2 0 1 8 A n n u a l R e p o r t
T H E P OW E R O F I N N OVAT I O N
THE POWER OF INNOVATION
NEW “Invis-A-Rise” Design —
Power Liftgate with No Visible
Tailgate Struts
Former Design —
Tailgate Struts are Visible
The INVIS-A-RISE Award-Winning Power Liftgate
elegant appearance, with a smooth
and quiet operation for opening and
closing at the touch of a button.
Lastly, by design, it reduces the
chance of malfunction due to ice,
water or debris.
INSPIRATION
Through inspiration, many new
concepts are born. With all of the
dreaming and design effort around the
concept of autonomous cars,
STRATTEC engineers are creating
exciting products for vehicle access.
We expect to have an impact on the
future of the automobile industry by
developing new and improved ways
to automatically open and close
access points on the vehicle.
PARTNERSHIP / COLLABORATION
It is critical that our engineering teams
understand customer requirements
and develop a system that works with
the customer designs. This requires
an atmosphere of teamwork and
cooperation with our customers. As
inventive ideas are nurtured, the
engineering teams investigate multiple
concepts before pursuing the most
robust design for cost, quality and
ease of manufacture.
ANOTHER BREAKTHROUGH
Winning the prestigious PACE Award
is not enough. STRATTEC is on the go
by also bringing to market the first-
ever Power Open / Power Close
Pick-Up Truck Tailgate system on the
all-new Chevrolet Silverado. It
provides the same great convenience
feature on a pick-up truck tailgate that
consumers are now accustomed to on
vehicle liftgate systems. STRATTEC is
excited to provide leadership in the
industry by adding another innovative
design to our product portfolio of
power closure systems.
A HISTORY OF INNOVATION
First to market, 20 years ago with the
Power Sliding Door, the STRATTEC
engineering team has continued to
stay on the cutting edge of
technology development. Our
capabilities have been demonstrated
by two different customers
choosing us to bring to market both
the Invis-A-Rise™ Power Liftgate and
the all new Invis-A-Rise™ Power
Tailgate for pick-up trucks. We are
very proud of our team members’
talent and creativity which has kept
us on the forefront of power access
in the automotive industry.
STRATTEC is very proud to have been
honored with receiving the prestigious
PACE Award. PACE is an acronym for
Premier Automotive Suppliers’
Contribution to Excellence Award. The
Award is recognized throughout the
automotive industry as the “Academy
Award for Innovation”. Our STRATTEC
team won the award for its unique
design of the Invis-A-Rise™ Power
Liftgate System, currently featured on
the Honda Odyssey. What makes the
award more satisfying is that it
required very close collaboration and
partnership with Honda – an
atmosphere of trust in us to
incorporate appropriate vehicle
modifications.
MARKET IMPACT
How is the Invis-A-Rise™ different? It
eliminates the need for visible struts
connecting the liftgate to the vehicle
body. The most practical benefit for
the ultimate consumer is maximized
rear opening to load and unload
cargo. In addition, it has a clean and
2 0 1 8 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 Automotive Group” 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 32
REPORT OF MANAGEMENT
58
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 59
FINANCIAL SUMMARY
PERFORMANCE GRAPH
61
63
DIRECTORS / OFFICERS / SHAREHOLDERS’ INFORMATION 64
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’ recall policies, foreign currency fluctuations, fluctuations in costs of operations
(including fluctuations in the cost of raw materials), the volume and scope of product returns and warranty
claims, uncertainties stemming from U.S. trade policies, tariffs and reactions to same from foreign
countries 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,
We made progress on many fronts this year.
Thanks to all of our Associates for their efforts. Over the past two years, we have
been challenged to deliver on two to three times the number of product launches than is
typical for STRATTEC. I wish that I could say that everything went flawlessly, but that is not
the case. We incurred some added costs as we ramped up manufacturing and incurred
premium freight in order to properly serve our customers. For this coming year, as we
digest the new business, there is opportunity for us to improve our efficiencies at the same
time as we add the impact of more sales.
While the new tax law certainly benefitted our bottom line for one half of our fiscal
year, we still would have shown significant progress without it. With the encouragement of
our Board of Directors, we were pleased to share some of the tax law benefits with our
Associates in recognition of their efforts and the progress we made this past year.
I N N O VAT I O N
Despite the short term challenges of delivering on our commitments, we continue to
maintain a focus on innovation for the future, thus keeping a pipeline of opportunity
ahead of us.
We are very proud of being a winner of the very prestigious PACE Award and for being
featured on the front page of the April 16 edition of Automotive News Magazine for our
Invis-A-Rise power tailgate system (see inside cover for a description of benefits). We
competed against many companies, many much larger than STRATTEC.
In addition to creating an innovative concept, it took the cooperation of the engineers at
Honda to make modifications to their Odyssey vehicle and put it in production to make us
eligible for the award. While there was a dedicated group of people involved, it was an
opportunity for the entire company to celebrate and take pride in our collective
accomplishments.
We also drew much attention by introducing a power end gate on the Chevrolet
Silverado pick-up truck at the Detroit Auto Show in January 2018. This product allows the
consumer to both lower and raise the gate on the back of their pick-up truck automatically.
This is a new product in a market segment with very significant growth potential, with
production beginning this fiscal year.
We continue to see many opportunities in offering more power assisted products.
Convenience continues to be an increasing expectation. It also appears that power doors
which automatically open and close will play an important role in the longer term
development of autonomous vehicles.
O P E R AT I O N S
With the unusually high number of program launches recently, it stretched our
organization to deliver product launches on a timely basis. We are now in the phase of
moving from a time when we spent significant money and effort on developing products for
new business to a time where those new projects will evolve into sales. That now gives us
the opportunity to focus on improved process efficiency and asset utilization. It also gives
us the opportunity to redeploy our people to focus on new initiatives.
Our capital spending was higher than normal. We invested in equipment to support
new business as well as improve efficiencies. We should soon benefit from lower rates of
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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
capital expenditures and the higher utilization of new equipment, thus helping both
earnings and cash flow.
The Leon, Mexico plant is still in its start-up phase. While we are beginning to
produce painted door handles, it is still negatively impacting our profitability. We expect to
see continued improvement as operational performance is enacted and additional volume
is realized.
We had another good year of winning business. While it will take some time for these
wins to convert into sales, it makes us confident that we will continue to be busy.
With the current talk of tariffs and trade wars, it is certainly a concern which may
negatively impact overall market volumes. How it may specifically impact our primary
customers is difficult to predict. Whatever happens in the overall market, any negative
impacts on STRATTEC will be tempered by our increase in content per vehicle.
VA S T
This unique partnership, that was formed nearly two decades ago, continues to grow
and create opportunities. It is interesting to see how more partnerships are now being
formed in automotive and other industries. More companies are recognizing the
opportunity to mutually benefit each other without trying to blend organizations together or
taking on debt to finance an acquisition.
With our family owned partners, WITTE Automotive of Germany and ADAC
Automotive of Michigan, we continue to find ways to better collaborate with each other.
We originally created an alliance to give each of us global support of our North American
and European customers. That included joint investments in China and India. We are now
experiencing the benefits of the rapidly growing Chinese market. Through cooperative
efforts and support, our VAST China operations experienced significant growth in sales and
profitability this year and we are optimistic that this trend will continue.
S U M M A RY
In 1908, Steve Briggs and Harry Stratton saw a time full of change and opportunity in
the early days of the automobile industry. While the path was not always smooth, they
launched a business that has grown into what STRATTEC is today. We are thankful for their
foresight and perseverance.
As we celebrate our 110th anniversary, we are part of an automotive industry which is
vastly different. It is full of rapid global and technological shifts, but once again, full of
change and opportunity.
I am pleased to report that this 110th year was both a year of significant progress and
a year that positions us to take advantage of more opportunity in the future.
Thank you to our Shareholders, our Directors, our Customers and our Associates.
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
2018
$439.2
54.4
13.3
12.3
2017 2016
$401.4
$417.3
61.0 65.7
14.8 22.2
9.1
307.2 273.7 242.2
30.0 20.0
139.3
51.0
162.2
151.1
7.2
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 2018 was a negative $3.3 million which represents a $0.9
million reduction from 2017. (For further explanation of our EVA® Plan and suggested changes
for fiscal 2019, see our 2018 definitive Proxy Statement.)
Net Operating Profit After Cash-Basis Taxes
Average Monthly Net Capital Employed
Cost of Capital
Capital Charge
Economic Value Added
$155.8
__10%
$ 12.3
15.6
$ (3.3)
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:
2018 Net Income Attributable to STRATTEC as Reported
Deferred Tax Provision
Other
Net Operating Profit After Cash-Basis Taxes
$ 12.3
1.0
(1.0)
$ 12.3
Average Monthly Net Capital Employed:
$162.2
Total STRATTEC Shareholders’ Equity as Reported July 1, 2018
Long-Term Liabilities
55.1
Long-Term Assets – Other than Property, Plant and Equipment (39.5)
(6.0)
Other
$171.8
Net Capital Employed At July 1, 2018
_ (16.0)
Impact of 12 Month Average
$155.8
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
Automotive Group (“VAST”). Under this relationship STRATTEC, WITTE and ADAC market each
company’s products to global customers under the VAST Automotive Group 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-three years.
Our history in the automotive security business spans 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 have developed and are continuing to develop
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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C O M PA N Y D E S C R I P T I O N
a joint venture formed with ADAC Automotive during fiscal 2007, we
also supply painted and non-painted 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,
Key Fob
application, manufacturing, warranty analysis,
service/aftermarket, and financial/commercial issues.
The Product Business Managers work closely
with our sales organization, our engineering
Trunk Latch
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.
M A R K E T S
Power Sliding Door
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.
Direct sales to various OEMs represented approximately 76% of our total sales for fiscal
2018. 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, 9 and 10.
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 that we
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C O M PA N Y D E S C R I P T I O N
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.
Trunk Latch
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
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 IATF 16949:2016 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 in Leon, Mexico
and houses our custom paint system for door handles and assembly for ADAC-STRATTEC de
Mexico and is owned by the ADAC-
STRATTEC de Mexico joint venture. This
facility was operational during the second
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, 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
C O M PA N Y D E S C R I P T I O N
9
ADAC-STRATTEC de Mexico (Plant 4) - Painted Door Handle
and Assembly Facility
VAST Auburn Hills, Michigan Facility
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
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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 $174 million and
$128 million during fiscal 2018 and 2017, respectively. This was an important step which gives
STRATTEC a one-third interest in VAST China’s activities in the important growing Chinese/Asian market
for manufacturing and assembly of painted door handles, locksets and latch products. VAST China
currently operates out of two manufacturing facilities in Taicang and Fuzhou, China, with plans to open a
third facility within the next two years to support new growth in the China market. In March, 2014, VAST
LLC purchased the remaining 49 percent interest of its local partner in Brazil, which had annual net sales
of approximately $1 million during fiscal years 2018 and 2017.
Seat-back Latches
Glove Box Lock Cylinders
Rear Compartment
Lock Cylinders
Power
Liftgates and
Trunk Lids
Ignition Lock Cylinders,
Keys, Fobs and Push
Button Start Options
Ignition Lock Housings
Hood Latches
Power and
Manual Rear
Compartment
Latches
Door Handles
Door Latches
Door Lock Cylinders
Power Sliding Doors
STRATTEC and
STRATTEC POWER ACCESS products
VAST partner products
C O M PA N Y D E S C R I P T I O N
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”). As part of this transition,
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 $36 million and $34 million during fiscal years 2018 and 2017, respectively. Minda is
a leading manufacturer of security & access products and handles, for both OEMs and the aftermarket in
India. Minda-VAST financial results are accounted for on the equity method of accounting by VAST LLC.
For further VAST LLC financial information, see “Equity Earnings (Loss) of Joint Ventures” on
pages 47 through 49 included in this 2018 Annual Report.
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.
GLOBAL PRESENCE
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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
2018 and 2017, ASdM was
profitable and represented $88.8
and $67.7 million, respectively, of
our consolidated net sales.
STRATTEC de Mexico Plant No. 4
is in Leon, Mexico and houses our
custom paint system for door
handles and assembly for ADAC-
STRATTEC de Mexico. This facility
was operational during the second
quarter of fiscal year 2018.
Interior and exterior door handles are
painted in our Leon, Mexico facility.
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 100 percent of 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 2018 and 2017, SPA was profitable and represented $86.4 and $84.5 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 2018 and 2017. During fiscal 2018, we, along with our joint venture partner, reduced
operating the business of STRATTEC Advanced Logic to winding down and selling only RTS
commercial biometric locks. STRATTEC owns 51% of this joint venture and its financial results are
accounted for on the equity method of accounting. For further STRATTEC Advanced Logic
financial information, see “Equity Earnings (Loss) of Joint Ventures” on pages 47 through 49
included in this 2018 Annual Report.
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. During fiscal 2019, we are in the process of reviewing and
modifying our existing EVA® bonus plans, however, these plan changes will contain similar concepts
as to return on investment and creating shareholder value.
STRATTEC’s significant market presence is the result of a 110-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 cars and light trucks are equipped with STRATTEC
components during our 2019 fiscal year:
PA S S E N G E R C A R S
Acura NSX
Aston Martin DB 11*
Aston Martin Rapide*
Aston Martin Vanquish*
Aston Martin Vantage*
Buick Cascada*
Buick Excelle*
Buick LaCrosse*
Buick Regal*
Cadillac ATS*
Cadillac CT6*
Cadillac CTS
Cadillac XTS*
Chevrolet Bolt EV
Chevrolet Camaro
Chevrolet Corvette
Chevrolet Cruze*
Chevrolet Impala
Chevrolet Malibu
Chevrolet Sonic*
Chevrolet Spin*
Chevrolet Volt
Chrysler 300
Dodge Challenger
Dodge Charger
Ford Fiesta
Ford Focus*
Ford Fusion
Ford GT
Ford Ka*
Ford Mustang
Ford Taurus
Honda Accord
Honda Civic
Lincoln Continental
Lincoln MKZ
Maserati Ghibli*
Maserati Quattroporte*
Opel Adam*
Opel Astra*
Opel Cascada*
Opel Corsa*
Tesla Model S
Tesla Model X
Tesla Model 3
Volkswagen 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 XT4
Cadillac XT5
Chevrolet Blazer
Chevrolet Captiva*
Chevrolet Colorado*
Chevrolet Equinox
Chevrolet Express Van
Chevrolet Silverado &
Silverado HD Pickup
Chevrolet Suburban
Chevrolet Tahoe
Chevrolet Trail Blazer*
Chevrolet Trax*
Chevrolet Traverse
Chrysler Pacifica
Dodge Durango
Dodge Grand Caravan
Dodge Journey
Ford C-Max*
Ford Edge
Ford Escape
Ford Expedition
Ford Explorer
Ford Flex
Ford F-Series Pickup
Ford F-Series Super Duty
Pickup
Ford Ranger
Ford Transit Connect*
GMC Acadia
GMC Terrain
GMC Canyon*
GMC Savana
GMC Sierra & Sierra HD
Pickup
GMC Yukon and Yukon XL
Honda CRV
Honda RDX
Honda Odyssey
Jeep Cherokee
Jeep Compass
Jeep Grand Cherokee
Jeep Wrangler/Wrangler
Unlimited
Kia Sedona*
Lincoln MKC
Lincoln MKT
Lincoln Nautilus
Lincoln Navigator
Lincoln Avaitor
Maserati Levante*
Opel Mokka
Ram 1500/2500/3500
Pickup
Volkswagen 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 2018, 2017 and
2016, the above domestic automotive OEMs together represented 59 percent, 60 percent and 63
percent, respectively, of our total net sales.
During fiscal years 2018 and 2017, 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 flat or slightly higher over the next year, we anticipate this
consumer buying trend will continue.
Fiscal 2018 net sales were $439 million compared to $417 million in 2017 and $401 million in
2016. Net income attributable to STRATTEC for fiscal 2018 was $12.3 million compared to $7.2 million
in 2017 and $9.1 million in 2016. The financial health of our three largest customers continues to be
stable. 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 planned to move passenger car production from the United States into Mexico over the next
3-5 years to improve their overall profitability on these vehicles. Ford and Fiat Chrysler’s plans have
changed subsequent to the above contract date and have started eliminating passenger car production
on certain models in North America entirely. STRATTEC and our joint venture partner ADAC Automotive
just completed a new production facility in Leon, Mexico to capture these new opportunities as well as
other OEM’s as it relates to painted door handles and assemblies in the expanding Mexican market.
As we look out into the future, the July 2018 projections from our third-party forecasting service
indicate that North American light vehicle production will show steady to flat production for the next five
years. By model year, based on these projections we are expecting a 2018 build of 16.8 million vehicles,
17.4 million vehicles for 2019, 17.3 million vehicles for 2020, 17.4 million vehicles for 2021 and 17.5
million vehicles for 2022. 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 potential tariff enactment by the United States Government
or other foreign countries, the current levels of employment, availability of consumer credit, home equity
values, fluctuating fuel prices, changes in customer vehicle and option preferences, 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 or particular brands.
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 Automotive Group 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
2018 Compared to 2017
Years Ended
July 1, 2018
$439.2
July 2, 2017
$417.3
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 1, 2018
$110.7
85.8
64.4
70.5
82.0
25.8
$439.2
July 2, 2017
$100.6
88.6
62.3
72.4
60.3
33.1
$417.3
Net sales were $439.2 million in 2018 compared to $417.3 million in 2017. Sales to Fiat Chrysler
Automobiles in the current year increased over the prior year due to a combination of higher vehicle
production volumes and product content on the components we supply, partially offset by reduced
sales during the six months ended December 31, 2017 as a result of the discontinuation of the
Chrysler 200 in December 2016. The decrease in sales to General Motors Company in the current
year compared to the prior year was attributed to lower production volumes and content on products
we supplied to Opel Automotive GmbH as part of our General Motors business in the prior year,
partially offset by increased sales attributed to higher content sales on models for which we supply
components, in particular latches. We now supply products directly to Opel Automotive rather than
through General Motors, which are now included under “Commercial and Other OEM Customers”
above. Increased sales to Ford Motor Company in the current year as compared to the prior year was
due to a combination of higher production volumes and content on components we supply. Sales to
Tier 1 Customers decreased in the current year period as compared to the prior year due to lower
sales on our driver controls products. Sales to Commercial and Other OEM Customers during the
current year increased in comparison to the prior year due to including Opel Automotive in this
category as mentioned above and new programs at Honda of America Manufacturing, Inc. and
Volkswagen. These customers, along with our Tier 1 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 decreased sales to Hyundai / Kia in the current year as compared to the prior
year were due to lower levels of production on vehicles for which we supply components.
Cost of Goods Sold (millions of dollars) $384.8
July 1, 2018
Years Ended
July 2, 2017
$356.4
Direct material costs are the most significant component of our cost of goods sold and
comprised $245.5 million or 63.8 percent of cost of goods sold in the current year compared to
$236.1 million or 66.2 percent of cost of goods sold in the prior year. This dollar value increase in our
direct material costs of $9.4 million or 4.0 percent was due to increased sales volumes in the current
year as compared to the prior year, partially offset by decreased sorting costs resulting from internal
manufacturing process quality issues incurred in the current year as compared to the prior year as
well as prior 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 $19.0 million or 15.8 percent to $139.3 million in the current year from $120.3 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
production and expediting costs associated with new product launches occurring in fiscal year 2018,
in particular in connection with the start-up of our new door handle paint facility in Leon, Mexico, an
unfavorable Mexican peso to U.S. dollar exchange rate affecting our operations in Mexico, a year
over year increase in warranty expense provisions of approximately $3.5 million for expected
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warranty payments to be settled in future periods and an increase of approximately $840,000 in
expense provisions for the accrual of bonuses between years. The fiscal 2018 bonus expense
provisions include the accrual of a discretionary bonus approved by our Board of Directors as well
as the accrual of bonuses under our incentive bonus plans. There was no similar discretionary bonus
related to fiscal 2017. The U.S. dollar value of our Mexican operations increased approximately $1.5
million in the current year as compared to the prior year due to an unfavorable Mexican peso to U.S.
dollar exchange rate between years. The average U.S. dollar / Mexican peso exchange rate
decreased to approximately 18.75 pesos to the dollar in the current year from approximately 19.29
pesos to the dollar in the prior year.
Gross Profit (millions of dollars)
Gross Profit as a percentage of net sales
Years Ended
July 1, 2018
$54.4
12.4%
July 2, 2017
$61.0
14.6%
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 attributed to higher than expected start-up production and expediting
costs associated with new product launches occurring during the current year, in particular in
connection with the opening of our new paint facility in Leon, Mexico, to meet certain customer
schedules as well as an unfavorable Mexican Peso to U.S. Dollar exchange rate affecting the cost of
our Mexican operations, a year over year increase in warranty expense provisions and increased
expense provisions for the accrual of bonuses, 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 1, 2018
$41.2
9.4%
July 2, 2017
$46.1
10.0%
Engineering, selling and administrative expenses decreased approximately $4.9 million between
years. The current year as compared to the prior year included a reduction in new product program
development costs for which we utilized third party vendors for a portion of the development work.
This impact was partially offset by an increase of approximately $265,000 in expense provisions for
the accrual of bonuses between years. The fiscal 2018 bonus expense provisions include the accrual
of a discretionary bonus approved by our Board of Directors as well as the accrual of bonuses under
our incentive bonus plans. There was no similar discretionary bonus related to fiscal 2017.
Income from operations in the current year was $13.3 million compared to $14.8 million in the
prior year. This decrease was the result of reduced gross profit margins during 2018 partially offset by
a reduction 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 1, 2018
July 2, 2017
$ 4,441
91
$ 4,532
$ 2,593
(1,927)
666
$
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 our limited amount of business in that region. 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, reduced operating the business of STRATTEC Advanced
Logic to winding down and selling only commercial biometric locks.
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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 (Loss) Gain on Mexican
Peso Forward Contracts
Realized Gain (Loss) on Mexican Peso
Forward Contracts
Pension and Postretirement Plans
Credit (Cost)
Rabbi Trust Gain
Other
Years Ended
July 1, 2018
$ 549
July 2, 2017
$1,128
(1,160)
1,140
447
193
(149)
$1,020
2,010
(1,650)
(1,140)
296
523
$1,167
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 2017 and 2018 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 1, 2018 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.
Pension and postretirement plan impacts include the components of net periodic benefit cost other than
the service cost component. The Rabbi Trust assets fund our amended and restated supplemental
executive retirement plan. The investments held in the Trust are considered trading securities.
Our income tax provision for the current year was impacted by the Tax Cuts and Jobs Act of 2017
(“the Act”), which was signed into law on December 22, 2017 with an effective date of January 1, 2018.
The Act makes broad and complex changes to the U.S. tax code that affected our fiscal year ending July
1, 2018, including but not limited to (1) a reduction in the U.S. statutory tax rate to 21 percent following its
effective date and a change in the measurement of our deferred tax assets and deferred tax liabilities
resulting from the reduction in the statutory rate, (2) requiring a one-time transition tax on certain deemed
repatriated earnings of foreign subsidiaries that is payable over eight years, and (3) bonus depreciation
that will allow for full expensing of qualified property. Section 15 of the Internal Revenue Code stipulates
that for our fiscal year ending July 1, 2018, we will have a blended statutory corporate tax rate of 28%,
which is based on the applicable statutory tax rates before and after the Act and the number of days in
our fiscal year.
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Act.
SAB 118 provides a measurement period that should not extend beyond one year from the Act’s
enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118,
a company must reflect the income tax effects of those aspects of the Act for which the accounting under
ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Act
is incomplete but it is still able to determine a reasonable estimate of the tax effect, it must record a
provisional estimate in the financial statements. If a company cannot determine a provisional estimate to
be included in the financial statements, it should continue to apply ASC 740 on the basis of the provision
of the tax laws that were in effect immediately before the enactment of the Act.
In connection with our analysis of the impact of the Act, we have recorded an overall net tax benefit
of approximately $3 million during 2018. This net tax benefit primarily consists of (1) the impact of the
change in measurement of our deferred tax assets and liabilities, which resulted in a favorable provision
impact of $1.6 million, (2) the one-time transition tax on non-previously taxed post-1986 accumulated
foreign earnings, which resulted in a net favorable impact of $500,000 and includes transition tax of $1.4
million offset by the reversal of net deferred tax liability balances totaling $1.9 million which related to basis
differences in foreign earnings, and (3) the impact of changing our annualized effective tax rate, which
resulted in a favorable provision impact of $900,000. For various reasons that are discussed more fully
below, we have not completed our accounting for the income tax effects for certain elements of the Act.
However, we were able to make reasonable estimates of certain effects and, therefore, we recorded
provisional adjustments of these elements in the accompanying consolidated financial statements. We
identified these items as provisional since our analysis of the items is not complete.
The Act reduces the corporate tax rate to 21 percent, effective January 1, 2018. For certain of
our net deferred tax assets, we have recorded a provisional adjustment to reflect the reduction in the
corporate tax rate. While we are able to make a reasonable estimate of the impact of the reduction
in the corporate rate, it may be affected by other analyses related to the Act, including, but not
limited to, the impact of our calculation of deemed repatriation of deferred foreign income and the
impact of full expensing for certain assets.
The Deemed Repatriation Transition Tax (“Transition Tax”) is a tax on previously untaxed
accumulated and current earnings and profits (E&P) of certain of our foreign subsidiaries. To
determine the amount of the Transition Tax, we must determine, in addition to other factors,
the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S.
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income taxes paid on such earnings. We were able to make a reasonable estimate of the
Transition Tax and recorded a provisional Transition Tax obligation in the accompanying
consolidated financial statements. However, we are continuing to gather additional
information to more precisely compute the amount of the Transition Tax.
We must assess whether our valuation allowance analyses are affected by various
aspects of the Act (e.g., deemed repatriation of deferred foreign income, Global Intangible
Low-Taxed Income (“GILTI”) inclusions, and new categories of Foreign Tax Credits). Since, as
discussed herein, we have recorded provisional amounts related to certain portions of the
Act, any corresponding determination of the need for, or any change in, a valuation
allowance is also provisional.
Our accounting for the following elements of the Act is incomplete, and we were not yet able
to make reasonable estimates of the tax effects. Therefore, no provisional adjustments were
recorded for the following elements in our accompanying consolidated financial statements.
Because of the complexity of the new GILTI tax rules, we are continuing to evaluate this
provision of the Act and the application of ASC 740. Under U.S. GAAP, we are allowed to make
an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable
income related to GILTI as a current-period expense when incurred (the “period cost method”)
or (2) factoring such amounts into a company’s measurement of its deferred taxes (the
“deferred method”). Our selection of an accounting policy with respect to the new GILTI tax
rules will depend, in part, on analyzing our global income to determine whether we expect to
have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is
expected to be. Because whether we expect to have future U.S. inclusions in taxable income
related to GILTI depends on not only our current structure and estimated future results of global
operations but also our intent and ability to modify our structure and/or our business, we are
not yet able to reasonably estimate the effect of this provision of the Act. Therefore, we have
not made any adjustments related to potential GILTI tax in our financial statements and have
not made a policy decision regarding whether to record deferred taxes on GILTI.
Our income tax provision for 2017 was impacted by the recognition of a $424,000 deferred
tax liability resulting from a change in assertion regarding the permanent reinvestment of earnings
from two of our Mexican subsidiaries. Prior to our fiscal 2017 second quarter, 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 our fiscal 2017 second quarter, 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 were no longer considered permanently
reinvested as of January 1, 2017. As a result, we repatriated $15.8 million from Mexico to the U.S.
during our fiscal 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 in future
periods as deemed necessary.
Additionally, our income tax provisions for 2018 and 2017 were affected by the non-
controlling interest portion of our pre-tax income. The non-controlling interest impacts the effective
tax rate as ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entities are taxed as
partnerships for U.S. tax purposes.
2017 Compared to 2016
Net Sales (millions of dollars)
Years Ended
July 2, 2017
$417.3
July 3, 2016
$401.4
Net Sales to each of our customers or customer groups in 2017 and 2016 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
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was the typical 52 weeks while our 2016 fiscal year was 53 weeks. The impact of the additional
week of customer shipments during 2016 increased 2016 sales by approximately $7.5 million. Sales
to Fiat Chrysler Automobiles in 2017 decreased in comparison to 2016 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 2017 over 2016 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 2017 as compared to 2016 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 2017 increased
in comparison to 2016 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
2017 over 2016 were due to higher levels of production on the Kia Sedona minivan for which we
supply components.
Cost of Goods Sold
(millions of dollars)
Years Ended
July 2, 2017
July 3, 2016
$356.4
$335.7
Direct material costs are the most significant component of our cost of goods sold and
comprised $236.1 million or 66.2 percent of cost of goods sold in 2017 compared to $224.9
million or 67.0 percent of cost of goods sold in 2016. This increase in our direct material costs
of $11.2 million or 5.0 percent was due to increased sales volumes in 2017 as compared to
2016 and increased scrap and sorting costs resulting from internal manufacturing process
quality issues incurred in 2017 as compared to 2016 as well as 2017 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 $9.5 million or 8.6 percent to $120.3 million in 2017 from $110.8 million in 2016
as the variable portion of these costs increased due to the increase in sales volumes between
years. Additionally, 2017 as compared to 2016 included higher payroll, benefit, outside service,
and maintenance costs related to quality improvement initiatives undertaken during 2017, 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 2016 and 2017 as well as a reduction in warranty expense
provisions between these years. The average U.S. dollar/Mexican peso exchange rate increased
to approximately 19.29 pesos to the dollar in 2017 from approximately 17.22 pesos to the dollar in
2016. Warranty recoveries and expense provision reversals in 2017 totaled $843,000 compared
to expense provisions of $583,000 in 2016.
Gross Profit (millions of dollars)
Gross Profit as a percentage of net sales
$61.0
14.6%
Years Ended
July 2, 2017
July 3, 2016
$65.7
16.4%
The reduction in gross profit and gross profit as a percentage of net sales in 2017 as
compared to 2016 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 2017 as compared to
2016, which 2017 included a lower percentage of sales in the power access and OEM service
product lines as compared to 2016 reducing gross profit margins in 2017, increased costs
related to quality improvement initiatives undertaken during 2017, 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
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cost of our Mexican operations and a reduction in warranty expense provisions during 2017 as
compared to 2016, all as discussed above.
Engineering, Selling and Administrative Expenses in 2017 and 2016 were as follows:
Expenses (millions of dollars)
Expenses as a percentage of net sales
Years Ended
July 2, 2017
$46.1
11.0%
July 3, 2016
$43.5
10.8%
Engineering, selling and administrative expenses increased approximately $2.6 million
between years while 2016 included an additional week of expense as a result of the 53 week fiscal
year. The increase in these costs in 2017 as compared to 2016 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 2017 was $14.8 million compared to $22.2 million in 2016. This
decrease was the result of reduced gross profit margins during 2017 as well as an increase in
engineering, selling and administrative expenses in 2017 as compared to 2016, all as discussed
above.
The equity earnings (loss) of joint ventures was comprised of the following in 2017 and 2016
(thousands of dollars):
Years Ended
July 2, 2017
July 3, 2016
Vehicle Access Systems Technology LLC
STRATTEC Advanced Logic, LLC
$ 2,593
(1,927)
666
$
$ (639)
(1,596)
$(2,235)
Our Vehicle Access Systems Technology LLC (“VAST LLC”) joint ventures in China and India
reported profitable operating results in 2017 and 2016 while our joint venture in Brazil reported
losses in each year 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, during 2017 and 2016, 100 percent of the funding for SAL
LLC was being made through loans from STRATTEC to SAL LLC. Therefore, STRATTEC recognized
100 percent of the losses of SAL LLC up to our committed financial support. During fiscal 2018,
we, along with our joint venture partner, reduced operating the business of STRATTEC Advanced
Logic to winding down and selling only commercial biometric locks.
Included in other income (expense), net in 2017 and 2016 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
Pension and Postretirement Plans Cost
Rabbi Trust Gain (Loss)
Other
Years Ended
July 2, 2017
$1,128
July 3, 2016
$2,559
2,010
(1,650)
(1,140)
296
523
$1,167
(889)
(1,196)
(1,271)
(41)
235
$ (603)
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. Pension and postretirement plan impacts include the
components of net periodic benefit cost other than the service cost component. The Rabbi Trust
assets fund our amended and restated supplemental executive retirement plan. The investments
held in the Trust are considered trading securities.
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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 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 1, 2018 was as follows (millions of dollars):
Fiat Chrysler Automobiles $ 19.9
General Motors Company $ 16.4
$ 7.5
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 1, 2018, $5.7 of our $8.1
million cash and cash equivalents balance was held in Mexico. These funds are available for
repatriation as deemed necessary.
Cash Flow Analysis
Cash Flows from (millions of dollars):
Operating Activities
Investing Activities
Financing Activities
July 1, 2018
$
6.9
$ (23.9)
$ 16.4
Years Ended
July 2, 2017
$ 23.1
$ (39.5)
9.2
$
July 3, 2016
$
8.2
$ (25.3)
$ 7.2
The reduction in cash provided by operating activities between 2017 and 2018 reflected a net
increase in working capital requirements between the two years of $21.6 million, with the net 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
2017
2018
$ 7.9
$ 1.7
$ 9.6
$ 14.4
$ (3.2)
$ 11.2
$ (3.6)
$ 4.6
$ 1.0
$ 1.6
$ 1.9
$ 3.5
$ 1.5
$ (5.2)
$ (3.7)
The year over year change in accounts receivable balances reflected a larger increase in
accounts receivable balances during 2018 as compared to 2017. Higher sales during the fourth
quarter of 2018 as compared to the fourth quarter of 2017 caused receivable balances to increase
during 2018. Additionally, an increase in outstanding customer tooling billings increased the 2018
accounts receivable balances by approximately $5.2 million between years. The increase in the
receivable balances 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 during 2018, which was the result of ramping up
for new customer program launches, compared to a decrease in inventory balances during 2017.
Inventory balances decreased during 2017 due to lower sales of parts we supplied for certain
customer vehicle programs towards the end of 2016, which increased 2017 beginning balances. The
year over year change in customer tooling balances, which consisted of costs incurred for the
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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 billings for customer reimbursements. The year over year change
in other assets was the result of an increase in the income tax recoverable balance in 2018 as
compared to a decrease in 2017, which changes were based on the required income tax provision, the
timing and amounts of Federal, state and foreign tax payments made, and the timing of the utilization
of foreign tax credits and research and development tax credits. The year over year change in the
accounts payable and other liability balances, which reflected a smaller reduction in working capital
requirements in 2018 as compared to 2017, resulted from increases in accounts payable balances
during 2017 partially offset by the year over year change in warranty reserve balances. 2018 accounts
payable balances, after adjustment for non-cash items, were relatively consistent with 2017 balances.
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 due to the timing of purchases
and payments with our vendors based on normal payment terms. 2018 warranty reserve balances
increased $2.3 million over 2017 primarily due to expense provisions for expected warranty payments
to be settled in future periods while the 2017 warranty reserve balances decreased $3.7 million from
2016 balances due to $2.8 million of customer warranty payments as well as $843,000 of reversals of
previously accrued balances.
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. No cash contributions were made to our
qualified pension plan during 2018. Net cash payments and recoveries for Federal, state and foreign
income taxes totaled $2.5 million during 2018 compared to $318,000 during 2017.
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
$ (3.4)
$ 5.1
$ (7.1)
$ 3.9
$ 1.1
$ 3.5
$ (4.1)
$ 6.0
$ (8.2)
$ 3.0
2017
$ 1.7
$ (3.2)
$ 4.6
$ 1.9
$ (5.2)
The year over year change in the accounts receivable balances reflected a larger increase in
accounts receivable balances during 2016 as compared to the increase in 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.
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Other significant cash payments impacting net cash provided by operating activities during both
2017 and 2016 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.
Net cash used by investing activities of $23.9 million during 2018, $39.5 million during 2017 and
$25.3 million during 2016 included capital expenditures of $24.1 million, $37.0 million and $23.5
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. Capital expenditures
included $2.5 million, $12.8 million and $7.0 million during 2018, 2017 and 2016, respectively for the
purchase of land, equipment and the construction of a new facility in Leon, Mexico, which is 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. Net cash used by
investing activities during 2018, 2017 and 2016 also included an investment in our VAST LLC joint
venture of $125,000, $400,000 and $220,000, respectively. The investments were made for the
purpose of funding general operating expenses for Sistema de Acesso Veicular Ltda (formerly known
as VAST do Brasil). 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. Prior to 2016, loans were made by each
partner, STRATTEC, WITTE and ADAC to our joint venture, VAST LLC. 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 outstanding loan balances
totaling $300,000, $100,000 and $100,000 were made from VAST LLC to each partner during 2018,
2017 and 2016, respectively. Loans were made from STRATTEC to SAL LLC totaling $2.2 million
during 2017 and $225,000 during 2016 in support of operating expenses and working capital needs.
Net cash provided by financing activities of $16.4 million during 2018 included $24.0 million of
borrowings under credit facilities and $242,000 of proceeds from stock purchases and option plan
exercises, partially offset by $3.0 million for repayments of borrowings under credit facilities, $2.0
million for regular quarterly dividend payments to shareholders and $2.8 million for dividend payments
to non-controlling interests in our subsidiaries. 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 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.
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 2018, 2017 and 2016, capital contributions totaling $375,000, $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 $125,000 in 2018, $400,000 in 2017 and $220,000 in 2016. We
anticipate the Brazilian entity will require a capital contribution of approximately $750,000 collectively by
all VAST partners to fund operations during fiscal 2019. STRATTEC’s portion of the capital contributions
is anticipated to be $250,000.
ADAC-STRATTEC LLC Cash Requirements
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,
completed the construction of a new manufacturing facility in Leon, Mexico during the current year
period. Total capital expenditures required for the land, facility, paint system, and assembly equipment
totaled approximately $22.5 million. See further discussion under Future Capital Expenditures
included herein. In contemplation of this facility construction, effective April 27, 2016, the ADAC-
STRATTEC Credit Facility was amended to increase the available borrowings under the credit facility
from $10 million to $20 million. 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 the quarter ended October 2, 2016. STRATTEC’s portion of the required capital
contribution was $3.06 million. The ADAC-STRATTEC Credit Facility was further amended effective as
of June 26, 2017 to increase the borrowing limit to $25 million and effective as of March 27, 2018 to
increase the borrowing limit to $30 million until June 30, 2019, at which time the borrowing limit will
return to $25 million.
STRATTEC Advanced Logic, LLC Cash Requirements
During all periods presented in this report, STRATTEC provided 100 percent of the financial
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support to fund the start-up operating losses of SAL LLC due to our partner’s inability to contribute
capital to this joint venture. During fiscal 2018, we, along with our joint venture partner, reduced
operating the business of STRATTEC Advanced Logic to winding down and selling only commercial
biometric locks. We anticipate STRATTEC will provide minimal to no funding for SAL LLC in fiscal
year 2019.
Future Capital Expenditures
We anticipate capital expenditures will be approximately $15.0 million in fiscal 2019 in support
of requirements for new product programs and the upgrade and replacement of existing equipment.
On March 17, 2016, ASdM purchased land in Leon, Mexico. ASdM completed the construction of a
new manufacturing facility on this land during the current year. This facility is being used primarily to
paint and assemble door handle products. During our second quarter of fiscal 2018, the paint
system and assembly equipment was fully operational. Currently, the ADAC-STRATTEC LLC joint
venture has annual net sales of approximately $88.8 million. With newly awarded customer business,
we anticipate annual net sales will increase to approximately $110 million in the next fiscal year. Total
capital expenditures required for the land, facility, paint system and assembly equipment totaled
approximately $22.5 million. During 2018, capital expenditures for the land, facility and equipment
totaled $2.5 million.
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 1,
2018. A total of 3,655,322 shares have been repurchased over the life of the program through July 1,
2018, at a cost of approximately $136.4 million. No shares were repurchased during fiscal 2018 or 2017.
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 2019.
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 $30 million secured revolving credit facility (the
“ADAC-STRATTEC Credit Facility”) with BMO Harris Bank N.A., which is guaranteed by STRATTEC. The
ADAC-STRATTEC Credit Facility borrowing limit decreases to $25 million effective July 1, 2019. 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. STRATTEC’s portion of this capital contribution totaled $3.06 million. As of
July 1, 2018, we were in compliance with all financial covenants required by these credit facilities.
Outstanding borrowings under the STRATTEC Credit Facility totaled $23.0 million at July 1, 2018 and
$16.0 million at July 2, 2017. The average outstanding borrowings and weighted average interest rate on
the STRATTEC Credit Facility loans were approximately $21.7 million and 2.5 percent, respectively, during
2018. 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. Outstanding
borrowings under the ADAC-STRATTEC Credit Facility totaled $28.0 million at July 1, 2018 and $14.0
million at July 2, 2017. The average outstanding borrowings and weighted average interest rate on the
ADAC-STRATTEC Credit Facility loans were approximately $22.6 million and 2.5 percent, respectively,
during 2018. 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. 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.
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 provided for monthly
Mexican peso currency forward contracts for a portion of our estimated peso denominated operating costs.
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Refer to the discussion of Derivative Instruments under Organization and Summary of Significant Accounting
Policies included in the Notes to Financial Statements included within this 2018 Annual Report.
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 1, 2018 (thousands of dollars):
Payments Due By Period
Contractual Obligation
Total
$ 1,645
Operating Leases
Other Purchase Obligations 13,124
Pension and Postretirement
Less Than
1 Year
$
919
9,195
Obligations (a)
Total
_ 579
$15,348
_ 579
$10,693
1-3 Years
3-5 Years
$ 586
3,929
_ -
$ 4,515
$ 97
-
_ _ -
97
$
More Than
5 Years
$
43
-
_ __-
$ 43
(a) As disclosed in our Notes to Financial Statements, estimated cash funding related to our pension and postretirement
benefit plans is expected to total $579,000 in 2019. Because the timing of funding related to these plans beyond 2019 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 2019 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 2018 Annual Report for further information related to purchase
obligations.
Liabilities recognized for uncertain tax benefits of $796,000 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 $30 million secured revolving credit facility with BMO Harris Bank N.A., which is
guaranteed by STRATTEC. The ADAC-STRATTEC Credit Facility limit decreases to $25 million effective
July 1, 2019. Borrowings under the STRATTEC credit facility totaled $23.0 million at July 1, 2018.
Borrowings under the ADAC-STRATTEC credit facility totaled $28.0 million at July 1, 2018. 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
Refer to the discussion of Investment in Joint Ventures and Majority Owned Subsidiaries and
discussion of Equity Earnings (Loss) of Joint Ventures included in the Notes to Financial
Statements included within this 2018 Annual Report.
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 2018, 2017 or
2016 financial results.
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 4.3 percent to be appropriate as of June 30, 2018, which is an
increase of 39 percentage points from the discount rate of 3.91 percent used at June 30,
2017. The impact of this change decreased our year-end 2018 projected pension benefit
obligations by approximately $4.0 million and the year-end 2018 accumulated pension
benefit obligations by approximately $4.0 million. This change is also expected to decrease
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our 2019 pension expense by $450,000. Our pension expense increases as the discount rate
decreases. Lowering our 2018 discount rate assumption by 50 basis points would have
increased our 2018 pension expense by approximately $610,000.
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 5.45 percent for 2016, 2017 and
2018. This assumption decreased to 4.05 percent for 2019. The change to this assumption is
expected to increase our 2019 pension expense by $1.6 million. 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 2018 expected rate of return assumption for our plan assets by 50 basis points
would have increased our 2018 pension expense by approximately $560,000.
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, 2018, we had $26 million of net unrecognized pension actuarial
losses, which included deferred asset losses of $2 million and unrecognized postretirement
actuarial losses of $1 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 7 years for the pension and postretirement plans.
We made no contributions to our qualified pension plan during 2018. During 2017 and
2016, we contributed $5 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 proceed with the termination of the qualified pension plan. We anticipate
settlement to occur by the end of December 2018, which is subject to final board approval. 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 2018 Annual Report.
Other Reserves – We have reserves such as 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.
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
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Accounting Policies included in the Notes to Financial Statements included within this 2018
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 2018 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.
NEW ACCOUNTING STANDARDS
Refer to the discussion of New Accounting Standards under Organization and Summary
of Significant Accounting Policies included in the Notes to Financial Statements included
within this 2018 Annual Report.
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 57 percent of our annual net sales (based on fiscal 2018 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
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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.
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.
Cross-border Trade Issues or Tariffs – Our business is impacted by international or
cross-border trade, including the import and export of products and goods into and out of the
United States and trade tensions among nations. The shipping of goods across national borders
is often more expensive and complicated than domestic shipping. Customs and duty procedures
and reviews, including duty-free thresholds in various key markets, the application of tariffs, and
security related governmental processes at international borders, may increase costs,
discourage cross-border purchases, delay transit and create shipping uncertainties. Further,
uncertainties stemming from changes in U.S. trade policies, tariffs and the reaction of other
countries thereto, could have an adverse effect on our business and may adversely impact our
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results of operations or financial condition or reduce profitability on certain of our
products.
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.
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
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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
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.
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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
STRATTEC Advanced Logic, LLC Joint Venture – As discussed under
Investment in Joint Ventures and Majority Owned Subsidiaries included herein in our
Notes to Financial Statements, 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 adversely 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, reduced operating the business of STRATTEC Advanced Logic to winding down
and selling only commercial biometric locks.
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 from STRATTEC, we increased our provision to
cover warranty exposures since fiscal year 2010. In 2015 and 2018, 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 and June
2018, respectively, 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.
Income Taxes – We are a U.S.-based multinational company subject to tax in
multiple U.S. and foreign tax jurisdictions. Significant judgement is required in determining
our global provision for income taxes, deferred tax assets or liabilities and in evaluating
our tax positions on a worldwide basis. While we believe our tax positions are consistent
with the tax laws in the jurisdictions in which we conduct our business, it is possible that
these positions may be overturned by jurisdictional tax authorities, which may have a
significant impact on our global provision for income taxes. Tax laws are dynamic and
subject to change as new laws are passed and new interpretations of the law are issued
or applied. We are also subject to ongoing tax audits. These audits can involve complex
issues, which may require an extended period of time to resolve and can be highly
subjective. Tax authorities may disagree with certain tax reporting positions taken by us
and, as a result, assess additional taxes against us. We regularly assess the likely
outcomes of these audits in order to determine the appropriateness of our tax provision.
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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
COMPREHENSIVE INCOME (LOSS) (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 (expense), 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 1, 2018
July 2, 2017
July 3, 2016
$439,195
384,752
54,443
41,168
13,275
8
4,532
(1,137)
1,020
17,698
2,070
15,628
$417,325
356,370
60,955
46,113
14,842
136
666
(417)
1,167
16,394
_ 4,284
12,110
$401,419
335,693
65,726
43,547
22,179
25
(2,235)
(176)
(603)
19,190
_ 5,068
14,122
3,345
4,913
4,973
STRATTEC SECURITY CORPORATION
$ 12,283
$ 7,197
$ 9,149
COMPREHENSIVE INCOME:
NET INCOME
Currency translation adjustments, net of tax
Pension and postretirement plan funded status
adjustment, net of tax
TOTAL OTHER COMPREHENSIVE (LOSS) INCOME
COMPREHENSIVE INCOME
Comprehensive income attributable to
$ 15,628
(2,219)
602
(1,617)
14,011
$ 12,110
(426)
5,768
5,342
17,452
$ 14,122
(5,248)
(5,880)
(11,128)
2,994
non-controlling interest
COMPREHENSIVE INCOME (LOSS)
ATTRIBUTABLE TO STRATTEC
SECURITY CORPORATION
EARNINGS PER SHARE ATTRIBUTABLE
TO STRATTEC SECURITY CORPORATION:
BASIC
DILUTED
AVERAGE SHARES OUTSTANDING:
BASIC
DILUTED
2,279
5,470
4,659
$ 11,732
$ 11,982
$ (1,665)
$
3.39
$ 3.32
$
$
2.01
1.96
$
$
2.55
2.51
3,628
3,703
3,588
3,670
3,559
3,621
The accompanying Notes to Financial Statements are an integral part of these Consolidated Statements of
Income and Comprehensive Income (Loss).
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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 1, 2018 and July 2, 2017
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 50
BORROWINGS UNDER CREDIT FACILITIES
DEFERRED INCOME TAXES
ACCRUED PENSION OBLIGATIONS
ACCRUED POSTRETIREMENT OBLIGATIONS
OTHER LONG-TERM LIABILITIES
SHAREHOLDERS’ EQUITY:
Common stock, authorized 12,000,000 shares, $.01 par value,
issued 7,251,937 shares at July 1, 2018 and
7,216,103 shares at July 2, 2017
Capital in excess of par value
Retained earnings
Accumulated other comprehensive loss
Less: Treasury stock at cost (3,616,734 shares at
July 1, 2018 and 3,619,487 shares at July 2, 2017)
Total STRATTEC SECURITY CORPORATION shareholders’ equity
Non-controlling interest
Total shareholders’ equity
July 1, 2018
July 2, 2017
$ 8,090
$ 8,361
73,832
46,654
12,514
3,559
6,454
151,103
22,192
-
17,338
116,542
$307,175
64,933
35,476
11,544
1,987
_ 6,704
129,005
16,840
256
16,022
111,591
$273,714
$ 38,439
$ 39,679
13,393
1,291
7,800
7,870
68,793
51,000
961
1,553
826
796
73
95,140
236,162
(33,439)
(135,778)
162,158
21,088
183,246
$307,175
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
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 28, 2015
$152,401
$71
$89,560
$213,442
$ (26,859)
$ (135,902) $12,089
Net income
Currency translation adjustments
Pension and postretirement
funded status adjustment,
net of tax of $3,454
Cash dividends declared
($0.52 per share)
Cash dividends paid to
non-controlling interests
of subsidiaries
Stock-based compensation and
14,122
(5,248)
(5,880)
(1,863)
(1,568)
-
-
-
-
-
-
-
-
-
-
9,149
-
-
(4,934)
-
(5,880)
(1,863)
-
-
-
-
-
-
-
-
4,973
(314)
-
-
(1,568)
shortfall tax benefit
Stock option exercises
Employee stock purchases
2,075
364
109
-
1
-
2,075
363
78
-
-
-
-
-
-
-
-
31
-
-
-
BALANCE July 3, 2016
$154,512
$72
$92,076
$220,728
$ (37,673)
$ (135,871) $15,180
Net income
Currency translation adjustments
Pension and postretirement
funded status adjustment,
net of tax of $3,388
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
Net income
Currency translation adjustments
Pension and postretirement
funded status adjustment,
net of tax of $340
Cash dividends declared
($0.56 per share)
Cash dividends paid to
non-controlling interests of
subsidiaries
Stock-based compensation
Stock option exercises
Employee stock purchases
BALANCE July 1, 2018
12,110
(426)
5,768
(2,012)
(1,964)
2,940
1,601
79
106
-
-
-
-
-
-
-
-
-
-
-
-
7,197
-
-
(983)
-
5,768
(2,012)
-
-
-
-
-
-
-
-
-
-
-
4,913
557
-
-
(1,964)
2,940
-
-
-
1,601
79
57
-
-
-
-
-
-
-
-
49
-
-
-
$172,714
$72
$93,813
$225,913
$ (32,888)
$ (135,822) $21,626
15,628
(2,219)
602
(2,034)
-
-
-
-
-
-
-
-
12,283
-
-
(1,153)
-
(2,034)
602
-
-
-
-
-
3,345
(1,066)
-
-
(2,817)
1,130
140
102
-
-
1
-
-
1,130
139
58
-
-
-
-
-
-
-
-
-
-
-
44
(2,817)
-
-
-
$183,246
$ 73
$95,140
$236,162
$ (33,439) $ (135,778) $21,088
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 2, 2017
July 3, 2016
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
Unrealized loss (gain) on peso forward contracts
(Gain) loss 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 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
$15,628
$12,110
$14,122
(4,532)
14,585
(549)
1,160
(28)
1,029
1,130
(9,571)
(11,178)
(4,457)
3,749
(26)
6,940
(125)
-
300
(24,134)
41
(23,918)
24,000
(3,000)
242
-
-
(2,817)
(2,034)
16,391
316
(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)
(271)
(7,116)
(10,218)
8,361
$ 8,090
15,477
$ 8,361
25,695
$15,477
$ 2,503
$ 1,078
$ (1,702)
-
$
318
$
$ 350
$
$
(99)
-
$ 4,699
$ 157
$ 2,625
505
$
The accompanying Notes to Financial Statements are an integral part of these Consolidated Statements of
Cash Flows.
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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
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 Automotive Group” 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 VAST Automotive Group 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. The results of the VAST LLC foreign subsidiaries and joint
venture are reported on a one-month lag basis. 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 modified
retrospective method, which requires the cumulative effect of initially applying the guidance be recognized
at the date of initial application. We do not expect the adoption of this standard to have a material impact
on our results of operations or financial position; however, we expect to expand disclosures in line with
the requirements of the new standard. We currently do not expect any changes to how we account for
reimbursable pre-production costs, which are currently accounted for as a cost reduction. We expect
revenue related to parts shipped under our production contracts to remain unchanged. We will adopt this
standard as of July 2, 2018, the first day of our 2019 fiscal year, using the modified retrospective
approach.
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. The adoption of this pronouncement did not 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 was permitted. The
standard is to be applied prospectively. The adoption of this pronouncement did not 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
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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. The adoption of this
pronouncement did not 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 elected early adoption beginning with the interim periods of our fiscal 2018. The adoption of
this guidance resulted in the reclassification of expense within our Consolidated Statements of Income and
Comprehensive Income (Loss) for the fiscal years ended July 2, 2017 and July 3, 2016 of $793,000 and
$901,000, respectively, from cost of goods sold to Other Income, net and $347,000 and $370,000,
respectively, from engineering, selling and administrative expenses to Other Income, net.
In February 2018, the FASB issued guidance on the reclassification of certain tax effects from
accumulated other comprehensive income. The guidance will permit entities to reclassify tax effects
stranded in accumulated other comprehensive income as a result of U.S. tax reform to retained earnings.
The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within
these fiscal years. We do not expect that the adoption of this pronouncement will have a material impact on
our consolidated financial statements.
Fiscal Year: Our fiscal year ends on the Sunday nearest June 30. The years ended July 1, 2018, July 2,
2017 and July 3, 2016 are comprised of 52, 52 and 53 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 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 December 17, 2018. 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 1, 2018
(thousands of dollars, except average forward contractual exchange rates):
Effective
Dates
July 16, 2018 -
December 17, 2018
Notional
Amount
Average
Forward Contractual
Exchange Rate
$6,000
20.02
Fair
Value
$ (39)
Buy MXP/Sell USD
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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 (liabilities) assets:
Mexican peso forward contracts
July 1, 2018
July 2, 2017
$ (39)
$1,121
The pre-tax effects of the Mexican peso forward contracts on the accompanying Consolidated
Statements of Income and Comprehensive Income (Loss) consisted of the following (thousands of dollars):
Not Designated as Hedging Instruments:
Realized gain (loss)
Unrealized (loss) gain
July 1, 2018
$ 1,140
$(1,160)
Other Income, net
Years Ended
July 2, 2017
$(1,650)
$ 2,010
July 3, 2016
$(1,196)
$ (889)
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 1, 2018 and July 2, 2017. 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 1, 2018 and July 2, 2017 (thousands of dollars):
July 1, 2018
Total
Level 1
Level 2
Level 3
July 2, 2017
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
$ 298
286
562
793
850
-
$
-
-
-
-
-
3
$
$ - $ 298
286
-
562
-
-
793
- 850
$ 382
391
519
541
763
-
3
-
-
-
-
-
-
3
-
-
-
-
-
1,121
value
$2,789
$ 3
$ - $2,792
$2,596
$ 1,124
$ - $ 382
- 391
- 519
- 541
- 763
- 3
-
$ -
1,121
$3,720
Liabilities:
Mexican peso forward
contracts
$
-
$ 39
$ - $
39
$ -
$ -
$ -
$
-
The Rabbi Trust assets fund our 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 2018 or 2017.
Receivables: Receivables consist primarily of trade receivables due from Original Equipment
Manufacturers in the automotive industry and locksmith/dealership 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):
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Year ended July 1, 2018
Year ended July 2, 2017
Year ended July 3, 2016
Balance,
Beginning
of Year
$500
$500
$500
Provision
for Doubtful
Accounts
-
$
$
-
$ -
Net
Write-Offs
$ -
$ -
-
$
Balance,
End of
Year
$500
$500
$500
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 1, 2018
$ 13,410
10,059
27,185
50,654
(4,000)
$46,654
July 2, 2017
$ 9,976
9,328
20,682
39,986
(4,510)
$35,476
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 1, 2018
Year ended July 2, 2017
Year ended July 3, 2016
Balance,
Beginning
of Year
$4,510
$2,800
$2,300
Provision
Charged to
Expense
$1,002
$2,718
$ 844
Amounts
Written Off
$1,512
$1,008
$ 344
Balance,
End of
Year
$4,000
$4,510
$2,800
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 $3.8 million at July 1, 2018 and $3.7 million at July 2, 2017. 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 1, 2018
Year ended July 2, 2017
Year ended July 3, 2016
Balance,
Beginning
of Year
$900
$700
$620
Provision
Charged to
Expense
$201
$438
$366
Amounts
Written Off
$201
$238
$286
Balance,
End of
Year
$900
$900
$700
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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 1, 2018
$ 890
(890)
-
$
July 2, 2017
$ 890
(849)
$ 41
Intangible amortization expense was $41,000 for the year ended July 1, 2018 and $99,000 for
each of the years ended July 2, 2017, July 3, 2016. The intangible assets are fully amortized as of
July 1, 2018.
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 1, 2018
$ 5,545
34,483
229,688
269,716
(153,174)
$116,542
$
July 2, 2017
4,732
36,046
210,741
251,519
(139,928)
$ 111,591
Depreciation expense was as follows for the periods indicated (thousands of dollars):
Fiscal Year
2018
2017
2016
Depreciation Expense
$14,544
$11,319
$10,022
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 1, 2018
$140,681
$ 74,364
July 2, 2017
$130,166
$ 69,652
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 1, 2018, July 2, 2017 or July 3, 2016.
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
2018
2017
2016
Percentage of
Inventory Purchases
32%
39%
36%
Number of
Suppliers
5
7
6
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 4,420 full-time associates of which approximately
260 or 5.9 percent were represented by a labor union at July 1, 2018. 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 $4.8 million in 2018, $4.6 million in 2017 and $430,000 in 2016.
Other Income (Expense), Net: Net other income (expense) included in the accompanying
Consolidated Statements of Income and Comprehensive Income (Loss) primarily included foreign currency
transaction gains and losses, realized and unrealized gains and losses on our Mexican peso currency
forward contracts, the components of net periodic benefit cost other than the service cost component
related to our pension and postretirement plans 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, 2017 and
2018 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 (loss) gain on Mexican peso
forward contracts
Realized gain (loss) on Mexican peso
forward contracts
Pension and postretirement plans credit (cost)
Other
July 1, 2018
$
549
193
(1,160)
1,140
447
(149)
$ 1,020
Years Ended
July 2, 2017
$1,128
296
2,010
(1,650)
(1,140)
523
$1,167
July 3, 2016
$2,559
(41)
(889)
(1,196)
(1,271)
235
$ (603)
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 2015 through 2018.
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 (Loss). 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 1, 2018
Year ended July 2, 2017
Year ended July 3, 2016
Balance,
Beginning
of Year
$420
$420
$420
Provision
Charged to
Expense
$5,784
$5,796
$5,032
Payments
$5,784
$5,796
$5,032
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. The 2018 warranty provision included costs for various known or expected
warranty issues as of June 2018 for which amounts were reasonably estimable. During 2017, the warranty
liability was reduced as a result of settlement payments of previously accrued customer warranty issues.
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 1, 2018
Year ended July 2, 2017
Year ended July 3, 2016
Balance,
Beginning
of Year
$ 5,550
$ 9,228
$11,835
Provision
(Recoveries)
Charged
to Expense
$2,617
$ (843)
$ 583
Payments
$ 367
$2,835
$3,190
Balance
End of
Year
$7,800
$5,550
$9,228
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 (Loss).
Accumulated Other Comprehensive Loss: Accumulated other comprehensive loss (“AOCL”)
was comprised of the following (thousands of dollars):
Unrecognized pension and postretirement
benefit liabilities, net of tax
Foreign currency translation, net of tax
July 1, 2018
July 2, 2017
July 3, 2016
$18,148
15,291
$33,439
$18,750
14,138
$32,888
$24,518
13,155
$37,673
The following tables summarize the changes in AOCL for the years ended July 1, 2018 and July 2, 2017
(thousands of dollars):
Foreign Currency
Translation
Adjustments
Year Ended July 1, 2018
Retirement and
Postretirement
Plans
Balance July 2, 2017
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 loss
attributable to non-controlling interest
Balance July 1, 2018
$14,138
2,370
(151)
2,219
-
-
-
-
-
2,219
1,066
$15,291
$18,750
820
(193)
627
752
(2,514)
(1,762)
533
(1,229)
(602)
-
$18,148
Total
$32,888
3,190
(344)
2,846
752
(2,514)
(1,762)
533
(1,229)
1,617
1,066
$33,439
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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
(A) Amounts reclassified are included in the computation of net periodic benefit cost, which is included in Other Income, net
in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss). See Retirement
Plans and Postretirement Costs note to these Notes to Financial Statements below.
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 1, 2018 were 133,074.
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.
All compensation cost related to stock options granted under the plan has been recognized as of
July 1, 2018. Unrecognized compensation cost as of July 1, 2018 related to restricted stock granted under
the plan was as follows (thousands of dollars):
Compensation
Cost
$1,092
Weighted Average Period
over which Cost is to be
Recognized (in years)
0.9
Restricted stock granted
Unrecognized compensation cost will be adjusted for any future changes in estimated and actual forfeitures.
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Cash received from stock option exercises and the related income tax benefit were as follows
(thousands of dollars):
Fiscal Year
2018
2017
2016
Cash Received from
Stock Option Exercises
$ 139
$ 136
$ 364
Income Tax
Benefit
$
-
$ 25
$ 196
The intrinsic value of stock options exercised and the fair value of options vested were as follows
(thousands of dollars):
Intrinsic value of options exercised
Fair value of stock options vested
July 1, 2018
$ 110
$ 315
Years Ended
July 2, 2017
$ 115
$ 566
July 3, 2016
$ 529
$ 331
No options were granted during the fiscal years ended July 1, 2018, July 2, 2017 or 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
81,850/81,850
9,010/9,010
$15.36/$15.36
$31.06/$31.06
$79.73/$79.73
$29.37/$29.37
1.2
4.2
6.1
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 (Loss).
Our income tax provision for the current year was impacted by the Tax Cuts and Jobs Act of 2017 (“the
Act”), which was signed into law on December 22, 2017 with an effective date of January 1, 2018. The Act
makes broad and complex changes to the U.S. tax code that affected our fiscal year ending July 1, 2018,
including but not limited to (1) a reduction in the U.S. statutory tax rate to 21 percent following its effective
date and a change in the measurement of our deferred tax assets and deferred tax liabilities resulting from
the reduction in the statutory rate, (2) requiring a one-time transition tax on certain deemed repatriated
earnings of foreign subsidiaries that is payable over eight years, and (3) bonus depreciation that will allow for
full expensing of qualified property. Section 15 of the Internal Revenue Code stipulates that for our fiscal year
ending July 1, 2018, we will have a blended statutory corporate tax rate of 28%, which is based on the
applicable statutory tax rates before and after the Act and the number of days in our fiscal year.
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the
Act. SAB 118 provides a measurement period that should not extend beyond one year from the Act’s
enactment date for companies to complete the accounting under ASC 740. In accordance with SAB
118, a company must reflect the income tax effects of those aspects of the Act for which the accounting
under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of
the Act is incomplete but it is still able to determine a reasonable estimate of the tax effect, it must
record a provisional estimate in the financial statements. If a company cannot determine a provisional
estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of
the provision of the tax laws that were in effect immediately before the enactment of the Act.
In connection with our analysis of the impact of the Act, we have recorded an overall net tax
benefit of approximately $3 million during 2018. This net tax benefit primarily consists of (1) the impact of
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the change in measurement of our deferred tax assets and liabilities, which resulted in a favorable
provision impact of $1.6 million, (2) the one-time transition tax on non-previously taxed post-1986
accumulated foreign earnings, which resulted in a net favorable impact of $500,000 and includes
transition tax of $1.4 million offset by the reversal of net deferred tax liability balances totaling $1.9
million, which related to basis differences in foreign earnings, and (3) the impact of changing our
annualized effective tax rate, which resulted in a favorable provision impact of $900,000. Measurement
period adjustments recorded in the three and six month periods ended July 1, 2018 totaled $1.6 million
and $2.0 million, respectively. For various reasons that are discussed more fully below, we have not
completed our accounting for the income tax effects for certain elements of the Act. However, we were
able to make reasonable estimates of certain effects and, therefore, we recorded provisional adjustments
of these elements in the accompanying consolidated financial statements. We identified these items as
provisional since our analysis of the items is not complete.
The Act reduces the corporate tax rate to 21 percent, effective January 1, 2018. For certain
of our net deferred tax assets, we have recorded a provisional adjustment to reflect the reduction
in the corporate tax rate. While we are able to make a reasonable estimate of the impact of the
reduction in the corporate rate, it may be affected by other analyses related to the Act, including,
but not limited to, the impact of our calculation of deemed repatriation of deferred foreign income
and the impact of full expensing for certain assets.
The Deemed Repatriation Transition Tax (“Transition Tax”) is a tax on previously untaxed
accumulated and current earnings and profits (E&P) of certain of our foreign subsidiaries. To determine
the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-
1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such
earnings. We were able to make a reasonable estimate of the Transition Tax and recorded a provisional
Transition Tax obligation in these consolidated financial statements. However, we are continuing to
gather additional information to more precisely compute the amount of the Transition Tax.
We must assess whether our valuation allowance analyses are affected by various aspects of
the Act (e.g., deemed repatriation of deferred foreign income, Global Intangible Low-Taxed Income
(“GILTI”) inclusions, and new categories of Foreign Tax Credits). Since, as discussed herein, we
have recorded provisional amounts related to certain portions of the Act, any corresponding
determination of the need for, or any change in, a valuation allowance is also provisional.
Our accounting for the following elements of the Act is incomplete, and we were not yet able to
make reasonable estimates of the effects. Therefore, no provisional adjustments were recorded for the
following elements in these consolidated financial statements.
Because of the complexity of the new GILTI tax rules, we are continuing to evaluate this
provision of the Act and the application of ASC 740. Under U.S. GAAP, we are allowed to make an
accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income
related to GILTI as a current-period expense when incurred (the “period cost method”) or (2)
factoring such amounts into a company’s measurement of its deferred taxes (the “deferred
method”). Our selection of an accounting policy with respect to the new GILTI tax rules will depend,
in part, on analyzing our global income to determine whether we expect to have future U.S.
inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Because
whether we expect to have future U.S. inclusions in taxable income related to GILTI depends on not
only our current structure and estimated future results of global operations but also our intent and
ability to modify our structure and/or our business, we are not yet able to reasonably estimate the
effect of this provision of the Act. Therefore, we have not made any adjustments related to potential
GILTI tax in our financial statements and have not made a policy decision regarding whether to
record deferred taxes on GILTI.
Our income tax provision for 2017 was impacted by the recognition of a $424,000 deferred tax
liability resulting from a change in assertion regarding the permanent reinvestment of earnings from two
of our Mexican subsidiaries. Prior to our fiscal 2017 second quarter, 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
our fiscal 2017 second quarter, 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 were no longer considered permanently reinvested as of January 1, 2017. As a result, we
repatriated $15.8 million from Mexico to the U.S. during our fiscal 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 in future periods as deemed necessary.
Additionally, our income tax provisions for 2018 and 2017 were affected by the non-controlling interest
portion of our pre-tax income. The non-controlling interest impacts the effective tax rate as ADAC-STRATTEC
LLC and STRATTEC POWER ACCESS LLC entities are taxed as partnerships for U.S. tax purposes.
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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 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 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 and the
results of the VAST LLC foreign subsidiaries and joint venture are reported on a one-month lag
basis. The activities related to the VAST LLC joint ventures resulted in equity earnings of joint
ventures to STRATTEC of approximately $4.4 million during 2018, equity earnings of joint ventures to
STRATTEC of approximately $2.6 million during 2017 and equity loss of joint ventures to STRATTEC
of approximately $639,000 during 2016. 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 2018, 2017
and 2016, capital contributions totaling $375,000, $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 $125,000 in 2018, $400,000 in 2017 and $220,000 in 2016.
ADAC-STRATTEC LLC, a Delaware limited liability company, was formed in fiscal year 2007
to support injection molding and door handle assembly operations in Mexico. ADAC-STRATTEC
LLC was 51 percent owned by STRATTEC and 49 percent owned by ADAC for all periods
presented in this report. An additional Mexican entity, ADAC-STRATTEC de Mexico, is wholly
owned by ADAC-STRATTEC LLC. ADAC-STRATTEC LLC’s financial results are consolidated with
the financial results of STRATTEC and resulted in increased net income to STRATTEC of
approximately $1.8 million in 2018, $3.1 million in 2017 and $2.9 million in 2016. 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 2018 or 2016.
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 $2.2 million in 2018, approximately $2.6 million in 2017
and approximately $2.0 million in 2016.
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
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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 earnings of joint ventures to STRATTEC of
approximately $91,000 in 2018, and equity loss of joint ventures to STRATTEC of approximately $1.9
million in 2017 and $1.6 million in 2016. During all periods presented in this report, 100 percent of
the funding for SAL LLC was being made through loans from STRATTEC to SAL LLC and through
STRATTEC’s guarantee of the SAL Credit Facility which is discussed herein. Therefore, for all periods
presented in this report, even though STRATTEC maintains a 51 percent ownership interest in SAL LLC,
STRATTEC recognized 100 percent of the losses of SAL LLC up to our committed financial support
through Equity Earnings (Loss) of Joint Ventures in the accompanying Consolidated Statements of
Income and Comprehensive Income (Loss). In addition, the equity loss of joint ventures for SAL LLC
included the following for the periods presented (thousands of dollars):
Loss on Loan to SAL LLC
Loss on Guarantee of SAL LLC
Credit Facility
July 1, 2018
$
$
-
-
Years Ended
July 2, 2017
$
$
-
-
July 3, 2016
$ 225
$ 247
During fiscal 2018, we, along with our joint venture partner, reduced operating the business of SAL
LLC to winding down and selling only commercial biometric locks.
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 1, 2018
July 2, 2017
$22,192
$16,840
$
458
$
463
See further discussion under Equity Earnings (Loss) of Joint Ventures included in Notes to Financial
Statements herein.
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 1, 2018
$174,896
134,185
40,711
26,450
-
14,261
1,757
16,018
2,632
$ 13,386
$ 4,463
(22)
Years Ended
July 2, 2017
$128,963
101,910
27,053
19,710
-
7,343
1,662
9,005
1,235
7,770
$
$
2,590
3
July 3, 2016
$114,338
94,060
20,278
15,866
6,000
(1,588)
(115)
(1,703)
168
$ (1,871)
$
(624)
(15)
of VAST LLC
$ 4,441
$
2,593
$
(639)
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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 1, 2018
$ 8,959
43,930
20,510
16,020
89,419
42,923
14,974
$147,316
July 2, 2017
$ 11,757
41,942
15,185
11,782
80,666
31,017
12,850
$124,533
$ 74,721
5,654
$ 80,375
$ 70,753
2,960
$ 73,713
$ 66,941
$ 50,820
STRATTEC’s share of VAST LLC net assets
$ 22,314
$ 16,940
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, as
applicable, in the accompanying Consolidated Statements of Income and Comprehensive Income (Loss).
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. This license agreement expired August 16, 2018. Payments due to Westinghouse
under the license agreement were guaranteed by STRATTEC. As of July 2, 2017, 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. STRATTEC made a payment to Westinghouse of $250,000 on this guarantee during 2018.
STRATTEC’s proportionate share of the guarantee of this payment 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 1, 2018 and July 2, 2017.
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 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
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financial support through Equity Earnings (Loss) of Joint Ventures in the accompanying Consolidated
Statements of Income and Comprehensive Income (Loss) 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 profit (loss)
Engineering, selling and administrative expense
Earnings (Loss) from operations
Other expense, net
Net loss
July 1, 2018
$ 89
67
22
17
5
(258)
$ (253)
STRATTEC’s share of SAL LLC earnings (loss)
Loss on loan to SAL LLC
Loss on guarantee of SAL LLC credit facility
STRATTEC’s equity earnings (loss) of SAL LLC $
91
-
-
91
$
Cash and cash equivalents
Receivables, net
Inventories, net
Total assets
Current liabilities
Net liabilities
STRATTEC’s share of SAL LLC
net liabilities
Years Ended
July 2, 2017
$
369
610
(241)
1,534
(1,775)
(155)
$ (1,930)
$ (1,927)
-
-
$(1,927)
July 3, 2016
$ 603
382
221
1,311
(1,090)
(34)
$(1,124)
$(1,124)
(225)
(247)
$(1,596)
July 1, 2018
July 2, 2017
$
5
40
87
$ 132
$ 3,208
$ (3,076)
$
11
11
345
$
367
$ 3,189
$ (2,822)
$ (1,569)
$ (1,439)
During fiscal 2018, we, along with our joint venture partner, reduced operating the business of SAL LLC
to winding down and selling only commercial biometric locks.
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 1, 2018
$ 3,151
$
98
$ 183
$ 984
$ 886
July 1, 2018
$
53
$
-
$
-
-
$
$ 87
Years Ended
July 2, 2017
$ 1,966
$
234
$ 245
$ 843
$ 1,134
July 2, 2017
$
$
$
$
$
-
-
-
300
-
July 3, 2016
$ 304
$ 363
$ 149
$1,034
$1,526
(A) As of July 1, 2018, outstanding loan and accounts receivable balances due from SAL LLC to STRATTEC totaled $2.6 million and $82,000,
respectively. 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 1, 2018 and 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.
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 $30 million secured revolving credit facility (the
“ADAC-STRATTEC Credit Facility”) with BMO Harris Bank N.A., which is guaranteed by STRATTEC. The
ADAC-STRATTEC Credit Facility borrowing limit decreases to $25 million effective July 1, 2019. The
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credit facilities both expire on 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 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 1, 2018, 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 2018 and 2017 were as follows (thousands of dollars):
STRATTEC Credit Facility
ADAC-STRATTEC Credit Facility
July 1, 2018
$23,000
$28,000
July 2, 2017
$16,000
$14,000
Average outstanding borrowings and the weighted average interest rate under each such credit
facility during 2018 and 2017 were as follows (thousands of dollars):
Average Outstanding
Borrowings
Weighted Average
Interest Rate
Years Ended Years Ended
July 2, 2017
July 1, 2018
1.8%
STRATTEC Credit Facility
$21,668
1.8%
ADAC-STRATTEC Credit Facility $22,621
July 1, 2018
2.5%
2.5%
July 2, 2017
$12,490
$10,865
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 1,
2018, costs of approximately $584,000 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 1, 2018, is adequate.
At July 1, 2018, we had purchase commitments related to zinc, other purchased parts and natural gas.
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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
2019
2020
2021
2022
2023-2024
Rental expense under all non-cancelable operating leases was as follows (thousands of dollars):
Fiscal Year
2018
2017
2016
Rental Expense
$ 731
$ 704
691
$
Minimum Rental
Commitments
$ 919
$ 361
$ 134
$ 91
$ 140
Purchase
Commitments
$ 9,195
$ 3,929
$ -
-
$
-
$
INCOME TAXES
The provision for income taxes consisted of the following (thousands of dollars):
Currently payable:
Federal
State
Foreign
Deferred tax provision
July 1, 2018
Years Ended
July 2, 2017
July 3, 2016
$ 156
73
812
1,041
1,029
$2,070
$ 228
3
2,202
2,433
1,851
$4,284
$
18
130
1,893
2,041
3,027
$5,068
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
U.S. tax reform: transition tax
U.S. tax reform: change in deferred rate
Research and development tax credit
Non-controlling interest
Uncertain tax positions
Stock based compensation
Other
July 1, 2018
28.0%
1.6
(0.7)
-
(3.0)
(9.3)
(2.5)
(5.6)
2.1
1.7
(0.6)
11.7%
Years Ended
July 2, 2017
35.0%
1.2
(1.1)
3.8
-
-
(2.7)
(9.9)
0.8
0.1
(1.1)
26.1%
July 3, 2016
34.0%
1.3
0.6
-
-
-
-
(9.3)
-
0.2
(0.4)
26.4%
The components of deferred tax (liabilities) assets were as follows (thousands of dollars):
July 1, 2018
July 2, 2017
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
$ 6,887
517
1,959
727
799
303
212
118
248
(375)
(4,902)
(9,235)
814
967
$ (961)
$11,191
925
2,605
1,488
1,249
484
333
185
1,669
(405)
(6,034)
(14,483)
808
241
256
$
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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.
State operating loss and credit carry-forwards at July 1, 2018 resulted in future benefits of approximately
$248,000 and expire at varying times between 2024 and 2032. A valuation allowance of $172,000 has been
recorded as of July 1, 2018, 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 $1.1 million in 2018, $5.3 million in 2017 and
$6.0 million in 2016. 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 $796,000 as of July 1, 2018 and $610,000 as of July 2,
2017 and was included in Other Long-term Liabilities in the accompanying Consolidated Balance Sheets. This
liability includes approximately $741,000 of unrecognized tax benefits at July 1, 2018 and $571,000 at July 2,
2017 and approximately $55,000 of accrued interest at July 1, 2018 and $39,000 at July 2, 2017. 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 $375,000 at July 1, 2018 and $143,000 at July 2, 2017. 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 1, 2018 and July 2, 2017 (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 1, 2018
July 2, 2017
$ 571
101
-
126
(57)
$ 741
$ 441
28
-
177
(75)
$ 571
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 2015 through 2018 for Federal, fiscal 2011
through 2018 for most states and calendar 2013 through 2017 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 prior to 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 subsequently approved to proceed with the termination of the
Qualified Pension Plan. We submitted a request to and received a response from the IRS for a determination letter
that the Qualified Pension Plan is qualified for termination. We intend to distribute substantially all of the Qualified
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Pension Plan assets prior to the end of December 2018. 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 may occur during fiscal year 2019 but have not yet been determined and is still subject to
final Board approval.
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 $2.8 million at July 1,
2018 and $2.6 million at July 2, 2017, and are included in Other Long-Term Assets in the accompanying
Consolidated Balance Sheets. The projected benefit obligation under the amended SERP was $1.9 million at July 1,
2018 and $1.8 million at July 2, 2017. 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 1, 2018, which have not yet
been recognized in net periodic benefit cost were as follows (thousands of dollars):
Prior service credit
Net actuarial loss
Pension and SERP
$
-
16,515
$ 16,515
Postretirement
$
(294)
1,927
$ 1,633
Prior service cost (credit) and unrecognized net actuarial losses included in accumulated other
comprehensive loss at July 1, 2018 which are expected to be recognized in net periodic benefit cost
(credit) in fiscal 2019, net of tax, for the pension, SERP and postretirement plans are as follows (thousands
of dollars):
Prior service credit
Net actuarial loss
Pension and SERP
$
-
1,272
$ 1,272
Postretirement
$
(336)
329
(7)
$
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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,
July 2,
2016
2017
July 1,
2018
Postretirement Benefits
Years Ended
July 3,
July 2,
2016
2017
July 1,
2018
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)
3,857
(6,111)
12
$ 66 $ 54 $ 50
4,387
3,926
(5,509)
(5,854)
11
11
2,035 3,228 2,443
$ (141) $1,365 $1,382
$
13 $ 13 $
45
-
(764)
12
87
-
(764)
479 538 616
(158) $ (49)
$ (227) $
55
-
(764)
Pension and SERP Benefits
2018
2017
Postretirement Benefits
2017
2018
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
4.30%
3.0%
3.91%
5.45%
3.0%
CHANGE IN PROJECTED
BENEFIT OBLIGATION:
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial gain
Benefits paid
Benefit obligation at end of year
$101,266
66
3,857
(1,392)
(4,962)
$ 98,835
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $112,524
3,890
14
(4,962)
$111,466
Actual return on plan assets
Employer contribution
Benefits paid
Fair value of plan assets at end of year
Funded status–prepaid (accrued)
3.91%
3.0%
3.79%
5.45%
3.0%
$106,152
54
3,926
(4,342)
(4,524)
$101,266
$104,460
7,574
5,014
(4,524)
$112,524
4.30%
n/a
3.91%
n/a
n/a
3.91%
n/a
3.79%
n/a
n/a
$ 1,268
13
45
(8)
(277)
$ 1,041
$
-
-
277
(277)
$ -
$ 1,602
13
55
(80)
(322)
$ 1,268
$
-
-
322
(322)
$ -
benefit obligations
$ 12,631
$ 11,258
$ (1,041)
$ (1,268)
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
$ 14,547
$ 13,082
$
-
$
-
(363)
(332)
(215)
(265)
(1,553)
$ 12,631
(1,492)
$ 11,258
(826)
$ (1,041)
(1,003)
$ (1,268)
CHANGES IN PLAN ASSETS AND
BENEFIT OBLIGATIONS RECOGNIZED
IN OTHER COMPREHENSIVE INCOME:
Net periodic benefit (credit) cost
Net actuarial loss (gain)
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
$ (141)
828
(12)
(2,035)
$ 1,365
(6,063)
(11)
(3,228)
$ (227)
(8)
764
(479)
$ (158)
(80)
764
(538)
(1,219)
(9,302)
277
146
$ (1,360)
$ (7,937)
$
50
$
(12)
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 1, 2018
$96,919
$96,919
July 2, 2017
$99,442
$99,442
July 1, 2018
$1,749
$1,916
July 2, 2017
$1,591
$1,824
For measurement purposes as it pertains to the estimated obligation associated with retirees prior to January 1,
2010, a 7.4 percent annual rate increase in the per capita cost of covered health care benefits was assumed for fiscal
2019; 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 2018
Effect on postretirement benefit obligation as of July 1, 2018
1% Increase
$ -
$ 5
1% Decrease
$ -
$ (4)
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 2018 and 2017:
Equity investments
Fixed-income investments /cash
Total
Target Allocation
0-50%
50-100
100%
July 1, 2018
13%
87
100%
July 2, 2017
38%
62
100%
The following is a summary, by asset category, of the fair value of pension plan assets at the June 30,
2018 and June 30, 2017 measurement dates (thousands of dollars):
June 30, 2018
Level 1
Level 2 Level 3
$ - $ 7,617 $
Asset Category
Cash and cash equivalents
Equity securities/funds:
Total
June 30, 2017
Level 1 Level 2
Level 3
Total
- $ 7,233
- $ 7,617 $ - $ 7,233 $
Small cap
Mid cap
Large cap
International
Fixed income:
-
4,953
4,945
4,443
-
-
-
-
- -
- 4,953
- 4,945
- 4,443
1,008
12,414
19,961
8,941
-
-
-
-
- 1,008
- 12,414
- 19,961
- 8,941
Bond funds/bonds
Total
- 89,508 - 89,508 5,718 57,249 - 62,967
- $111,466 $ 48,042 $64,482 $ - $112,524
$ 14,341 $97,125 $
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There were no transfers in or out of Level 3 investments during the measurement year ended
June 30, 2018.
The expected long-term rate of return on U.S. pension plan assets used to calculate net periodic
benefit cost was 4.05 percent for 2019 and 5.45 percent for 2018. In connection with the planned
termination of the Qualified Pension Plan, we have shifted the target asset allocation to 0 - 50 percent
public equity and 50 - 100 percent fixed income/cash in 2018 from the previous years’ target allocation
of 35 percent public equity and 65 percent fixed income/cash. The 4.05 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, 2018 were 2.97 percent for 5 years, 3.98 percent for 10 years, 4.28 percent for 15 years, 4.80
percent for 20 years, 5.21 percent for 25 years and 5.97 percent for 30 years.
We do not expect to make contributions to our qualified pension plan in fiscal 2019. We expect
to contribute $364,000 to our SERP and $215,000 to our postretirement health care plan in fiscal 2019.
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):
2019
2020
2021
2022
2023
2024-2028
Pension and SERP Benefits
$ 5,719
$ 5,760
$ 6,360
$ 6,411
$ 6,136
$31,401
Postretirement Benefits
$ 215
$ 163
$ 146
$ 135
$ 108
$ 254
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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 1, 2018
$ 1,793
Years Ended
July 2, 2017
$ 1,805
July 3, 2016
$ 1,783
We have 12,000,000 shares of authorized common stock, par value $.01 per share, with 3,635,203 and
3,596,616 shares outstanding at July 1, 2018 and July 2, 2017, 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 1, 2018. As of July 1, 2018, 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 2018 or 2017.
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 1, 2018
$12,283
-
$12,283
Years Ended
July 2, 2017
$ 7,197
1
$ 7,196
July 3, 2016
$ 9,149
58
$ 9,091
3,628
75
3,703
$ 3.39
$ 3.32
3,588
82
3,670
$
$
2.01
1.96
3,559
62
3,621
$
$
2.55
2.51
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 1, 2018
July 2, 2017
July 3, 2016
Number of Options Excluded
41,200
9,010
9,010
STOCK OPTION AND PURCHASE PLANS
A summary of stock option activity under our stock incentive plan was as follows:
Balance at June 28, 2015
Exercised
Terminated
Balance at July 3, 2016
Exercised
Balance at July 2, 2017
Exercised
Balance at July 1, 2018
Exercisable as of:
July 1, 2018
July 2, 2017
July 3, 2016
Shares
163,907
(16,909)
(2,000)
144,998
(6,490)
138,508
(5,434)
133,074
133,074
129,498
103,798
No options were granted during fiscal 2018, 2017 or 2016.
Weighted
Average
Exercise
Price
Weighted Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic
Value
(in thousands)
$27.97
$21.55
$17.59
$28.86
$20.96
$29.23
$25.64
$29.37
$29.37
$25.71
$21.39
3.4
3.4
4.2
4.6
$ 862
$ 862
$ 1,361
$2,174
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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
A summary of restricted stock activity under our stock incentive plan was as follows:
Nonvested Balance at June 28, 2015
Granted
Vested
Forfeited
Nonvested Balance at July 3, 2016
Granted
Vested
Forfeited
Nonvested Balance at July 2, 2017
Granted
Vested
Forfeited
Nonvested Balance at July 1, 2018
Shares
66,350
28,750
(20,300)
(3,050)
71,750
27,150
(21,250)
(1,800)
75,850
27,950
(30,400)
(4,275)
69,125
Weighted Average
Grant Date Fair Value
$45.03
$69.02
$23.69
$59.92
$60.05
$43.87
$37.53
$58.24
$60.61
$33.30
$62.99
$52.47
$49.02
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
2,753 at an average price of $37.06 during 2018, 3,019 at an average price of $34.88 during 2017 and 1,948 at an average
price of $55.77 during 2016. A total of 61,412 shares remain available for purchase under the plan as of July 1, 2018.
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 1, 2018
Years Ended
July 2, 2017
Net Sales
$157,862
%
36%
Net Sales
$160,275
%
38%
July 3, 2016
Net Sales
$152,728
%
38%
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 1, 2018
Years Ended
July 2, 2017
Net Sales
$ 70,920
%
16%
Net Sales
$ 73,481
%
18%
July 3, 2016
Net Sales
$ 74,310
%
19%
Export sales into Canada
PRODUCT SALES
Sales by product group were as follows (thousands of dollars and percent of total net sales):
Keys & locksets
Door handles & exterior trim
Power access
Driver controls
Aftermarket & OE service
Latches
Other
July 1, 2018
Net Sales
$118,256
88,788
86,380
51,817
43,311
42,381
8,262
$439,195
%
27%
20
20
12
10
9
2
100%
Years Ended
July 2, 2017
Net Sales
$114,938
67,722
84,457
56,983
47,216
35,307
10,702
$417,325
%
28%
16
20
14
11
8
3
100%
July 3, 2016
Net Sales
$113,765
61,376
83,747
55,955
48,200
28,023
10,353
$401,419
%
28%
15
21
14
12
7
3
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 1, 2018
Net Sales
$110,650
85,827
64,427
$260,904
%
25%
20
14
59%
Years Ended
July 2, 2017
Net Sales
$100,575
88,624
62,314
$251,513
%
24%
21
15
60%
July 3, 2016
Net Sales
$115,858
79,893
57,317
$253,068
%
29%
20
14
63%
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 1, 2018 July 2, 2017
Receivables
$ 19,908
16,366
7,537
$ 43,811
%
27%
22
10
59%
Receivables %
26%
$ 17,107
21
13,395
13
8,644
60%
$ 39,146
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 1, 2018, 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 1, 2018, 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 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 shareholders and the Board of Directors of STRATTEC SECURITY CORPORATION:
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of STRATTEC SECURITY
CORPORATION and subsidiaries (the “Company”) as of July 1, 2018, based on criteria
established in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the
Company maintained, in all material respects, effective internal control over financial
reporting as of July 1, 2018, based on criteria established in Internal Control — Integrated
Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements
as of and for the year ended July 1, 2018, of the Company and our report dated September
6, 2018, expressed an unqualified opinion on those financial statements.
Basis for Opinion
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 are a public
accounting firm registered with the PCAOB and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
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Deloitte & Touche LLP
Milwaukee, Wisconsin
September 6, 2018
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 shareholders and the Board of Directors of STRATTEC SECURITY CORPORATION:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of STRATTEC
SECURITY CORPORATION and subsidiaries (the "Company") as of July 1, 2018 and July 2,
2017, the related consolidated statements of income and comprehensive income (loss),
shareholders’ equity, and cash flows, for each of the three years in the period ended July 1,
2018, and the related notes (collectively referred to as the "financial statements"). In our
opinion, the financial statements present fairly, in all material respects, the financial position
of the Company as of July 1, 2018 and July 2, 2017, and the results of its operations and its
cash flows for each of the three years in the period ended July 1, 2018, 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) (PCAOB), the Company's internal control over
financial reporting as of July 1, 2018, based on criteria established in Internal Control —
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated September 6, 2018, expressed an unqualified
opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the Company's financial statements based on our
audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or
fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the financial statements. Our
audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
Deloitte & Touche LLP
Milwaukee, Wisconsin
September 6, 2018
We have served as the Company’s auditor since 2010.
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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 2014 and 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. Fiscal years
2014 through 2017 have been retrospectively adjusted for the adoption of an update to the accounting
guidance for the presentation of net periodic pension cost and net periodic postretirement benefit cost
which requires the service cost component of net periodic benefit cost to be reported in the same line items
as other compensation costs arising from services rendered by the pertinent employees during the
applicable period while remaining components of net periodic benefit cost are required to be presented
separately outside a subtotal of income from operations. 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
2018
2017
2016
2015
2014
$439,195
54,443
$417,325
60,955
$401,419
65,726
$411,475
73,230
$348,419
66,448
INCOME STATEMENT DATA
Net sales
Gross profit
Engineering, selling and
administrative expenses
41,168
46,113
43,547
41,277
39,045
Income from operations
Interest income
Equity earnings (loss)
of joint ventures
Interest expense
Other income (expense), 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
13,275
8
14,842
136
22,179
25
31,953
185
4,532
(1,137)
1,020
17,698
2,070
15,628
666
(417)
1,167
16,394
4,284
12,110
(2,235)
(176)
(603)
19,190
5,068
14,122
(788)
(71)
2,654
33,933
9,382
24,551
27,403
106
957
(45)
(607)
27,814
8,674
19,140
3,345
4,913
4,973
3,897
2,716
STRATTEC SECURITY CORPORATION
$ 12,283
$ 7,197
$ 9,149
$ 20,654
$ 16,424
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
$
$
3.39
3.32
$
$
2.01
1.96
$
0.56
$
0.56
$
$
$
2.55
2.51
$
$
5.80
5.66
0.52
$
0.48
$
$
$
4.70
4.59
0.44
$ 82,310
$307,175
$ 55,136
$ 61,110
$273,714
$ 33,105
$ 70,236
$242,176
$ 23,449
$ 63,871
$230,834
$ 13,698
$ 64,705
$207,909
$ 7,743
$162,158
$151,088
$139,332
$140,312
$125,506
F I N A N C I A L S U M M A RY
QUARTERLY FINANCIAL DATA (UNAUDITED)
Fiscal 2017 quarterly financial data has been retrospectively adjusted for the adoption of an update
to the accounting guidance for the presentation of net periodic pension cost and net periodic
postretirement benefit cost which requires the service cost component of net periodic benefit cost to be
reported in the same line items as other compensation costs arising from services rendered by the
pertinent employees during the applicable period while remaining components of net periodic benefit
cost are required to be presented separately outside a subtotal of income from operations. The following
data are in thousands of dollars except per share amounts.
2018
2017
Quarter
Net Sales Gross Profit
First
Second
Third
Fourth
TOTAL
First
Second
Third
Fourth
TOTAL
$102,460
103,182
116,823
116,730
$439,195
$100,244
98,945
109,706
108,430
$417,325
$13,463
12,646
15,197
13,137
$54,443
$14,803
13,694
17,601
14,857
$60,955
Net Income
Attributable to
STRATTEC
Earnings
Per Share
Basic
Diluted
Cash
Dividends
Declared
Per Share
Market Price Per Share
High
Low
$ 2,456
2,882
2,969
3,976
$12,283
$ 1,542
398
3,482
1,775
$ 7,197
$ 0.68
0.79
0.82
1.09
$ 3.39
$ 0.43
0.11
0.97
0.49
$2.01
$ 0.67
0.78
0.80
1.07
$ 3.32
$ 0.42
0.11
0.95
0.48
$1.96
$ 43.85
$ 49.20
$ 46.40
$ 40.40
$30.05
$39.00
$33.10
$30.25
$ 48.86
$ 44.00
$ 44.43
$ 39.10
$34.76
$31.05
$25.65
$23.00
$0.14
0.14
0.14
0.14
$0.56
$0.14
0.14
0.14
0.14
$0.56
Registered shareholders of record at July 1, 2018, were 1,174.
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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 June 30, 2013 had
$100 been invested at the close of business on June 30, 2013 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
6/30/13
6/29/14
6/28/15
7/3/16
7/2/17
7/1/18
STRATTEC SECURITY CORPORATION** 100.00
178.32
190.81
116.04
98.58
86.40
NASDAQ Composite Index
100.00
132.45
151.00
148.88
189.66
233.12
Dow Jones U.S. Auto Parts Index
100.00
135.92
146.53
127.68
157.51
177.30
* $100 invested on 6/30/13 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 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, the closing price on June 30, 2017 was $35.40 and the closing price on June 29,
2018 was $30.55.
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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 9, 2018, at the
Holiday Inn Milwaukee Riverfront,
4700 North Port Washington Road,
Milwaukee, WI 53217
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
EQ 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, 70
Chairman of the Board
Frank J. Krejci, 68
President and Chief Executive Officer
Thomas W. Florsheim, Jr., 60
Chairman and Chief Executive Officer of
Weyco Group, Inc.
Director of Weyco Group, Inc.
Michael J. Koss, 64
Chairman, President and
Chief Executive Officer of Koss Corporation
Director of Koss Corporation
David R. Zimmer, 72
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, 68
Patrick J. Hansen, 59
Senior Vice President-Chief Financial Officer,
Treasurer and Secretary
Rolando J. Guillot, 50
Senior Vice President-Operations
Brian J. Reetz, 60
Vice President-Security Products
Richard P. Messina, 52
Vice President-Global Sales and
Access Products
Al-Waleed H. Hamdan, 50
Vice President-Product Management
THE POWER OF INNOVATION
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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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