 3,839,395 outstanding shares of
our common stock as of July 2, 2017. As of July 2, 2017, 3,655,322 shares have been repurchased under this program
at a cost of approximately $136.4 million. No shares were repurchased under this program during 2017 or 2016.
EARNINGS PER SHARE (“EPS”)
Basic earnings per share is computed on the basis of the weighted average number of shares of
common stock outstanding during the applicable period. Diluted earnings per share is computed on the
basis of the weighted average number of shares of common stock plus the potential dilutive common shares
outstanding during the applicable period using the treasury stock method. Potential dilutive common shares
include outstanding stock options and unvested restricted stock awards. A reconciliation of the components
of the basic and diluted per share computations follows (in thousands, except per share amounts):
Net income attributable to STRATTEC
Less: Income attributable to participating securities
Net income attributable to common shareholders
Weighted average shares of common stock outstanding
Incremental shares – stock based compensation
Diluted weighted average shares of common stock outstanding
Basic earnings per share
Diluted earnings per share
July 2, 2017
$ 7,197
1
$ 7,196
Years Ended
July 3, 2016
$ 9,149
58
$ 9,091
June 28, 2015
$20,654
258
$20,396
3,588
82
3,670
$ 2.01
$ 1.96
3,559
62
3,621
$
$
2.55
2.51
3,515
89
3,604
$
$
5.80
5.66
We consider unvested restricted stock that provides the holder with a non-forfeitable right to receive dividends
to be a participating security.
Options to purchase shares of common stock that were excluded from the calculation of diluted earnings per
share because their inclusion would have been antidilutive were as follows:
Years Ended
July 2, 2017
July 3, 2016
June 28, 2015
Number of Options Excluded
9,010
9,010
10,000
STOCK OPTION AND PURCHASE PLANS
A summary of stock option activity under our stock incentive plan was as follows:
Balance at June 29, 2014
Granted
Exercised
Terminated
Balance at June 28, 2015
Exercised
Terminated
Balance at July 3, 2016
Exercised
Balance at July 2, 2017
Exercisable as of:
July 2, 2017
July 3, 2016
June 28, 2015
Shares
185,242
10,000
(22,746)
(8,589)
163,907
(16,909)
(2,000)
144,998
(6,490)
138,508
129,498
103,798
91,103
Weighted
Average
Exercise Price
Weighted Average
Remaining
Contractual Term (in years)
Aggregate
Intrinsic Value
(in thousands)
$24.73
$79.73
$20.83
$37.43
$27.97
$21.55
$17.59
$28.86
$20.96
$29.23
$25.71
$21.39
$19.86
4.4
4.2
4.6
4.1
$1,361
$1,361
$ 2,174
$4,592
Options granted at a price greater than the market value on the date of grant included in the table above were as follows:
Shares
Exercise price
2015
10,000
$79.73
No options were granted during either fiscal 2017 or 2016.
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A summary of restricted stock activity under our stock incentive plan was as follows:
Nonvested Balance at June 29, 2014
Granted
Vested
Forfeited
Nonvested Balance at June 28, 2015
Granted
Vested
Forfeited
Nonvested Balance at July 3, 2016
Granted
Vested
Forfeited
Nonvested Balance at July 2, 2017
Shares
63,600
25,000
(18,100)
(4,150)
66,350
28,750
(20,300)
(3,050)
71,750
27,150
(21,250)
(1,800)
75,850
Weighted Average
Grant Date Fair Value
$28.64
$70.90
$23.02
$45.71
$45.03
$69.02
$23.69
$59.92
$60.05
$43.87
$37.53
$58.24
$60.61
We have an Employee Stock Purchase Plan to provide substantially all U.S. full-time associates an opportunity
to purchase shares of STRATTEC common stock through payroll deductions. A participant may contribute a
maximum of $5,200 per calendar year to the plan. On the last day of each month or if such date is not a trading day
on the most recent previous trading day, participant account balances are used to purchase shares of our common
stock at the average of the highest and lowest reported sales prices of a share of STRATTEC common stock on the
NASDAQ Global Market on such date. A total of 100,000 shares may be issued under the plan. Shares issued from
treasury stock under the plan totaled 3,019 at an average price of $34.88 during 2017, 1,948 at an average price of
$55.77 during 2016 and 1,038 at an average price of $76.06 during 2015. A total of 64,165 shares remain available
for purchase under the plan as of July 2, 2017.
EXPORT SALES
Total export sales, sales from the United States to locations outside of the United States, are
summarized as follows (thousands of dollars and percent of total net sales):
Export sales
July 2, 2017
Years Ended
July 3, 2016
Net Sales
$160,275
%
38%
Net Sales
$152,728
%
38%
June 28, 2015
Net Sales
$141,584
%
34%
Countries for which customer sales account for ten percent or more of total net sales are summarized as
follows (thousands of dollars and percent of total net sales):
July 2, 2017
Years Ended
July 3, 2016
Net Sales
$ 73,481
%
18%
Net Sales
$ 74,310
%
19%
June 28, 2015
Net Sales
$ 60,987
%
15%
Export sales into Canada
PRODUCT SALES
Sales by product group were as follows (thousands of dollars and percent of total net sales):
Keys & locksets
Power access
Door handles & exterior trim
Driver controls
Aftermarket & OE service
Latches
Other
July 2, 2017
Net Sales
$114,938
84,457
67,722
56,983
47,216
35,307
10,702
$417,325
%
28%
20
16
14
11
8
3
100%
Years Ended
July 3, 2016
Net Sales
$113,765
83,747
61,376
55,955
48,200
28,023
10,353
$401,419
%
28%
21
15
14
12
7
3
100%
June 28, 2015
Net Sales
$114,287
68,078
60,864
57,894
78,717
24,320
7,315
$411,475
%
28%
16
15
14
19
6
2
100%
SALES AND RECEIVABLE CONCENTRATION
Sales to our largest customers were as follows (thousands of dollars and percent of total net sales):
Fiat Chrysler Automobiles
General Motors Company
Ford Motor Company
July 2, 2017
Net Sales
$100,575
88,624
62,314
$251,513
%
24%
21
15
60%
Years Ended
July 3, 2016
Net Sales
$115,858
79,893
57,317
$253,068
%
29%
20
14
63%
June 28, 2015
Net Sales
$116,914
105,809
45,415
$268,138
%
28%
26
11
65%
Receivables from our largest customers were as follows (thousands of dollars and percent of gross receivables):
Fiat Chrysler Automobiles
General Motors Company
Ford Motor Company
July 2, 2017 July 3, 2016
Receivables
$ 17,107
13,395
8,644
$ 39,146
%
26%
21
13
60%
Receivables %
28%
$ 18,103
21
13,090
11
6,863
60%
$ 38,056
R E P O R T S
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R E P O R T O N M A N A G E M E N T ’ S A S S E S S M E N T O F I N T E R N A L
C O N T R O L O V E R F I N A N C I A L R E P O R T I N G
STRATTEC SECURITY CORPORATION is responsible for the preparation, integrity, and
fair presentation of the consolidated financial statements included in this annual report. The
consolidated financial statements and notes included in this annual report have been
prepared in conformity with accounting principles generally accepted in the United States of
America and necessarily include some amounts that are based on management’s best
estimates and judgments.
We, as management of STRATTEC SECURITY CORPORATION, are responsible for
establishing and maintaining effective internal control over financial reporting that is
designed to produce reliable financial statements in conformity with United States generally
accepted accounting principles. The system of internal control over financial reporting as it
relates to the financial statements is evaluated for effectiveness by management and tested
for reliability through a program of internal audits. Actions are taken to correct potential
deficiencies as they are identified. Any system of internal control, no matter how well
designed, has inherent limitations, including the possibility that a control can be
circumvented or overridden and misstatements due to error or fraud may occur and not be
detected. Also, because of changes in conditions, internal control effectiveness may vary
over time. Accordingly, even an effective system of internal control will provide only
reasonable assurance with respect to financial statement preparation.
The Audit Committee of the Company’s Board of Directors, consisting entirely of
independent directors, meets regularly with management and the independent registered
public accounting firm, and reviews audit plans and results, as well as management’s
actions taken in discharging responsibilities for accounting, financial reporting, and internal
control. Deloitte & Touche LLP, independent registered public accounting firm, has direct
and confidential access to the Audit Committee at all times to discuss the results of their
examinations.
Management assessed the Corporation’s system of internal control over financial
reporting as of July 2, 2017, in relation to criteria for effective internal control over financial
reporting as described in Internal Control – Integrated Framework (2013), issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on
the assessment, management concluded that, as of July 2, 2017, its system of internal
control over financial reporting was effective and met the criteria of the Internal Control –
Integrated Framework. Deloitte & Touche LLP, independent registered public accounting
firm, has issued an attestation report on the Corporation’s internal control over financial
reporting, which is included herein.
Frank J. Krejci
President and
Chief Executive Officer
Patrick J. Hansen
Senior Vice President and
Chief Financial Officer
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R E P O R T O F I N D E P E N D E N T R E G I S T E R E D P U B L I C
A C C O U N T I N G F I R M
To the Board of Directors and Shareholders of STRATTEC SECURITY CORPORATION:
We have audited the internal control over financial reporting of STRATTEC SECURITY
CORPORATION and subsidiaries (the “Company”) as of July 2, 2017, based on criteria
established in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company’s management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Report on Management’s Assessment of Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under
the supervision of, the company’s principal executive and principal financial officers, or
persons performing similar functions, and effected by the company’s board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of July 2, 2017, based on the criteria established in
Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial statements as of and
for the year ended July 2, 2017 of the Company and our report dated September 7, 2017
expressed an unqualified opinion on those consolidated financial statements.
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Deloitte & Touche LLP
Milwaukee, Wisconsin
September 7, 2017
R E P O R T S
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R E P O R T O F I N D E P E N D E N T R E G I S T E R E D
P U B L I C A C C O U N T I N G F I R M
To the Board of Directors and Shareholders of STRATTEC SECURITY CORPORATION:
We have audited the accompanying consolidated balance sheets of STRATTEC
SECURITY CORPORATION and subsidiaries (the “Company”) as of July 2, 2017 and July
3, 2016, and the related consolidated statements of income and comprehensive income,
shareholders’ equity, and cash flows for each of the three years in the period ended July 2,
2017. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of STRATTEC SECURITY CORPORATION and subsidiaries
as of July 2, 2017 and July 3, 2016, and the results of their operations and their cash flows
for the three years in the period ended July 2, 2017, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company’s internal control over financial
reporting as of July 2, 2017, based on the criteria established in Internal Control —
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated September 7, 2017 expressed an unqualified
opinion on the Company’s internal control over financial reporting.
Deloitte & Touche LLP
Milwaukee, Wisconsin
September 7, 2017
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F I N A N C I A L S U M M A RY
FIVE-YEAR FINANCIAL SUMMARY
The financial data for each period presented below reflects the consolidated results of STRATTEC
SECURITY CORPORATION, its wholly owned Mexican subsidiary and its majority owned subsidiaries.
Fiscal years 2013 through 2015 have been retrospectively adjusted for the adoption of an update to an
accounting standard issued by the FASB which simplifies the presentation of deferred taxes in a classified
statement of financial position by requiring that deferred tax assets and liabilities be classified as non-
current. The information below should be read in conjunction with “Management’s Discussion and
Analysis,” and the Financial Statements and Notes thereto included elsewhere herein. The following
data are in thousands of dollars except per share amounts.
Fiscal Years
2017
2016
2015
2014
2013
$417,325
60,162
$401,419
64,825
$411,475
72,660
$348,419
65,798
$298,179
53,866
INCOME STATEMENT DATA
Net sales
Gross profit
Engineering, selling and
administrative expenses
46,460
43,917
41,534
39,274
34,934
Loss on settlement of
pension obligation
Income from operations
Interest income
Equity earnings (loss)
of joint ventures
Interest expense
Other income, net
Income before taxes and
non-controlling interest
Provision for income taxes
Net income
Net income attributable to
non-controlling interest
Net income attributable to
-
-
-
-
2,144
13,702
136
20,908
25
31,126
185
26,524
106
16,788
21
666
(417)
2,307
16,394
4,284
12,110
(2,235)
(176)
668
19,190
5,068
14,122
(788)
(71)
3,481
33,933
9,382
24,551
957
(45)
272
27,814
8,674
19,140
(225)
(34)
329
16,879
5,366
11,513
4,913
4,973
3,897
2,716
2,138
STRATTEC SECURITY CORPORATION
$ 7,197
$ 9,149
$ 20,654
$ 16,424
$ 9,375
Earnings per share
attributable to STRATTEC
SECURITY CORPORATION:
Basic
Diluted
Cash dividends declared
per share
BALANCE SHEET DATA
Net working capital
Total assets
Long-term liabilities
Total STRATTEC SECURITY
CORPORATION
Shareholders’ equity
$
$
2.01
1.96
$
$
2.55
2.51
$
0.56
$
0.52
$
$
$
5.80
5.66
$
$
4.70
4.59
0.48
$
0.44
$
$
$
2.77
2.72
0.40
$ 61,110
$273,714
$ 33,105
$ 70,236
$242,176
$ 23,449
$ 63,871
$230,834
$ 13,698
$ 64,705
$207,909
$ 7,743
$ 51,507
$168,491
$ 5,886
$151,088
$139,332
$140,312
$125,506
$104,218
F I N A N C I A L S U M M A RY
QUARTERLY FINANCIAL DATA (UNAUDITED)
The following data are in thousands of dollars except per share amounts.
2017
2016
Quarter
Net Sales Gross Profit
First
Second
Third
Fourth
TOTAL
$100,244
98,945
109,706
108,430
$417,325
First
Second
Third
Fourth(1)
TOTAL
$ 96,513
102,511
94,048
108,347
$401,419
$14,605
13,495
17,403
14,659
$60,162
$16,499
18,610
14,521
15,195
$64,825
Net Income
Attributable to
STRATTEC
Earnings
Per Share
Basic
Diluted
Cash
Dividends
Declared
Per Share
Market Price Per Share
High
Low
$ 1,542
398
3,482
1,775
$ 7,197
$ 3,273
3,403
1,889
584
$ 9,149
$ 0.43
0.11
0.97
0.49
$ 2.01
$ 0.92
0.95
0.53
0.16
$2.55
$ 0.42
0.11
0.95
0.48
$ 1.96
$ 0.90
0.93
0.52
0.16
$2.51
$ 48.86
$ 44.00
$ 44.43
$ 39.10
$34.76
$31.05
$25.65
$23.00
$ 78.79
$ 71.61
$ 60.00
$ 60.38
$60.19
$55.17
$44.62
$39.38
$0.14
0.14
0.14
0.14
$0.56
$0.13
0.13
0.13
0.13
$0.52
(1)
Our 2016 fiscal fourth quarter was impacted by approximately $2.0 million of equity loss of joint ventures
resulting from a $6 million impairment charge recognized by VAST LLC related to its Minda-VAST Access
Systems joint venture in India. STRATTEC’s portion of this impairment charge totaled $2 million.
Registered shareholders of record at July 2, 2017, were 1,227.
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P E R F O R M A N C E G R A P H
The chart below shows a comparison of the cumulative return since July 1, 2012 had
$100 been invested at the close of business on July 1, 2012 in STRATTEC Common Stock,
the NASDAQ Composite Index (all issuers), and the Dow Jones U.S. Auto Parts Index.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN*
Among STRATTEC SECURITY CORPORATION, The NASDAQ Composite Index
and The Dow Jones U.S. Auto Parts Index
7/1/12
6/30/13
6/29/14 6/28/15
7/3/16
7/2/17
STRATTEC SECURITY CORPORATION** 100.00
180.67
322.17
344.73
209.64
178.10
NASDAQ Composite Index
100.00
117.69
155.50
177.19
173.36
221.11
Dow Jones U.S. Auto Parts Index
100.00
143.45
194.98
210.20
183.15
225.95
* $100 invested on 7/1/12 in stock or in index, including reinvestment of dividends. Indexes calculated on a month-end basis.
**The Friday fiscal year end closing price (i.e. the last trading day prior to our fiscal year end) of STRATTEC Common Stock on
June 29, 2012 was $21.04, the closing price on June 28, 2013 was $37.36, the closing price on June 27, 2014 was $66.06, the
closing price on June 26, 2015 was $70.26, the closing price on July 1, 2016 was $42.33 and the closing price on June 30, 2017
was $35.40.
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D I R E C T O R S / O F F I C E R S
S H A R E H O L D E R S ’ I N F O R M AT I O N
STRATTEC Board of Directors: (Left to Right)
Frank J. Krejci, Thomas W. Florsheim, Jr., Michael J.
Koss, David R. Zimmer, Harold M. Stratton II
S H A R E H O L D E R S ’
I N F O R M AT I O N
Annual Meeting
The Annual Meeting of Shareholders will
convene at 8:00 a.m. (CDT)
on October 10, 2017, at the
Holiday Inn Milwaukee Riverfront,
4700 North Port Washington Road,
Milwaukee, WI 53212
Common Stock
STRATTEC SECURITY CORPORATION
common stock is traded on the NASDAQ
Global Market under the symbol: STRT.
Form 10-K
You may receive a copy of the
STRATTEC SECURITY CORPORATION
Form 10-K, filed with the Securities and
Exchange Commission, by writing to the
Secretary at STRATTEC SECURITY
CORPORATION, 3333 West Good Hope
Road, Milwaukee, WI 53209.
Corporate Governance
To review the Company’s corporate
governance, board committee charters
and code of business ethics, please visit
the “Corporate Governance” section of
our website at www.strattec.com.
Shareholder Inquiries
Communications concerning the transfer
of shares, lost certificates or changes of
address should be directed to the
Transfer Agent.
Transfer Agent and Registrar
Wells Fargo Bank, N.A.
Shareholder Services
1110 Centre Pointe Curve
Suite 101
Mendota Heights, MN 55120-4100
1-800-468-9716
STRATTEC Corporate Officers: (Left to Right)
Richard P. Messina, Patrick J. Hansen, Brian J. Reetz,
Frank J. Krejci, Al-Waleed H. Hamdan,
Rolando J. Guillot
B O A R D O F D I R E C T O R S
Harold M. Stratton II, 69
Chairman of the Board
Frank J. Krejci, 67
President and Chief Executive Officer
Thomas W. Florsheim, Jr., 59
Chairman and Chief Executive Officer of
Weyco Group, Inc.
Director of Weyco Group, Inc.
Michael J. Koss, 63
Chairman, President and
Chief Executive Officer of Koss Corporation
Director of Koss Corporation
David R. Zimmer, 71
Retired Managing Partner of
Stonebridge Business Partners
C O R P O R AT E O F F I C E R S
Frank J. Krejci, 67
Patrick J. Hansen, 58
Senior Vice President-Chief Financial Officer,
Treasurer and Secretary
Rolando J. Guillot, 49
Senior Vice President-Operations
Brian J. Reetz, 59
Vice President-Security Products
Richard P. Messina, 51
Vice President-Global Sales and
Access Products
Al-Waleed H. Hamdan, 49
Vice President-Product Management
S T R A T T E C S E C U R I T Y C O R P O R A T I O N
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