What changed in this filing

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2020-09-03 compared with 2019-09-05 · 321 added, 273 removed, 911 unchanged (39% of the section changed)

1 unchanged sentence

Not applicable.

FINANCIAL S TATEME NTS AND S UPPLEMENTARY DATA

FINANCIAL STATEME NTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE (LOSS) INCOME

CONSOLIDATED BALANCE SHEETS

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Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of STRATTEC SECURITY CORPORATION and subsidiaries (the "Company") as of June 30, 2019 and July 1, 2018, the related consolidated statements of (loss) income and comprehensive income, shareholders’ equity, and cash flows, for each of the two years in the period ended June 30, 2019, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and July 1, 2018, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have audited the accompanying consolidated balance sheets of STRATTEC SECURITY CORPORATION and subsidiaries (the "Company") as of June 28, 2020 and June 30, 2019, the related consolidated statements of loss and comprehensive (loss) income, shareholders’ equity, and cash flows, for each of the two years in the period ended June 28, 2020, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 28, 2020 and June 30, 2019, and the results of its operations and its cash flows for each of the two years in the period ended June 28, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 28, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 3, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.

Change in Accounting Principle

As discussed in the notes to the financial statements, the Company changed its method of accounting for leases in the year ended June 28, 2020 due to the adoption of Accounting Standard Update 2016-02, Leases , using the modified retrospective method.

Basis for Opinion

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/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP

Milwaukee, WI

Milwaukee, Wisconsin

September 3, 2020

We have served as the Company's auditor since 2010.

CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE (LOSS) INCOME

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

June 28, 2020

June 30, 2019

Cost of goods sold

Engineering, selling, and administrative expenses

INCOME FROM OPERATIONS

Interest income

Equity earnings of joint ventures

(LOSS) INCOME FROM OPERATIONS

Equity (loss) earnings of joint ventures

Interest expense

Pension termination settlement charge

Other (expense) income, net

(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES AND NON-

Other income (expense), net

LOSS BEFORE BENEFIT FOR INCOME TAXES AND NON-

CONTROLLING INTEREST

(Benefit) provision for income taxes

NET (LOSS) INCOME

Benefit for income taxes

Net income attributable to non-controlling interest

NET (LOSS) INCOME ATTRIBUTABLE TO STRATTEC SECURITY

COMPREHENSIVE INCOME:

NET (LOSS) INCOME

NET LOSS ATTRIBUTABLE TO STRATTEC SECURITY

COMPREHENSIVE (LOSS) INCOME:

Currency translation adjustments, net of tax

Pension and postretirement plans, net of tax

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)

COMPREHENSIVE INCOME

Comprehensive income attributable to non-controlling interest

COMPREHENSIVE INCOME ATTRIBUTABLE TO

TOTAL OTHER COMPREHENSIVE (LOSS) INCOME

COMPREHENSIVE (LOSS) INCOME

Comprehensive (loss) income attributable to non-controlling interest

COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO

STRATTEC SECURITY CORPORATION

(LOSS) EARNINGS PER SHARE ATTRIBUTABLE TO STRATTEC

LOSS PER SHARE ATTRIBUTABLE TO STRATTEC

SECURITY CORPORATION:

AVERAGE SHARES OUTSTANDING:

The accompanying Notes to Financial Statements are an integral part of these Consolidated Statements of (Loss) Income and Comprehensive Income.

The accompanying Notes to Financial Statements are an integral part of these Consolidated Statements of Loss and Comprehensive (Loss) Income.

CONSOLIDATED BALANCE SHEETS

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June 28, 2020

June 30, 2019

CURRENT ASSETS:

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Receivables, less allowance for doubtful accounts of $ 500 at June 28, 2020 and

June 30, 2019

Inventories, net

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BORROWINGS UNDER CREDIT FACILITIES

DEFERRED INCOME TAXES

ACCRUED PENSION OBLIGATIONS

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Common stock, authorized 12,000,000 shares, $ .01 par value, issued 7,358,812

shares at June 30, 2019 and 7,251,937 shares at July 1, 2018

shares at June 28, 2020 and 7,304,994 shares at June 30, 2019

Capital in excess of par value

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Treasury stock at cost ( 3,609,193 shares at June 28, 2020 and 3,613,439 shares

at July 1, 2018)

at June 30, 2019)

Total STRATTEC SECURITY CORPORATION shareholders’ equity

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BALANCE July 1, 2018

Net (loss) income

Currency translation adjustments

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adjustment, net of tax of $ 6,101

Reclassification of stranded tax effects

Cash dividends declared ($ 0.56 per share)

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of subsidiaries

Stock-based compensation and shortfall tax

Stock-based compensation

Stock option exercises

Employee stock purchases

BALANCE July 1, 2018

BALANCE June 30, 2019

Net (loss) income

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adjustment, net of tax of $ 85

Reclassification of stranded tax effects

Cash dividends declared ($ 0.42 per share)

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June 28, 2020

June 30, 2019

CASH FLOWS FROM OPERATING ACTIVITIES

Net (loss) income

Adjustments to reconcile net (loss) income to net cash provided by operating

Equity earnings of joint ventures

Depreciation and amortization

Foreign currency transaction loss (gain)

Unrealized (gain) loss on peso forward contracts

Loss (gain) on disposition of property, plant and equipment

Adjustments to reconcile net loss to net cash provided by operating

Equity loss (earnings) of joint ventures

Foreign currency transaction (gain) loss

Unrealized loss (gain) on peso forward contracts

Loss on disposition of property, plant and equipment

Pension termination settlement charge

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Investment in joint ventures

Repayments from loan to joint ventures

Additions to property, plant and equipment

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Dividends paid

Net cash (used in) provided by financing activities

Net cash used in financing activities

FOREIGN CURRENCY IMPACT ON CASH

NET DECREASE IN CASH AND CASH

NET INCREASE (DECREASE) IN CASH AND CASH

CASH AND CASH EQUIVALENTS

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ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

STRATTEC SECURITY CORPORATION designs, develops, manufactures and markets automotive access control products including mechanical locks and keys, electronically enhanced locks and keys, steering column and instrument panel ignition lock housings, latches, power sliding side door systems, power lift gate systems, power deck lid systems, door handles and related products for primarily North American automotive customers.

STRATTEC SECURITY CORPORATION designs, develops, manufactures and markets automotive access control products including mechanical locks and keys, electronically enhanced locks and keys, passive entry passive start systems (PEPS), steering column and instrument panel ignition lock housings, latches, power sliding side door systems, power tailgate systems, power lift gate systems, power deck lid systems, door handles and related products for primarily North American automotive customers.

We also supply global automotive manufacturers through a unique strategic relationship with WITTE Automotive (“WITTE”) of Velbert, Germany and ADAC Automotive (“ADAC”) of Grand Rapids, Michigan.

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STRATTEC products are shipped to customer locations in the United States, Canada, Mexico, Europe, South America, Korea, China and India, and we provide full service and aftermarket support for each VAST Automotive Group partner’s products.

We also maintain a 51 percent interest in a joint venture, STRATTEC Advanced Logic, LLC (“SAL LLC”), which was established to introduce a new generation of commercial and residential biometric security products based on the designs of Actuator Systems, our partner and the owner of the remaining ownership interest.

The business of SAL LLC has been wound down to sell only commercial biometric locks.

We also maintained a 51 percent interest in a joint venture, STRATTEC Advanced Logic, LLC (“SAL LLC”), which was established to introduce a new generation of commercial and residential biometric security products based on the designs of Actuator Systems, our partner and the owner of the remaining ownership interest.

SAL LLC was dissolved during fiscal 2020.

The accompanying consolidated financial statements reflect the consolidated results of STRATTEC SECURITY CORPORATION, its wholly owned Mexican subsidiary, STRATTEC de Mexico, and its majority owned subsidiaries, ADAC-STRATTEC, LLC and STRATTEC POWER ACCESS LLC.

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The results of the VAST LLC foreign subsidiaries and joint venture are reported on a one-month lag basis.

SAL LLC is located in El Paso, Texas.

SAL LLC was located in El Paso, Texas.

We have only one reporting segment.

Risks and Uncertainties:

In December 2019, a novel strain of coronavirus (COVID-19) was reported in Wuhan, China.

The coronavirus has since spread, and infections have been found in multiple countries around the world, including the United States.

In March 2020, the World Health Organization recognized the COVID-19 outbreak as a pandemic based on the global spread of the disease, the severity of illnesses it causes and its effects on society.

In response to the COVID-19 outbreak, the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes.

Accordingly, the COVID-19 outbreak has severely restricted the level of economic activity in many countries, and continues to adversely impact global economic activity.

STRATTEC’s operating performance is subject to global economic conditions and levels of consumer spending specifically within the automotive industry.

During fiscal 2020, the impact of the COVID-19 outbreak reduced our sales by approximately $ 78 million, which negatively impacted our operating results.

The extent of the impact of the COVID-19 outbreak on our future operating results will depend on certain developments, including the duration, intensity and continued spread of the outbreak, regulatory and private sector responses, which may be precautionary, and the impact to our customers, workforce and suppliers, all of which are uncertain and cannot be predicted.

These changing conditions may also affect the estimates and assumptions made by management.

Such estimates and assumptions affect, among other things, our long-lived asset valuations, equity investment valuation, 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.

Events and changes in circumstances arising after June 28, 2020, including those resulting from the impacts of COVID-19, will be in management’s estimates for future periods.

During the period late March 2020 through mid-June 2020, the majority of our OEM customer assembly plant operations were completely closed including the majority of the supply chain.

Additionally, during this same period, STRATTEC’s Mexico facilities were closed as a result of the Mexican government’s shutdown of non-essential businesses.

Re-opening of our OEM customer facilities and our Mexico facilities began in June 2020.

As of June 28, 2020, our Mexican facilities were open with 50 percent of the workforce allowed to return.

Based on information available, our current estimates indicate the continued ramp-up of the automotive industry resulting in an increase in our net sales for the upcoming fiscal year compared to our fiscal 2020.

Such estimates are dependent on the severity of the impacts of COVID-19 and any worsening of the impact of the pandemic on society.

We anticipate our fourth fiscal quarter of 2020 was the worst or trough quarter and that thereafter the automotive industry will continue to ramp back-up production during our fiscal 2021.

We expect the impact on our overall cash liquidity will be most significant at the beginning of our fiscal year 2021 with a reduction in payments from customers resulting from lower fourth quarter fiscal 2020 net sales as previously discussed.

We expect that this lower cash liquidity will cause us to utilize our credit facilities to fund our increased working capital requirements in fiscal 2021.

Significant Accounting Policies:

The significant accounting policies followed in the preparation of these financial statements, as summarized in the following paragraphs, are in conformity with accounting principles generally accepted in the United States of America (U.S.

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New Accounting Standards:

In May 2014, the FASB issued an update to the accounting guidance for the recognition of revenue arising from contracts with customers.

The update supersedes most current revenue recognition guidance and outlines a single comprehensive model for revenue recognition based on the principle that an entity should recognize revenue in an amount that reflects the expected consideration to be received in the exchange of goods and services.

The guidance update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts.

We implemented the new standard effective July 2, 2018, the first day of our 2019 fiscal year, using the modified retrospective approach to transition to the new standard.

We assessed our revenue stream based upon the provisions of our customer contracts in effect on the July 2, 2018 effective date to determine the cumulative effect of initially applying the guidance.

Based on our assessment, the adoption date financial statement impact was limited to a balance sheet reclassification required to establish the contract liability concept provided for in the guidance.

As such, comparative financial information for reporting periods prior to July 2, 2018 has not been restated and continues to be reported in accordance with our revenue recognition policies prior to the adoption of the new guidance.

Additionally, there was no cumulative effect adjustment required to be recorded to our retained earnings.

The effect of the reclassification changes made to our July 2, 2018 Consolidated Balance Sheet increased Receivables, net by $ 1.2 million, with a corresponding increase to Accrued Liabilities:

Refer to the discussion of Revenue Recognition included in these Notes to Financial Statements.

In February 2016, the FASB issued an update to the accounting guidance for leases.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses .

The update revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded.

Originally, the update was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted.

In November 2019, FASB issued ASU 2019-10, Financial Instruments – Credit Losses, Derivatives and Hedging, and Leases .

This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

We are planning to adopt this standard in the first quarter of our fiscal 2024.We are currently evaluating the potential effects of adopting the new guidance on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases , which provides updated guidance on accounting guidance for leases.

The update increases the transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about leasing arrangements.

The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those years.

We expect the adoption of this guidance will result in the recording of one operating lease asset and lease liability of approximately $ 4.1 million as of July 1, 2019.

Additionally, we expect no cumulative effect adjustment required to be recorded to our retained earnings.

In August 2016, the FASB issued an update to the accounting guidance on the classification of certain cash receipts and cash payments.

The update aims to eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.

The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years.

The adoption of this pronouncement did not have a material impact on our consolidated financial statements.

In August 2017, the FASB issued an update to the accounting for hedging activities.

The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness, due to a difference between the economic terms of the hedge instrument and the underlying transaction, and generally requires, for qualifying hedges, the entire change in the fair value of a hedging instrument to be presented in the same line as the hedged item in the consolidated statement of income.

We implemented the new guidance effective July 1, 2019, the first day of our 2020 fiscal year, by applying the modified retrospective method without restatement of comparative periods’ financial information, as permitted by the transition guidance.

The adoption of the new guidance had an impact on our balance sheet, but did not have an impact on either our consolidated operating results or our cash flows.

Adoption of the new guidance resulted in the recognition of a right-of-use asset of $ 4.1 million and related lease obligation of $ 4.1 million for an operating lease as of July 1, 2019.

We had no finance leases as of July 1, 2019.

As noted above, the adoption of the new guidance did not have a significant impact on our operating results or cash flows.

See “Leases” below for additional information.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging , which provides updated guidance to the accounting for hedging activities.

The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness due to a difference between economic terms of the hedge instrument and the underlying transaction, and generally requires, for qualifying hedges, the entire change in the fair value of a hedging instrument to be presented in the same line as the hedged item in the consolidated statement of income.

The standard also modifies the accounting for components excluded from the assessment of hedge effectiveness and simplifies the application of hedge accounting in certain situations.

The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those years.

We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.

In February 2018, the FASB issued guidance on the reclassification of certain tax effects from accumulated other comprehensive income.

The guidance will permit entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of U.S.

tax reform to retained earnings.

The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within these fiscal years.

We elected early adoption beginning effective December 30, 2018.

The adoption of the guidance resulted in the reclassification of $ 4.0 million from accumulated other comprehensive income to retained earnings during the quarter ended December 30, 2018.

In June 2018, the FASB issued an update to the accounting for nonemployee share-based payment accounting.

Our July 1, 2019 adoption of the new guidance had no impact to our consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation , which provides an update to the accounting for nonemployee share-based payment accounting.

The update aligns measurement and classification guidance for share-based payments to nonemployees with the guidance applicable to employees.

Under the new guidance, the measurement of equity-classified nonemployee awards will be fixed at the date of grant.

The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those years.

We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.

Under the new guidance, the measurement of equity-classified nonemployee awards is fixed at the date of grant.

Our July 1, 2019 adoption of the new guidance had no impact to our consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes , which enhances and simplifies various aspects of income tax accounting including hybrid tax regimes, tax basis step-up in goodwill obtained in a transaction that is not a business combination, separate financial statements of entities not subject to tax, the intraperiod tax allocation exception to the incremental approach, investment ownership changes from a subsidiary to an equity method investment and vice versa, interim-period accounting for enacted changes in tax law, and the year-to-date loss limitation in interim-period tax accounting.

This accounting update is effective for annual and interim periods beginning after December 15, 2020, with early adoption permitted.

We do not expect that the adoption of this pronouncement will have a material impact on our consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provided optional guidance for a limited time to ease the potential burden in accounting for reference rate reform.

The new guidance provides optional expedients and exceptions for applying U.S.

GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met.

The amendments apply only to contracts and hedging relationships that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued due to reference rate reform.

These amendments are effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022.

The adoption of this ASU did not have a material impact on our consolidated financial statements and related disclosures.

Our fiscal year ends on the Sunday nearest June 30.

The years ended June 30, 2019 and July 1, 2018 are each comprised of 52 weeks.

The years ended June 28, 2020 and June 30, 2019 are each comprised of 52 weeks .

Use of Estimates:

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dollar/Mexican peso exchange rate.

During the years ended June 30, 2019 and July 1, 2018, 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.

Our objective in entering into these currency forward contracts is to minimize our earnings volatility resulting from changes in exchange rates affecting the U.S.

We have contracts with Bank of Montreal that provide for monthly Mexican peso currency forward contracts for a portion of our estimated peso denominated operating costs.

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 consolidated financial statements at fair value and changes in the fair value are reported in current earnings as part of Other (Expense) Income, net.

No Mexican peso forward contracts were outstanding as of June 30, 2019.

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 (Expense), net.

The following table quantifies the outstanding Mexican peso forward contracts as of June 28, 2020 (thousands of dollars, except with respect to the average forward contractual exchange rate):

Effective Dates

Notional Amount

Average Forward Contractual Exchange Rate

Buy MXP/Sell USD

July 15, 2020 - December 16, 2020

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

June 28, 2020

June 30, 2019

Not designated as hedging instruments:

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Mexican peso forward contracts

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

Other (Expense) Income, net

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

Other Income, net

June 28, 2020

June 30, 2019

Not Designated as Hedging Instruments:

Realized gain

Unrealized gain (loss)

Realized (loss) gain

Unrealized (loss) gain

Fair Value of Financial Instruments:

The fair value of our cash and cash equivalents, accounts receivable, accounts payable and borrowings under our credit facilities approximated their book value as of June 30, 2019 and July 1, 2018.

The fair value of our cash and cash equivalents, accounts receivable, accounts payable and borrowings under our credit facilities approximated their book value as of June 28, 2020 and June 30, 2019.

Fair value is defined as the exchange price that would be received for an asset or paid for a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

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These inputs reflect the reporting entity’s own assumptions of the data that market participants would use in pricing the asset or liability, based on the best information available in the circumstances.

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2019 and July 1, 2018 (thousands of dollars) :

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of June 28, 2020 and June 30, 2019 (thousands of dollars) :

June 28, 2020

June 30, 2019

Rabbi Trust assets:

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Mexican peso forward contracts

The Rabbi Trust assets fund our supplemental executive retirement plan and are included in Other Long-Term Assets in the accompanying Consolidated Balance Sheets.

The Rabbi Trust assets fund our supplemental executive retirement plan and are primarily included in Other Long-Term Assets in the accompanying Consolidated Balance Sheets.

Refer to discussion of Mexican peso forward contracts under Derivative Instruments above.

The fair value of the Mexican peso forward contracts considers the remaining term, current exchange rate and interest rate differentials between the two currencies.

There were no transfers between Level 1 and Level 2 assets during 2019 or 2018.

Receivables consist primarily of trade receivables due from Original Equipment Manufacturers in the automotive industry and locksmith/dealership distributors relating to our service and aftermarket sales.

We evaluate the collectability of receivables based on a number of factors.

An allowance for doubtful accounts is recorded for significant past due receivable balances based on a review of the past due items, general economic conditions and the industry as a whole.

The allowance for doubtful accounts totaled $ 500,000 at June 30, 2019 and July 1, 2018.

An allowance for doubtful accounts is recorded for significant past due receivable balances based on a review of the past due items, general economic conditions (including with respect to the impact of COVID-19 on our customers) and the industry as a whole.

The allowance for doubtful accounts totaled $ 500,000 at June 28, 2020 and June 30, 2019.

Inventories are comprised of material, direct labor and manufacturing overhead, and are stated at net realizable value using the first-in, first-out (“FIFO”) cost method of accounting.

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June 28, 2020

June 30, 2019

Finished products

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Year ended June 28, 2020

Year ended July 1, 2018

Year ended June 30, 2019

Customer Tooling in Progress:

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Other tooling costs are not directly reimbursed by the customer.

These costs are capitalized and amortized over the life of the related product based on the fact that the related tool will be used over the life of the supply arrangement.

We capitalize and amortize these other tooling costs over the life of the related product based on the fact that the related tool will be used over the life of the supply arrangement.

To the extent that estimated costs exceed expected reimbursement from the customer we recognize a loss.

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June 28, 2020

June 30, 2019

Land and improvements

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June 28, 2020

June 30, 2019

Gross book value

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Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset.

If an asset is considered to be impaired, the impairment recognized is measured by the excess of the carrying amount of the asset over the fair value of the asset.

If such indicators are present, the recoverability of assets to be held and used is assessed by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset.

If an asset is determined to not be recoverable, the impairment recognized is calculated as the excess of the carrying amount of the asset over the fair value of the asset.

Assets to be disposed of are reported at the lower of the carrying amount or fair value, less estimated costs to sell.

There were no impairments recorded in the years ended June 30, 2019 or July 1, 2018.

There were no impairments recorded in the years ended June 28, 2020 or June 30, 2019.

Expenditures for repairs and maintenance are charged to expense as incurred.

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Upon retirement or disposition of plant and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in income.

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 that has a current lease term through October 2023 .

This lease includes renewal terms that can extend the lease term for five additional years.

For purposes of calculating operating lease obligations, we included the option to extend the lease as it is reasonably certain that we will exercise such option.

The lease does 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 lease does 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.

The operating lease asset and obligation related to our El Paso warehouse lease included in the accompanying Condensed Consolidated Balance Sheet are presented below (thousands of dollars):

June 28, 2020

Right-of-Use Asset Under Operating Lease:

Other Long-Term Assets

Lease Obligation Under Operating Lease:

Current Liabilities:

Accrued Liabilities:

Other Long-Term Liabilities

Future minimum lease payments, by our fiscal year, including options to extend that are reasonably certain to be exercised, under the non-cancelable lease are as follows as of June 28, 2020 (thousands of dollars):

Total Future Minimum Lease Payments

Imputed Interest

Total Lease Obligations

Future minimum lease payments, by our fiscal year, excluding options to extend that are reasonably certain to be exercised, prior to the adoption of the new accounting guidance on leases were as follows as of June 30, 2019 (thousands of dollars):

Total Future Minimum Lease Payments

Cash flow information related to the operating lease is shown below (thousands of dollars):

June 28, 2020

Operating Cash Flows:

Cash Paid Related to Operating Lease Obligation

Non-Cash Activity:

Right-of-Use Asset Obtained in Exchange for Operating Lease Obligation

The weighted average lease term and discount rate for the El Paso, Texas operating lease are shown below:

June 28, 2020

Weighted Average Remaining Lease Term (in years)

Weighted Average Discount Rate

Operating lease expense for the year ended June 28, 2020 totaled $ 461,000 .

Rental expense for the year ended June 30, 2019 totaled $ 773,000 .

Supplier Concentrations:

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Therefore, we recognize revenue at the point in time we satisfy a performance obligation by transferring control of a part to a customer.

Amounts billed to customers related to shipping and handling costs are included in Net Sales in the accompanying Consolidated Statements of (Loss) Income and Comprehensive Income.

Shipping and handling costs are accounted for as fulfillment costs and are included in Cost of Goods Sold in the accompanying Consolidated Statements of (Loss) Income and Comprehensive Income.

Amounts billed to customers related to shipping and handling costs are included in Net Sales in the accompanying Consolidated Statements of Loss and Comprehensive (Loss) Income.

Shipping and handling costs are accounted for as fulfillment costs and are included in Cost of Goods Sold in the accompanying Consolidated Statements of Loss and Comprehensive (Loss) Income.

Tooling and Pre-Production Engineering Costs Related to Long-Term Supply Arrangements:

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The activity related to contract liability balances during the year ended June 28, 2020 was as follows (thousands of dollars):

Balance, July 1, 2018

Balance, June 30, 2019

Discounts Recorded as a Reduction in Sales

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Research and development expenditures were approximately $ 9.8 million in 2020 and $ 13.8 million in 2019.

Other (Expense) Income, Net:

Net other (expense) income included in the accompanying Consolidated Statements of (Loss) 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.

Other Income (Expense), Net:

Net other income (expense) included in the accompanying Consolidated Statements of Loss and Comprehensive (Loss) 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 held by our Mexican subsidiaries.

We entered into the Mexican peso currency forward contracts during fiscal 2018 and 2019 to minimize earnings volatility resulting from changes in exchange rates affecting the U.S.

dollar cost of our Mexican operations.

The Rabbi Trust assets fund our amended and restated supplemental executive retirement plan.

The investments held in the Trust are considered trading securities.

We entered into the Mexican peso currency forward contracts during fiscal 2020 and 2019 to minimize earnings volatility resulting from changes in exchange rates affecting the U.S.

dollar cost of our Mexican operations.

Unrealized gains and losses on the peso forward contracts recognized as a result of mark-to-market adjustments as of June 28, 2020 may or may not be realized in future periods, depending on actual Mexican peso to U.S.

dollar exchange rates experienced during the balance of the contract period.

Pension and postretirement plan costs include the components of net periodic benefit cost other than the service cost component.

Additionally, during fiscal 2020, other miscellaneous income, net includes $ 450,000 of favorable valued-added tax adjustments realized by our Mexican entities and $ 434,000 of experience gains from asset returns related to the termination of our Qualified Pension Plan as discussed under Retirement Plans and Postretirement Costs.

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

June 28, 2020

Foreign currency transaction (loss) gain

Rabbi Trust gain

Unrealized gain (loss) on Mexican peso forward contracts

Realized gain on Mexican peso forward contracts

Pension and postretirement plans (cost) credit

June 30, 2019

Foreign currency transaction gain (loss)

Rabbi Trust (loss) gain

Unrealized (loss) gain on Mexican peso forward contracts

Realized (loss) gain on Mexican peso forward contracts

Pension and postretirement plans cost

Warranty Reserve:

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In recent fiscal periods, our largest customers have extended their warranty protection for their vehicles and have since demanded higher warranty cost sharing arrangements from their suppliers in their terms and conditions to purchase, including from STRATTEC.

The 2018 warranty provision included costs for various known or expected warranty issues as of July 1, 2018 for which amounts were reasonably estimable.

As additional information becomes available, actual results may differ from recorded estimates, which may require us to adjust the amount of our warranty provision.

1 unchanged sentence

Year ended June 28, 2020

Year ended July 1, 2018

Year ended June 30, 2019

Foreign Currency Translation:

2 unchanged sentences

Foreign currency translation adjustments are included as a component of accumulated other comprehensive loss.

Foreign currency transaction gains and losses are included in other (expense) income, net in the accompanying Consolidated Statements of (Loss) Income and Comprehensive Income.

Foreign currency transaction gains and losses are included in other income (expense), net in the accompanying Consolidated Statements of Loss and Comprehensive (Loss) Income.

Accumulated Other Comprehensive Loss:

1 unchanged sentence

June 28, 2020

June 30, 2019

Unrecognized pension and postretirement benefit

1 unchanged sentence

Foreign currency translation, net of tax

The following tables summarize the changes in AOCL for the years ended June 30, 2019 and July 1, 2018 (thousands of dollars):

The following tables summarize the changes in AOCL for the years ended June 28, 2020 and June 30, 2019 (thousands of dollars):

Year Ended June 28, 2020

Postretirement

Balance July 1, 2018

Balance June 30, 2019

Other comprehensive loss before reclassifications

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Reclassifications:

Pension termination settlements (A)

Prior service credits (A)

Actuarial gains (A)

Actuarial losses (A)

Total reclassifications before tax

Net reclassifications

Other comprehensive loss (income)

Other comprehensive loss

Other comprehensive loss attributable

to non-controlling interest

Reclassification of stranded tax effects

Balance June 28, 2020

Year ended July 1, 2018

Year Ended June 30, 2019

Postretirement

4 unchanged sentences

Reclassifications:

Pension termination settlements (A)

Prior service credits (A)

Actuarial gains (A)

Actuarial losses (A)

Total reclassifications before tax

Net reclassifications

Other comprehensive loss (income)

Other comprehensive income attributable to

non-controlling interest

Balance July 1, 2018

Amounts reclassified are included in the computation of net periodic benefit cost, which is included in Other (Expense) Income, net in the accompanying Consolidated Statements of (Loss) Income and Comprehensive Income.

Other comprehensive income

Other comprehensive income attributable

to non-controlling interest

Reclassification of stranded tax effects

Balance June 30, 2019

Amounts reclassified are included in the computation of net periodic benefit cost, which is included in Other Income (Expense), net in the accompanying Consolidated Statements of Loss and Comprehensive (Loss) Income.

See Retirement Plans and Postretirement Costs note to these Notes to Financial Statements below.

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Shares of restricted stock granted under the plan are subject to vesting criteria determined by the Compensation Committee of our Board of Directors at the time the shares are granted and have a minimum vesting period of one year from the date of grant.

Restricted shares granted prior to August 2014 have voting and dividend rights, regardless of whether the shares are vested or unvested.

Restricted shares granted during August 2014 and thereafter have voting rights, regardless of whether the shares are vested or unvested, but only have the right to receive cash dividends after such shares become vested.

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 issued vest 1 to 5 years after the date of grant.

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All compensation cost related to stock options granted under the plan has been recognized as of June 28, 2020.

Unrecognize d compensation cost as of J une 30 , 201 9 related to restricted stock granted under the plan was as follows (thousands of dollars):

Unrecognized compensation cost as of June 28, 2020 related to restricted stock granted under the plan was as follows (thousands of dollars):

Weighted Average

6 unchanged sentences

June 28, 2020

June 30, 2019

Intrinsic value of options exercised

Fair value of stock options vested

No options were granted during the fiscal years ended June 30, 2019 or July 1, 2018.

No options were granted during the fiscal years ended June 28, 2020 or June 30, 2019.

The range of options outstanding as of June 28, 2020 was as follows :

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Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases and operating loss carry-forwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and operating loss carry-forwards are expected to be recovered, settled or utilized.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered, settled or utilized.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

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Additionally, we accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws.

Interest and penalties on uncertain tax positions are classified in the Provision for Income Taxes in the accompanying Consolidated Statements of (Loss) Income and Comprehensive Income.

Our income tax provision for 2018 was impacted by the Tax Cuts and Jobs Act of 2017 (“the Act”), which was signed into law on December 22, 2017 with an effective date of January 1, 2018.

The Act makes broad and complex changes to the U.S.

tax code that affected our fiscal year ending July 1, 2018, including but not limited to (1) a reduction in the U.S.

statutory tax rate to 21 percent following its effective date and a change in the measurement of our deferred tax assets and deferred tax liabilities resulting from the reduction in the statutory rate, (2) requiring a one-time transition tax on certain deemed repatriated earnings of foreign subsidiaries that is payable over eight years , and (3) bonus depreciation that will allow for full expensing of qualified property.

Section 15 of the Internal Revenue Code stipulates that for our fiscal year ending July 1, 2018, a blended statutory corporate tax rate of 28 % was applicable, which is based on the applicable statutory tax rates before and after the Act and the number of days in our fiscal year.

The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Act.

SAB 118 provides a measurement period that should not extend beyond one year from the Act’s enactment date for companies to complete the accounting under ASC 740.

In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete.

To the extent that a company’s accounting for certain income tax effects of the Act is incomplete but it is still able to determine a reasonable estimate of the tax effect, it must record a provisional estimate in the financial statements.

If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provision of the tax laws that were in effect immediately before the enactment of the Act.

In connection with our analysis of the impact of the Act, we recorded a discrete net tax benefit of approximately $ 3 million during 2018.

This net tax benefit primarily consisted of (1) the impact of the change in measurement of our deferred tax assets and liabilities, which resulted in a favorable provision impact of $ 1.6 million, (2) the one-time transition tax on non-previously taxed post-1986 accumulated foreign earnings, which resulted in a net favorable impact of $ 500,000 and included a transition tax of $ 1.4 million offset by the reversal of net deferred tax liability balances totaling $ 1.9 million, which related to basis differences in foreign earnings, and (3) the impact of changing our annualized effective tax rate, which resulted in a favorable provision impact of $ 900,000 .

For various reasons that are discussed more fully below, we did not complete our accounting for the income tax effects for certain elements of the Act as of December 31, 2017.

However, we were able to make reasonable estimates of certain effects and, therefore, we recorded provisional adjustments of these elements in the accompanying consolidated financial statements.

We identified these items as provisional since our analysis of the items was not complete.

The Act reduced the corporate tax rate to 21 percent, effective January 1, 2018.

For certain of our net deferred tax assets, we have recorded a provisional adjustment to reflect the reduction in the corporate tax rate.

While we are able to make a reasonable estimate of the impact of the reduction in the corporate rate, it may be affected by other analyses related to the Act, including, but not limited to, the impact of our calculation of deemed repatriation of deferred foreign income and the impact of full expensing for certain assets.

The Deemed Repatriation Transition Tax (“Transition Tax”) is a tax on previously untaxed accumulated and current earnings and profits (E&P) of certain of our foreign subsidiaries.

To determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S.

income taxes paid on such earnings.

We were able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation in these consolidated financial statements.

However, as of December 31, 2017, additional information needed to be gathered to more precisely compute the amount of the Transition Tax.

We were required to assess whether our valuation allowance analyses was affected by various aspects of the Act (e.g., deemed repatriation of deferred foreign income, Global Intangible Low-Taxed Income (“GILTI”) inclusions, and new categories of Foreign Tax Credits).

Since, as discussed herein, we have recorded provisional amounts related to certain portions of the Act, any corresponding determination of the need for, or any change in, a valuation allowance was also provisional.

As of December 30, 2018, we had completed our accounting for all income tax elements of the Act.

Measurement period adjustments related to the Act recorded in 2019 totaled $ 372,000 .

Our income tax provision for 2019 was impacted by a $ 7.5 million tax benefit resulting from the termination of our qualified, noncontributory defined benefit pension plan as discussed under Retirement Plans and Postretirement Costs below and a reduction in the expected effective tax rate as compared to 2018.

Our income tax provision for 2019 was also impacted by a discrete benefit of $372,000, which represents measurement period adjustments to the one-time transition tax on non-previously taxed post-1986 accumulated foreign earnings.

Additionally, our income tax provisions for 2019 and 2018 were affected by the non-controlling interest portion of our pre-tax income.

The non-controlling interest impacts the effective tax rate as ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entities are taxed as partnerships for U.S.

tax purposes.

Interest and penalties on uncertain tax positions are classified in the (Benefit) Provision for Income Taxes in the accompanying Consolidated Statements of Loss and Comprehensive (Loss) Income.

INVESTMENT IN JOINT VENTURES AND MAJORITY OWNED SUBSIDIARIES

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Additionally, a joint venture company, Vehicle Access Systems Technology LLC (“VAST LLC”), in which WITTE, STRATTEC and ADAC each hold a one-third equity interest, exists to seek opportunities to manufacture and sell each company’s products in areas of the world outside of North America and Europe.

VAST LLC has investments in Sistema de Veicular Ltda, VAST Fuzhou, VAST Great Shanghai, VAST Shanghai Co., VAST Jingzhou Co.

VAST LLC has investments in Sistema de Acesso Veicular Ltda, VAST Fuzhou, VAST Great Shanghai, VAST Shanghai Co., VAST Jingzhou Co.

Ltd., and Minda-VAST Access Systems.

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VAST Fuzhou, VAST Great Shanghai, VAST Shanghai Co.

anf VAST Jingzhou Co.

and VAST Jingzhou Co.

(collectively known as VAST China), provide a base of operations to service each VAST partner’s automotive customers in the Asian market.

Minda-VAST Access Systems is based in Pune, India and is a 50:

50 joint venture with Minda Management Services Limited, an affiliate of both Minda Corporation Limited and Spark Minda, Ashok Minda Group of New Delhi, India (collectively “Minda”).

50 joint venture between VAST LLC and Minda Management Services Limited, an affiliate of both Minda Corporation Limited and Spark Minda, Ashok Minda Group of New Delhi, India (collectively “Minda”).

Minda and its affiliates cater to the needs of all major car, motorcycle, commercial vehicle, tractor and off-road vehicle manufacturers in India.

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The VAST LLC investments are accounted for using the equity method of accounting and the results of the VAST LLC foreign subsidiaries and joint venture are reported on a one-month lag basis.

The activities related to the VAST LLC joint ventures resulted in equity earnings of joint ventures to STRATTEC of approximately $ 2.7 million during 2019 and approximately $ 4.4 million during 2018.

During 2019 and 2018, capital contributions totaling $ 600,000 and $ 375,000 , respectively, were made to VAST LLC for purposes of funding operations in Brazil.

STRATTEC’s portion of the capital contributions totaled $ 200,000 in 2019 and $ 125,000 in 2018.

The activities related to the VAST LLC joint ventures resulted in equity loss of joint ventures to STRATTEC of approximately $ 565,000 during 2020 and equity earnings of joint ventures of approximately $ 2.7 million during 2019.

The current year equity loss of joint ventures for VAST LLC included a $ 2 million impairment charge related to its Minda-VAST Access Systems joint venture in India.

STRATTEC’s portion of this impairment charge for 2020 totaled $ 667,000 .

During 2020, no capital contributions were made to VAST LLC.

During 2019, capital contributions totaling $ 600,000 were made to VAST LLC for purposes of funding operations in Brazil.

STRATTEC’s portion of the capital contributions totaled and $ 200,000 .

ADAC-STRATTEC LLC, a Delaware limited liability company, was formed in fiscal year 2007 to support injection molding and door handle assembly operations in Mexico.

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ADAC-STRATTEC LLC’s financial results are consolidated with the financial results of STRATTEC and resulted in increased net income to STRATTEC of approximately $ 1.5 million in 2020 and $ 2.7 million in 2019.

ADAC-STRATTEC LLC incurs an engineering, research and design fee as well as a sales fee with ADAC.

Such fees are calculated as a percentage of ADAC-STRATTEC LLC net sales, are included in the consolidated results of STRATTEC, and totaled $ 6.9 million in 2020 and $ 8.2 million in 2019.

The related outstanding payable balance to ADAC was $ 658,000 and $ 1.5 million as of June 28, 2020 and June 30, 2019, respectively.

Additionally, ADAC-STRATTEC LLC has sales of production parts to ADAC.

Sales to ADAC are included in the consolidated results of STRATTEC and totaled $ 10.2 million in 2020 and $ 15.3 million in 2019.

The related outstanding receivable balance from ADAC was $ 1.0 million and $ 2.1 million as of June 28, 2020 and June 30, 2019, respectively.

STRATTEC POWER ACCESS LLC (“SPA”) was formed in fiscal year 2009 to supply the North American portion of the power sliding door, lift gate and deck lid system access control products which were acquired from Delphi Corporation.

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An additional Mexican entity, STRATTEC POWER ACCESS de Mexico, is wholly owned by SPA.

The financial results of SPA are consolidated with the financial results of STRATTEC and resulted in increased net income to STRATTEC of approximately $ 2.5 million in 2019 and approximately $ 2.2 million in 2018.

SAL LLC was formed in fiscal 2013 to introduce a new generation of biometric security products based upon the designs of Actuator Systems LLC, our partner and the owner of the remaining ownership interest.

SAL LLC was 51 percent owned by STRATTEC for all periods presented in this report.

Our investment in SAL LLC, for which we exercise significant influence but do not control and are not the primary beneficiary, is accounted for using the equity method.

The activities related to SAL LLC resulted in equity earnings of joint ventures to STRATTEC of approximately $ 128,000 in 2019 and equity earnings of joint ventures to STRATTEC of approximately $ 91,000 in 2018.

During all periods presented in this report, 100 percent of the funding for SAL LLC was being made through loans from STRATTEC to SAL LLC.

Therefore, for all periods presented in this report, even though STRATTEC maintains a 51 percent ownership interest in SAL LLC, STRATTEC recognized 100 percent of the losses of SAL LLC up to our committed financial support through Equity Earnings of Joint Ventures in the accompanying Consolidated Statements of (Loss) Income and Comprehensive Income.

During fiscal 2018, we, along with our joint venture partner, reduced operating the business of SAL LLC to winding down and selling only commercial biometric locks.

The financial results of SPA are consolidated with the financial results of STRATTEC and resulted in reduced net income to STRATTEC of approximately $ 1.3 million in 2020 and increased net income to STRATTEC of approximately $ 2.5 million in 2019.

STRATTEC purchases production parts from WITTE.

Purchases totaled $ 1.0 million in 2020 and $ 1.3 million in 2019.

The outstanding payable balance to WITTE was $ 21,000 and $ 153,000 as of June 28, 2020 and June 30, 2019, respectively.

SAL LLC, which was 51 percent owned by STRATTEC, was formed in fiscal 2013 to introduce a new generation of biometric security products based upon the designs of Actuator Systems LLC, our partner and the owner of the remaining ownership interest.

SAL was dissolved during our fiscal 2020 fourth quarter.

Our investment in SAL LLC, for which we exercised significant influence but did not control and were not the primary beneficiary, was accounted for using the equity method.

The activities related to SAL LLC resulted in equity earnings of joint ventures to STRATTEC of approximately $ 356,000 in 2020 and approximately $ 128,000 in 2019.

The current year equity earnings of SAL LLC includes a gain on dissolution of $ 342,000 .

STRATTEC’s joint venture investments are included in the accompanying Consolidated Balance Sheets as follows (thousands of dollars):

June 28, 2020

June 30, 2019

Investment in Joint Ventures:

2 unchanged sentences

Investment in SAL LLC

See further discussion under Equity Earnings of Joint Ventures included in Notes to Financial Statements herein.

EQUITY EARNINGS OF JOINT VENTURES

See further discussion under Equity (Loss) Earnings of Joint Ventures included in Notes to Financial Statements herein.

EQUITY (LOSS) EARNINGS OF JOINT VENTURES

As discussed above under the note Investment in Joint Ventures and Majority Owned Subsidiaries, we hold a one-third ownership interest in VAST LLC, for which we exercise significant influence but do not control and are not the primary beneficiary.

3 unchanged sentences

June 28, 2020

June 30, 2019

Cost of goods sold

Engineering, selling and administrative expense

Income from operations

Impairment charge

(Loss) income from operations

Other income, net

Income before provision for income taxes

(Loss) income before provision for income taxes

Provision for income taxes

Net (loss) income

STRATTEC’s share of VAST LLC net

(loss) income

Intercompany profit eliminations

STRATTEC’s equity earnings of VAST LLC

STRATTEC’s equity (loss) earnings of VAST LLC

June 28, 2020

June 30, 2019

Cash and cash equivalents

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STRATTEC’s share of VAST LLC net assets

As discussed above under the note Investment in Joint Ventures and Majority Owned Subsidiaries, we hold a 51 percent ownership interest in a joint venture company, SAL LLC, which was established to introduce a new generation of commercial and residential biometric security products based on the designs of Actuator Systems, our partner and the owner of the remaining ownership interest.

During fiscal 2018, we, along with our joint venture partner, reduced operating the business of SAL LLC to winding down and selling only commercial biometric locks.

SAL LLC is considered a variable interest entity based on the STRATTEC guarantee and additional loans from STRATTEC as discussed below.

STRATTEC is not the primary beneficiary and does not control the entity.

Accordingly, our investment in SAL LLC is accounted for using the equity method.

SAL LLC maintained a license agreement with Westinghouse allowing SAL LLC to do business as Westinghouse Security.

This license agreement expired August 16, 2018 .

Payments due to Westinghouse under the license agreement were guaranteed by STRATTEC.

STRATTEC made a payment to Westinghouse of $ 250,000 on this guarantee during 2018.

STRATTEC’s proportionate share of the guarantee of this payment based on our ownership percentage in SAL LLC totaled $ 127,000 , and accordingly, our investment in SAL LLC was increased by this amount as of July 1, 2018.

Loans were made from STRATTEC to SAL LLC in support of operating expenses and working capital needs.

The outstanding loan amount totaled $ 2.6 million as of June 30, 2019 and July 1, 2018 and was eliminated against STRATTEC’s negative Investment in SAL LLC in the preparation of the consolidated financial statements.

Even though we maintain a 51 percent ownership interest in SAL LLC, effective with our fiscal 2015 fourth quarter, 100 percent of the funding for SAL LLC was being made by loans from STRATTEC to SAL LLC.

Therefore, STRATTEC began recognizing 100 percent of the losses of SAL LLC up to our committed financial support through Equity Earnings of Joint Ventures in the accompanying Consolidated Statements of (Loss) Income and Comprehensive Income effective with our fiscal 2015 fourth quarter.

We have sales of component parts to VAST LLC and SAL LLC, purchases of component parts from VAST LLC, expenses charged to VAST LLC for engineering and accounting services and expenses charged from VAST LLC to STRATTEC for general headquarter expenses.

The following tables summarize the related party transactions with VAST LLC and SAL LLC for the periods indicated (thousands of dollars):

Our joint venture company, SAL LLC, was dissolved during 2020.

STRATTEC’s equity earnings of SAL LLC totaled $ 356,000 in 2020 and $ 128,000 in 2019.

We have sales of component parts to VAST LLC, purchases of component parts from VAST LLC, expenses charged to VAST LLC for engineering and accounting services and expenses charged from VAST LLC to STRATTEC for general headquarter expenses.

The following tables summarize the related party transactions with VAST LLC for the periods indicated (thousands of dollars):

June 28, 2020

June 30, 2019

Sales to VAST LLC

Sales to SAL LLC

Purchases from VAST LLC

2 unchanged sentences

June 28, 2020

June 30, 2019

Accounts receivable from VAST LLC

Accounts receivable from SAL LLC (A)

Current loan receivable from SAL LLC (A)

Accounts payable to VAST LLC

As of June 30, 2019, outstanding loan and accounts receivable balances due from SAL LLC to STRATTEC totaled $ 2.6 million and $ 82,000 , respectively.

As of July 1, 2018, outstanding loan and accounts receivable balances due from SAL LLC to STRATTEC totaled $ 2.6 million and $ 82,000 , respectively.

As of June 30, 2019 and July 1, 2018, these outstanding balances have been offset against our investment in SAL LLC, which is included in Other Current Liabilities in the Consolidated Balance Sheet.

CREDIT FACILITIES

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ADAC-STRATTEC LLC has a $ 25 million secured revolving credit facility (the “ADAC-STRATTEC Credit Facility”) with BMO Harris Bank N.A., which is guaranteed by STRATTEC.

The ADAC-STRATTEC Credit Facility borrowing limit decreased to $ 25 million effective July 1, 2019.

The credit facilities both expire on August 1, 2022 .

6 unchanged sentences

June 28, 2020

June 30, 2019

STRATTEC Credit Facility

6 unchanged sentences

June 30, 2019

June 28, 2020

June 30, 2019

STRATTEC Credit Facility

6 unchanged sentences

We have a reserve for estimated costs to remediate an environmental contamination site at our Milwaukee facility.

The site was contaminated by a solvent spill, which occurred in 1985, from a former above ground solvent storage tank located on the east side of the facility.

The site was contaminated by a solvent spill, which occurred in 1985, from a former above ground solvent storage tank located on the east side of

the facility.

The reserve was initially established in 1995.

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Minimum Rental

Rental expense under all non-cancelable operating leases was as follows (thousands of dollars):

Rental Expense

The provision for income taxes consisted of the following (thousands of dollars):

June 28, 2020

Currently payable:

June 30, 2019

Currently (recoverable) payable:

Deferred tax provision

1 unchanged sentence

June 28, 2020

June 30, 2019

statutory rate

2 unchanged sentences

transition tax

change in deferred rate

Federal net operating loss carry-back statutory

rate differential

Global intangible low-taxed income

Research and development tax credit

2 unchanged sentences

Stock based compensation

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("the CARES Act") was enacted.

The CARES Act contains several income tax provisions, as well as other measures, that are intended to assist businesses impacted by the economic effects of the COVID-19 pandemic.

The CARES Act includes a five-year carryback allowance for taxable net operating losses generated in tax years 2018 through 2020, our fiscal years 2019 through 2021.

We recorded an expected benefit for the carryback of our fiscal year 2020 federal net operating loss.

As we are carrying the losses back to years beginning before January 1, 2018, the tax benefit is a result of the rate differential between the previous 35 % federal tax rate and current statutory rate of 21 %.

The components of deferred tax (liabilities) assets were as follows (thousands of dollars):

June 28, 2020

Unrecognized pension and postretirement benefit

plan liabilities

June 30, 2019

Unrecognized pension and postretirement plan liabilities

Accrued warranty

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Allowance for doubtful accounts

Lease liability

Right of use assets

Credit carry-forwards

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Foreign income before the provision for income taxes was $ 7.7 million in 2020 and $ 4.0 million in 2019.

The total liability for unrecognized tax benefits was $ 1.2 million as of June 30, 2019 and $ 796,000 as of July 1, 2018 and was included in Other Long-term Liabilities in the accompanying Consolidated Balance Sheets.

This liability includes approximately $ 1.1 million of unrecognized tax benefits at June 30, 2019 and $ 741,000 at July 1, 2018 and approximately $ 93,000 of accrued interest at June 30, 2019 and $ 55,000 at July 1, 2018.

The total liability for unrecognized tax benefits was $ 1.6 million as of June 28, 2020 and $ 1.2 million as of June 30, 2019 and was included in Other Long-term Liabilities in the accompanying Consolidated Balance Sheets.

This liability includes approximately $ 1.5 million of unrecognized tax benefits at June 28, 2020 and $ 1.1 million at June 30, 2019 and approximately $ 147,000 of accrued interest at June 28, 2020 and $ 93,000 at June 30, 2019.

This liability does not include an amount for accrued penalties.

The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was approximately $ 854,000 at June 30, 2019 and $ 375,000 at July 1, 2018.

The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was approximately $ 1.1 million at June 28, 2020 and $ 854,000 at June 30, 2019.

We recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows for the years ended June 30, 2019 and July 1, 2018 (thousands of dollars):

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows for the years ended June 28, 2020 and June 30, 2019 (thousands of dollars):

June 28, 2020

June 30, 2019

Unrecognized tax benefits, beginning of year

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RETIREMENT PLANS AND POSTRETIREMENT COSTS

We have a qualified, noncontributory defined benefit pension plan (“Qualified Pension Plan”) covering substantially all U.S.

We had a qualified, noncontributory defined benefit pension plan (“Qualified Pension Plan”) covering substantially all U.S.

associates employed by us prior to January 1, 2010.

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A non-cash compensation expense charge of $ 4.2 million was also recorded during fiscal 2019 related to the future transfer of the excess assets in the Qualified Pension Plan to a STRATTEC defined contribution plan for subsequent pay-out to eligible STRATTEC employees based on a plan approved by the Board of Directors in June 2019.

It is expected that an additional $ 4.3 million in non-cash compensation expense will be recorded in the six month period ending December 2019 related to this future transfer and pay-out of the excess Qualified Pension Plan assets.

We have historically had in place a noncontributory supplemental executive retirement plan (“SERP”), which prior to January 1, 2014 was a nonqualified defined benefit plan that essentially mirrored the Qualified Pension Plan, but provided benefits in excess of certain limits placed on our Qualified Pension Plan by the Internal Revenue Code.

As noted above, we froze our Qualified Pension Plan effective as of December 31, 2009 and the SERP provided benefits to participants as if the Qualified Pension Plan had not been frozen.

Because the Qualified Pension Plan was frozen and because new employees were not eligible to participate in the Qualified Pension Plan, our Board of Directors adopted amendments to the SERP on October 8, 2013 that were effective as of December 31, 2013 to simplify the SERP calculation.

The SERP is funded through a Rabbi Trust with BMO Harris Bank N.A.

Under the amended SERP, participants received an accrued lump-sum benefit as of December 31, 2013 which was credited to each participant’s account.

An additional $ 4.8 million non-cash compensation expense charge related to the final transfer and pay-out of the excess Qualified Pension Plan assets was recorded during our fiscal 2020.

During fiscal 2020, the excess Qualified Pension Plan assets were transferred to our defined contribution plan and distributed to eligible STRATTEC employees, which completed the full termination of the Qualified Pension Plan.

We have a noncontributory supplemental executive retirement plan (“SERP”), which is a nonqualified defined benefit plan.

The SERP is funded through a Rabbi Trust with TMI Trust Company.

Under the SERP, as amended December 31, 2013, participants received an accrued lump-sum benefit as of December 31, 2013 which was credited to each participant’s account.

Subsequent to December 31, 2013, each eligible participant receives a supplemental retirement benefit equal to the foregoing lump-sum benefit, plus an annual benefit accrual equal to 8 percent of the participant’s base salary and cash bonus, plus annual credited interest on the participant’s account balance.

1 unchanged sentence

The SERP, which is considered a defined benefit plan under applicable rules and regulations of the Internal Revenue Code, will continue to be funded through use of a Rabbi Trust to hold investment assets to be used in part to fund any future required lump sum benefit payments to participants.

The Rabbi Trust assets had a value of $ 2.9 million at June 30, 2019 and $ 2.8 million at July 1, 2018, and are included in Other Long-Term Assets in the accompanying Consolidated Balance Sheets.

The projected benefit obligation under the amended SERP was $ 2.2 million at June 30, 2019 and $ 1.9 million at July 1, 2018.

The Rabbi Trust assets had a value of $ 2.9 million at both June 28, 2020 and June 30, 2019.

At June 28, 2020, $ 217,000 of the Rabbi Trust asset balance was included in Other Current Assets and $ 2.7 million of the Rabbi Trust balance was included in Other Long-Term Assets in the accompanying Consolidated Balance Sheets.

At June 30, 2019, the Rabbi Trust asset balance was included in Other Long-Term Assets in the accompanying Consolidated Balance Sheets.

The projected benefit obligation under the SERP was $ 2.3 million at June 28, 2020 and $ 2.2 million at June 30, 2019.

The SERP liabilities are included in the pension tables below.

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June 30, 2019

COMPONENTS OF NET PERIODIC BENEFIT

COST (CREDIT):

June 28, 2020

June 30, 2019

COMPONENTS OF NET PERIODIC BENEFIT COST:

Interest cost

4 unchanged sentences

Net periodic benefit cost (credit)

Pension and SERP Benefits

Postretirement Benefits

WEIGHTED-AVERAGE ASSUMPTIONS:

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Discount rate

Expected return on plan assets

Rate of compensation increases – SERP

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Employer contribution

Excess Asset Transfer

Plan settlements

1 unchanged sentence

Fair value of plan assets at end of year

Funded status – prepaid (accrued) benefit obligations

Funded status – (accrued) prepaid benefit obligations

AMOUNTS RECOGNIZED IN CONSOLIDATED

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Net amount recognized

Pension and SERP Benefits

Postretirement Benefits

CHANGES IN PLAN ASSETS AND BENEFIT

1 unchanged sentence

COMPREHENSIVE INCOME:

Net periodic benefit (credit) cost

Net periodic benefit cost

Net actuarial loss (gain)

Plan settlements

Amortization of prior service (cost) credits

Amortization of prior service credits

Amortization of unrecognized net loss

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Total recognized in net periodic benefit

cost and other comprehensive (income) loss,

cost and other comprehensive loss,

The pension benefits have a separately determined accumulated benefit obligation, which is the actuarial present value of benefits based on service rendered and current and past compensation levels.

3 unchanged sentences

June 30, 2019

June 28, 2020

June 30, 2019

Accumulated benefit obligation

Projected benefit obligation

As of June 30, 2019, the qualified pension plan weighted-average asset allocation was 100 percent to cash and cash equivalents, which asset value totaled $ 8.6 million and was considered a Level 2 investment.

Due to the full termination of the qualified pension plan as discussed above, the plan held no assets at June 28, 2020.

For measurement purposes as it pertains to the estimated obligation associated with retirees prior to January 1, 2010, a 6.71 percent annual rate increase in the per capita cost of covered health care benefits was assumed for fiscal 2021;

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June 30, 2020

The pension plan weighted-average asset allocations by asset category were as follows for 2019 and 2018:

Target Allocation

June 30, 2019

Equity investments

Fixed-income investments / cash

The following is a summary, by asset category, of the fair value of pension plan assets at the June 30, 201 9 and June 30, 201 8 measurement dates (thousands of dollars):

June 30, 2019

June 30, 2018

Asset Category

Cash and cash equivalents

Equity securities/funds:

International

Fixed income:

Bond funds/bonds

There were no transfers in or out of Level 3 investments during the measurement year ended June 30, 2019.

We expect to contribute $ 509,000 to our SERP and $ 152,000 to our postretirement health care plan in fiscal 2020.

We expect to contribute $ 1.0 million to our SERP and $ 119,000 to our postretirement health care plan in fiscal 2021.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid during the fiscal years noted below (thousands of dollars):

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June 28, 2020

June 30, 2019

Company contributions

SHAREHOLDERS’ EQUITY

We have 12,000,000 shares of authorized common stock, par value $ .01 per share, with 3,691,555 and 3,635,203 shares outstanding at June 30, 2019 and July 1, 2018, respectively.

We have 12,000,000 shares of authorized common stock, par value $ .01 per share, with 3,749,619 and 3,691,555 shares outstanding at June 28, 2020 and June 30, 2019, respectively.

Holders of our common stock are entitled to one vote for each share on all matters voted on by shareholders.

2 unchanged sentences

No shares were repurchased under this program during 2020 or 2019.

(LOSS) EARNINGS PER SHARE (“EPS”)

Basic (loss) 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.

LOSS PER SHARE

Basic loss per share is computed on the basis of the weighted average number of shares of common stock outstanding during the applicable period.

Diluted loss 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.

1 unchanged sentence

June 28, 2020

Net (loss) income attributable to STRATTEC

June 30, 2019

Net loss attributable to STRATTEC

Weighted average shares of common stock outstanding

1 unchanged sentence

Diluted weighted average shares of common stock

Basic earnings per share

Diluted earnings per share

Options to purchase shares of common stock that were excluded from the calculation of diluted earnings per share because their inclusion would have been antidilutive were as follows:

Number of Options

Basic loss per share

Diluted loss per share

Potentially dilutive common shares that were excluded from the calculation of diluted earnings per share because their inclusion would have been antidilutive were as follows:

June 28, 2020

June 30, 2019

STOCK OPTION AND PURCHASE PLANS

6 unchanged sentences

Balance at July 1, 2018

Balance at June 30, 2019

Balance at June 28, 2020

Exercisable as of:

June 28, 2020

June 30, 2019

No options were granted during fiscal 2020 or 2019.

2 unchanged sentences

Nonvested Balance at July 1, 2018

Nonvested Balance at June 30, 2019

Nonvested Balance at June 28, 2020

We have an Employee Stock Purchase Plan to provide substantially all U.S.

2 unchanged sentences

On the last day of each month or if such date is not a trading day on the most recent previous trading day, participant account balances are used to purchase shares of our common stock at the average of the highest and lowest reported sales prices of a share of STRATTEC common stock on the NASDAQ Global Market on such date.

A total of 100,000 shares may be issued under the

A total of 100,000 shares may be issued under the plan.

Shares issued from treasury stock under the plan totaled 4,246 at an average price of $ 19.42 during 2020 and 3,295 at an average price of $ 30.13 during 2019.

A total of 58,117 shares remain available for purc hase under the plan as of June 30 , 201 9 .

A total of 53,871 shares remain available for purchase under the plan as of June 28, 2020.

Total export sales, sales from the United States to locations outside of the United States, are summarized as follows (thousands of dollars and percent of total net sales):

June 28, 2020

June 30, 2019

Countries for which customer sales account for ten percent or more of total net sales are summarized as follows (thousands of dollars and percent of total net sales):

June 28, 2020

June 30, 2019

Export sales into Canada

2 unchanged sentences

June 28, 2020

June 30, 2019

Keys & locksets

5 unchanged sentences

June 28, 2020

Fiat Chrysler Automobiles

June 30, 2019

General Motors Company

Fiat Chrysler Automobiles

Ford Motor Company

1 unchanged sentence

June 28, 2020

Fiat Chrysler Automobiles

June 30, 2019

General Motors Company

Fiat Chrysler Automobiles

Ford Motor Company

24 unchanged sentences

The Audit Committee of the Company’s Board of Directors, consisting entirely of independent directors, meets regularly with management and the independent registered public accounting firm, and reviews audit plans and results, as well as management’s actions taken in discharging responsibilities for accounting, financial reporting, and internal control.

Deloitte & Touche LLP, independent registered public accounting firm, has direct and confidential access to the Audit Committee at all times to discuss the results of their examinations.

Deloitte & Touche LLP, independent registered public accounting firm, has direct and confidential access to the Audit Committee at all times to discuss the results of their audits.

Management assessed the Corporation’s system of internal control over financial reporting as of June 28, 2020, in relation to criteria for effective internal control over financial reporting as described in Internal Control – Integrated Framework (2013) , issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

4 unchanged sentences

Senior Vice President and Chief Financial Officer

Attestation Report of Independent Registered Public Accounting Firm

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of STRATTEC SECURITY CORPORATION

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In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 28, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended June 30, 2019, of the Company and our report dated September 5, 2019, expressed an unqualified opinion on those financial statements.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended June 28, 2020, of the Company and our report dated September 3, 2020, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of a new accounting standard.

Basis for Opinion

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/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP

Milwaukee, WI

Milwaukee, Wisconsin

September 3, 2020

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The information included in our Proxy Statement, dated on or about September 3, 2020, under “Proposal 1:

Election of Director,” “Corporate Governance Matters-Code of Business Ethics,” “Audit Committee Matters-Audit Committee Financial Expert,” “Executive Officers,” “Deliquent Section 16(a) Reports,” “Director’s Meetings and Committees – Nominating and Corporate Governance Committee,” and “Corporate Governance Matters-Director Nominations” is incorporated herein by reference.

Election of Directors,” “Corporate Governance Matters-Code of Business Ethics,” “Audit Committee Matters-Audit Committee Financial Expert,” “Executive Officers,” “Section 16(a) Reports,” “Director’s Meetings and Committees – Nominating and Corporate Governance Committee,” and “Corporate Governance Matters-Director Nominations” is incorporated herein by reference.

The Audit Committee of our Board of Directors is an “audit committee” for purposes of Section 3(a)(58)(A) of the Securities Exchange Act of 1934.

33 unchanged sentences

Amended and Restated Articles of Incorporation of the Company

Amendment to Amended and Restated Articles of Incorporation of the Company

Amended By-laws of the Company

Description of Registrants’ Securities

Credit Agreement, dated as of August 1, 2011, between STRATTEC SECURITY CORPORATION and BMO Harris Bank N.A., as lender

12 unchanged sentences

5 to Credit Agreement, dated as of September 28, 2018, between STRATTEC SECURITY CORPORATION and BMO Harris Bank N.A., as lender

Amendment No.

6 to Credit Agreement, dated as of October 28, 2019, between STRATTEC SECURITY CORPORATION and BMO Harris Bank N.A., as lender

Credit Agreement, dated as of June 28, 2012, between ADAC-STRATTEC LLC and BMO Harris Bank N.A., as lender

11 unchanged sentences

6 to Credit Agreement, dated as of December 30, 2018, between ADAC-STRATTEC LLC and BMO Harris Bank N.A., as lender

Amendment No.

7 to Credit Agreement, dated as of October 28, 2019, between ADAC-STRATTEC LLC and BMO Harris Bank N.A., as lender

Amended and Restated STRATTEC SECURITY CORPORATION Stock Incentive Plan

10.2 (1 0 )**

Form of Restricted Stock Grant Agreement with employees

35 unchanged sentences

Change of Control Employment Agreement between the Company and Al Hamdan made as of May 4, 2017

10.19 (10 )**

Form of Restricted Stock Grant Agreement with non-employee directors

33 unchanged sentences

Incorporated by reference from the exhibit to the Form 10-K filed on September 6, 2018.

Incorporated by reference from the exhibit to the Form 10-K filed on September 5, 2019.

Incorporated by reference from the exhibit to the Form 8-K filed on October 28, 2019

Incorporated by reference from the exhibit to the Form 10-Q filed on November 7, 2019

This certification is not "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

26 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk