STRATTEC SECURITY CORP [STRT] Filings

10-Q 1 strt-20240929.htm 10-Q 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 29, 2024


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 0-25150

STRATTEC SECURITY CORPORATION

(Exact Name of Registrant as Specified in Its Charter)


Wisconsin		39-1804239
(State of Incorporation)		(I.R.S. Employer Identification No.)

3333 West Good Hope Road, Milwaukee, WI 53209

(Address of Principal Executive Offices)

(414) 247-3333

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of exchange on which registered
Common stock, $.01 par value	STRT	The Nasdaq Global Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large Accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller Reporting Company	☒
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Common stock, par value $0.01 per share: 4,101,092 shares outstanding as of September 30, 2024 (which number includes all restricted shares previously awarded that have not vested as of such date).

STRATTEC SECURITY CORPORATION

FORM 10-Q

September 29, 2024

INDEX


		Page
Part I - FINANCIAL INFORMATION
Item 1	Financial Statements
	Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)	3
	Condensed Consolidated Balance Sheets (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6-16
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17-23
Item 3	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4	Controls and Procedures	24

Part II - OTHER INFORMATION
Item 1	Legal Proceedings	25
Item 1A	Risk Factors	25
Item 2	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	25
Item 3	Defaults Upon Senior Securities	25
Item 4	Mine Safety Disclosures	25
Item 5	Other Information	25
Item 6	Exhibits	26

PROSPECTIVE INFORMATION

A number of the matters and subject areas discussed in this Form 10-Q 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,” “could,” “expect,” “intend,” “may,” “planned,” “potential,” “should,” “will,” and “would,” or the negative of these terms or words of similar meaning. These statements include 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 this Form 10-Q. The discussion of such matters and subject areas contained herein is 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, including:

•

an uncertain economic environment and inflationary conditions coupled with the cyclical nature of the automotive industry may adversely affect global vehicle production and demand for our products;

•

we operate in a highly competitive market and technological developments within our sphere of offerings are rapidly evolving;

•

changes in customer purchasing actions, warranty provisions and product recall policies could adversely affect our business, results of operations and financial condition;

•

work stoppages within our operations or at the location of our key customers as a result of labor disputes could adversely impact our business, results of operations and financial condition;

•

delays and restrictions impacting the import of goods and components stemming from heightened security procedures implemented by the U.S. Government related to U.S.-Mexico border crossings could have a negative effect on our business;

•

an increase in the volume and scope of product returns or customer cost reimbursement actions could adversely impact our business, results of operations and financial condition;

•

our ability to manage changes in the costs of operations, warranty claims, adverse business and operational issues could be affected by a material global supply chain and logistics disruption;

•

future shortages in the supply of semiconductor chips and other matters adversely impacting the timing, availability and costs of material component parts and raw materials for the production of our products could adversely affect our business, results of operations and financial condition;

•

macroeconomic and geopolitical conditions, including the ongoing military conflict between Russia and the Ukraine, could adversely affect our business, results of operations and financial condition;

•

interruptions to our information security management systems and cybersecurity incidents could adversely affect our business, results of operations and financial condition;

and other matters described in the section titled “Risk Factors” in the Company’s Form 10-K report filed on September 5, 2024 with the Securities and Exchange Commission (“SEC”) for the year ended June 30, 2024 (the “Annual Report”).

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 Form 10-Q 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 Form 10-Q.

Part I. Financial Information

Item 1 Financial Statements

STRATTEC SECURITY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Income and Comprehensive Income

(In Thousands, Except Per Share Amounts)

(Unaudited)


	Three Months Ended
	September 29, 2024			October 1, 2023
Net sales	$	139,052		$	135,406
Cost of goods sold		120,131			116,686
Gross profit		18,921			18,720
Engineering, selling and administrative expenses		13,858			12,614
Income from operations		5,063			6,106
Equity loss from joint ventures		—			(265	)
Interest expense		(295	)		(220	)
Investment income		349			87
Other income, net		129			134
Income before provision for income taxes and non-controlling interest		5,246			5,842
Provision for income taxes		1,498			1,387
Net income		3,748			4,455
Net income attributable to non- controlling interest		45			290
Net income attributable to STRATTEC SECURITY CORPORATION	$	3,703		$	4,165

Comprehensive income:
Net income	$	3,748		$	4,455
Pension and postretirement plans, net of tax		256			46
Currency translation adjustments		(2,760	)		(649	)
Other comprehensive loss, net of tax		(2,504	)		(603	)
Comprehensive income		1,244			3,852
Comprehensive (loss) income attributable to non-controlling interest		(1,044	)		20
Comprehensive income attributable to STRATTEC SECURITY CORPORATION	$	2,288		$	3,832

Earnings per share attributable to STRATTEC SECURITY CORPORATION:
Basic	$	0.92		$	1.05
Diluted	$	0.92		$	1.05

Weighted Average shares outstanding:
Basic		4,005			3,948
Diluted		4,046			3,974

The accompanying notes are an integral part of these Condensed Consolidated Statements of Income and Comprehensive Income.

STRATTEC SECURITY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In Thousands, Except Share Amounts)

(Unaudited)


	September 29, 2024			June 30, 2024
ASSETS
Current Assets:
Cash and cash equivalents	$	34,403		$	25,410
Receivables, net		102,266			99,297
Inventories:
Finished products		18,540			19,833
Work in process		15,520			15,461
Purchased materials		49,734			46,355
Inventories, net		83,794			81,649
Pre-production costs		15,265			22,173
Value-added tax recoverable		20,624			19,684
Other current assets		4,396			5,601
Total current assets		260,748			253,814
Deferred income taxes		17,235			17,593
Other long-term assets		6,363			6,698
Net property, plant and equipment		82,521			86,184
	$	366,867		$	364,289
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	59,461		$	54,911
Accrued Liabilities:
Payroll and benefits		25,421			28,953
Value-added tax payable		10,982			9,970
Environmental		1,390			1,390
Warranty		10,698			10,695
Other		11,619			12,369
Total current liabilities		119,571			118,288
Borrowings under credit facilities – long-term		13,000			13,000
Accrued pension obligations		1,417			1,379
Accrued postretirement obligations		1,041			1,050
Other long-term liabilities		4,778			4,957
Shareholders’ Equity:
Common stock, authorized 18,000,000 shares, $.01 par value, 7,624,120 issued shares at September 29, 2024 and 7,586,920 issued shares at June 30, 2024		76			76
Capital in excess of par value		101,218			101,024
Retained earnings		254,315			250,612
Accumulated other comprehensive loss		(17,104	)		(15,689	)
Less: treasury stock, at cost (3,597,715 shares at September 29, 2024 and 3,589,126 shares at June 30, 2024)		(135,471	)		(135,478	)
Total STRATTEC SECURITY CORPORATION shareholders’ equity		203,034			200,545
Non-controlling interest		24,026			25,070
Total shareholders’ equity		227,060			225,615
	$	366,867		$	364,289

The accompanying notes are an integral part of these Condensed Consolidated Balance Sheets.

STRATTEC SECURITY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)


	Three Months Ended
	September 29, 2024			October 1, 2023
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	3,748		$	4,455
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		3,662			4,385
Foreign currency transaction gain		(1,005	)		(226	)
Unrealized loss on peso forward contracts		652			—
Stock-based compensation expense		188			505
Equity loss of joint ventures		—			265
Loss on settlement of pension obligation		283			—
Change in operating assets and liabilities:
Receivables		(3,189	)		2,333
Inventories		(2,145	)		(3,770	)
Other assets		5,881			(7,665	)
Accounts payable and accrued liabilities		2,998			(4,054	)
Other, net		264			(100	)
Net cash provided by (used in) operating activities		11,337			(3,872	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of interest in joint ventures		—			2,000
Purchase of property, plant and equipment		(2,073	)		(2,920	)
Net cash used in investing activities		(2,073	)		(920	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities		3,000			2,000
Repayment of borrowings under credit facilities		(3,000	)		(2,000	)
Exercise of stock options and employee stock purchases		13			17
Net cash provided by financing activities		13			17
Foreign currency impact on cash		(284	)		(131	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		8,993			(4,906	)

CASH AND CASH EQUIVALENTS
Beginning of period		25,410			20,571
End of period	$	34,403		$	15,665
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes	$	4,081		$	764
Interest	$	280		$	218
Non-cash investing activities:
Change in capital expenditures in accounts payable	$	(506	)	$	(193	)

The accompanying notes are an integral part of these Condensed Consolidated Statements of Cash Flows.

STRATTEC SECURITY CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

STRATTEC SECURITY CORPORATION (“STRATTEC”), headquartered in Milwaukee, Wisconsin, is a leading global provider of advanced automotive access, security, and select user interface solutions. Products include power access solutions such as automated lift gates and power doors, door handles, engineered latches, key fobs, advanced security systems, steering wheel controls, and electronic shifters. The majority of our sales are to the three largest automobile original equipment manufacturers (“OEMs”) in North America while we serve all major automotive OEMs globally.

STRATTEC’s condensed consolidated financial statements include our wholly owned subsidiaries STRATTEC de Mexico and STRATTEC POWER ACCESS LLC (“SPA”), and our majority owned subsidiary, ADAC-STRATTEC, LLC. We have one reporting segment.

In the opinion of management, the accompanying condensed consolidated balance sheets as of September 29, 2024 and June 30, 2024, which have been derived from our audited financial statements, and the related unaudited interim condensed consolidated financial statements included herein contain all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and in accordance with Rule 10-01 of Regulation S-X. All significant intercompany transactions have been eliminated.

STRATTEC’s results of operations and cash flows for the three months ended September 29, 2024 are not necessarily indicative of the results that may be expected for the current fiscal year, which ends June 29, 2025 (“fiscal 2025”). The information included in this Form 10-Q should be read in conjunction with the financial statements and notes thereto included in our Annual Report.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

STRATTEC’s significant accounting policies are described under Organization and Summary of Significant Accounting Policies in Notes to Financial Statements included in our Annual Report. There have been no material changes to the significant accounting policies during the three-month period ended September 29, 2024.

Use of Estimates

These changing conditions may also affect the estimates and assumptions made by our management in our financial statements. Such estimates and assumptions affect, among other things, our long-lived asset valuations, assessment of our annual effective tax rate, valuation of deferred income taxes, assessment of excess and obsolete inventory reserves, and assessment of collectability of trade receivables.

Recently Adopted and Recently Issued Accounting Standards

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) – Improvements to Reportable Segment Disclosures. The update enhances annual and interim reportable segment disclosures primarily by requiring disclosures about significant reportable segment expenses and provides new segment disclosure requirements for entities with a single reportable segment. ASU 2023-07 is effective for public business entities for fiscal years beginning after December 15, 2023 and for interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. This update is to be applied retrospectively to all periods presented in the financial statements. Annual reporting under this update becomes effective for our 2025 fiscal year. Interim reporting under this update becomes effective for us in our fiscal 2026. We are assessing the impact of this standard and expect that any impact would be limited to the addition of single reportable segment disclosure with segment expense disclosures in the footnotes to our consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures. The update requires greater disaggregation of income tax disclosures related to the income tax rate reconciliation and income taxes paid. ASU 2023-09 is effective for public business entities for annual periods beginning after December 15, 2024, with early adoption permitted. This update is to be applied on a prospective basis. Retrospective application is permitted. Annual reporting under this update becomes effective for us in our fiscal 2026. We are currently assessing the required disclosure impacts of this update.

NOTE 3. REVENUE FROM CONTRACTS WITH CUSTOMERS

We generate revenue from the production of parts sold to OEMs, or Tier 1 suppliers at the direction of the OEM, under long-term supply agreements supporting new vehicle production. Such agreements also require related production of service parts subsequent to the initial vehicle production periods. Additionally, we generate revenue from the production of parts sold in aftermarket service channels and to non-automotive commercial customers.

Contract Balances

We have no material contract assets or contract liabilities as of September 29, 2024 or June 30, 2024.

Revenue by Product Group and Customer

Revenue by product group for the periods presented was as follows (thousands of dollars):


	Three Months Ended
	September 29, 2024		October 1, 2023
Door handles & exterior trim	$	35,430	$	32,768
Power access		34,779		32,651
Keys & locksets		23,022		30,295
Latches		19,111		15,552
User interface controls		13,839		10,597
Aftermarket & OE service		10,063		10,905
Other		2,808		2,638
	$	139,052	$	135,406

Revenue by customer or customer group for the periods presented was as follows (thousands of dollars):


	Three Months Ended
	September 29, 2024		October 1, 2023
General Motors Company	$	42,160	$	40,505
Ford Motor Company		32,137		26,909
Stellantis		12,765		27,297
Tier 1 Customers		20,082		18,122
Commercial and Other OEM Customers		17,055		14,197
Hyundai / Kia		14,853		8,376
	$	139,052	$	135,406

NOTE 4. PRE-PRODUCTION COSTS

We incur customer-owned tooling and engineering development pre-production costs related to the products we produce for our customers. Pre-production costs for which reimbursement is contractually guaranteed by the customer are accumulated on the balance sheet and are then billed to the customer upon formal acceptance by the customer of products produced with the individual tools or upon customer approval of the completed engineering development. To the extent that the costs exceed expected reimbursement from the customer, we recognized expense. Costs for tooling that STRATTEC owns are capitalized as equipment costs and depreciated over the estimated useful lives of the tools.

NOTE 5. VALUE-ADDED TAX

Our Mexican entities are subject to value-added tax (“VAT”). VAT is paid on goods and services and collected on sales. A VAT certification generally allows for relief from VAT tax for temporarily imported goods. Our VAT recoverable and payable balances were increased as of September 29, 2024 and June 30, 2024 due to a temporary issue with our VAT tax certification that began during our quarter ended October 1, 2023. Although the certification issue was resolved during our quarter ended December 31, 2023, we were required to pay VAT on all parts temporarily imported into Mexico before seeking reimbursement for periods in which the certification issue was outstanding, which periods are now open to audit with the Mexican tax authority along with all periods subsequent to resolution of the certification issue. We believe temporary increases in the VAT recoverable and payable balances will remain elevated until the periods under audit are closed.

NOTE 6. 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. During fiscal 2025, we entered into contracts with Bank of Montreal that provides for monthly Mexican peso currency forward contracts for a portion of our estimated peso denominated operating costs during the period September 2024 through August 2025. During fiscal 2024, we had contracts with Bank of Montreal that provided for monthly Mexican peso currency forward contracts for a portion of our estimated peso denominated operating costs during the period January 2024 through June 2024. Our objective in entering into 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 condensed 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 September 29, 2024 (thousands of dollars, except with respect to the average forward contractual exchange rate):


	Effective Dates	Notional Amount		Average Forward Contractual Exchange Rate		Fair Value
Buy MXP/Sell USD	October 15, 2024 − August 18, 2025	$	31,000		19.77	$	(652	)

The fair market value of all outstanding Mexican peso forward contracts in the accompanying Condensed Consolidated Balance Sheets as of the dates specified was as follows (thousands of dollars):


	September 29, 2024			June 30, 2024
Not designated as hedging instruments:
Other current liabilities:
Mexican peso forward contracts	$	(652	)	$	—

The pre-tax effects of the Mexican peso forward contracts are included in Other Income, net on the accompanying Condensed Consolidated Statements of Income and Comprehensive Income and consisted of the following for the periods indicated below (thousands of dollars):


	Three Months Ended
	September 29, 2024			October 1, 2023
Not designated as hedging instruments:
Realized and unrealized loss, net	$	(735	)	$	—

NOTE 7. 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 book value as of September 29, 2024 and June 30, 2024. 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 in an orderly transaction between market participants on the measurement date.

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of September 29, 2024 and June 30, 2024 (in thousands):


	September 29, 2024
	Fair Value Inputs
	Level 1 Assets: Quoted Prices In Active Markets		Level 2 Assets: Observable Inputs Other Than Market Prices		Level 3 Assets: Unobservable Inputs
Assets:
Rabbi Trust assets:
Stock Index Funds:
Small cap	$	92	$	—	$	—
Mid cap		178		—		—
Large cap		369		—		—
International		432		—		—
Fixed income funds		478		—		—
Cash and cash equivalents		—		185		—
Total assets at fair value	$	1,549	$	185	$	—

Liabilities:
Mexican peso forward contracts	$	—	$	652	$	—
Total liabilities at fair value	$	—	$	652	$	—


	June 30, 2024
	Fair Value Inputs
	Level 1 Assets: Quoted Prices In Active Markets		Level 2 Assets: Observable Inputs Other Than Market Prices		Level 3 Assets: Unobservable Inputs
Assets:
Rabbi Trust assets:
Stock Index Funds:
Small cap	$	84	$	—	$	—
Mid cap		163		—		—
Large cap		349		—		—
International		399		—		—
Fixed income funds		458		—		—
Cash and cash equivalents		—		185		—
Total assets at fair value	$	1,453	$	185	$	—

The Rabbi Trust assets fund our Amended and Restated Supplemental Executive Retirement Plan and are included in Other Long-Term Assets in the accompanying Condensed Consolidated Balance Sheets.

NOTE 8. INVESTMENT IN MAJORITY OWNED SUBSIDIARY

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 Automotive of Grand Rapids, Michigan (“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 sales to STRATTEC of approximately $35.4 million with no impact to net income during the three-month period ended September 29, 2024 and increased net sales and reduced net income to STRATTEC of approximately $32.8 million and $324,000, respectively, during the three-month period ended October 1, 2023.

ADAC charges ADAC STRATTEC LLC an engineering, research and design fee as well as a sales fee. Such fees are calculated as a percentage of net sales and are included in the consolidated results of STRATTEC. Additionally, ADAC-STRATTEC LLC sells production parts to ADAC. Sales to ADAC are included in the consolidated results of STRATTEC. The following table summarizes these related party transactions for the periods indicated below (in thousands):


	Three Months Ended
	September 29, 2024		October 1, 2023
Engineering, research and design fee charged to ADAC-STRATTEC LLC	$	2,480	$	2,294
Sales to ADAC	$	2,325	$	2,834

NOTE 9. EQUITY LOSS FROM JOINT VENTURES

Prior to June 30, 2023, STRATTEC, WITTE Automotive of Velbert, Germany (“WITTE”) and ADAC each held a one-third interest in a joint venture company, Vehicle Access Systems LLC (“VAST LLC”). Effective June 30, 2023, we sold our one-third ownership interest in VAST LLC, under which we exercised significant influence but did not control. The equity loss of joint ventures for the three-month period ended October 1, 2023 was the result of additional professional fees incurred related to the sale of VAST LLC.

NOTE 10. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following as of September 29, 2024 and October 1, 2023 (in thousands):


	September 29, 2024			June 30, 2024
Land and improvements	$	6,384		$	6,697
Buildings and improvements		38,254			39,927
Machinery and equipment		231,912			258,622
		276,550			305,246
Less: accumulated depreciation		(194,029	)		(219,062	)
	$	82,521		$	86,184

NOTE 11. LEASES

Our right-of-use operating lease assets are recorded at the present value of future minimum lease payments, net of amortization. We have an operating lease for our El Paso, Texas finished goods and service parts distribution warehouse. This lease has a current lease term through December 2028 and does not include any options to extend the lease term beyond such timeframe. We have two operating leases for office space at our Korean branch office. Both of these leases have a lease term through June 2025 with automatic renewal. For purposes of calculating operating lease obligations, we included an extension of four years after June 2024 as it is reasonably certain that we will exercise such automatic renewals. Our leases do not contain material residual value guarantees or restrictive covenants. Operating lease expense is recognized on a straight-line basis over the lease term.

As the leases do not provide an implicit rate, we used our incremental borrowing rate at lease commencement to determine the present value of our lease payments. The incremental borrowing rate is an entity-specific rate which represents the rate of interest we would pay to borrow over a similar term with similar payments. Our operating lease assets and obligations included in the accompanying Condensed Consolidated Balance Sheets are presented below (in thousands):


	September 29, 2024
Right-of use assets under operating lease:
Other long-term assets	$	3,617
Lease obligations under operating lease:
Current liabilities: Accrued liabilities: other	$	768
Other long-term liabilities		3,190
	$	3,958

Future minimum lease payments, by our fiscal year, including options to extend that are reasonably certain to be exercised, under these non-cancelable leases are as follows as of September 29, 2024 (in thousands):


2025 (for the remaining nine months)	$	740
2026		1,026
2027		1,075
2028		1,127
2029		558
Thereafter		-
Total future minimum lease payments		4,526
Less: Imputed interest		(568	)
Total lease obligations	$	3,958

Cash flow information related to the operating leases is shown below (in thousands):


	Three Months Ended
	September 29, 2024		October 1, 2023
Operating cash flows:
Cash paid related to operating lease obligations	$	250	$	135

The weighted average lease term and discount rate for our operating leases are shown below:


	September 29, 2024
Weighted average remaining lease term (in years)		4.2
Weighted average discount rate		6.2	%

Operating lease expense was as follows for the periods presented below (in thousands):


	Three Months Ended
	September 29, 2024		October 1, 2023
Operating lease expense	$	247	$	247

NOTE 12. CREDIT FACILITIES

STRATTEC has a $40 million secured revolving credit facility (the “STRATTEC Credit Facility”) with BMO Harris Bank N.A. ADAC-STRATTEC LLC has a $20 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 $18 million on August 1, 2025. The credit facilities both expire August 1, 2026. Borrowings under either credit facility are secured by our U.S. cash balances, accounts receivable, inventory, and fixed assets located in the U.S. Interest on borrowings under the STRATTEC Credit Facility were at varying rates based, at our option, on the bank's prime rate or SOFR plus 1.35 percent prior to September 5, 2023 and SOFR plus 1.85 percent subsequent to September 5, 2023. Interest on borrowings under the ADAC-STRATTEC Credit Facility were at varying rates based, at our option, on the bank's prime rate with no interest rate margin through May 30, 2024 and a 2 percent interest rate margin subsequent to May 30, 2024 or SOFR plus 1.35 percent prior to May 30, 2024 and SOFR plus 3.10 percent subsequent to May 30, 2024. 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. As of September 29, 2024, we were in compliance with all financial covenants required by these credit facilities.

Outstanding borrowings under the credit facilities were as follows (in thousands):


	September 29, 2024		June 30, 2024
STRATTEC Credit Facility	$	—	$	—
ADAC-STRATTEC Credit Facility		13,000		13,000
	$	13,000	$	13,000

Average outstanding borrowings and the weighted average interest rate under each credit facility referenced above were as follows for each period presented (in thousands):


	Three Months Ended
	Average Outstanding Borrowings				Weighted Average Interest Rate
	September 29, 2024		October 1, 2023		September 29, 2024			October 1, 2023
STRATTEC Credit Facility	$	—	$	132	$	—			8.5	%
ADAC-STRATTEC Credit Facility	$	13,736	$	13,000		8.5	%		6.6	%

NOTE 13. 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 our consolidated financial position, results of operations or cash flows. With respect to warranty matters, although we cannot ensure that future costs of warranty claims by customers will not be material, we believe our established reserves are adequate to cover potential warranty settlements.

In 1995, we recorded a provision for estimated costs to remediate an environmental contamination site at our Milwaukee facility. The facility 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 originally established based on third party estimates to adequately cover the cost for active remediation of the contamination. Due to changing technology and related costs associated with active remediation of the contamination, in fiscal years 2010, 2016, and 2021, we obtained updated third party estimates of projected costs to adequately cover the cost for active remediation of this contamination and adjusted the reserve as needed. We monitor and evaluate the site with the use of groundwater monitoring wells. 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 at the site, 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 our 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 $1.4 million at September 29, 2024 is adequate.

NOTE 14. SHAREHOLDERS' EQUITY

A summary of activity impacting shareholders’ equity for the three-month periods ended September 29, 2024 and October 1, 2023 were as follows (in thousands):


	Three months ended September 29, 2024
	Total Shareholders’ Equity			Common Stock		Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss			Treasury Stock			Non-Controlling Interest
Balance, June 30, 2024	$	225,615		$	76	$	101,024	$	250,612	$	(15,689	)	$	(135,478	)	$	25,070
Net income		3,748			—		—		3,703		—			—			45
Translation adjustments		(2,760	)		—		—		—		(1,671	)		—			(1,089	)
Stock based compensation		188			—		188		—		—			—			—
Pension and postretirement adjustment, net of tax		256			—		—		—		256			—			—
Employee stock purchases		13			—		6		—		—			7			—
Balance, September 29, 2024	$	227,060		$	76	$	101,218	$	254,315	$	(17,104	)	$	(135,471	)	$	24,026


	Three months ended October 1, 2023
	Total Shareholders’ Equity			Common Stock		Capital in Excess of Par Value			Retained Earnings		Accumulated Other Comprehensive Loss			Treasury Stock			Non-Controlling Interest
Balance, July 2, 2023	$	211,024		$	75	$	100,309		$	234,299	$	(14,194	)	$	(135,526	)	$	26,061
Net income		4,455			—		—			4,165		—			—			290
Translation adjustments		(649	)		—		—			—		(379	)		—			(270	)
Purchase of SPA non- controlling interest		(97	)		—		(97	)		—		—			—			—
Stock based compensation		505			—		505			—		—			—			—
Pension and postretirement adjustment, net of tax		46			—		—			—		46			—			—
Employee stock purchases		17			1		4			—		—			12			—
Balance, October 1, 2023	$	215,301		$	76	$	100,721		$	238,464	$	(14,527	)	$	(135,514	)	$	26,081

NOTE 15. OTHER INCOME, NET

Net other income included in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income primarily included foreign currency transaction gains and losses, realized and unrealized gains and losses on our Mexican peso currency forward contracts, the components of net periodic benefit cost other than the service cost component related to our pension and postretirement plans and Rabbi Trust gains and losses. Foreign currency transaction gains and losses resulted from activity associated with foreign denominated assets and liabilities held by our Mexican subsidiaries. The Rabbi Trust assets fund our Amended and Restated Supplemental Executive Retirement Plan. The investments held in the Trust are considered trading securities. We entered into the Mexican peso currency forward contracts to reduce earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. Unrealized gains and losses on the peso forward contracts recognized as a result of mark-to-market adjustments as of September 29, 2024 may or may not be realized in future periods. Pension and postretirement plan costs include the components of net periodic benefit cost other than the service cost component.

The impact of these items for each of the periods presented was as follows (in thousands):


	Three Months Ended
	September 29, 2024			October 1, 2023
Foreign currency transaction gain	$	1,005		$	226
Realized and unrealized loss on peso forward contracts, net		(735	)		—
Pension and postretirement plans cost		(363	)		(99	)
Rabbi Trust gain		96			(42	)
Other		126			49
	$	129		$	134

NOTE 16. WARRANTY

We have a warranty reserve recorded on our accompanying Condensed Consolidated Balance Sheets 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 reserve balance involves judgment and estimates. Our reserve estimate is based on an analysis of historical warranty data as well as current trends and information. 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 for the three-month periods ended September 29, 2024 and October 1, 2023 were as follows (in thousands):


	Three Months Ended
	September 29, 2024			October 1, 2023
Balance, beginning of period	$	10,695		$	9,725
Provision Charged to expense		387			14
Payments		(384	)		(122	)
Balance, end of period	$	10,698		$	9,617

NOTE 17. INCOME TAXES

Our effective tax rate was 28.6 percent and 23.7 percent for the three-month periods ended September 29, 2024 and October 1, 2023, respectively. The effective tax rate for the three-month periods ended September 29, 2024 and October 1, 2023 were impacted by the foreign tax rate differential. The effective tax rate for the three-month period ended September 29, 2024 was also impacted by a limitation on the utilization of our foreign tax credits and non-deductible items, which impacts also causes the effective tax rate to differ from the statutory tax rate.

NOTE 18. EARNINGS PER SHARE

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):


	Three Months Ended
	September 29, 2024						October 1, 2023
	Net Income		Shares		Per-Share Amount		Net Loss		Shares		Per-Share Amount
Basic earnings per share	$	3,703		4,005	$	0.92	$	4,165		3,948	$	1.05
Stock option and restricted stock awards		—		41				—		26
Diluted earnings per share	$	3,703		4,046	$	0.92	$	4,165		3,974	$	1.05

No share-based payment awards were excluded from the calculation of earnings per share as of September 29, 2024. The calculation of earnings per share excluded 51,970 share-based payment awards as of October 1, 2023 because their inclusion would have been anti-dilutive.

NOTE 19. 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. As of September 29, 2024, the Board of Directors had designated 2,250,000 shares of common stock available for the grant of awards under the plan. Remaining shares available to be granted under the plan as of September 29, 2024 were 336,730. Awards that expire or are canceled 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 our stock incentive plan. No stock options are outstanding under the plan as of September 29, 2024. Shares of restricted stock granted under the plan are subject to vesting criteria determined by the Compensation Committee at the time the shares are granted and have a minimum vesting period of one year from the date of grant. Unvested restricted shares granted 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. Restricted stock grants vest 1 to 3 years after the date of grant as determined by the Compensation Committee.

A summary of stock option activity under our stock incentive plan for the three-month period ended September 29, 2024 follows:


	Shares			Weighted Average Exercise Price
Balance, June 30, 2024		8,070		$	79.73
Expired		(8,070	)	$	79.73
Balance, September 29, 2024		—

A summary of restricted stock activity under our stock incentive plan for the three-month period ended September 29, 2024 follows:


	Shares		Weighted Average Grant Date Fair Value
Nonvested Balance, June 30, 2024		79,325	$	27.21
Granted		34,800	$	38.83
Vested