LETTER TO THE SHAREHOLDERS

 

 

Dear STRATTEC Shareholders,

It is appropriate to first thank over 3,000 STRATTEC associates for their extra ordinary efforts this past year. This year should make us all proud of what we have accomplished.

After over 100 years of history, we celebrated our 20th year as an independent company spun off from Briggs & Stratton Corporation. It was highlighted by joining the Russell 2000 and an invitation from NASDAQ to ring the closing bell. It was a fun honor for the Board, the executives and a 20+ year employee chosen at random, who had never been to New York.

Financial:

On top of record sales in 2014, fiscal 2015 achieved both record sales and record profits despite earnings being tempered by extraordinary year-end charges. Long term shareholders have been rewarded with sky high total returns of 70% in fiscal 2013 and another 80% in fiscal 2014. During this fiscal year, similar returns were achieved when our stock price reached a record high. By year end, we returned to earth with modest returns of 7% for 2015.

Operations:

During our first quarter, we were under severe time pressure to deliver parts to support a customer’s warranty recall. It was a very significant effort, but we satisfied our customers’ needs. We benefitted from the added volume, but it was somewhat offset by time pressure inefficiencies and a multi-month plant shutdown by one of our major customers during the last half of our fiscal year.

We ended this otherwise excellent year with a large charge to profits in anticipation of an expected vehicle recall for a quality issue. Learning from this, we are taking action by significantly restructuring our quality organization to further reduce the chance of an event like this repeating in the future.

Less than 10% of our associates are union represented. We cooperatively completed a new 4-year agreement during fiscal 2015.

We are paying attention to managing our financial risks by de-risking our pension asset portfolio. Our position of investments in equities has been cut in half in anticipation of selling this obligation to a financial institution in the next 18 to 24 months.

This has been a year of expansion. STRATTEC operations in Mexico bought a third plant this year to handle increasing volumes and take advantage of other growth opportunities. Our Michigan Sales and Engineering group moved from multiple rented facilities into a purchased facility in Auburn Hills. It brings together sales, engineering, prototype operations and VAST partners under one roof, plus provides branding visibility that we did not have before. For about the same cost, we now have room to grow and can

 

LETTER TO THE SHAREHOLDERS

 

 

far better display technologies for our customers. These buildings are the primary reason that our capital expenditures were significantly higher than normal this year.

VAST:

Our global alliance, VAST, is extremely important to us. Together, the members of VAST have nearly $1.5 billion in global automotive sales. Yet, in presentations to analysts, it has become obvious that the working structure is confusing. Additional space in this annual report is devoted to better describe how VAST operates and benefits STRATTEC.

Through VAST, we made an important strategic investment to support our global footprint. India is projected to be one of the fastest growing developed economies where many automotive OEMs are making significant investments. We were fortunate that the premiere Indian company, making similar products, became available to partner with us. VAST now owns 50% of Minda-VAST Access Systems. The other half is owned by Spark Minda, a $600 million public company based in India. In addition to participating in Indian growth, we believe this will give VAST the resources to be even more competitive on global quotes.

Diversification:

Our biometric lock company secured the exclusive rights to market its products under the Westinghouse Security name. Securing this agreement resulted in delays and added costs this year. STRATTEC Component Solutions, which does automotive quality contract manufacturing primarily in zinc die casting, is making progress. Both of these endeavors have hurt our bottom line this year, but we fully expect them to generate benefits in the future.

We continue to have conversations with many companies about opportunities to work together in a variety of ways.

Summary:

It was a year which should make us proud of what we accomplished. While it is good to pause and savor the moment, we are already focused on striving for continuous improvement on many fronts. We appreciate the support of our customers, associates, shareholders and directors and view our day to day efforts as both a responsibility and an exciting opportunity.

Sincerely,

 

Frank J. Krejci

President & Chief Executive Officer

 

FINANCIAL HIGHLIGHTS

(IN MILLIONS)

 

 

 

		2015				2014				2013
Net Sales		$	411.5			$	348.4			$	298.2
Gross Profit			72.7				65.8				53.9
Income from Operations			31.1				26.5				16.8
Net Income Attributable to STRATTEC			20.7				16.4				9.4
Total Assets			235.4				213.0				169.5
Total Debt			10.0				2.5				2.3
STRATTEC Shareholders’ Equity			140.3				125.5				104.2

ECONOMIC VALUE ADDED (EVA ^® )

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 2015 was a positive $6.5 million which represents a $200,000 improvement from 2014. (For further explanation of our EVA ^® Plan, see our 2015 definitive Proxy Statement.)

 

Net Operating Profit After Cash-Basis Taxes						$	18.6
Average Monthly Net Capital Employed		$	120.7
Cost of Capital			10	%
Capital Charge							12.1
Economic Value Added						$	6.5

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:

 

2015 Net Income Attributable to STRATTEC as Reported		$	20.7
Deferred Tax Provision			(3.3	)
Other			1.2
Net Operating Profit After Cash-Basis Taxes		$	18.6

Average Monthly Net Capital Employed:

 

Total STRATTEC Shareholders’ Equity as Reported at June 28, 2015		$	140.3
Long-Term Liabilities			18.3
Other Long-Term Assets			(10.8	)
Deferred Tax Assets			(9.6	)
Other			(11.5	)
Net Capital Employed at June 28, 2015		$	126.7
Impact of 12 Month Average			(6.0	)
Average Monthly Net Capital Employed		$	120.7

EVA ^® is a registered trademark of Stem, Stewart & Co.

 

COMPANY DESCRIPTION

 

 

BASIC BUSINESS

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 through VAST LLC (“VAST”). Under this relationship STRATTEC, WITTE and ADAC market each company’s products to global customers under the “VAST” brand name. Our products are shipped to customer locations in the United States, Canada, Mexico, Europe, South America, Korea and China, and we provide full service and aftermarket support.

 

STRATTEC was named 2014 Supplier of the Year by Ford Rotunda which recognizes the service business STRATTEC has created.

 

HISTORY

STRATTEC formerly was a division of Briggs & Stratton Corporation. 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 twenty years.

Our history in the automotive security business spans over 100 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.

 

PRODUCTS

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 from zinc or injection molded plastic and may include electronic components for theft deterrent systems.

We are also developing additional access control products, including trunk latches, lift gate latches, tailgate latches, hood latches, side door latches and related hardware. With our acquisition of Delphi Corporation’s Power Products Group in fiscal 2009, we are now supplying power access devices for sliding side doors, lift gates and trunk lids. Through a joint venture formed with ADAC Automotive

 

COMPANY DESCRIPTION

 

 

during fiscal 2007, we also supply door handle components and related vehicle access hardware.

 

To maintain a strong focus on each of these access control products, we have Product Business Managers who oversee the product’s entire life cycle, including product concept, application, manufacturing, warranty analysis, service/aftermarket, and financial/commercial issues. The Product Business Managers work closely with our sales organization, our engineering group, and our manufacturing operations to assure their products are receiving the right amount of quality attention so that their value to STRATTEC and the marketplace is enhanced.

 

 

MARKETS

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 72% of our total sales for fiscal 2015. The remainder of our revenue is received primarily through sales to the OEM service channels, the aftermarket, Tier 1 automotive supplier customers, and 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 a modest amount of 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 Access Systems Technology LLC (VAST) brand we jointly own with WITTE Automotive and ADAC Automotive. VAST is described in more detail on pages 8 and 9.

OEM service and replacement parts are sold to the OEM’s own service operations. In addition, we distribute our components and security products to the automotive aftermarket through approximately 50 authorized wholesale distributors, as well as other marketers and users of component parts, including export customers. Increasingly, our products find their way into the retail channel, specifically the hardware

 

COMPANY DESCRIPTION

 

 

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 currently do not supply on an OE 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.

CUSTOMER SALES FOCUS

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 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, 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.

 

 

STRATTEC manufactures this Maserati electronic key fob.

 

PRODUCT ENGINEERING FOCUS

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.

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

 

The Aston Martin vehicles use an electronic key fob and mating docking station developed by STRATTEC exclusively for Aston Martin.

 

 

 

COMPANY DESCRIPTION

 

 

their security/access control requirements. STRATTEC is also ISO/TS 16949 and ISO 14001 certified. This means we embrace the philosophy that quality should exist not only in the finished product, but in every step of our processes as well.

 

OPERATIONS

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, stampings and milled key blades. We have three owned production facilities in Juarez, Mexico operating as STRATTEC de Mexico. Plant No. 1 houses assembly operations for locksets, ignition lock housings, and our new STRATTEC Advanced Logic (formerly NextLock) biometric security products. 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.

 

 

ADVANCED DEVELOPMENT

Research and development activities are centered around a dedicated research engineering Staff we call our Advanced Development Group. Molding Assembly Facility ADAC-STRATTEC de Mexico 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, with any further product development being shifted to our engineering groups for commercialization and product applications.

VEHICLE ACCESS SYSTEMS TECHNOLOGY LLC (VAST)

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

 

COMPANY DESCRIPTION

 

 

strategic markets outside of Europe and North America.

 

 

In February of 2006, we announced the expansion of this alliance and related joint venture with the addition of a third partner, ADAC Plastics, Inc. ADAC, of Grand Rapids, Michigan, adds North American expertise in door handles, a part of WITTE’s core product line that STRATTEC did not support, and an expertise in color-matched painting of these components.

With the expansion of the alliance, we can offer a full range of access control related products available on a global basis to support customer programs. To identify this powerful combination of independent companies focused on working together, we renamed the joint venture Vehicle Access Systems Technology LLC (VAST LLC). We now refer to the combination of the alliance structure and JV simply as “VAST”. WITTE is now called WITTE Automotive, and ADAC is now doing business as ADAC Automotive. We have adopted a common graphic image in which we share a logo mark and colors, and a specific VAST logo used on the partners’ printed and electronic presentation materials. 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 $120 million during fiscal 2015. This was an important step which gives STRATTEC a one-third interest in VAST China’s activities in the important growing

 

COMPANY DESCRIPTION

 

 

Chinese/Asia 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 $3 million during fiscal 2015.

 

On April 30, 2015 VAST LLC executed a purchase agreement to become a 50:50 Joint Venture partner with Minda Management Services Limited, an affiliate of both Minda Corporation Limited and Spark Minda, Ashok Minda Group of New Delhi, India (collectively, “Minda”). VAST acquired a fifty percent equity interest in the former Minda-Valeo Security Systems joint venture entity, based in Pune, India, for approximately $12 million. This joint venture entity was renamed, Minda-VAST Access Systems (“Minda-VAST”). Minda-VAST will have operations in Pune and Delhi and is expected to have annual sales of approximately $40 million. Minda is a leading manufacturer of security & access products and handles, for both OEMs and the aftermarket in India.

VAST is the embodiment of STRATTEC’s, WITTE’s and ADAC’s globalization strategy. We are developing VAST as a global brand with which we are jointly pursuing business with identified global customers. Those identified customers are General Motors, Ford, Fiat/Chrysler, Volkswagen, Honda, Toyota, Renault/Nissan and Hyundai/Kia.

To manage our customer relationships and coordinate global ventures and activities, we have established a VAST Management Group led by a President. The Management Group includes three Vice Presidents, one each from WITTE, STRATTEC and ADAC. With the focus provided by this Management Group, VAST is able to manage global programs with a single point of contact for customers, with the added advantage of providing regional support from the partners’ operating entities. Combined with VAST LLC’s ventures in China and Brazil, and sales/engineering offices in Japan and Korea, this structure establishes our global footprint.

 

 

 

COMPANY DESCRIPTION

 

 

STRATTEC LEGAL OWNERSHIP STRUCTURE INCLUDING VAST

 

ADAC-STRATTEC de MEXICO

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 injection molding 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 2015 and 2014, ASdM was profitable and represented $60.9 and $48.0 million, respectively, of our consolidated net sales.

 

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.

STRATTEC POWER ACCESS LLC

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

 

 

COMPANY DESCRIPTION

 

 

Products Group. WITTE is a 20 percent minority owner. SPA in turn owns a Mexican subsidiary, STRATTEC POWER ACCESS de Mexico. The purpose of this subsidiary is to produce power access devices for sliding side doors, lift gates and trunk lids. STRATTEC POWER ACCESS de Mexico currently operates out of defined space in STRATTEC de Mexico Plant No. 3 located in Juarez, Mexico. Financial results for SPA are consolidated in STRATTEC’s financial statements. For fiscal years ending 2015 and 2014, SPA was profitable and represented $68.1 and $60.1 million, respectively, of our consolidated net sales.

STRATTEC ADVANCED LOGIC LLC (formerly NEXTLOCK LLC)

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 fiscal 2015. During fiscal year 2015, STRATTEC Advanced Logic signed a marketing agreement with Westinghouse Security Products to sell under the Westinghouse brand name (see also www.westinghousesecurity.com). STRATTEC owns 51% of this joint venture and its financial results are accounted for on the equity method of accounting.

 

 

STRATTEC Advanced Logic Biometric Security Products

SEASONAL NATURE OF THE BUSINESS

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.

ECONOMIC VALUE COMMITMENT

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 our U.S. associates, outside directors and many of our Mexico-based salaried associates as an incentive to help positively drive the economic value of our business.

STRATTEC’s significant market presence is the result of over a 100-year commitment to creating quality products and systems that are responsive to changing needs. As technologies advance and markets grow, STRATTEC retains that commitment to meeting and exceeding the expectations of our customers, and providing economic value to our shareholders.

 

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

 

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.

EXECUTIVE OVERVIEW

Historically, a significant portion of our total net sales are to domestic automotive OEMs (General Motors, Ford and Fiat Chrysler). During the past decade 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, is dependent upon the U.S. and global economies. During fiscal years 2015, 2014 and 2013, the above domestic automotive OEMs together represented 65 percent, 70 percent and 66 percent, respectively, of our total net sales.

Our financial results for fiscal year 2015 reflected continued improvement over the prior years. Fiscal 2015 net sales were $411 million compared to $348 million in 2014 and $298 million in 2013. Net income attributable to STRATTEC for fiscal 2015 was $20.7 million compared to $16.4 million in 2014 and $9.4 million in 2013. The financial health of our three largest customers continues to improve. General Motors, Ford and Fiat Chrysler continued to report profitable results after implementing significant restructuring plans that modified their cost structures by closing manufacturing facilities, reducing benefits and wages and eliminating certain models and brands in 2009 and 2010.

As we look out into the future, the July 2015 projections from our third-party forecasting service indicate that North American light vehicle production will show steady improvement for the next five years. By model year, based on these projections we are expecting a 2015 build of 17.2 million vehicles, 17.6 million vehicles for 2016, 18.3 million vehicles for 2017, 18.2 million vehicles for 2018 and 18.7 million vehicles for 2019. As part of this third party projection, General Motors Company is expected to experience flat vehicle production volumes and Ford Motor Company is expected to experience modest increases in their production levels during this time period. Fiat Chrysler, however, is expected to decrease production in model years 2018 and 2019, primarily due to the forecasting uncertainty and risk in Fiat Chrysler’s future vehicle product plans for the Chrysler Group. Of course, all of these forecasts are subject to variability based on what happens in the overall North American and global economies, especially as it relates to the current levels of employment, availability of consumer credit, home equity values, fluctuating fuel prices, changes in customer preferences regarding product quality issues, including related to recall and product warranty coverage issues, and other key factors that we believe could determine whether consumers can or will purchase new vehicles.

Focus and Strategy Going Forward

STRATTEC’s long-term strategy is focused on maximizing long-term shareholder value by driving profitable growth. Our management believes productivity improvements and cost reductions are critical to our competitiveness, while enhancing the value we deliver to our customers. In order to accomplish this, we have been pursuing, and we intend to continue to pursue, the following objectives as summarized below:

 

•

Streamline and standardize processes to increase productivity and improve quality of our products

 

•

Maintain a disciplined and flexible cost structure to leverage scale and optimize asset utilization and procurement

 

•

Maintain our strong financial position by deploying capital spending targeted for growth and productivity improvement

 

•

Leverage the “VAST Brand” with customer relationships to generate organic growth from global programs

 

•

Offer our customers innovative products and cost savings solutions to meet their changing demands

 

•

Explore and execute targeted mergers and acquisitions with a disciplined due diligence approach and critical financial analysis to drive shareholder value

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.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

 

RESULTS OF OPERATIONS

2015 Compared to 2014

 

		Years Ended
		June 28, 2015				June 29, 2014
Net sales (millions of dollars)		$	411.5			$	348.4

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
		June 28, 2015				June 29, 2014
Fiat Chrysler Automobiles		$	116.9			$	117.5
General Motors Company			105.8				79.5
Ford Motor Company			45.5				46.6
Tier 1 Customers			71.3				61.6
Commercial and Other OEM Customers			41.7				36.0
Hyundai / Kia			30.3				7.2
Total		$	411.5			$	348.4

The increase in sales to General Motors Company in the current year was attributed to incremental service parts sales during the six months ended December 28, 2014 of $34.0 million related to a recall campaign. Incremental service parts sales during our fiscal 2014 fourth quarter totaled $11 million. The incremental sales adjusted to more normal levels during the second half of our fiscal 2015 and are expected to remain at normal levels going forward. Sales to General Motors were also impacted by higher vehicle production volumes and greater product content on vehicle models for which we supply components that were introduced for the 2015 model year and a $3.3 million sales concession we granted to General Motors which negatively impacted 2015 revenues. Decreased sales to Fiat Chrysler Automobiles in the current year were the result of Fiat Chrysler’s temporary shutdown of its Windsor, Canada assembly plant, which began in February 2015 and ended in May 2015, to re-tool the facility for the production of the new Chrysler minivan. This temporary plant shutdown decreased our net sales to Fiat Chrysler during 2015 by $18 million, which impact was mostly offset by increased sales related to higher customer vehicle production volumes and increased content on models for which we supply components and year-over-year increased service sales to Fiat Chrysler. Decreased sales to Ford Motor Company in the current year were attributed to lower vehicle production volumes on models for which we supply components and in particular for components we supply on the F-150 pick-up trucks, which were partially offset by higher latch product sales to Ford in the current year period and increased content on models for which we supply components. Sales to Tier 1 Customers during the current year increased in comparison to the prior year. These customers primarily represent purchasers of vehicle access control products, such as latches, fobs, and driver controls, that we have developed in recent years to complement our historic core business of locks and keys. The increase in sales to Hyundai / Kia in the current year was due to the ramp-up of the new Kia Sedona minivan for which we supply components.

 

		Years Ended
		June 28, 2015				June 29, 2014
Cost of Goods Sold (millions of dollars)		$	338.8			$	282.6

Direct material costs are the most significant component of our cost of goods sold and comprised $217.1 million or 64.1 percent of cost of goods sold in the current year period compared to $184.0 million or 65.1 percent of cost of goods sold in the prior year period. The increase in material costs between fiscal years of $33.1 million or 18.0 percent was due to increased sales volumes in the current year as compared to the prior year as discussed above. The direct material costs were also impacted by higher purchased raw material costs for zinc during 2015 as compared to 2014. 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. During 2015, we used approximately 13.5 million pounds of zinc. Increased zinc costs during 2015, as adjusted for the impact of raw material price adjustments with certain customers, totaled approximately $525,000.

The remaining components of cost of goods sold consist of labor and overhead costs which increased $23.1 million or 23.4 percent in the current year over the prior year as the variable portion of these costs increased due to the increased sales volumes during 2015. In addition, the current year period included a year-over-year increase in customer warranty provisions of $7.8 million for expected warranty payments to be settled in future periods, write-offs related to STRATTEC Advanced Logic, LLC

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

 

(formerly NextLock LLC), our biometric joint venture, of $300,000 and an increase of $1.8 million in current year royalty costs related to sales of aftermarket product. These unfavorable impacts were partially offset by benefits of favorable absorption of the fixed portion of our labor and overhead costs resulting from increased sales volumes between periods, a reduction of approximately $4.2 million in the U.S. dollar costs of our Mexican operations due to a favorable Mexican peso to U.S. dollar exchange rate, and a reduction of approximately $1.5 million in expense provisions for the accrual of bonuses under our incentive bonus plans between periods. The average U.S. dollar/Mexican peso exchange rate increased to approximately 14.34 pesos to the dollar in the current year period from approximately 13.07 pesos to the dollar in the prior year period.

 

		Years Ended
		June 28, 2015				June 29, 2014
Gross Profit (millions of dollars)		$	72.7			$	65.8
Gross Profit as a percentage of net sales			17.7	%			18.9	%

The improvement in gross profit in the current year as compared to the prior year was the result of the increase in sales, partially offset by the increase in cost of goods sold as discussed above. The reduction in gross profit as a percentage of net sales in the current year as compared to the prior year was the result of increased labor and overhead costs resulting from higher customer warranty provisions, write-offs related to STRATTEC Advanced Logic, LLC and increased royalty costs as compared to the prior year, partially offset by increased sales of service parts related to the General Motors’ recall campaign, which typically have higher gross profit margins as compared to gross profit margins on parts sold for new vehicle production, increased customer production volumes resulting in more favorable absorption of our fixed manufacturing costs, a favorable Mexican peso to U.S. dollar exchange rate and lower expense provisions for the accrual of bonuses under our incentive bonus plans as compared to the prior year, all as discussed above.

Engineering, Selling and Administrative Expenses in the current year and prior year were as follows:

 

		Years Ended
		June 28, 2015				June 29, 2014
Expenses (millions of dollars)		$	41.5			$	39.3
Expenses as a percentage of net sales			10.1	%			11.3	%

Engineering, selling and administrative expenses increased approximately $2.2 million between periods while decreasing slightly as a percentage of our net sales to 10.1 percent in the current year from 11.3 percent in the prior year. Higher costs in support of our new Auburn Hills, Michigan sales and engineering facility and higher engineering and selling costs associated with current product programs as well as new product programs under development were partially offset by a reduction of $882,000 in expense provisions for the accrual of bonuses under our incentive bonus plans in the current year as compared to the prior year.

Income from operations in the current year was $31.1 million compared to $26.5 million in the prior year period. This increase was the result of increased sales, partially offset by reduced gross profit margins during 2015, and an increase in engineering, selling and administrative expenses as discussed above.

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

 

		Years Ended
		June 28, 2015				June 29, 2014
Vehicle Access Systems Technology LLC		$	1,251			$	1,324
STRATTEC Advanced Logic, LLC (formerly known as NextLock LLC)			(2,039	)			(367	)
		$	(788	)		$	957

STRATTEC is not the primary beneficiary and does not control STRATTEC Advanced Logic, LLC. Accordingly, our investment in STRATTEC Advanced Logic, LLC is accounted for using the equity method. Notwithstanding the existence of the STRATTEC Advanced Logic Credit Facility described herein, as a result of STRATTEC’s guaranty of such credit facility and as a result of borrowing limitations imposed by the bank under such credit facility, even though we maintain a 51 percent ownership interest in STRATTEC Advanced Logic, LLC, effective with our fiscal 2015 fourth quarter, 100 percent of the funding for STRATTEC Advanced Logic, LLC was being made through loans from STRATTEC to STRATTEC Advanced Logic, LLC. Therefore, STRATTEC began recognizing 100 percent of the losses of STRATTEC Advanced Logic, LLC, which losses included write-offs of fixed assets and inventory totaling $381,000. In addition, the following losses were included in our 2015 Equity (Loss) Earnings of Joint Ventures for STRATTEC Advanced Logic, LLC (thousands of dollars):

 

Loss on Guarantee of STRATTEC Advanced Logic, LLC Vendor Contract		$	123
Loss on Loan to STRATTEC Advanced Logic, LLC		$	100
Loss on Guarantee of STRATEC Advanced Logic, LLC Credit facility		$	488

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

 

Effective November 1, 2014, a license agreement was signed with Westinghouse allowing STRATTEC Advanced Logic, LLC to do business as Westinghouse Security. Payments required under this license agreement were guaranteed by STRATTEC. As of June 28, 2015, STRATTEC has recorded a liability equal to the estimated fair value of the guarantee of these payments of $250,000, which amount is equal to the future payments required to be made under the license agreement as of June 28, 2015. STRATTEC’s proportionate share of the guarantee of these payments based on our ownership percentage in STRATTEC Advanced Logic, LLC totals $127,000, and accordingly, we have increased our investment in STRATTEC Advanced Logic, LLC as of June 28, 2015 by this amount. Our joint venture partner did not guarantee their proportionate share of the payments required under the license agreement. As a result, STRATTEC recorded a loss of $123,000 which is equal to our partner’s proportionate share, based upon their ownership interest in the joint venture, of the fair value of the STRATTEC guarantee.

During the fourth quarter of 2015, a loan was made from STRATTEC to STRATTEC Advanced Logic, LLC in support of operating expenses and working capital needs. As of June 28, 2015, the outstanding loan amount totaled $100,000. A valuation reserve of $100,000 was recorded related to this loan as of June 28, 2015.

STRATTEC Advanced Logic, LLC has a $1.5 million revolving credit facility with BMO Harris Bank N.A., which is fully guaranteed by STRATTEC. As of June 28, 2015, STRATTEC has a recorded a liability equal to the estimated fair value of the guarantee of $995,000, which amount is equal to the outstanding borrowings on the STRATTEC Advanced Logic Credit Facility as of June 28, 2015. STRATTEC’s proportionate share of the guarantee based on our ownership percentage in STRATTEC Advanced Logic, LLC totals $507,000, and accordingly, we have increased our investment in STRATTEC Advanced Logic, LLC as of June 28, 2015 by this amount. Our joint venture partner did not guarantee their proportionate share of the STRATTEC Advanced Logic Credit Facility. As a result, STRATTEC recorded a loss of $488,000 which is equal to our partner’s proportionate share, based upon their ownership interest in the joint venture, of the fair value of the STRATTEC guarantee.

Effective January 6, 2015, we changed the name of NextLock, LLC to STRATTEC Advanced Logic, LLC.

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

 

		Years Ended
		June 28, 2015				June 29, 2014
Foreign currency transaction gain (loss)		$	3,075			$	(36	)
Rabbi Trust gain			96				211
Other			310				97
		$	3,481			$	272

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

Our effective income tax rate for 2015 was 27.6 percent compared to 31.2 percent in 2014. Our income tax provision for each of 2015 and 2014 was affected by the non-controlling interest portion of our pre-tax income. Our income tax provision for 2015 was also affected by a lower statutory tax rate for income subject to tax in Mexico as compared to the statutory tax rate for income subject to tax in the U.S. Moreover, our income tax provision included a net reduction in our liability for unrecognized tax benefits of approximately $852,000 in 2015 compared to a reduction of approximately $221,000 in 2014 due to tax years that closed and changes in current and prior year tax positions. The decrease in the effective tax rate between periods was the result of the current year period reduction in the liability for unrecognized tax benefits and a reduction in the statutory tax rate for income subject to tax in Mexico.

2014 Compared to 2013

 

		Years Ended
		June 29, 2014				June 30. 2013
Net sales (millions of dollars)		$	348.4			$	298.2

Net Sales to each of our customers or customer groups in 2014 and 2013 were as follows (millions of dollars):

 

		Years Ended
		June 29, 2014				June 30, 2013
Fiat Chrysler Automobiles		$	117.5			$	95.5
General Motors Company			79.5				57.0
Ford Motor Company			46.6				44.8
Tier 1 Customers			61.6				57.4
Commercial and Other OEM Customers			36.0				33.2
Hyundai / Kia			7.2				10.3
Total		$	348.4			$	298.2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

 

Increased sales to Fiat Chrysler Automobiles, General Motors Company and Ford Motor Company in 2014 were due to increased customer vehicle production volumes and increased product content on the models for which we supply components. In addition, sales to General Motors Company increased $11 million in 2014 as compared to 2013 as a result of service part sales related to a recall campaign, which continued into the first half of fiscal 2015 after which service parts sales returned to more normal levels during the second half of fiscal 2015. Increased sales to Tier 1, Commercial and Other OEM customers in 2014 related to market growth and the increasing impact on our sales of other vehicle access control products, such as latches, fobs and driver controls, which we have developed in recent years to complement our historic lock and key access control products. The reduction in sales to Hyundai / Kia in 2014 was due to lower customer vehicle production volumes on models for which we supply components.

 

		Years Ended
		June 29, 2014				June 30, 2013
Cost of Goods Sold (millions of dollars)		$	282.6			$	244.3

Direct material costs are the most significant component of our cost of goods sold and comprised $184.0 million or 65.1 percent of cost of goods sold in 2014 compared to $158.4 million or 64.8 percent of cost of goods sold in 2013. The increase in material costs between fiscal years of $25.6 million or 16.2 percent was due to increased sales volumes in 2014 as compared to 2013 as discussed above. The direct material costs were also impacted by higher purchased raw material costs for zinc during 2014 as compared to 2013. 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. During 2014, we used approximately 12.7 million pounds of zinc. Increased zinc costs during 2014, as adjusted for the impact of raw material price adjustments with certain customers, totaled approximately $970,000.

The remaining components of cost of goods sold consist of labor and overhead costs which increased $12.7 million or 14.8 percent in 2014 over 2013 as the variable portion of these costs increased due to the increased sales volumes during 2014. In addition, 2014 included the benefits of favorable absorption of the fixed portion of our labor and overhead costs resulting from increased sales volumes between periods, a reduction of approximately $800,000 in the U.S. dollar costs of our Mexican operations due to a favorable Mexican peso to U.S. dollar exchange rate, and a reduction of approximately $1.5 million in pension expense provisions between periods. These favorable impacts to cost of goods sold were partially offset by an increase in 2014 manufacturing startup costs associated with new product launches, an increase of $1.1 million in 2014 royalty costs, an increase of $1.9 million in expense provisions for the accrual of bonuses under our incentive bonus plans, and an increase in warranty costs of $1.6 million. The average U.S. dollar/Mexican peso exchange rate increased to approximately 13.07 pesos to the dollar in 2014 from approximately 12.82 pesos to the dollar in 2013. This resulted in decreased U.S. dollar costs related to our Mexican operations of approximately $800,000 in 2014 compared to 2013. Pension expense provisions impacting our gross profit percentage decreased during 2014 as compared to 2013 due to a significantly improved funded status on our frozen defined benefit pension plan. Increased warranty costs between periods was the result of 2013 net warranty provision credits of $400,000, which reflected the impact of favorable adjustments for warranty claims settled during 2013, and warranty provisions of $1.2 million in 2014 resulting from various customer warranty issues. The amount of the accrual of bonuses under our incentive bonus plans which impacted our cost of goods sold increased in 2014 as compared to 2013 based on our increased profitability year over year.

 

		Years Ended
		June 29, 2014				June 30, 2013
Gross Profit (millions of dollars)		$	65.8			$	53.9
Gross Profit as a percentage of net sales			18.9	%			18.1	%

The improvement in gross profit in 2014 as compared to 2013 was the result of the increase in sales, partially offset by the increase in cost of goods sold as discussed above. The improvement in gross profit as a percentage of net sales in 2014 as compared to 2013 was the result of increased sales of service parts related to the General Motors’ customer recall campaign, which typically have higher gross profit margins as compared to gross profit margins on parts sold for new vehicle production, and increased customer production volumes resulting in more favorable absorption of our fixed manufacturing costs. Also contributing to the improvement in our gross profit margins were lower pension expense provisions in 2014 as compared to 2013 and a favorable Mexican peso to U.S. dollar exchange rate, partially offset by higher manufacturing startup costs associated with new product program launches, higher expense provisions for the accrual of bonuses under our incentive bonus plans and increased

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

 

royalty costs in 2014 as compared to 2013, all as discussed above.

Engineering, Selling and Administrative Expenses in 2014 and 2013 were as follows:

 

		Years Ended
		June 29, 2014				June 30, 2013
Expenses (millions of dollars)		$	39.3			$	34.9
Expenses as a percentage of net sales			11.3	%			11.7	%

Engineering, selling and administrative expenses increased approximately $4.4 million between periods while decreasing slightly as a percentage of our net sales to 11.3 percent in 2014 from 11.7 percent in 2013. The increase in costs in 2014 over 2013 was due to higher health care costs, higher expense provisions for the accrual of bonuses under our incentive bonus plans, increased 2014 outside consulting and temporary help costs associated with an upgrade to our existing enterprise resource planning (ERP) system, and higher engineering costs associated with new product programs under development.

During our fiscal 2013 third quarter, SERP benefits of approximately $5.8 million were cash settled using primarily Rabbi Trust assets and current cash balances. We incurred a related settlement charge to operations of approximately $2.1 million pre-tax in our fiscal 2013 third quarter as a result of the requirement to expense a portion of the unrealized actuarial losses due to the settlement of the SERP obligation. This charge had no effect on our aggregate equity balance because the unrealized actuarial losses were already recognized during prior periods in accumulated other comprehensive loss. Accordingly, the effect of the settlement charge on our retained earnings was offset by a corresponding reduction in accumulated other comprehensive loss.

Income from operations in 2014 was $26.5 million compared to $16.8 million in 2013. This increase was the result of increased sales and improved gross profit margins during 2014, partially offset by an increase in engineering, selling and administrative expenses, all as discussed above. The fiscal 2013 third quarter $2.1 million SERP settlement charge also impacted our 2013 income from operations.

Equity earnings of joint ventures was $957,000 during 2014 compared to equity loss of joint ventures of $225,000 in 2013. During the first half of fiscal year 2013 our joint venture in China incurred relocation costs associated with moves to a new facility and start-up costs associated with a new product line. These costs resulted in STRATTEC incurring an equity loss from joint ventures in 2013. Also included in equity earnings of joint ventures were start-up costs associated with our new joint venture, STRATTEC Advanced Logic, LLC (formerly known as NextLock, LLC). These start-up costs totaled $367,000 in 2014 and $78,000 in 2013.

Included in other income, net in 2014 and 2013 were the following items (thousands of dollars):

 

		Years Ended
		June 29, 2014				June 30, 2013
Foreign currency transaction loss		$	(36	)		$	(395	)
Rabbi Trust gain			211				164
Unrealized gain on Mexican peso option contracts			—				395
Realized loss on Mexican peso option contracts			—				(12	)
Other			97				177
		$	272			$	329

Foreign currency transaction losses resulted from activity associated with foreign denominated assets held by our Mexican subsidiaries. During 2013 we had agreements in place with Bank of Montreal that provided for two weekly Mexican peso currency option contracts to cover a portion of our weekly estimated peso denominated operating costs. In 2013, the Mexican peso appreciated to the U.S. dollar creating unrealized gains on these Mexican peso currency option contracts while realized losses were generated on the weekly commitments due under the contracts. Our objective in entering into these currency option contracts was to minimize our earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. The Mexican peso currency option contracts expired June 28, 2013. No Mexican peso currency contracts were effective during fiscal 2014. Our Rabbi Trust assets fund our amended and restated supplemental executive retirement plan. The investments held in the Trust are considered trading securities.

Our effective income tax rate for 2014 was 31.2 percent compared to 31.8 percent in 2013. Our income tax provision for each of 2014 and 2013 was affected by the non-controlling interest portion of our pre-tax income. Our income tax provision for 2013 was also affected by a lower statutory tax rate for income subject to tax in Mexico as compared to the statutory tax rate for income subject to tax in the U.S. Moreover, our income tax provision for 2014 included a reduction in our liability for

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

 

unrecognized tax benefits of approximately $221,000 due to changes in tax positions and tax years that closed. The decrease in the effective tax rate between periods was the result of the 2014 reduction in the liability for unrecognized tax benefits, partially offset by an increase, effective as of January 1, 2014, in the statutory tax rate for income subject to tax in Mexico.

LIQUIDITY AND CAPITAL RESOURCES

Outstanding Receivable Balances from Major Customers

Our primary source of cash flow is from our major customers, which include Fiat Chrysler Automobiles 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 June 28, 2015 was as follows (millions of dollars):

 

Fiat Chrysler Automobiles		$	17.1
General Motors Company		$	8.8
Ford Motor Company		$	7.3

Cash Balances in Mexico

We earn a portion of our operating income in Mexico, which is deemed to be permanently reinvested. As of June 28, 2015, $14.8 million of our $25.7 million cash and cash equivalents balance was deemed to be permanently reinvested in Mexico. Cash balances in Mexico will be used for future capital expenditures and future plant expansion in Mexico. We currently do not intend nor foresee a need to repatriate these funds. We expect existing domestic cash and cash equivalents and cash flows from operations to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities, such as regular quarterly dividends and capital expenditures, for at least the next 12 months and thereafter for the foreseeable future. Should we require more capital in the U.S. than is generated by our operations domestically, for example to fund significant discretionary activities, such as acquisitions of businesses and share repurchases, we could elect to repatriate future earnings from foreign jurisdictions or raise capital in the U.S. through borrowings under our revolving credit facility. These alternatives could result in higher effective tax rates, increased interest expense, or other dilution of our earnings.

Cash Flow Analysis

 

		Years Ended
		June 28, 2015				June 29, 2014				June 30, 2013
Cash Flows from (millions of dollars):
Operating Activities		$	31.5			$	11.5			$	15.7
Investing Activities		$	(30.8	)		$	(13.0	)		$	(13.4	)
Financing Activities		$	5.8			$	1.0			$	0.7

Net cash provided by operating activities was $31.5 million during 2015, compared to $11.5 million during 2014. The increase in cash provided by operating activities between years reflected a net reduction in working capital requirements between the two years of $19.8 million, with the reduction being made up of the following working capital changes (millions of dollars):

 

		Increase (Decrease) in Working Capital Requirements
		2015				2014				Change
Accounts Receivable		$	(9.2	)		$	21.3			$	(30.5	)
Inventories		$	4.3			$	6.2			$	(1.9	)
Customer Tooling		$	(1.8	)		$	3.0			$	(4.8	)
Other Assets		$	3.3			$	3.5			$	(0.2	)
Accounts Payable and Other liabilities		$	1.4			$	(16.2	)		$	17.6

The year over year change in the accounts receivable balances reflected a reduction in accounts receivable balances during 2015 compared to an increase in accounts receivable balances during 2014. The 2014 account receivable balances increased as a result of $11 million of additional service parts sales in conjunction with General Motors’ recall campaign in 2014 and an overall increase in customer vehicle production volumes on models for which we supply components causing a reduction in 2015 balances and an increase in 2014 balances. The year over year change in the inventory balances was due to higher inventory balances required in June 2014 related to this customer’s recall campaign. 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 the accounts payable and other liability balances was the result of a reduction in

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

 

accounts payable balances in 2015 and an increase in accounts payable balances in 2014, which occurred as a result of the timing of purchases and payments with our vendors based on normal payment terms as well as increased accounts payable balances at June 2014 related to the General Motors’ recall campaign.

Other significant cash payments impacting net cash provided by operating activities during both the current year and prior year periods included cash payments under our incentive bonus plans, cash contributions made to our qualified pension plan and cash payments made for Federal, state and foreign income taxes. Cash payments under our incentive bonus plans totaled $7.3 million during 2015 compared to $4.8 million during 2014. Cash contributions made to our qualified pension plan totaled $3.0 million during 2015 compared to $4.0 million during 2014. Cash payments made for Federal, state and foreign income taxes totaled $14.8 million during 2015 compared to $5.4 million during 2014.

Net cash provided by operating activities was $11.5 million during 2014, compared to $15.7 million during 2013. Although our operating results reflected an overall improvement in 2014 as compared to 2013, net cash provided by operating activities decreased as a result of a net increase in working capital requirements between the two years of $7.1 million, with the increase being made up of the following working capital changes (millions of dollars):

 

		Increase (Decrease) in Working Capital Requirements
		2014				2013				Change
Accounts Receivable		$	21.3			$	2.9			$	18.4
Inventories		$	6.2			$	3.1			$	3.1
Customer Tooling		$	3.0			$	(2.2	)		$	5.2
Other Assets		$	3.5			$	(0.6	)		$	4.1
Accounts Payable		$	(10.5	)		$	(1.4	)		$	(9.1	)
Income Taxes Payable		$	(0.5	)		$	2.9			$	(3.4	)
Other Liabilities		$	(5.2	)		$	6.1			$	(11.3	)

The year over year change in the accounts receivable balances reflected a significant increase in sales during the quarter ended June 29, 2014 as compared to the quarter ended June 30, 2013, which occurred as a result of $11 million of additional service parts sales in conjunction with General Motors’ recall campaign and an overall increase in customer vehicle production volumes on models for which we supply components. The year over year change in the customer tooling asset 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 the inventory balances was due to an increase in sales and production activity in 2014 as compared to 2013. The year over year change in the other asset balances was due to the settlement of $5.8 million of SERP benefits in 2013, of which $2.8 million was paid from current cash balances and $3.0 million was paid from other current asset balances. The year over year change in the accounts payable balances was based on the timing of purchases and payments based on normal payment terms with our suppliers. The year over year change in the income tax liability balances was due to the improvement in our overall financial results between periods and 2013 overpayments that were applied to 2014. The year over year change in the other liability balances was the result of the settlement of $5.8 million of SERP benefits in 2013, and an increase in our accrual of bonuses under our incentive bonus plans in 2014 as compared to 2013.

Other significant cash payments impacting net cash provided by operating activities during 2014 and 2013 included cash payments under our incentive bonus plans, cash contributions made to our qualified pension plan and cash payments made for Federal, state and foreign income taxes. Cash payments under our incentive bonus plans totaled $4.8 million during 2014 compared to $5.2 million during 2013. Cash contributions made to our qualified pension plan totaled $4.0 million during 2014 compared to $3.0 million during 2013. Cash payments made for Federal, state and foreign income taxes totaled $5.4 million during 2014 compared to $3.7 million during 2013.

Net cash used by investing activities of $30.8 million during 2015, $13.0 million during 2014 and $13.4 million during 2013 included capital expenditures of $26.1 million, $12.8 million and $12.5 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. The 2015 capital expenditures included $2.1 million and $4.5 million for the purchase of additional facilities in Juarez, Mexico and Auburn Hills, Michigan, respectively. The Michigan building is being used as a sales and engineering office and replaced two current leased facilities in Michigan. The Juarez, Mexico building is being used as an additional facility to support current operations and in anticipation of both new and potential business awards in Mexico. The 2013 capital expenditures included expenditures made in support of the expansion of our Juarez, Mexico facility. Net cash used by investing activities during 2015 also included an investment in our VAST LLC joint venture of $4.4 million in support of the acquisition of a fifty percent equity interest in a joint venture entity, Minda VAST Access Systems, based in Pune, India, and in support of general operating expenses for VAST do Brasil. Net cash used by investing activities in 2013 included a $750,000 initial capitalization payment in a newly formed joint venture, STRATTEC Advanced Logic, LLC (formerly known as NextLock, LLC), and an investment in our VAST LLC joint venture of $200,000 in support of general operating expenses. During 2014, no

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

 

capital contributions were made to STRATTEC Advanced Logic, LLC or to VAST LLC. Loans were made by each partner, STRATTEC, WITTE and ADAC to our joint venture, VAST LLC, totaling $215,000 for each partner in 2015 and $285,000 for each partner in 2014. The loans were made in support of VAST LLC’s purchase of the non-controlling interest in VAST do Brasil and in support of funding operating costs of the Brazil entity. A loan totaling $100,000 was made during the fourth quarter of 2015 from STRATTEC to STRATTEC Advanced Logic, LLC in support of operating expenses and working capital needs.

Net cash provided by financing activities of $5.8 million during 2015 included $9.0 million of borrowings under credit facilities, $553,000 of proceeds from stock purchases and option plan exercises and $367,000 in excess tax benefits from option plan exercises, partially offset by $1.5 million for repayments of borrowings under credit facilities, $1.7 million for regular quarterly dividend payments to shareholders and $882,000 for dividend payments to non-controlling interests in our subsidiaries. Net cash provided by financing activities of $961,000 during 2014 included $1.3 million of borrowings under credit facilities, $2.7 million of proceeds from stock purchases and option plan exercises and $495,000 in excess tax benefits from option plan exercises, mostly offset by $1 million for repayments of borrowings under credit facilities, $1.5 million for regular quarterly dividend payments to shareholders and $984,000 for dividend payments to non-controlling interests in our subsidiaries. Net cash provided by financing activities of $660,000 during 2013 included $3.3 million of borrowings under credit facilities, $823,000 of proceeds from stock purchases and option plan exercises and $270,000 in excess tax benefits from option plan exercises, mostly offset by $1.4 million for dividend payments to shareholders, $1.3 million for dividend payments to non-controlling interests in our subsidiaries, and $1.0 million for repayments of borrowings under credit facilities. The regular quarterly dividend payments that would normally have been paid during the third and fourth quarters of fiscal 2013 were declared and paid during the second quarter of fiscal 2013.

Qualified Defined Benefit Pension Plan

Our qualified defined benefit pension plan balance, included in other long-term assets in our accompanying Consolidated Balance Sheets, totaled $7.7 million at June 28,2015 and $8.8 million at June 29, 2014. The change in the other long-term assets balance related to this plan during 2015 was the result of the net impact of pension contributions, the actuarially calculated pension expense, reclassification adjustments from accumulated other comprehensive loss and the impact of the change in the year-end funded status of the plan. The 2015 pre-tax changes in plan assets and benefit obligations related to this plan recognized in other comprehensive income decreased our other long-term asset balance by approximately $3.4 million at June 28, 2015 compared to June 29, 2014. The resulting tax impact decreased our deferred income tax liability balance by $1.2 million at June 28, 2015 in comparison to the balance as of June 29, 2014.

VAST LLC Cash Requirements

During 2015, capital contributions of $4.4 million were made to VAST LLC in support of the acquisition of a fifty percent equity interest in a joint venture entity, Minda VAST Access Systems, based in Pune, India, and in support of general operating expenses for VAST do Brasil. During 2014, no capital contributions were made to VAST LLC. We currently anticipate VAST China and Minda-VAST Access Systems have adequate debt facilities in place over the next fiscal year to cover future operating and capital requirements. VAST do Brasil, due to economic conditions in Brazil, may require additional capital contributions in fiscal 2016 to fund operations.

STRATTEC Advanced Logic, LLC Cash Requirements

During the fourth quarter of fiscal year 2015, STRATTEC provided 100 percent of the financial support to fund the start-up operating losses of STRATTEC Advanced Logic, LLC due to our partner’s inability to contribute capital to this joint venture. We anticipate STRATTEC will continue to fund 100 percent of the start-up costs through the first half of fiscal year 2016.

Future Capital Expenditures

We anticipate capital expenditures will be approximately $15 million in fiscal 2016 in support of requirements for new product programs and the upgrade and replacement of existing equipment.

Stock Repurchase Program

Our Board of Directors has authorized a stock repurchase program to buy back outstanding shares of our common stock. Shares authorized for buy back under the program totaled 3,839,395 at June 28, 2015. A total of 3,655,322 shares have been repurchased over the life of the program through June 28, 2015, at a cost of approximately $136.4 million. No shares were repurchased during fiscal or 2014. Additional repurchases may occur from time to time and are expected to continue to be funded by cash flow from operations and current cash balances. At this time, we anticipate minimal or no stock repurchase activity in fiscal year 2016.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

 

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 $10 million secured revolving credit facility (the “ADAC-STRATTEC Credit Facility”) with BMO Harris Bank N.A, which is guaranteed by STRATTEC. The credit facilities both expire August 1, 2018. Borrowings under either credit facility are secured by our U.S. cash balances, accounts receivable, inventory and fixed assets located in the U.S. Interest on borrowings under the ADAC-STRATTEC Credit Facility for periods prior to January 22, 2014 was at varying rates based, at our option, on the London Interbank Offering Rate (“LIBOR”) plus 1.75 percent or the bank’s prime rate. Interest on borrowings under the STRATTEC credit facility and effective on or after January 22, 2014 under the ADAC-STRATTEC Credit Facility is at varying rates based, at our option, on LIBOR plus 1.0 percent or the bank’s prime rate. Both credit facilities contain a restrictive financial covenant that requires the applicable borrower to maintain a minimum net worth level. The ADAC-STRATTEC Credit Facility includes an additional restrictive financial covenant that requires the maintenance of a minimum fixed charge coverage ratio. Outstanding borrowings under the STRATTEC Credit Facility totaled $7.0 million at June 28, 2015. There were no borrowings under the STRATTEC Credit Facility during fiscal 2014. The average outstanding borrowings and weighted average interest rate on the STRATTEC Credit Facility loans were approximately $2.3 million and 1.2 percent, respectively, during the twelve months ended June 28, 2015. Outstanding borrowings under the ADAC-STRATTEC Credit Facility totaled $3.0 million at June 28, 2015 and $2.5 million at June 29, 2014. The average outstanding borrowings and weighted average interest rate on the ADAC-STRATTEC Credit Facility loans were approximately $3.7 million and 1.2 percent, respectively, during 2015. The average outstanding borrowings and weighted average interest rate on the ADAC-STRATTEC Credit Facility loans were approximately $2.6 million and 1.7 percent, respectively, during 2014.

Effective February 16, 2015, STRATTEC Advanced Logic, LLC (formerly known as NextLock LLC) entered into a $1.5 million revolving credit facility (the “STRATTEC Advanced Logic Credit Facility”) with BMO Harris Bank N.A., which is fully guaranteed by STRATTEC. Interest on borrowings under the STRATTEC Advanced Logic Credit Facility is at varying rates based, at STRATTEC Advanced Logic, LLC’s option, on LIBOR plus 1.0 percent or the bank’s prime rate. The STRATTEC Advanced Logic Credit Facility currently has a maturity date of February 16, 2016. Outstanding borrowings under the STRATTEC Advanced Logic Credit Facility as of June 28, 2015 totaled $995,000. As of June 28, 2015, STRATTEC has recorded a liability related to its guarantee of this credit facility of $995,000, which amount is equal to the outstanding borrowings on the STRATTEC Advanced Logic Credit Facility as of June 28, 2015, and which amount is also equal to the estimated fair value of the guarantee of this amount as of the June 28, 2015 balance sheet date.

Effective November 1, 2014, a license agreement was signed with Westinghouse allowing STRATTEC Advanced Logic, LLC to do business as Westinghouse Security. Payments required under the agreement were guaranteed by STRATTEC. As of June 28, 2015, STRATTEC has a recorded a liability equal to the estimated fair value of the guarantee of $250,000, which amount is equal to the future payments required to be made under the agreement as of June 28, 2015.

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 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. During fiscal 2013, we had agreements with Bank of Montreal that provided for two weekly Mexican peso currency option contracts to cover a portion of our weekly estimated peso denominated operating costs. The contracts with Bank of Montreal expired on June 28, 2013. The two weekly option contracts were for equivalent notional amounts. The contracts provided for the purchase of Mexican pesos at an average U.S. dollar / Mexican peso exchange rate of 12.40 if the spot rate at the weekly expiry date was below an average of 12.40 or for the purchase of Mexican pesos at an average U.S. dollar / Mexican peso exchange rate of 13.40 if the spot rate at the weekly expiry date was above an average of 13.40. Our objective in entering into these currency option contracts was to minimize our earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. The Mexican peso option contracts were not used for speculative purposes and were not designated as hedges. As a result, all currency option contracts were recognized in our accompanying consolidated financial statements at fair value and changes in the fair value of the currency option contracts were reported in current earnings as part of Other Income, net. The premiums paid and received under the weekly Mexican peso currency option contracts netted to zero. As a result, premiums related to the contracts did not impact our earnings. No Mexican peso currency option contracts were in effect during fiscal 2015 or 2014 and none were outstanding as of June 28, 2015, June 29, 2014 or June 30, 2013.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

 

The pre-tax effects of the Mexican peso option contracts on the accompanying Consolidated Statements of Income and Comprehensive Income consisted of the following (thousands of dollars):

 

		Other Income, net
		June 28, 2015				June 29, 2014				June 30, 2013
Not Designated as Hedging Instruments:
Realized gain		$	—			$	—			$	27
Realized (loss)		$	—			$	—			$	(39	)
Unrealized gain		$	—			$	—			$	395

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Contractual obligations are as follows as of June 28, 2015 (thousands of dollars):

 

		Payments Due By Period
Contractual Obligation		Total				Less Than 1 Year				1-3 Years				3-5 Years				More Than 5 Years
Operating Leases		$	845			$	305			$	247			$	210			$	83
Other Purchase Obligations			39,616				12,987				11,335				10,503				4,791
Guarantees			1,245				995				250				—				—
Pension and Postretirement Obligations (a)			3.522				3.522				—				—				—
Total		$	45,228			$	17,809			$	11,832			$	10,713			$	4,874

 

(a)

As disclosed in our Notes to Financial Statements, estimated cash funding related to our pension and postretirement benefit plans is expected to total $3.5 million in 2016. Because the timing of funding related to these plans beyond 2016 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 2016 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 2015 Annual Report for further information related to purchase obligations.

Liabilities recognized for uncertain tax benefits of $460,000 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 $10 million secured revolving credit facility with BMO Harris Bank N.A., which is guaranteed by STRATTEC. Borrowings under the STRATTEC credit facility totaled $7.0 million at June 28, 2015. Borrowings under the ADAC-STRATTEC credit facility totaled $3.0 million at June 28, 2015. STRATTEC Advanced Logic, LLC has a $1.5 million revolving credit facility with BMO Harris Bank N. A., which is fully guaranteed by STRATTEC. Borrowings under the STRATTEC Advanced Logic credit facility totaled $995,000 at June 28, 2015, which amount is included in the table above under Guarantees.

JOINT VENTURES AND MAJORITY OWNED SUBSIDIARIES

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

The Alliance Agreements include a set of cross-licensing agreements for the manufacture, distribution and sale of WITTE products by STRATTEC and ADAC in North America, and the manufacture, distribution and sale of STRATTEC and ADAC products by WITTE in Europe. Additionally, a joint venture company, Vehicle Access Systems Technology LLC (“VAST LLC”), in which WITTE, STRATTEC and ADAC each hold a one-third interest, exists to seek opportunities to manufacture and sell each company’s products in areas of the world outside of North America and Europe.

VAST do Brasil services customers in South America. Effective March 21, 2014, VAST LLC purchased the remaining non-controlling interest in VAST do Brasil. VAST Fuzhou, VAST Great Shanghai and VAST Shanghai Co. (collectively known as VAST China), provide a base of operations to service our automotive customers in the Asian market. VAST LLC also maintains branch offices in South Korea and Japan in support of customer sales and engineering requirements.

Effective April 30, 2015, VAST LLC executed an agreement to become a 50:50 Joint Venture