Strattec Security Corp.
Annual Report 2013

Plain-text annual report

OPPORTUNITIES2013 ANNUAL REPORTOver a decade ago, STRATTEC andWITTE Automotive of Velbert, Germanyformed a unique alliance. Soon after,ADAC Automotive of Grand Rapids,Michigan joined this alliance which wenow call “VAST,” an acronym for VehicleAccess Systems Technology.VAST collectively represents theentire gamut of products used to accessyour vehicle. From keys and lock sets …to handles and latches. From motorizedlift gates and power doors … to lockingsteering wheel columns. We view VAST as being vital to ourfuture. Each company, individually andtogether, is needed to successfullysupport the global vehicle access needsof our customers.We are proud to say that therelationship we forged with strong partnershas been recognized by our customers.This year, STRATTEC received a Supplierof the Year Award from Chrysler. WITTEreceived a similar award from Volkswagenand ADAC was similarly recognized byGeneral Motors.In addition to our home markets ofNorth America and Europe, we havesubstantial VAST joint venture operationsin China to serve the world’sfastestgrowing market and an expandingpresence in Brazil.We believe that greater knowledgeand performance comes through synergyand collaboration. This is why we haveseized upon this VAST Opportunity toleverage our individual skills and ourcollective reach in purchasing, engineering,manufacturing, logistics and sales. Individually, STRATTEC and ourpartners are highly capable regionalsuppliers, each with specific vehicleaccess products. Together, we form aunique, unified source of Vehicle AccessSystems for global automotivemanufacturers. Much progress has beenmade, with VAST Opportunities stillahead of us.OPPORTUNITIES2013 ANNUAL REPORTPROSPECTIVE INFORMATIONAnumber of the matters and subject areas discussed in this Annual Report (see above“Contents” section) contain “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These statements may be identified by the use offorward-looking words or phrases such as “anticipate,” “believe,” “would,” “expect,” “intend,”“may,” “planned,” “potential,” “should,” “will,” and “could.” These include expected futurefinancial results, product offerings, global expansion, liquidity needs, financing ability, plannedcapital expenditures, management’sor the Company’s expectations and beliefs, and similarmatters discussed in the Letter to the Shareholders, Company’s Management’s Discussion andAnalysis, and other sections of this Annual Report. The discussions of such matters and subjectareas are qualified by the inherent risks and uncertainties surrounding future expectationsgenerally,and also may materially differ from the Company’sactual futureexperience. The Company’sbusiness, operations and financial performance aresubject to certain risksand uncertainties, which could result in material differences in actual results from the Company’scurrent expectations. These risks and uncertainties include, but are not limited to, generaleconomic conditions, in particular relating to the automotive industry,customer demand for theCompany’sand its customers’ products, competitive and technological developments, customerpurchasing actions, foreign currency fluctuations, costs of operations and other mattersdescribed under “Risk Factors” in the Management’s Discussion and Analysis section of thisreport. In addition, such uncertainties and other operational matters are discussed further in theCompany’s quarterly and annual report filings with the Securities and Exchange Commission.Shareholders, potential investors and other readers are urged to consider these factorscarefully in evaluating the forward-looking statements and are cautioned not to place unduereliance on such forward-looking statements. The forward-looking statements made herein areonly made as of the date of this Annual Report and the Company undertakes no obligation topublicly update such forward-looking statements to reflect subsequent events or circumstancesoccurring after the date of this Annual Report.CONTENTSLETTER TO THE SHAREHOLDERS 2FINANCIAL HIGHLIGHTS 4COMPANY DESCRIPTION 5STRATTEC EQUIPPED VEHICLE LIST 12MANAGEMENT’S DISCUSSION AND ANALYSIS 13FINANCIAL STATEMENTS 27REPORT OF MANAGEMENT 47REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 48FINANCIAL SUMMARY50FINANCIAL SUMMARY/PERFORMANCE GRAPH 51DIRECTORS / OFFICERS / SHAREHOLDERS’ INFORMATION 52STRATTEC SECURITY CORPORATION designs, develops, manufactures and marketsautomotive access control products including mechanical locks and keys, electronically enhancedlocks and keys, steering column and instrument panel ignition lock housings, latches, powersliding side door systems, power lift gate systems, power deck lid systems, door handles andrelated products for North American automotive customers. We also supply global automotivemanufacturers through a unique strategic relationship with WITTE Automotive of Velbert, Germanyand ADAC Automotive of Grand Rapids, Michigan. Under this relationship STRATTEC, WITTEand ADAC market each company’s products to global customers under the “VAST” brand name.Our products are shipped to customer locations in the United States, Canada, Mexico, Europe,South America, Korea and China, and we provide full service and aftermarket support. LETTER TO THE SHAREHOLDERS2013STRATTECAnnualReport2Dear STRATTEC Shareholders,On behalf of the over 2,600 STRATTEC Associates, I am pleased to outline theprogress that we have made over the last fiscal year. While we are proud of our results, wemust also recognize that the overall strength of the global automotive markets provided awelcomed tail wind.Since STRATTEC was spun off from Briggs & Stratton in 1995, this is the first time thatHarry Stratton is not signing this letter as CEO. It is an honor to follow him in a companythat has both great tradition and opportunity. I am pleased to have access to Harry’sperspective in his continued role as Chairman of the Board.In other governance, Thomas Florsheim replaced Robert Feitler, who had been adirector since the creation of STRATTEC and provided valuable counsel over the years. Tomis Chairman & CEO of Weyco Group and brings significant experience in global businessand successfully integrating complimentary acquisitions.Operations:Just before the end of our fiscal year, we won a Supplier of the Year award fromChrysler. As a Finalist in the Electrical Products category, we edged out two othercompanies, one based in Japan and one based in Korea. This award is a significant honor. Iam very proud of the efforts of our employees in delivering current production as well asintroducing new products.Our Mexican assembly and distribution facilities were expanded this year, primarily tosupport the growth in our latch and door handle businesses. Both of these businesses grewout of our participation in VAST,our global strategic partnership.VAST China made significant progress this year. The management team has beenstrengthened. Operations recently turned profitable again after incurring significantrelocation and start-up costs related to increasing capacity and new product introductions. Financial:The bottom line for our shareholders is the return on investment that we generated.This fiscal year,ashare of STRATTEC stock grew from $21.04 to $38.24 plus dividends of$.40 for a total annual return of 84%. That compares favorably to the NASDAQ return of14% over the same period. Our dividends were all paid in calendar year 2012 in order totake advantage of lower federal income tax rates in 2012. The total return for STRATTECstock was 1% in fiscal 2012, which compares unfavorably to the NASDAQ return of 6%. Sales grew 7% to $298.2 million, a new sales record for STRATTEC. Operating incomegrew 16% to $19.0 million before a $2.1 million charge. While sales growth is important, ourprimary measureof success is EVA®(Economic Value Added) which creates a disciplinedapproach to profitability and use of capital. After applying imputed costs of capital, economicvalue added increased from $.6 million in fiscal 2012 to $2.6 million during this past fiscal year.We strengthened our balance sheet significantly through the reduction of our underfunded pension obligations, a plan that was frozen in 2009. At the end of our last fiscal year,the underfunded defined benefit pension obligation amounted to $16.6 million or about$5.00 per share. On June 30, 2013, the plan was essentially fully funded. None the less, whilethis progress is not reflected on our income statement, it does impact our balance sheet. VAST:Our global partnership called VAST plays an increasingly important role in our future.VAST is an acronym for Vehicle Access Systems Technology. By working with our twoprivately held partners, WITTE Automotive of Velbert Germany and ADAC Automotive ofLETTER TO THE SHAREHOLDERS2013STRATTECAnnualReport3Grand Rapids, MI and jointly owning facilities in China and Brazil, we are strategicallyorganized to support customers on global programs, including participating in the rapidlygrowing Chinese auto market.VAST also opens growth opportunities in complementary products. Significantprogress has been made in how we effectively work together as well as recognition bycustomers of the VAST brand. Together, with combined sales of over $1.2 billion, the VASTGroup has been seeking and finding more ways to leverage our purchasing, engineering andmanufacturing capabilities. Through our VAST partners, we have seen increased involvement and ownership in themanufacture of automotive door handles. Through VAST, we are identifying growthopportunities in additional automotive access products. Diversification:At the time of the creation of STRATTEC SECURITY CORPORATION as a separatecompany, the name was appropriate. Virtually all of our business was related to locks andkeys for the automotive market. As we discussed last year, we are re-defining our business as access systems. In otherwords, efforts similar to VAST, without the dedicated focus on vehicles. Our thinking hasconsidered motion control and access products in addition to our security products. We arealso looking at our strong position with locksmiths in the aftermarket and at leveraging ourtechnical manufacturing skills into contract business through our division, STRATTECComponent Solutions, a supplier of high quality parts and assemblies with a particularemphasis on zinc die casting. In another step this year, we made a 51% investment in a joint venture calledNextLock. It is a designer and marketer of biometric access devices. An advanced line ofproducts for both residential and commercial applications should be available in early 2014.This partnership will result in opportunities for applications of new technology in bothautomotive and non-automotive markets.Over the past year, we have received shareholder comments and suggestions for ourbusiness. We appreciate this evidence of interest and support. While suggestions aresometimes conflicting, we give careful consideration in management discussions about allideas to improve the company and increase shareholder value.Much of our current success is influenced by the global automotive markets. Manycrystal balls still predict significant growth. Hopefully our efforts in further developing ourglobal footprint, as well as diversification efforts, will result in continued profitable growth inthe years to come.Sincerely,Frank J. KrejciPresident & Chief Executive OfficerEVA®is a registered trademark of Stern, Stewart & Co.2013STRATTECAnnualReport4201320122011Net Sales$298.2$279.2$260.9Gross Profit53.950.342.2Income from Operations16.816.38.7Net Income Attributable to STRATTEC 9.48.85.4Total Assets169.5166.0148.1Total Debt2.3––STRATTEC Shareholders’ Equity104.280.6 86.2ECONOMIC VALUE ADDED (EVA®)We believe that EVA®represents an accurate measure of STRATTEC’s overall performanceand shareholder value. All U.S. associates and many of our Mexico-based salaried associatesparticipate in incentive plans that arebased upon our ability to add economic value to theenterprise. The EVA®performance for 2013 was a positive $2.6 million which represents a $2.0million improvement from 2012. (For further explanation of our EVA®Plan, see our 2013definitive Proxy Statement.)Net Operating Profit After Cash-Basis Taxes$11.5Average Monthly Net Capital Employed$88.9Cost of Capital_10%Capital Charge_8.9Economic Value Added$2.6EVA®is not a traditional financial measurement under U.S. GAAP and may not be similar toEVA®calculations used by other companies. However, STRATTEC believes the reporting of EVA®provides investors with greater visibility of economic profit. The following is a reconciliation of therelevant GAAP financial measures to the non-GAAP measures used in the calculation ofSTRATTEC’s EVA®.Net Operating Profit After Cash-Basis Taxes:2013 Net Income Attributable to STRATTEC as Reported $9.4Deferred Tax Provision3.8Other(1.7)Net Operating Profit AfterCash-Basis Taxes$11.5Average Monthly Net Capital Employed:Total STRATTEC Shareholders’ Equity as Reported at June 30, 2013 $104.2Long-Term Liabilities6.9DeferredTax Asset(4.3)Other(10.0)Net Capital Employed at June 30, 2013$96.8Impact of 12 Month Average(7.9)Average Monthly Net Capital Employed$88.9EVA®is a registered trademark of Stern, Stewart & Co.FINANCIAL HIGHLIGHTS(IN MILLIONS)COMPANY DESCRIPTION2013STRATTECAnnualReport5BASIC BUSINESSSTRATTEC SECURITY CORPORATION designs, develops, manufactures and marketsautomotive access control products including mechanical locks and keys, electronicallyenhanced locks and keys, steering column and instrument panel ignition lock housings,latches, power sliding side door systems, power lift gate systems, power deck lid systems,door handles and related products for North American automotive customers. We alsosupply global automotive manufacturers through a unique strategic relationship with WITTEAutomotive of Velbert, Germany and ADAC Automotive of Grand Rapids, Michigan. Underthis relationship STRATTEC, WITTE and ADAC market each company’s products to globalcustomers under the “VAST” brand name. Our products areshipped to customer locations in the United States, Canada,Mexico, Europe, South America, Korea and China, and weprovide full service and aftermarket support.HISTORYSTRATTEC formerly was a division of Briggs & StrattonCorporation. In 1995, STRATTEC was spun off from Briggs &Stratton through a tax-free distribution to the then-existingBriggs & Stratton shareholders and has been an independentpublic company for eighteen years.Our history in the automotive security business spansover 100 years. STRATTEC has been the world’s largest producer of automotive locks andkeys since the late 1920s, and we currently maintain a dominant share of the North Americanmarkets for these products.PRODUCTSOur historically traditional products are lock sets (locks andkeys)for cars and light trucks. Typically, two keys are providedwith each vehicle lockset. Most of the vehicles we currentlysupply are using keys with sophisticated radio frequencyidentification technology for additional theft prevention. Keys with remoteentry devices integrated into a single unit and bladeless electronic keys havebeen added to our product line and are gaining in popularity.Ignition lock housings represent a growing access control product forus. These housings are the mating part for our ignition locks and typicallyarepart of the steering column structure, although there are instrumentpanel-mountedversions for certain vehicle applications. These housingsareeither die cast from zinc or magnesium, or injection moldedplastic and may include electronic componentsfor theft deterrent systems. We are also developing additional access controlproducts, including trunk latches, liftgate latches,tailgate latches, hood latches, side door latches andrelated hardware. With our acquisition of DelphiCorporation’s Power Products Group in fiscal 2009,we are now supplying power access devices forsliding side doors, liftgates and trunk lids. ThroughSTRATTECreceived the 2013ChryslerSupplier of the Year Award forElectricalProductsCOMPANY DESCRIPTION2013STRATTECAnnualReport6ajoint venture formed with ADAC Automotive during fiscal 2007, we also supply door handle components and related vehicle access hardware.To maintain a strong focus on each of these access controlproducts, we have Product Business Managers who overseethe product’s entire life cycle, includingconcept, application, manufacturing,warranty analysis, service/aftermarket, andfinancial/commercial issues. The ProductBusiness Managers work closely with our sales organization, ourengineering group, and our manufacturing operations toassure their products are receiving the right amount ofquality attention so that their value to STRATTEC andthe market place is enhanced.MARKETSWeare a direct supplier to OEMautomotive and light truck manufacturers aswell as other transportation-relatedmanufacturers. Our largestcustomers areChrysler Group LLC,General Motors Company and FordMotor Company.Our access control product mix varies by customer,but generally ouroverall sales tend to be highest in lock and key, followed by power access, ignition lockhousings, the door handle and trim components produced by ADAC-STRATTEC de Mexicoand latching mechanisms.Direct sales to various OEMs represented approximately 72% of our total sales forfiscal 2013. The remainder of our revenue is received primarily through sales to the OEMservice channels, the aftermarket, Tier 1 automotive supplier customers, and certainproducts to non-automotive commercial customers.Sales to our major automotive customers, both OEM and Tier 1, are coordinatedthrough direct sales personnel located in our Detroit-area office. Sales are also facilitatedthrough daily interaction between our Program Managers, Application Engineers and otherproduct engineering personnel. Sales to other OEM customers are accomplished throughacombination of our sales personnel located in Detroit and personnel in our Milwaukeeheadquarters office.The majority of our OEM products are sold inNorth America. While a modest amount of exporting isdone to Tier 1 and automotive assembly plants inEurope, Asia and South America, we are in the processof expanding our presence in these markets andelsewherethrough the Vehicle Access SystemsTechnology (VAST) brand we jointly own with WITTEAutomotive and ADAC Automotive. VAST is describedin more detail on pages 8 and 9.OEM service and replacement parts are sold to theOEM’s own service operations. In addition, wedistribute our components and security products to the automotive aftermarket throughapproximately 50 authorized wholesale distributors, as well as other marketers and usersEl Paso Distribution Service WarehouseCOMPANY DESCRIPTION2013STRATTECAnnualReport7of component parts, including export customers. Increasingly, our products find their wayinto the retail channel, specifically the hardware store channel. Our ability to provide a fullline of keys to that channel has been accomplished through the introduction of theSTRATTEC “XL” key line. This extension to our line includes keys that we currently do notsupply on an OE basis, including keys for Toyota, Honda and other popular domestic andimport vehicles. This extended line of keys enables automotive repair specialists to satisfyconsumer needs for repair or replacement parts. Our aftermarket activities are servicedthrough a warehousing operation in El Paso, Texas.CUSTOMER SALES FOCUSTo bring the proper focus to the relationships with our majorcustomers, we have seven customer-focused teams, each with aDirector of Sales, one or two Engineering Program Managers andCustomer Application Engineers. In addition to customerteams for General Motors, Ford and Chrysler, wecurrently have teams for New Domestic VehicleManufacturers, Driver Control/IgnitionLock Housing customers, Tier 1customers, and Service andAftermarket customers. Sales andengineering for ADAC-STRATTEC LLCare supported by our JV partner, ADAC Automotive. Each Sales Director is responsible for the overallrelationship between STRATTEC and a specific customer group.Program Managers are responsible for coordinating cross functionalactivities while managing new product programs for their customers.PRODUCT ENGINEERING FOCUSTo best serve our customers’ product needs, STRATTEC’sengineering resources are organized into groups which focus on specificaccess control applications. Wecurrently have six engineering groups: Locksand Keys, Aftermarket, Latches, Power Access Devices, Driver Control/IgnitionLock Housings and Electrical. Each group has a Product Business Manager, an EngineeringManager and a complement of skilled engineers who design and develop products forspecific applications. In doing this, each engineering group works closely with the Customerteams, Engineering Program Managers, and Application Engineers.Underlying this organization is a formalized product development process to identifyand meet customer needs in the shortest possible time. By following thisThe Aston Martin DBSusesan electronic key foband mating docking stationdeveloped by STRATTECexclusively for Aston Martin.STRATTECmanufacturesthis Maseratielectronic key fob.COMPANY DESCRIPTION2013STRATTECAnnualReport8streamlined development system, we shorten product lead times, tighten our response tomarket changes and provide our customers with the optimum value solution to theirsecurity/access control requirements. STRATTEC is also ISO/TS 16949 and ISO 14001certified. This means we embrace the philosophy that quality should exist not only in thefinished product, but in every step of our processes as well.OPERATIONSAsignificant number of the componentsthat go into our products are manufactured atour headquarters in Milwaukee, Wisconsin. Thisfacility produces zinc die cast components,stampings and milled key blades. We have twoowned production facilities in Juarez, Mexicooperating as STRATTEC de Mexico. Plant No. 1houses assembly operations for locksets,ignition lock housings, and our new NextLock biometric security products. Plant No. 2 wasbuilt during fiscal 2009 to replace aleased facility. It houses our keyfinishing and latch assembly operations,as well as dedicated space for theassembly operations of STRATTECPOWER ACCESS de Mexico andADAC-STRATTEC de Mexico.ADVANCED DEVELOPMENTResearch and developmentactivities arecentered around adedicated research engineering staff wecall our Advanced Development Group.This group has the responsibility fordeveloping future products that will keepus in the forefront of the markets weserve. We primarily focus on electronicand mechanical access control productsand modularization of relatedaccess/security control components. Once our Advanced Development Group establishes aproof-of-concept product utilizing new technology, further product development shifts to ourengineering groups for commercialization and product applications.VEHICLE ACCESS SYSTEMS TECHNOLOGY (VAST)In fiscal 2001, we entered into a formal alliance with WITTE-Velbert GmbH, an automotivesupplier based in Germany which designs, develops, manufactures and markets automotiveaccess control products for European-based customers. This alliance consisted of two initiatives.The first was a set of legal agreements which allowed STRATTEC to manufacture and marketWITTE’s core products in North America, and WITTE to manufacture and market STRATTEC’s coreproducts in Europe. The second initiative was a 50-50 joint venture, WITTE-STRATTEC LLC, toinvest in operations with local partners in strategic markets outside of Europe and North America.Milwaukee Headquarters and Manufacturing FacilitySTRATTEC de Mexico (Plant 1)-Assembly Facility STRATTEC de Mexico (Plant 2) - Key Finishing ADAC-STRATTEC de MexicoSTRATTEC POWER ACCESS de MexicoCOMPANY DESCRIPTION2013STRATTECAnnualReport9In February of 2006, we announced the expansion of this alliance and related joint venturewith the addition of a third partner, ADAC Plastics, Inc. ADAC, of Grand Rapids, Michigan, addsNorth American expertise in door handles, a part of WITTE’s core product line that STRATTECdid not support, and an expertise in color-matched painting of these components.With the expansion of the alliance, we can offer a full range of access control relatedproducts available on a global basis to support customer programs. To identify this powerfulcombination of independent companies focused on working together, we renamed the jointventure Vehicle Access Systems Technology LLC (VAST LLC). We now refer to the combinationof the alliance structure and JV simply as “VAST”. WITTE is now called WITTE Automotive, andADAC is now doing business as ADAC Automotive. We have adopted a common graphicimage in which we share a logo mark and colors, and a specific VAST logo used on thepartners’ printed and electronic presentation materials. VAST made investments with a localpartner in Brazil in September, 2001, and local partners in China in March, 2002. VAST do Brasilremains a joint venture with the local partner there. However, during fiscal 2010, VAST LLCpurchased the remaining 40 percent interest of its local partners in the China venture. VASTChina is now wholly owned by VAST LLC. This was an important step which gives STRATTEC aone-thirdinterest in VAST China’s activities in the important growing Chinese/Asia market. VAST is the embodiment of STRATTEC’s, WITTE’s and ADAC’s globalization strategy. Weare developing VAST as a global brand with which we are jointly pursuing business withidentified global customers. Those identified customers are General Motors, Ford, Fiat/Chrysler,Volkswagen, Honda, Toyota, Renault/Nissan and Hyundai/Kia.Tomanage our customer relationships and coordinate global ventures and activities, wehave established a VAST Management Group led by a President. The Management Groupincludes three Vice Presidents, one each from WITTE, STRATTEC and ADAC. With the focusprovided by this Management Group, VAST is able to manage global programs with a singlepoint of contact for customers, with the added advantage of providing regional support fromthe partners’ operating entities. Combined with VAST LLC’s ventures in China and Brazil, andsales/engineering offices in Japan and Korea, this structure establishes our global footprint.Door LatchesDoor Lock CylindersRear Compartment Lock CylindersSeat-back LatchesPower andManual Rear CompartmentLatchesIgnition Lock CylindersGlove Box Lock CylindersHood LatchesIgnition Lock HousingsDoor HandlesPower Sliding DoorsPowerLiftgates andTrunk LidsSTRATTEC and STRATTECPOWER ACCESS productsVAST partner productsCOMPANY DESCRIPTION2013STRATTECAnnualReport10ADAC-STRATTEC de MEXICODuring fiscal 2007, we formed a new entity with ADAC Automotive called ADAC-STRATTEC LLC including a wholly owned Mexican subsidiary ADAC-STRATTEC de Mexico(ASdM). The purpose of this joint venture is to produce certain ADAC and STRATTECproducts utilizing ADAC’s plastic molding expertise and STRATTEC’s assembly capability.ASdM currently operates out of defined space in STRATTEC de Mexico Plant No. 2 locatedinJuarez, Mexico. Products from this joint venture include non-painted door handlecomponents and exterior trim components for OEM customers producing in NorthAmerica. STRATTEC owns 51% of this joint venture and its financial results areconsolidated into STRATTEC’s financial statements. In our fiscalyears ending 2013 and 2012, ASdM was profitable and represented$37.2 and $31.0 million, respectively, of our consolidated net sales.STRATTEC POWER ACCESS LLCDuring fiscal year 2009, we formed a new subsidiary with WITTEAutomotive called STRATTEC POWER ACCESS LLC (SPA) to acquirethe North American business of the Delphi Power Products Group.WITTE is a 20 percent minority owner.SPAin turnowns a Mexicansubsidiary,STRATTEC POWER ACCESS de Mexico. The purpose ofthis subsidiary is to produce power access devices forsliding side doors, liftgates and trunk lids. STRATTECPOWER ACCESS de Mexico currently operates outof defined space in STRATTEC de MexicoPlant No. 2 located in Juarez, Mexico.Financial results for SPA areconsolidated inSTRATTEC’sfinancialstatements. Forfiscal years ending2013 and 2012, SPA was profitable and represented $56.4 and$62.7 million, respectively, of our consolidated net sales.NEXTLOCK LLCDuring the fourth quarter of fiscal year 2013, we formed a new joint venture withActuator Systems LLC called NextLock LLC. The initial capitalization of the joint venturewas $1.5 million. The purpose of this joint venture is to assemble and sell the nextgeneration of biometric security products based upon the designs of Actuator Systems. Weexpect that this joint venturewill have minimal sales activity through calendar year 2013.STRATTEC owns 51% of this joint venture and its financial results will be accounted for onthe equity method of accounting.SEASONAL NATURE OF THE BUSINESSThe manufacturing of components used in automobiles is driven by the normal peaksand valleys associated with the automotive industry. Typically, the months of July and Augustare relatively slow as summer vacation shutdowns and model year changeovers occur at theautomotive assembly plants. September volumes increase rapidly as each new model yearSTRATTEC has introducedthe BOLTline of products,the world’sfirst codeablepadlock. In a simple one-step process, users cancode the padlock to theirvehicle key.This providessignificant convenience byreducing the number ofkeys users need to securetheir lockers, storagesheds and vehicleaccessories such as toolboxes, trailer hitches, etc.You can buy this productdirect at www.boltlock.com.NextLock: BiometricSecurityProductsCOMPANY DESCRIPTION2013STRATTECAnnualReport11begins. This volume strength continues through October and into early November. As theholiday and winter seasons approach, the demand for automobiles slows, as does production.March usually brings a major sales and production increase, which then continues throughmost of June. This results in our first fiscal quarter sales and operating results typically beingour weakest, with the remaining quarters being more consistent. The recession of 2008-2009abnormally altered this pattern resulting in dramatically reduced production levels throughoutthe period. We believe the more normal peaks and valleys have returned as the auto industryhas emerged from the recession.GLOBAL PRESENCEECONOMIC VALUE COMMITMENTThe underlying philosophy of our business and the means by which we measure ourperformance is Economic Value Added (EVA®). Simply stated, economic value is createdwhen our business enterprise yields a returngreater than the cost of capital we and ourshareholders have invested in STRATTEC. The amount by which our return exceeds thecost of our capital is EVA®.In line with this philosophy,EVA®bonus plans arein effect forall our U.S. associates, outside directors and many of our Mexico-based salariedassociates as an incentive to help positively drive the economic value of our business.STRATTEC’s significant market presence is the result of over a 100-yearcommitment to creating quality products and systems that are responsive to changingneeds. As technologies advance and markets grow,STRATTEC retains that commitmentto meeting and exceeding the expectations of our customers, and providing economicvalue to our shareholders.1. STRATTEC – Milwaukee, Wisconsin12. STRATTEC de Mexico – Juarez, Mexico13. STRATTEC de Mexico - Key Finishing – Juarez, Mexico14.ADAC-STRATTEC de Mexico – Juarez, Mexico5. STRATTEC Power Access de Mexico – Juarez, Mexico6. ADAC Automotive – Grand Rapids and Muskegon, Michigan17. ADAC Automotive, STRATTEC and STRATTEC POWER ACCESS (Sales/Engineering Offices – Detroit, Michigan)18. WITTE Automotive – Velbert, Germany19. WITTE Automotive – Nejdek, Czech Republic110. VAST do Brasil – Sao Paulo, Brazil211. VAST Fuzhou – Fuzhou, China212. VAST China Co. Ltd. – Taicang, China213. VAST Japan – Tokyo, Japan (Branch Office)214. VAST Korea – Anyang, Korea (Branch Office)21Members of VAST. 2Units of VAST LLC joint venture.VEHICLE LIST122014 VEHICLESWe are proud to be associated with many of the quality vehicles produced inNorth America and elsewhere. The following model year 2014 cars and light trucksare equipped with STRATTEC products.2013STRATTECAnnualReportLIGHT TRUCKS, VANS AND SPORT UTILITY VEHICLESAcura TLAston Martin DB9 *Aston Martin Rapide *Aston Martin Vanquish *Aston Martin V8 Vantage *Aston Martin V12 Vantage *Aston Martin Zagato *Buick Alpheon *Buick Anthem *Buick Enclave Buick Encore *Buick Excelle *Buick Gentra *Buick GL8 *Buick LaCrosse *Buick VeranoBuick Regal *Cadillac ATS *Cadillac CTSCadillac ELRCadillac SRX Cadillac XTS *Chevrolet Camaro Chevrolet Captiva *Chevrolet CorvetteChevrolet Cruze *Chevrolet EquinoxChevrolet Impala Chevrolet MalibuChevrolet Orlando *Chevrolet Sonic *Chevrolet SS *Chevrolet TraverseChevrolet VoltChrysler 200Chrysler 300Daewoo Gentra *Dodge Avenger Dodge ChallengerDodge Charger Dodge DartDodge JourneyFiat FreemontFord EdgeFordFiestaFordFlexFord FocusFord FusionFord Mustang Ford TaurusGMC AcadiaGMC TerrainHolden Commodore *Jeep CherokeeJeep CompassJeep PatriotLancia FlaviaLancia ThemaLincoln MKSLincoln MKTLincoln MKXLincoln MKZOpel Ampera *Opel Antara *Opel Astra *Opel Astra Van *Opel Insignia *Opel Meriva *Opel Zafira *SRTViperAcura MDXCadillac EscaladeCadillac Escalade ESVCadillac Escalade EXTChevrolet AvalancheChevrolet Colorado *Chevrolet Express VanChevrolet Silverado PickupChevrolet SuburbanChevrolet TahoeChevrolet Trail Blazer *Chevrolet Trax *Chrysler Town & Country Dodge DurangoDodge Grand CaravanFord C-MaxFord EscapeFord ExpeditionFord ExplorerFord F-Series PickupFordF-Series Super Duty PickupFordKuga *Ford TransitGMC Canyon *GMC SavanaGMC Sierra PickupGMC Yukon and Yukon XLHonda PilotJeep CherokeeJeep Grand CherokeeJeep Wrangler/Wrangler UnlimitedKia Sedona *Lancia Grand VoyagerLincoln C-CUVLincoln Mark LTLincoln NavigatorNissan TitanRam 1500/2500/3500 PickupCARS AND CAR BASED UTILITY VEHICLES*Vehicles produced outside of North America, or both in and outside North America.MANAGEMENT’S DISCUSSION AND ANALYSIS2013STRATTECAnnualReport13The following Discussion and Analysis should be read in conjunction with STRATTECSECURITY CORPORATION’s accompanying Financial Statements and Notes thereto. Unlessotherwise indicated, all references to years or quarters refer to fiscal years or fiscal quarters.EXECUTIVE OVERVIEWHistorically, a significant portion of our total net sales are to domestic automotive OEMs(General Motors, Ford and Chrysler). During the past decade these customers lost NorthAmerican market share to the New Domestic automotive manufacturers (primarily the Japaneseand Korean automotive manufacturers). In addition to our customers’ market share, our financialperformance depends in large part on conditions in the overall automotive industry, which in turn,is dependent upon the U.S. and global economies. During fiscal years 2013, 2012 and 2011, thedomestic automotive OEMs together represented 66 percent, 68 percent and 66 percent,respectively, of our total sales.Our financial results for fiscal year 2013 reflected continued improvement over the prior years.Fiscal 2013 net sales were $298 million compared to $279 million in 2012 and $261 million in 2011.Net income attributable to STRATTEC for fiscal 2013 was $9.4 million compared to $8.8 million in2012 and $5.4 million in 2011. The financial health of our three largest customers continued toimprove in fiscal year 2013. General Motors, Ford and Chrysler continued to report profitable resultsafter implementing significant restructuring plans that modified their cost structures by closingmanufacturing facilities, reducing benefits and wages and eliminating certain models and brands in2009 and 2010.As we look out into the future, the July 2013 projections from our third-party forecastingservice indicate that North American light vehicle production will show steady improvement forthe next five years. By model year, based on these projections we are expecting a 2013 build of15.7 million vehicles, 16.3 million vehicles for 2014, 16.5 million vehicles for 2015, 17.3 millionvehicles for 2016 and 17.9 million vehicles for 2017. As part of this third party projection, GeneralMotors Company and FordMotor Company areexpected to experience modest increases intheir production levels during this time period. Chrysler Group LLC is expected to decreaseproduction in model years 2014 through 2017, primarily due to the forecasting uncertainty andrisk in Fiat’s future vehicle product plans for the Chrysler Group. Of course, all of these forecastsare subject to variability based on what happens in the overall North American and globaleconomies, especially as it relates to the current levels of employment, availability of consumercredit, home equity values, fluctuating fuel prices and other key factors that we believe coulddetermine whether consumers can or will purchase new vehicles.Focus and Strategy Going ForwardSTRATTEC's long-term strategy is focused on maximizing long-term shareholder value bydriving profitable growth. Our management believes productivity improvements and cost reductionsarecritical to our competitiveness, while enhancing the value we deliver to our customers. In orderto accomplish this, we have been pursuing, and continue to pursue, the following objectives assummarized below:•Streamline and standardize processes to increase productivity•Maintain a disciplined and flexible cost structure to leverage scale and optimize assetutilization and procurement•Maintain our strong financial position by deploying capital spending targeted for growthand productivity improvement•Leverage the “VAST Brand” with customer relationships to generate organic growth fromglobal programs•Offer our customers innovative products and cost savings solutions to meet theirchanging demands•Explore and execute targeted mergers and acquisitions with a disciplined due diligenceapproach and critical financial analysis to drive shareholder valueWe use several key performance indicators to gauge progress toward achieving theseobjectives. These indicators include net sales growth, operating margin improvement, returnoncapital employed and cash flow from operations.RESULTS OF OPERATIONSThe following is a discussion and analysis of our financial position and results of operationsfor the years ended June 30, 2013 and July 1, 2012. MANAGEMENT’S DISCUSSION AND ANALYSIS2013STRATTECAnnualReport142013 Compared to2012Years EndedJune 30, 2013July 1, 2012Net sales (in millions)$298.2$279.2Net Sales to each of our customers or customer groups in the current year and prior yearwere as follows (in millions):Years EndedJune 30, 2013July 1, 2012Chrysler Group LLC$ 95.5$ 90.8General Motors Company57.064.6Ford Motor Company44.833.9Tier 1 Customers57.445.8Commercial and Other OEM Customers33.229.7Hyundai / Kia 10.314.4Total$298.2$279.2Increased sales to Chrysler Group LLC and Ford Motor Company in the current year wereprimarily due to increased customer vehicle production volumes on models for which we supplycomponents. New product content also contributed to the increased sales to Ford MotorCompany. The reduction in sales to General Motors Company in the current year was primarilyattributed to business we lost to other suppliers during the latter half of the 2012 model year,partially offset by higher production on other General Motors vehicles for which we continue tosupply components. Increased sales to Tier 1, Commercial and Other OEM customers in thecurrent year primarily related to market growth and the increasing impact of other vehicle accesscontrol products, such as latches, fobs and driver controls, which we have developed in recentyears to complement our historic core lock and key access control products. The reduction insales to Hyundai / Kia in the current year was principally due to lower customer vehicle productionvolumes on models for which we supply components and the discontinuation of a vehicle modelfor which we had been supplying components.Years EndedJune 30, 2013July 1, 2012Gross profit as a percentage of net sales18.1%18.0%During 2013, we experienced favorable overhead absorption of our fixed manufacturing costsresulting from favorable customer production volumes of most of the vehicles for which we supplycomponents and reduced warranty expense. These favorable impacts on our gross profit marginwere mostly offset by a less favorable product content sales mix, higher expense provisions for ourpension plan during 2013 as compared to 2012 and an unfavorable Mexican peso to U.S. dollarexchange rate affecting the U.S. dollar cost of our Mexican operations. Warranty provision creditstotaled $400,000 in 2013 compared to warranty provisions of $2.1 million in 2012. The current yearwarranty provision credits included the impact of favorable adjustments for warranty claims settledduring the year.Historically,we had experienced relatively low warranty charges from ourcustomers due to our contractual arrangements and improvements in the quality, reliability anddurability of our products. In recent fiscal periods, our largest customers extended the warrantyprotection for their vehicles and have since demanded higher warranty cost sharing arrangementsfrom their suppliers, including STRATTEC. The 2012 warranty provisions included additionalaccruals to address the warranty exposure related to the demand for higher warranty cost sharing.We froze our defined benefit pension plan for future benefit accruals effective January 1, 2010.Expense provisions for our pension plan increased approximately $2.1 million during the currentyear as compared to the prior year due to to lower bond returns which resulted in a lower discountrate and lower expected returnon invested assets as of the end of fiscal 2013 in comparison to thesame measurements at the end of fiscal year 2012. Approximately $1.5 million of this $2.1 millionincrease impacted overhead costs. The average U.S. dollar/Mexican peso exchange ratedecreased to approximately 12.82 pesos to the dollar in the current year from approximately 13.12pesos to the dollar in the prior year. This resulted in increased U.S. dollar costs related to ourMexican operations of approximately $756,000 in the current year compared to the prior year.Engineering, Selling and Administrative Expenses in the current year and prior year were as follows:Years EndedJune 30, 2013July 1, 2012Expenses (in millions)$34.9$33.9 Expenses as a percentage of net sales11.7%12.1% MANAGEMENT’S DISCUSSION AND ANALYSIS2013STRATTECAnnualReport15The major contributor to the increase in engineering, selling and administrative expenses was a higherexpense provision for our frozen defined benefit pension plan as discussed above. Expense provisions forour pension plan increased engineering, selling and administrative costs approximately $630,000 in thecurrent year as compared to the prior year.During 2013, SERP benefits of approximately $5.8 million were cash settled using Rabbi trust assetsand current cash balances. We incurred a related pre-tax settlement charge to operations of approximately$2.1 million as a result of the requirement to expense a portion of the unrealized actuarial losses inconnection with the settlement of the SERP obligation. The charge had no effect on our aggregate equitybalance because the unrealized actuarial losses were previously recognized during prior periods inaccumulated other comprehensive loss. Accordingly, the effect of the settlement charge on our retainedearnings was offset by a corresponding reduction in accumulated other comprehensive loss.Income from operations in the current year was $16.8 million compared to $16.3 million in the prioryear. This change was the result of the increase in sales and gross profit margin in the current year over theprior year as discussed above, partially offset by the $2.1 million SERP settlement charge discussed above. Equity loss of joint ventures was $225,000 in the current year compared to $1.1 million in the prior year.During 2012 our joint ventures in China and Brazil incurred relocation costs associated with moves to new facilitiesand start-up costs associated with a new product line. These relocation costs and start-up costs continued forVAST China primarily during the first half of 2013 and, accordingly, these costs resulted in STRATTEC incurring anequity loss of joint ventures in both 2013 and 2012. The facility moves have been completed. In addition, the 2012equity loss also included a goodwill impairment charge relating to VAST China. STRATTEC’s portion of thisimpairment charge totaled $284,000.Included in other income, net in the current year and prior year were the following items (in thousands):Years EndedJune 30, 2013July 1, 2012Foreign currency transaction (loss) gain $ (395)$1,369Rabbi Trust gain164 24Unrealized gain (loss) on Mexican peso option contracts 395(640)Realized loss on Mexican peso option contracts(12)(420)Other177249$329$582Foreign currency transaction gains and losses resulted from activity associated with foreigndenominated assets held by our Mexican subsidiaries. In the prior fiscal year,the Mexican pesodevalued to the U.S. dollar creating both foreign currency transaction gains and unrealized losses onour Mexican peso currency option contracts. In the current year, the Mexican peso appreciated to theU.S. dollar resulting in foreign currency transaction losses. Our Rabbi Trust funds our supplementalexecutive retirement plan. The investments held in the Trust are considered trading securities.Our effective income tax rate for 2013 was 31.8 percent compared to 22.7 percent in 2012.Both the 2013 and 2012 tax rates were impacted by a lower effective tax rate for income subject totax in Mexico as compared to the effective tax rate for income subject to tax in the U.S. The majorcontributors to the change in the effective rate between years were an increase in income subjectto tax in the U.S. and the impact of the non-controlling interest. The non-controlling interest impactsthe effective tax rate as the ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entitiesarepartnerships for U.S. tax purposes.2012 Compared to2011Years EndedJuly 1, 2012July 3, 2011Net sales (in millions)$279.2$260.9Our 2012 fiscal year was the typical 52 weeks while our 2011 fiscal year was 53 weeks. Theimpact of the additional week of customer shipments increased sales during our 2011 fiscal year byapproximately $4.5 million. The 2011 net sales were reduced by $650,000 resulting from anadjustment for certain agreed upon customer price concessions. Net sales to each of ourcustomers or customer groups in 2012 and 2011 wereas follows (in millions):Years EndedJuly 1, 2012July 3, 2011Chrysler Group LLC$ 90.8$ 80.9General Motors Company64.663.6FordMotor Company33.926.9Tier 1 Customers45.838.2Commercial and Other OEM Customers29.735.6Hyundai / Kia14.415.7Total$279.2$260.9MANAGEMENT’S DISCUSSION AND ANALYSIS2013STRATTECAnnualReport16Increased sales to Chrysler Group LLC and Ford Motor Company in 2012 were primarily dueto increased customer vehicle production volumes on models for which we supply components.New product content also contributed to the increased sales to Ford Motor Company. Included inthe 2011 sales to General Motors were $3.0 million of Sales to Nexteer Automotive, formerly aunit of Delphi Corporation, which was owned by General Motors through December 2, 2010.2011 sales to Nexteer Automotive subsequent to December 2, 2010 totaled $4.6 million. Sales toNexteer Automotive in 2012 totaled $5.7 million and are included in sales to Tier 1 customers.Increased sales to Tier 1 customers in 2012 primarily related to market growth in latches, fobsand driver controls, which we developed in recent years to complement our historic core lockandkey access control products. The decrease in sales to commercial and other OEM customersin 2012 represents programs for which we no longer supply products. The reduction in sales toHyundai / Kia in 2012 was principally due to lower customer vehicle production volumes of thevehicles for which we supply components.Years EndedJuly 1, 2012July 3, 2011Gross profit as a percentage of net sales18.0%16.2%The higher gross profit margin in 2012 was primarily the result of favorable customer vehicleproduction volumes which resulted in more favorable absorption of our fixed manufacturingcosts, a favorable Mexican Peso to U.S. dollar exchange rate affecting the U.S. dollar cost of ourMexican operations, a reduction in warranty expense and ongoing cost reduction initiatives.These favorable impacts were partially offset by a less favorable product content sales mix andhigher purchased raw material costs for zinc and brass during 2012 as compared to 2011. The2011 gross profit margins werealso negatively impacted by a $650,000 adjustment we made inconnection with certain agreed upon customer price concessions. The average U.S.dollar/Mexican peso exchange rate increased to approximately 13.12 pesos to the dollar in 2012from approximately 12.25 pesos to the dollar in 2011. This resulted in decreased U.S. dollarcosts related to our Mexican operations of approximately $2.3 million in 2012 compared to 2011.Warranty provisions totaled $2.1 million in 2012 compared to $2.8 million in 2011. Historically, wehad experienced relatively low warranty charges from our customers due to our contractualarrangements and improvements in the quality, reliability and durability of our products. In recentfiscal periods, our largest customers extended the warranty protection for their vehicles and havesince demanded higher warranty cost sharing arrangements from their suppliers, includingSTRATTEC. The 2012 and 2011 warranty provisions included additional accruals to address thewarranty exposure related to the demand for higher warranty cost sharing. The 2011 provisionalso included $1.15 million related to our share of costs associated with a customer’s specificwarranty claim involving one of our products. The average zinc price paid per pound increased to$1.06 in 2012 from $1.02 in 2011. Wehave negotiated raw material price adjustment clauseswith certain, but not all, of our customers to offset some of the market price fluctuations in thecost of zinc. During 2012, we used approximately 10.8 million pounds of zinc. Increased zinccosts, net of raw material price adjustments received from certain customers, totaledapproximately $250,000 in 2012 compared to 2011. The average brass price paid per poundincreased to $4.11 in 2012 from $3.93 in 2011. During 2012, we used approximately 905,000pounds of brass. This resulted in increased brass costs of approximately $170,000 in 2012compared to 2011.Years EndedJuly 1, 2012July 3, 2011Engineering, selling and administrative expenses (in millions)$33.9$33.4Increased operating expenses due to higher expense provisions for the accrual of bonusesearned under our EVA®Incentive Bonus Plans in 2012 as compared to 2011 were offset by anadditional week of expense in 2011 as a result of a 53 week fiscal year. Income from operations in 2012 was $16.3 million compared to $8.7 million in 2011. Thisimprovement was primarily the result of the increase in sales and gross profit margin asdiscussed above. Equity loss of joint ventures was $1.1 million in 2012 compared to equity earnings of $1.2million in 2011. During 2012 our joint ventures in China and Brazil both incurred relocation costsassociated with moves to new facilities and start-up costs associated with a new product line.Both of these items resulted in STRATTEC incurring an equity loss of joint ventures in 2012compared to 2011 in which STRATTEC had equity earnings from joint ventures. In addition, the2012 equity loss also included a goodwill impairment charge relating to VAST China. STRATTEC’sportion of this impairment charge amounted to $284,000.MANAGEMENT’S DISCUSSION AND ANALYSIS2013STRATTECAnnualReport17Included in other income, net in 2012 and 2011 were the following items (in thousands):Years EndedJuly 1, 2012July 3, 2011Foreign currency transaction gain (loss) $1,369$ (836)Rabbi Trust gain24384Unrealized (loss) gain on Mexican peso option contracts(640)245Realized (loss) gain on Mexican peso option contracts(420)33Other249394$582$ 220Foreign currency transaction gains and losses resulted from activity associated with foreigndenominated assets held by our Mexican subsidiaries. In 2012, the Mexican peso devalued to theU.S. dollar creating both foreign currency transaction gains and unrealized losses on our Mexicanpeso currency option contracts which we entered into in January and August 2011. Our objective inentering into these currency option contracts was to minimize our earnings volatility resulting fromchanges in exchange rates affecting the U.S. dollar cost of our Mexican operations. Unrealizedlosses recognized as a result of mark-to-market adjustments as of July 1, 2012 totaledapproximately $395,000. Our Rabbi Trust funds our supplemental executive retirement plan. Theinvestments held in the Trust are considered trading securities. Our effective income tax rate for 2012 was 22.7 percent compared to 25.1 percent in 2011.Both the 2012 and 2011 tax rates wereimpacted by a lower effective tax rate for income subject totax in Mexico as compared to the effective tax rate for income subject to tax in the U.S. As of July 1,2012, we had a valuation allowance of $177,000 related to our assessment of the future realization ofcertain capital loss carry-forwardbenefits.LIQUIDITY AND CAPITAL RESOURCESOur primary source of cash flow is from our major customers, which include Chrysler Group LLC,General Motors Company and FordMotor Company.As of the date of filing this Annual Reportwith the Securities and Exchange Commission, all of our customers aremaking payments ontheir outstanding accounts receivable in accordance with the payment terms included on theirpurchase orders. A summary of our outstanding receivable balances from our major customersas of June 30, 2013 was as follows (in millions of dollars):Chrysler$15.7General Motors$ 8.7Ford$6.5Weearnaportion of our operating income in Mexico, which is deemed to be permanentlyreinvested. As of June 30, 2013, $9.2 million of our $20.3 million cash and cash equivalentsbalance was held by our foreign subsidiaries in Mexico. Cash balances in Mexico will be used forfuture capital expenditures and future plant expansion in Mexico. We currently do not intend norforesee a need to repatriate these funds. We expect existing domestic cash and cash equivalentsand cash flows from operations to continue to be sufficient to fund our operating activities andcash commitments for investing and financing activities, such as regular quarterly dividends andcapital expenditures, for at least the next 12 months and thereafter for the foreseeable future.Should we requiremorecapital in the U.S. than is generated by our operations domestically,forexample to fund significant discretionary activities, such as acquisitions of businesses and sharerepurchases, we could elect to repatriate futureearnings from foreign jurisdictions or raise capital inthe U.S. through borrowings under our revolving credit facility. These alternatives could result inhigher effective tax rates, increased interest expense, or other dilution of our earnings.Cash flow provided by operating activities was $15.7 million in 2013 compared to $17.2million in 2012. Cash flows from operating activities decreased in the current year compared to theprior year primarily due to increased working capital requirements in the current year as comparedto the prior year and the cash settlement of SERP benefits in the current year. Net income and theimpact of non-cash items such as depreciation, unrealized gains and losses on foreign currencycontracts, foreign currency transaction gains and losses and loss on settlement of pensionobligations, as detailed in the Statements of Cash Flows, increased approximately $6.0 million inthe current year as compared to the prior year. Cash used for working capital requirementsincreased approximately $7.6 million in the current year as compared to the prior year. The majorcontributors to the current year increased working capital requirements were increased inventorybalances, the cash settlement of SERP benefits and payments made under our incentive bonusMANAGEMENT’S DISCUSSION AND ANALYSIS2013STRATTECAnnualReport18plans. Inventory balances increased approximately $3.1 million during the current year due to newprogram launches and related purchased content with longer supply chain lead times. The cashsettlement of SERP benefits totaled approximately $5.8 million resulting in a reduction of accruedpayroll and benefit balances. $3.0 million of the Rabbi trust assets were utilized for the cashsettlement resulting in a reduction of other current asset balances. Current year operating cash flowwas also impacted by an August 2012 payment of approximately $5.2 million in bonuses, whichwere earned during fiscal 2012 under our incentive bonus plans. Bonus payments in August 2011,which were earned during fiscal 2011 under our incentive bonus plans, totaled approximately $4.3million. Contributions made to our qualified pension plan totaled $3.0 million in 2013 and $2.0million in 2012. The accrued pension obligations balance at June 30, 2013 includes only our SERP whilethe balance at July 1, 2012 includes our qualified plan and our SERP. Our qualified plan balanceat June 30, 2013 is included in other long-term assets. The change in the accrued pensionobligations balance during 2013 is the result of the net impact of pension contributions, theactuarially calculated pension expense and the impact of the change in the funded status of theplans due to stronger than projected returns on plan assets and an increase in the discount ratebetween periods. The 2013 pre-tax changes in plan assets and benefit obligations recognized inother comprehensive income decreased our accrued pension obligation balance by approximately$18.8 million and increased our other long-term assets balance by approximately $2.0 million atJune 30, 2013 compared to July 1, 2012. The resulting tax impact decreased our deferredincome tax asset balance by $7.9 million at our 2013 year end in comparison to the end of ourprior year.During 2013, our portion of capital contributions made to VAST LLC in support of generaloperating expenses totaled $200,000. During both the current year and prior year, the VAST jointventurein China incurred relocation costs associated with moves to a new facility and start-upcosts associated with a new product line. These relocation costs and start-up costs have beenfinanced by operating cash flow from VAST China along with external financing secured from threelocal Chinese banks. We currently anticipate VAST China has adequate debt facilities in place overthe next fiscal year to cover futureoperating and capital requirements. Capital expenditures were$12.5 million in 2013 compared to $13.6 million in 2012.Expenditures were primarily in support of requirements for new product programs, expansion of ourJuarez, Mexico facility,and the upgrade and replacement of existing equipment. We anticipatecapital expenditures will be approximately $9 million to $10 million in fiscal 2014 in support ofrequirements for new product programs and the upgrade and replacement of existing equipment.Our Board of Directors has authorized a stock repurchase program to buy back outstandingshares of our common stock. Shares authorized for buy back under the program totaled 3,839,395at June 30, 2013. A total of 3,655,322 shares have been repurchased over the life of the programthrough June 30, 2013, at a cost of approximately $136.4 million. No shares were repurchasedduring fiscal 2013 or 2012. Additional repurchases may occur from time to time and are expectedto continue to be funded by cash flow from operations and current cash balances. At this time, weanticipate minimal or no stock repurchase activity in fiscal year 2014.STRATTEC has a $25 million secured revolving credit facility (“STRATTEC Credit Facility”) withBMO Harris Bank N.A. The STRATTEC Credit Facility expires August 1, 2014. ADAC-STRATTEC LLChas a $5 million secured revolving credit facility (“ADAC-STRATTEC Credit Facility”) with BMOHarris Bank N.A, which is guaranteed by STRATTEC. The ADAC-STRATTEC Credit Facility expiresJune 28, 2015. Any borrowings under either of the credit facilities will be secured by our U.S. cashbalances, accounts receivable, inventory and fixed assets located in the U.S. Interest onborrowings under these credit facilities is at varying rates based, at our option, on the LondonInterbank Offering Rate plus 1.0 to 1.75 percent or the bank’sprime rate. Both credit facilitiescontain a restrictive financial covenant that requires the maintenance of a minimum net worth level.The ADAC-STRATTEC credit facility includes an additional restrictive financial covenant thatrequires the maintenance of a minimum fixed charge coverage ratio. There were no outstandingborrowings under the STRATTEC Credit Facility at June 30, 2013 or July 1, 2012. There were noborrowings under the STRATTEC Credit Facility during 2013, 2012 or 2011. Borrowings under theADAC-STRATTEC Credit Facility totaled $2.25 million at June 30, 2013. The average outstandingborrowings and weighted average interest rate on the ADAC-STRATTEC Credit Facility loans wereapproximately $1.7 million and 1.99 percent, respectively, during fiscal 2013. There were noborrowings under the ADAC-STRATTEC Credit Facility during 2012 or 2011. We believe that thecredit facilities are adequate, along with existing cash balances and cash flow from operations, tomeet our anticipated capital expenditure, working capital, dividend and operating expenditurerequirements. Over the past several years, we have been impacted by rising health carecosts, which haveincreased our cost of associate medical coverage. A portion of these increases have been offset byplan design changes and associate wellness initiatives. We have also been impacted byfluctuations in the market price of zinc and brass and inflation in Mexico, which impacts the U. S.dollar costs of our Mexican operations. Wehave negotiated raw material price adjustment clauseswith certain, but not all, of our customers to offset some of the market price fluctuations in the costof zinc. Moreover, in January 2011 and August 2011, we entered into agreements with Bank ofMANAGEMENT’S DISCUSSION AND ANALYSIS2013STRATTECAnnualReport19Montreal that provided for two weekly Mexican peso currency option contracts to cover a portionof our weekly estimated peso denominated operating costs. The contracts with Bank of Montrealexpired June 28, 2013. The two weekly option contracts were for equivalent notional amounts. Thecontracts that were effective during fiscal 2011 and 2012 expired July 6, 2012, and provided for thepurchase of Mexican pesos at a U.S. dollar / Mexican peso exchange rate of 11.85 if the spot rateat the weekly expiry date was below 11.85 or for the purchase of Mexican pesos at a U.S. dollar /Mexican peso exchange rate of 12.85 if the spot rate at the weekly expiry date was above 12.85.Additional contracts that were effective during fiscal 2013 expired June 28, 2013 and provided forthe purchase of Mexican pesos at an average U.S. dollar / Mexican peso exchange rate of 12.40 ifthe spot rate at the weekly expiry date was below an average of 12.40 or for the purchase ofMexican pesos at an average U.S. dollar / Mexican peso exchange rate of 13.40 if the spot rate atthe weekly expiry date was above an average of 13.40. Our objective in entering into thesecurrency option contracts was to minimize our earnings volatility resulting from changes inexchange rates affecting the U.S. dollar cost of our Mexican operations. The Mexican peso optioncontracts were not used for speculative purposes and were not designated as hedges. As a result,all currency option contracts were recognized in our accompanying consolidated financialstatements at fair value and changes in the fair value of the currency option contracts werereported in current earnings as part of Other Income, net. The premiums paid and received underthe weekly Mexican peso currency option contracts netted to zero. As a result, premiums related tothe contracts did not impact our earnings. No Mexican peso currency option contracts wereoutstanding as of June 30, 2013.The fair market value of all outstanding Mexican peso option contracts in the accompanyingConsolidated Balance Sheets was as follows (thousands of dollars):June 30, 2013July 1, 2012Not Designated as Hedging Instruments:Other Current Liabilities:Mexican Peso Option Contracts$ -$(395)The pre-tax effects of the Mexican peso option contracts on the accompanying ConsolidatedStatements of Income and Comprehensive Income (Loss) consisted of the following (thousands ofdollars):Other Income, netJune 30, 2013July 1, 2012Not Designated as Hedging Instruments:Realized Gain$27$ 18Realized (Loss)$(39)$(438)Unrealized Gain (Loss) $395$(640)CONTRACTUAL OBLIGATIONS AND COMMITMENTSContractual obligations are as follows as of June 30, 2013 (thousands of dollars):Payments Due By PeriodLess ThanMoreThanContractual ObligationTotal1 Year1-3 Years3-5 Years5 YearsOperating Leases$828$ 526$ 302$-$ -Other Purchase Obligations22,49611,5468,7722,178-Pension and PostretirementObligations(a)_3,823_3,823_-__ -___-Total$27,147$15,895$9,074$2,178$ -(a)As disclosed in our Notes to Financial Statements, estimated cash funding related to our pension and postretirementbenefit plans is expected to total $3.8 million in 2014. Because the timing of funding related to these plans beyond 2014 isuncertain, and is dependent on future movements in interest rates and investment returns, changes in laws and regulations,and other variables, pension and postretirement outflows beyond 2014 have not been included in the table above.Liabilities recognized for uncertain tax benefits of $1.7 million are not presented in the tableabove due to uncertainty as to amounts and timing regarding futurepayments.STRATTEC has a $25 million secured revolving credit facility with BMO Harris Bank N.A. ADAC-STRATTEC LLC has a $5 million secured revolving credit facility with BMO Harris Bannk N.A., whichis guaranteed by STRATTEC. There were no borrowings under STRATTEC’s credit facility at June 30,2013. Borrowings under ADAC-STRATTEC’scredit facility totaled $2.25 million at June 30, 2013.JOINT VENTURES AND MAJORITY OWNED SUBSIDIARIESWe participate in certain Alliance Agreements with WITTE Automotive (“WITTE”) and ADACAutomotive (“ADAC”). WITTE, of Velbert, Germany,is a privately held automotive supplier. WITTEMANAGEMENT’S DISCUSSION AND ANALYSIS2013STRATTECAnnualReport20designs, manufactures and markets automotive components, including locks and keys, hoodlatches, rear compartment latches, seat back latches, door handles and specialty fasteners.WITTE’s primary market for these products has been Europe. ADAC, of Grand Rapids, Michigan,is a privately held automotive supplier and manufactures engineered products, including doorhandles and other automotive trim parts, utilizing plastic injection molding, automated paintingand various assembly processes. The Alliance agreements include a set of cross-licensing agreements for the manufacture,distribution and sale of WITTE products by STRATTEC and ADAC in North America, and themanufacture, distribution and sale of STRATTEC and ADAC products by WITTE in Europe. Additionally,ajoint venture company, Vehicle Access Systems Technology LLC (“VAST LLC”), in which WITTE,STRATTEC and ADAC each hold a one-third interest, exists to seek opportunities to manufacture andsell the companies’ products in areas of the world outside of North America and Europe.VAST do Brasil, a joint venture between VAST LLC and Ifer do Brasil Ltda., servicescustomers in South America. VAST Fuzhou, VAST Great Shanghai and VAST China Co.(collectively known as VAST China), provides a base of operations to service our automotivecustomers in the Asian market. VAST LLC also maintains branch offices in South Korea and Japanin support of customer sales and engineering requirements.The VAST LLC investments are accounted for using the equity method of accounting. Theactivities related to the VAST LLC joint ventures resulted in equity loss of joint ventures toSTRATTEC of approximately $147,000 during 2013 and $1.1 million during 2012, and equityearnings of joint ventures to STRATTEC of approximately $1.2 million during 2011. During 2012our joint ventures in China and Brazil continued to incur relocation costs associated with moves tonew facilities and start-up costs associated with a new product line. These relocation costs andstart-up costs continued for VAST China primarily during the first half of 2013. These itemsresulted in STRATTEC incurring an equity loss from joint ventures in both 2013 and 2012. Inaddition, the 2012 equity loss also included a goodwill impairment charge relating to VAST China.STRATTEC’s portion of this impairment charge amounted to $284,000. Effective November 20,2009, VAST LLC purchased the 40 percent non-controlling interest owned by its former partners inthe joint ventures in China. Initially,aloan of $2.5 million was made by each partner,STRATTEC,WITTE and ADAC, to fund a portion of the purchase price. In December 2009, $1 million of eachpartner’sloan balance was repaid. During 2012, each partner’soutstanding principal and accruedinterest balance of $1.5 million and $112,000, respectively,wereterminated and converted toadditional capital contributions by each partner in VAST LLC. During each of 2013 and 2012, cashcapital contributions totaling $600,000 weremade to VAST LLC in support of general operatingexpenses. STRATTEC’sportion of the cash capital contributions during each year totaled $200,000.In fiscal year 2007, we established a new entity with ADAC forming ADAC-STRATTEC LLC,aDelawarelimited liability company.The joint venture was created to establish injection moldingand door handle assembly operations in Mexico. STRATTEC holds a 51 percent interest in ADAC-STRATTEC LLC. A Mexican entity, ADAC-STRATTEC de Mexico, exists and is wholly owned byADAC-STRATTEC LLC. ADAC-STRATTEC LLC’s financial results are consolidated with the financialresults of STRATTEC and resulted in increased net income to STRATTEC of approximately $1.1million in 2013, approximately $1.7 million in 2012, and approximately $910,000 in 2011.Effective November 30, 2008, STRATTEC established a new entity,STRATTEC POWERACCESS LLC (“SPA”), which is 80 percent owned by STRATTEC and 20 percent owned byWITTE. SPA supplies the North American portion of the power sliding door, lift gate and deck lidsystem access control products which wereacquired from Delphi Corporation. The financialresults of SPA are consolidated with the financial results of STRATTEC and resulted in increasednet income to STRATTEC of approximately $1.0 million in 2013, approximately $2.6 million in2012, and approximately $2.5 million in 2011. On April 5, 2013, we acquired a 51 percent ownership interest in NextLock LLC, a newlyformed joint venture which will introduce a new generation of biometric security products basedupon the designs of Actuator Systems LLC, our partner and the owner of the remaining 49percent interest. The initial capitalization of the NextLock joint venture totaled $1.5 million.STRATTEC’s portion of the initial capitalization totaled $765,000. During the first half of fiscal2014, we anticipate the NextLock joint venturewill incur start-up costs and losses. Weanticipateshipments of the new biometric security products to begin during the second half of fiscal 2014.The equity investment in NextLock for which we exercise significant influence but do not controland arenot the primary beneficiary,is accounted for using the equity method. The activitiesrelated to NextLock resulted in equity loss of joint ventures to STRATTEC of approximately$78,000 during 2013.OTHER MATTERSHealth care reform legislation was recently enacted by the Federal government. Changes tothis legislation and modifications on effective dates for this legislation are ongoing. We areMANAGEMENT’S DISCUSSION AND ANALYSIS2013STRATTECAnnualReport21currently evaluating the legislation to determine its effects on our plan structure, future operatingresults and financial position.CRITICAL ACCOUNTING POLICIESWe believe the following represents our critical accounting policies:Pension and Postretirement Health Benefits –Pension and postretirement healthobligations and costs are developed from actuarial valuations. The determination of theobligation and expense for pension and postretirement health benefits is dependent on theselection of certain assumptions used by actuaries in calculating such amounts. Thoseassumptions are described in the Notes to Financial Statements and include, among others, thediscount rate, expected long-term rate of return on plan assets, retirement age, rates of increasein compensation and health care costs. We evaluate and update all of the assumptions annuallyon June 30, the measurement date. Refer to Notes to Financial Statements for the impact of thepension and postretirement plans on our financial statements.We determine the discount rate used to measure plan liabilities using prevailing marketrates of a large population of high-quality, non-callable, corporate bonds currently available that,if the obligation was settled at the measurement date, would provide the necessary future cashflows to pay the benefit obligation when due. Using this methodology, we determined a discountrate of 5.02 percent to be appropriate as of June 30, 2013, which is an increase of 0.46percentage points from the rate of 4.56 percent used at June 30, 2012. The impact of thischange decreased our year-end 2013 projected pension benefit obligations by approximately$5.2 million, the year-end 2013 accumulated pension benefit obligations by approximately $5.1million and the year-end 2013 accumulated postretirement obligation by approximately $55,000.This change is also expected to decrease our 2014 pension expense by $455,000 and increaseour postretirement expense by $4,000. Our pension expense increases as the discount ratedecreases. Lowering our 2013 discount rate assumption by 50 basis points would haveincreased our 2013 pension expense by approximately $580,000.Asignificant element in determining the pension expense is the expected return on planassets. Our assumption for the expected return on plan assets is based on historical results forsimilar allocations among asset classes and was 8.0 percent for 2011, 7.8 percent for 2012 and7.5 percent for 2013. This assumption remained at 7.5 percent for 2014. The changes to thisassumption had no impact on the expected return on plan assets in 2011 and reduced theexpected returnon plan assets by approximately $165,000 in 2012 and $245,000 in 2013. Referto Notes to Financial Statements for additional information on how this rate was determined.Pension expense increases as the expected rate of return on plan assets decreases. Loweringthe 2013 expected rate of returnassumption for our plan assets by 50 basis points would haveincreased our 2013 pension expense by approximately $410,000.The difference between the expected return and actual return on plan assets is deferredand, under certain circumstances, amortized over future years of service. Therefore, the deferralof past asset gains and losses ultimately affects future pension expense. This is also the casewith changes to actuarial assumptions, including discount rate assumptions, pay rateassumptions, mortality assumptions, turnover assumptions and other demographic assumptions.As of June 30, 2013, we had $28 million of net unrecognized pension actuarial losses, whichincluded deferred asset gains of $2 million. As of June 30, 2013, we had unrecognizedpostretirement actuarial losses of $7 million. These amounts represent potential future pensionand postretirement expenses that would be amortized over average future service periods. Theaverage remaining service period is about 8 years for the pension and postretirement plans. During fiscal years 2013, 2012 and 2011, we contributed $3 million, $2 million and $2million, respectively, to our qualified pension plan. Future pension contributions are expected tobe approximately $3 million annually depending on market conditions. We have evaluated thepotential impact of the Pension Protection Act including provisions of MAP-21 (Moving Ahead forProgress in the 21st Century Act) (the "Acts"), which was passed into law on August 17, 2006and July 6, 2012 respectively, on future pension plan funding requirements based on currentmarket conditions. The Acts have not had and are not anticipated to have in future periods amaterial effect on our level of future funding requirements or on our liquidity and capitalresources. Asignificant element in determining the postretirement health expense is the health care costtrend rates. We develop these rates based on historical cost data, the near-term outlook and anassessment of likely long-term trends. Changes in the health care cost trend rate assumption willhave a significant effect on the postretirement benefit amounts reported. As of January 1, 2011,we updated the health care cost trend assumption. The impact of this change increased our year-end 2011 accumulated postretirement obligation by approximately $139,000. This change alsoincreased our 2012 postretirement expense by approximately $20,000. Refer to Notes to FinancialMANAGEMENT’S DISCUSSION AND ANALYSIS2013STRATTECAnnualReport22Statements for an analysis of the impact of a one percent change in the trend rate.As of January 1, 2010, the postretirement health care benefit plan was amended to limitfuture eligible retirees’ benefits under the plan to $4,000 per year for a maximum of five years.This change decreased 2011 postretirement expense by approximately $645,000.While we believe that the assumptions used to determine our pension and postretirementhealth obligations and expenses are appropriate, significant differences in the actual experienceor significant changes in the assumptions may materially affect the amounts of these obligationsand the related future expense.Liability for Uncertain Tax Positions –We are subject to income taxation in manyjurisdictions around the world. Significant management judgment is required in the accounting forincome tax contingencies because the outcomes are often difficult to determine. We are required tomeasure and recognize uncertain tax positions that we have taken or expect to take in our incometax returns. The benefit of an uncertain tax position can only be recognized in the financialstatements if management concludes that it is more likely than not that the position will besustained with the tax authorities. For a position that is likely to be sustained, the benefit recognizedin the financial statements is measured at the largest amount that is greater than 50 percent likely ofbeing realized. A reserve is established for the difference between a position taken in an income taxreturn and the amount recognized in the financial statements. Refer to the discussion of IncomeTaxes included in the Notes to Financial Statements included within this 2013 Annual Report.Other Reserves – We have reserves such as an environmental reserve, a warranty reserve, anincurred but not reported claim reserve for self-insured health plans, an allowance for doubtfulaccounts related to trade accounts receivable, an excess and obsolete inventory reserve and arepair and maintenance supply parts reserve. These reserves require the use of estimates andjudgment with regard to risk exposure, ultimate liability and net realizable value.Environmental Reserve – Wehave a liability recorded related to the estimated costs toremediate a site at our Milwaukee facility, which was contaminated by a solvent spill from a formerabove ground solvent storage tank occurring in 1985. The recorded environmental liability balanceinvolves judgment and estimates. Our reserve estimate is based on a thirdparty assessment of thecosts to adequately cover the cost of active remediation of the contamination at this site. Actualcosts might vary from this estimate for a variety of reasons including changes in laws and changesin the assessment of the level of remediation actually required at this site. Therefore, future changesin laws or the assessment of the level of remediation required could result in changes in ourestimate of the required liability. Refer to the discussion of Commitments and Contingenciesincluded in the Notes to Financial Statements included within this 2013 Annual Report.Warranty Reserve – Wehave a warranty liability recorded related to our exposureto warrantyclaims in the event our products fail to perform as expected, and we may be required to participatein the repair costs incurred by our customers for such products. The recorded warranty liabilitybalance involves judgment and estimates. Our liability estimate is based on an analysis of historicalwarranty data as well as current trends and information, including our customers’ recent extensionof their warranty programs. Actual warranty costs might vary from estimates due to the level ofactual claims varying from our claims experience and estimates. Therefore, future actual claimsexperience could result in changes in our estimates of the required liability. Refer to the discussionof Warranty Reserve under Organization and Summary of Significant Accounting Policies included inthe Notes to Financial Statements included within this 2013 Annual Report.Incurred But Not Reported Claim Reserve for Self-Insured Health Plans – We have self-insuredmedical and dental plans covering all eligible U.S. associates. The expected ultimate cost of claimsincurred under these plans is subject to judgment and estimation. We estimate the ultimateexpected cost of claims incurred under these plans based upon the aggregate liability for reportedclaims and an estimated additional liability for claims incurred but not reported. Our estimate ofclaims incurred but not reported is based on an analysis of historical data, current trends related toclaims and health care costs and information available from our third-party administrator. Actualultimate costs may vary from estimates due to variations in actual claims experience from pasttrends and large unexpected claims being filed. Therefore, changes in claims experience and largeunexpected claims could result in changes to our estimate of the claims incurred but not reportedliabilities. Refer to the discussion of Self Insurance Plans under Organization and Summary ofSignificant Accounting Policies included in the Notes to Financial Statements included within this2013 Annual Report.Allowance for Doubtful Accounts Related to Trade Accounts Receivable – Our trade accountsreceivable consist primarily of receivables due from Original Equipment Manufacturers in theautomotive industry and locksmith distributors relating to our service and aftermarket business. Ourevaluation of the collectability of our trade accounts receivable involves judgment and estimates andincludes a review of past due items, general economic conditions and the economic climate of theindustry as a whole. The estimate of the required reserve involves uncertainty as to futurecollectability of receivable balances. Refer to the discussion of Receivables under Organization andSummary of Significant Accounting Policies included in the Notes to Financial Statements includedMANAGEMENT’S DISCUSSION AND ANALYSIS2013STRATTECAnnualReport23within this 2013 Annual Report. Excess and Obsolete Inventory Reserve – We record a reserve for excess and obsoleteinventory based on historical and estimated future demand and market conditions. The reserve levelis determined by comparing inventory levels of individual materials and parts to historical usage andestimated future sales by analyzing the age of the inventory, in order to identify specific material andparts that are unlikely to be sold. Technical obsolescence and other known factors are alsoconsidered in evaluating the reserve level. Actual future write-offs of inventory may differ fromestimates and calculations used to determine reserve levels due to changes in customer demand,changes in technology and other factors. Refer to the discussion of Inventories under Organizationand Summary of Significant Accounting Policies included in the Notes to Financial Statementsincluded within this 2013 Annual Report. Repair and Maintenance Supply Parts Reserve – We maintain an inventory of repair andmaintenance parts in support of operations. This inventory includes critical repair parts for allproduction equipment as well as general maintenance items. The inventory of critical repair parts isrequired to avoid disruptions in our customers’ just-in-time production schedules due to lack ofspare parts when equipment break-downs occur. Depending on maintenance requirements duringthe life of the equipment, excess quantities of repair parts arise. A repair and maintenance supplyparts reserve is maintained to recognize the normal adjustment of inventory for obsolete and slow-moving repair and maintenance supply parts. Our evaluation of the reserve level involves judgmentand estimates, which are based on a review of historical obsolescence and current inventory levels.Actual obsolescence may differ from estimates due to actual maintenance requirements differingfrom historical levels. This could result in changes to our estimated required reserve. Refer to thediscussion of Repair and Maintenance Supply Parts under Organization and Summary of SignificantAccounting Policies included in the Notes to Financial Statements included within this 2013 AnnualReport.Webelieve the reserves discussed above are estimated using consistent and appropriatemethods. However,changes to the assumptions could materially affect the recorded reserves.Stock-Based Compensation –Stock-based compensation cost is measured at the grant datebased on the value of the awardand is recognized as expense over the vesting period. Determining thefair value of stock-based awards at the grant date requires judgment, including estimating futurevolatility of our stock, the amount of stock-based awards that are expected to be forfeited and theexpected term of awards granted. We estimate the fair value of stock options granted using the Black-Scholes option valuation model. Weamortize the fair value of all awards on a straight-line basis over thevesting periods. The expected term of awards granted represents the period of time they are expectedto be outstanding. We determine the expected term based on historical experience with similar awards,giving consideration to the contractual terms and vesting schedules. Weestimate the expected volatilityof our common stock at the date of grant based on the historical volatility of our common stock. Thevolatility factor used in the Black-Scholes option valuation model is based on our historical stock pricesover the most recent period commensurate with the estimated expected term of the award. We basethe risk-freeinterest rate used in the Black-Scholes option valuation model on the implied yield currentlyavailable on U.S. Treasury zero-coupon issues with a remaining term commensurate with the expectedterm of the award. We use historical data to estimate pre-vesting option forfeitures. We record stock-based compensation only for those awards that are expected to vest. If actual results differ significantlyfrom these estimates, stock-based compensation expense and our results of operations could bematerially impacted.NEW ACCOUNTING STANDARDIn February 2013, the Financial Accounting Standards Board (“FASB”) issued AccountingStandards Update (“ASU” or “Update”) 2013-02, “Comprehensive Income: Reporting of AmountsReclassified Out of Accumulated Other Comprehensive Income”, which adds new disclosurerequirements for items reclassified out of accumulated other comprehensive income (“AOCI”). TheUpdate is effective for annual reporting periods beginning after December 15, 2012 and requires thatwe present either in a single note or parenthetically on the face of the financial statements, the effectof significant amounts reclassified from each component of AOCI based on its source and theincome statement line items affected by the reclassification. We do not expect these new disclosurerequirements to have a significant impact on our Consolidated Financial Statements.RISK FACTORSWerecognize we are subject to the following risk factors based on our operations and thenatureof the automotive industry in which we operate:Loss of Significant Customers, Vehicle Content, Vehicle Models and Market Share–Sales to General Motors Company,Ford Motor Company and Chrysler Group LLC representedapproximately 66 percent of our annual net sales (based on fiscal 2013 results) and, accordingly,theseMANAGEMENT’S DISCUSSION AND ANALYSIS2013STRATTECAnnualReport24customers account for a significant percentage of our outstanding accounts receivable. The contractswith these customers provide for supplying the customer’s requirements for a particular model. Thecontracts do not specify a specific quantity of parts. The contracts typically cover the life of a model,which averages approximately four to five years. Components for certain customer models may also be“market tested” annually. Therefore, the loss of any one of these customers, the loss of a contract for aspecific vehicle model, a reduction in vehicle content, the early cancellation of a specific vehicle model,technological changes or a significant reduction in demand for certain key models could occur, and if so,could have a material adverse effect on our existing and future revenues and net income.Our major customers also have significant under-funded legacy liabilities related to pension andpostretirement health care obligations. The loss in our major customers’ North American automotivemarket share to the New Domestic automotive manufacturers (primarily the Japanese and Koreanautomotive manufacturers) and/or a significant decline in the overall market demand for new vehiclesmayultimately result in severe financial difficulty for these customers, including bankruptcy. If our majorcustomers cannot fund their operations, we may incur significant write-offs of accounts receivable, incurimpairment charges or require additional restructuring actions.Production Slowdowns by Customers –Our major customers and many of their supplierswere significantly impacted by the recession of 2008/2009. Many of our major customers institutedproduction cuts during our fiscal 2009 and 2010. While production subsequently increased after thecuts made in 2009, additional economic slowdowns could bring about new production cuts whichcould have a material adverse effect on our existing and future revenues and net income.Financial Distress of Automotive Supply Base –During calendar years 2009 and 2010,deteriorating automotive industry conditions adversely affected STRATTEC and our supply base.Lower production levels at our major customers, volatility in certain raw material and energy costs andthe global credit market crisis resulted in severe financial distress among many companies within theautomotive supply base. During the above time frame, several automotive suppliers filed forbankruptcy protection or ceased operations. The potential continuation or renewal of financial distresswithin the supply base and suppliers’ inability to obtain credit from lending institutions could lead tocommercial disputes and possible supply chain interruptions. In addition, the potential for futureand/or continued adverse industry conditions may requireus to provide financial assistance or othermeasures to ensure uninterrupted production. The continuation or renewal of these industry conditionscould have a material adverse effect on our existing and futurerevenues and net income.Shortage of Raw Materials or Components Supply – In the event of catastrophic acts ofnature such as fires, tsunamis, hurricanes and earthquakes or a rapid increase in productiondemands, either we or our customers or other suppliers may experience supply shortages of rawmaterials or components. This could be caused by a number of factors, including a lack ofproduction line capacity or manpower or working capital constraints. In order to manage and reducethe costs of purchased goods and services, we and others within our industry have been rationalizingand consolidating our supply base. As a result, there is greater dependence on fewer sources ofsupply for certain components and materials used in our products, which could increase thepossibility of a supply shortage of any particular component. If any of our customers experience amaterial supply shortage, either directly or as a result of supply shortages at another supplier, thatcustomer may halt or limit the purchase of our products. Similarly, if we or one of our own suppliersexperience a supply shortage, we may become unable to produce the affected products if we cannotprocure the components from another source. Such production interruptions could impede a ramp-up in vehicle production and could have a material adverse effect on our business, results ofoperations and financial condition. We consider the production capacities and financial condition of suppliers in our selectionprocess, and expect that they will meet our delivery requirements. However, there can be noassurance that strong demand, capacity limitations, shortages of raw materials, labor disputes orother problems will not result in any shortages or delays in the supply of components to us.Cost Reduction – There is continuing pressure from our major customers to reduce the priceswe charge for our products. This requires us to generate cost reductions, including reductions in thecost of components purchased from outside suppliers. If we are unable to generate sufficientproduction cost savings in the futureto offset pre-programmed price reductions, our gross marginand profitability will be adversely affected.Cyclicality and Seasonality in the Automotive Market – The automotive market is cyclicaland is dependent on consumer spending, on the availability of consumer credit and to a certainextent, on customer sales incentives. Economic factors adversely affecting consumer demand forautomobiles and automotive production, such as rising fuel costs, could adversely impact our netsales and net income. Wetypically experience decreased sales and operating income during the firstfiscal quarter of each year due to the impact of scheduled customer plant shut-downs in July andnew model changeovers during that period.Foreign Operations – Weown and operate manufacturing operations in Mexico. As discussedunder “Joint Ventures”, we also have joint venture investments in Mexico, Brazil and China. As theseoperations continue to expand, their success will depend, in part, on our and our partners’ ability toMANAGEMENT’S DISCUSSION AND ANALYSIS2013STRATTECAnnualReport25anticipate and effectively manage certain risks inherent in international operations, including: enforcingagreements and collecting receivables through certain foreign legal systems, payment cycles of foreigncustomers, compliance with foreign tax laws, general economic and political conditions in thesecountries and compliance with foreign laws and regulations. The success of these joint ventureoperations may be impacted by our two partners’ ability to influence business decisions and thereforeoperating results of the joint ventures. These influences, as well as conflicts or disagreements with ourjoint venture partners, could negatively impact the operations and financial results of our joint ventureinvestments, which could have an adverse impact on our financial results. In addition, failure of ourpartners to be able to continue to fund their portion of the joint venture operations could have amaterial adverse effect on the financial condition and financial results of our joint venture investments,which could have a material adverse effect on our financial results. The joint venture investments inChina generated losses in 2012 and 2013 due to relocation costs associated with moves to a newfacility and start-up costs associated with a new product line. These relocation costs and start-upcosts have been financed internally and externally by VAST China. The impact of any future VASTChina losses, along with planned capital expenditures in China, may result in the need for additionalfuture capital contributions to fund the operations of these joint venture investments.Currency Exchange Rate Fluctuations –Our sales are denominated in U.S. dollars. Wehave manufacturing operations in Mexico, and as a result, a portion of our manufacturing costs areincurred in Mexican pesos. Therefore, fluctuations in the U.S. dollar / Mexican peso exchange ratemay have a material effect on our profitability, cash flows, financial position, and may significantlyaffect the comparability of our results between financial periods. Any depreciation in the value of theU.S. dollar in relation to the value of the Mexican peso will adversely affect the cost of our Mexicanoperations when translated into U.S. dollars. Similarly, any appreciation in the value of the U.S. dollarin relation to the value of the Mexican peso will decrease the cost of our Mexican operations whentranslated into U.S. dollars.Sources of and Fluctuations in Market Prices of Raw Materials –Our primary rawmaterials are high-grade zinc, brass, nickel silver, aluminum, steel and plastic resins. These materialsare generally available from a number of suppliers, but we have chosen to concentrate our sourcingwith one primary vendor for each commodity or purchased component. We believe our sources ofraw materials are reliable and adequate for our needs. However, the development of future sourcingissues related to using existing or alternative raw materials and the global availability of thesematerials as well as significant fluctuations in the market prices of these materials may have anadverse effect on our financial results if the increased raw material costs cannot be recovered fromour customers.Given the significant financial impact on us relating to changes in the cost of our primary rawmaterials, commencing with fiscal 2008, we began quoting quarterly material price adjustments forchanges in our zinc costs in our negotiations with our customers. Our success in obtaining thesequarterly price adjustments in our customer contracts is dependent on separate negotiations witheach customer. It is not a standard practice for our customers to include such price adjustments intheir contracts. We have been successful in obtaining quarterly price adjustments in some of ourcustomer contracts. However,we have not been successful in obtaining the adjustments with all ofour customers.Disruptions Due to Work Stoppages and Other Labor Matters –Our major customersand many of their suppliers have unionized work forces. Work stoppages or slow-downs experiencedby our customers or their suppliers could result in slow-downs or closures of assembly plants whereour products are included in assembled vehicles. For example, strikes by a critical supplier called bythe United Auto Workers led to extended shut-downs of most of General Motors’ North Americanassembly plants in February 2008 and in 1998. A material work stoppage experienced by one or moreof our customers could have an adverse effect on our business and our financial results. In addition, allproduction associates at our Milwaukee facility areunionized. A sixteen-day strike by these associatesin June 2001 resulted in increased costs as all salaried associates worked with additional outsideresources to produce the components necessary to meet customer requirements. The current contractwith our unionized associates is effective through June 29, 2014. We may encounter further labordisruption after the expiration date of this contract and may also encounter unionization efforts in ourother plants or other types of labor conflicts, any of which could have an adverse effect on ourbusiness and our financial results. Labor contracts between General Motors Company, Ford MotorCompany and Chrysler Group LLC and their unionized associates under the United Auto Workersexpirein September and October 2015. In addition, their respective labor agreements with theCanadian auto workers union expireinSeptember 2016. Labor disruptions encountered during thecontract period could have an adverse effect on our business and our financial results.Environmental and Safety Regulations –Wearesubject to Federal, state, local and foreignlaws and other legal requirements related to the generation, storage, transport, treatment anddisposal of materials as a result of our manufacturing and assembly operations. These laws includethe Resource Conservation and Recovery Act (as amended), the Clean Air Act (as amended) and theComprehensive Environmental Response, Compensation and Liability Act (as amended). We have anMANAGEMENT’S DISCUSSION AND ANALYSIS2013STRATTECAnnualReport26environmental management system that is ISO-14001 certified. We believe that our existingenvironmental management system is adequate for current and anticipated operations and we haveno current plans for substantial capital expenditures in the environmental area. An environmentalreserve was established in 1995 for estimated costs to remediate a site at our Milwaukee facility. Thesite was contaminated from a former above-ground solvent storage tank, located on the east side ofthe facility. The contamination occurred in 1985 and is being monitored in accordance with Federal,state and local requirements. We do not currently anticipate any material adverse impact on ourresults of operations, financial condition or competitive position as a result of compliance withFederal, state, local and foreign environmental laws or other related legal requirements. However, riskof environmental liability and changes associated with maintaining compliance with environmentallaws is inherent in the nature of our business and there is no assurance that material liabilities orchanges could not arise.Highly Competitive Automotive Supply Industry –The automotive component supplyindustry is highly competitive. Some of our competitors are companies, or divisions or subsidiaries ofcompanies, that are larger than STRATTEC and have greater financial and technology capabilities.Our products may not be able to compete successfully with the products of these other companies,which could result in loss of customers and, as a result, decreased sales and profitability. Some ofour major customers have previously announced that they will be reducing their supply base. Thiscould potentially result in the loss of these customers and consolidation within the supply base. Theloss of any of our major customers could have a material adverse effect on our existing and futurenet sales and net income.In addition, our competitive position in the North American automotive component supplyindustry could be adversely affected in the event that we are unsuccessful in making strategicinvestments, acquisitions or alliances or in establishing joint ventures that would enable us to expandglobally.Weprincipally compete for new business at the beginning of the development of newmodels and upon the redesign of existing models by our major customers. New model developmentgenerally begins two to five years prior to the marketing of such new models to the public. The failureto obtain new business on new models or to retain or increase business on redesigned existingmodels could adversely affect our business and financial results. In addition, as a result of relativelylong lead times for many of our components, it may be difficult in the short-term for us to obtain newsales to replace any unexpected decline in the sale of existing products. Finally,we may incursignificant product development expense in preparing to meet anticipated customer requirementswhich may not be recovered.Program Volume and Pricing Fluctuations –Weincur costs and make capitalexpenditures for new program awards based upon certain estimates of production volumes overthe anticipated program life for certain vehicles. While we attempt to establish the price of ourproducts for variances in production volumes, if the actual production of certain vehicle models issignificantly less than planned, our net sales and net income may be adversely affected. We cannotpredict our customers’ demands for the products we supply either in the aggregate or for particularreporting periods.Investments in Customer Program Specific Assets –We make investments in machinery andequipment used exclusively to manufacture products for specific customer programs. This machinery andequipment is capitalized and depreciated over the expected useful life of each respective asset. Therefore,the loss of any one of our major customers, the loss of specific vehicle models or the early cancellation of avehicle model could result in impairment in the value of these assets which may have a material adverseeffect on our financial results.Warranty Claims –We are exposed to warranty claims in the event that our products fail toperform as expected, and we may be required to participate in the repair costs incurred by ourcustomers for such products. Our largest customers have recently extended their warranty protectionfor their vehicles. Other automotive OEMs have similarly extended their warranty programs. We areengaged in ongoing discussions with our customers regarding warranty information and potentialclaims. The results of these discussions could result in additional warranty charges / claims in futureperiods. Depending on the nature of and the volume of vehicles involved in the potential warrantyclaims, these charges could be material to the financial statements. The extended warranty trend mayalso result in higher cost recovery claims by OEMs from suppliers whose products incur a higher rateof warranty claims above an OEM derived nominal level. Prior to fiscal 2010, we had experiencedrelatively low warranty charges from our customers due to our commercial arrangements andimprovements in the quality,reliability and durability of our products. Due to our largest customers’extension of their warranty protection programs and demands for higher warranty cost sharingarrangements from their suppliers, including STRATTEC, we increased our provision to coverwarranty exposures during fiscal years 2010, 2011 and 2012. Moreover, in 2011 and 2012, ourincreased warranty provision was the result of our shareof the cost associated with a specificwarranty claim involving a product we supplied to one of our largest customers. If our customersdemand higher warranty-related cost recoveries, or if our products fail to perform as expected, itcould have a material adverse impact on our results of operations and financial condition.CONSOLIDATED STATEMENTS OF INCOME ANDCOMPREHENSIVEINCOME (LOSS)(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)2013STRATTECAnnualReport27Years EndedJune 30, 2013July 1, 2012July 3, 2011NET SALES$298,179$279,234$260,933Cost of goods sold244,313228,971218,770GROSS PROFIT53,86650,26342,163Engineering, selling, and administrative expenses34,93433,92033,443Loss on settlement of pension obligation2,144--INCOME FROM OPERATIONS16,78816,3438,720Interest income2169119Equity (loss) income of joint ventures(225)(1,071)1,246Interest expense(34)(81)(175)Other income, net329582220INCOME BEFORE PROVISION FOR INCOME TAXES AND NON-CONTROLLING INTEREST16,87915,84210,130Provision for income taxes5,366_3,589_2,540NET INCOME 11,51312,2537,590Net income attributable to non-controllinginterest2,1383,4602,172NET INCOME ATTRIBUTABLE TOSTRATTEC SECURITY CORPORATION$9,375$8,793$5,418COMPREHENSIVE INCOME (LOSS):NET INCOME $11,513$12,253$7,590Change in cumulative translation adjustments736(2,080)1,777Pension and postretirement plan funded status adjustment, net of tax12,818(11,990)8,450TOTAL OTHER COMPREHENSIVE INCOME (LOSS) 13,554(14,070)10,227COMPREHENSIVE INCOME (LOSS)25,067(1,817)17,817Comprehensive income attributable tonon-controlling interest2,1473,3972,208COMPREHENSIVE INCOME (LOSS)ATTRIBUTABLE TO STRATTECSECURITY CORPORATION$22,920$(5,214)$ 15,609EARNINGS PER SHARE:BASIC$2.77$2.66$1.65DILUTED$2.72$2.64$1.63AVERAGE SHARES OUTSTANDING:BASIC3,3273,3003,285DILUTED3,3793,3303,323The accompanying Notes to Financial Statements arean integral part of these Consolidated Statements ofIncome and Comprehensive Income (Loss).CONSOLIDATED BALANCE SHEETS(IN THOUSANDS, EXCEPT SHARE AMOUNTS AND PER SHARE AMOUNTS)2013STRATTECAnnualReport28June 30, 2013July 1, 2012ASSETS CURRENT ASSETS:Cash and cash equivalents$ 20,307$ 17,487Receivables, less allowance for doubtful accounts of $500 at June 30, 2013 and July 1, 201247,51444,496Inventories, net24,31221,236Customer tooling in progress, net2,2784,434Deferred income taxes4,2675,219Other current assets7,821_8,419Total current assets106,499101,291DEFERRED INCOME TAXES-9,742INVESTMENT IN JOINT VENTURES9,1668,139OTHER LONG-TERM ASSETS2,420536PROPERTY, PLANT AND EQUIPMENT, NET51,41546,330$169,500$166,038LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES:Accounts payable$ 25,543$ 24,149Borrowings under credit facility2,250-Accrued liabilities:Payroll and benefits13,99319,233Environmental1,4141,436Warranty2,5004,958Income taxes-2,934Other5,0254,263Total current liabilities50,72556,973COMMITMENTS AND CONTINGENCIES–see note on page 40DEFERRED INCOME TAXES1,009-ACCRUED PENSION OBLIGATIONS1,46418,202ACCRUED POSTRETIREMENT OBLIGATIONS2,7173,465OTHER LONG-TERM LIABILITIES1,705-SHAREHOLDERS’ EQUITY:Common stock, authorized 12,000,000 shares, $.01 par value, issued 6,998,702 shares at June 30, 2013 and 6,932,457 shares at July 1, 20127069Capital in excess of par value82,68480,621Retained earnings179,614171,590Accumulated other comprehensive loss(22,212)(35,757)Less: Treasury stock at cost (3,626,673 shares at June 30, 2013 and 3,628,673 shares at July 1, 2012)(135,938)(135,971)Total STRATTEC SECURITY CORPORATION shareholders’ equity104,21880,552Non-controlling interest7,6626,846Total shareholders’ equity111,88087,398$169,500$166,038The accompanying Notes to Financial Statements are an integral part of these Consolidated Balance Sheets.CONSOLIDATED STATEMENTS OFSHAREHOLDERS’EQUITY(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)2013STRATTECAnnualReport29AccumulatedCapital inOtherCommonExcess ofRetainedComprehensiveTreasuryNon-controllingTotalStockParValueEarningsLossStockInterestBALANCE June 27,2010$75,789$69$79,339$162,706$(31,941)$ (136,047)$1,663Net income7,590--5,418--2,172Translation adjustments1,777---1,741-36Pension and postretirementfunded status adjustment,net of tax of $5,1788,450---8,450--Cash dividends declared ($1.20 per share)(3,986)--(3,986)---Purchase of Additional Interest in Majority Owned Subsidiary(22)-----(22)Stock-based compensation andshortfall tax benefit, including tax benefit on restricted stockdividends of $15 364-364----Stock Option Exercises40-40----Employee stock purchases 62-24--38-BALANCE July 3,2011$90,064$69$79,767$164,138$ (21,750)$ (136,009)$3,849Net income12,253--8,793--3,460Translation adjustments(2,080)---(2,017)-(63)Pension and postretirementfunded status adjustment,net of tax of $7,348(11,990)---(11,990)--Cash dividends declared ($0.40 per share)(1,341)--(1,341)---Cash dividends paid to non-controlling interestsof subsidiaries(400)-----(400)Stock-based compensationand shortfall tax benefit, including tax benefit on restricted stock dividends of $7806-806----Stock Option Exercises33-33----Employee stock purchases 53-15--38-BALANCE July 1,2012$87,398$69$80,621$171,590$(35,757)$ (135,971)$6,846Net income11,513--9,375--2,138Translation adjustments736---727-9Pension and postretirement funded status adjustment,net of tax of $7,85712,818---12,818--Cash dividends declared ($0.40 per share)(1,351)--(1,351)---Cash dividends paid to non-controlling interests ofsubsidiaries(1,331)-----(1,331)Stock-based compensation andshortfall tax benefit, includingtax benefit on restricted stock dividends of $81,273-1,273----Stock Option Exercises7701769----Employee stock purchases 54-21--33-BALANCE June 30,2013$111,880$70$82,684$179,614$(22,212)$ (135,938)$7,662The accompanying Notes to Financial Statements are an integral part of these Consolidated Statements of Shareholders’ Equity.CONSOLIDATED STATEMENTS OF CASH FLOWS(IN THOUSANDS)2013STRATTECAnnualReport30Years Ended June 30, 2013July 1, 2012July 3, 2011CASH FLOWS FROM OPERATING ACTIVITIESNet Income $11,513$12,253$ 7,590Adjustments to reconcile net income tonet cash provided by operating activities:Equity loss (income) of joint ventures2251,071(1,246)Depreciation and amortization7,4906,8096,619 Foreign currency transaction loss (gain)395(1,369)836Unrealized (gain) loss on peso option contracts(395)640(245) Loss (gain) on disposition of property, plant and equipment10030(6)Deferred income taxes3,84754(177)Stock based compensation expense1,062825621 Provision for doubtful accounts-116- Loss on settlement of pension obligation2,144--Change in operating assets and liabilities: Receivables(2,923)(5,394)(3,309)Inventories(3,076)899(5,049)Other assets2,809(2,130)(183)Accounts payable and accrued liabilities(7,553)3,4372,902Other,net27-18Net cash provided by operating activities15,66517,2418,371CASH FLOWS FROM INVESTING ACTIVITIESInvestment in joint ventures(965)(200)(450)Restricted cash--2,100Additions to property, plant and equipment(12,515)(13,558)(9,531)Purchase of additional interest in majority owned subsidiary--(22)Proceeds received on sale of property,plant and equipment9119111Net cash used in investing activities(13,389)(13,739)(7,792)CASH FLOWS FROM FINANCING ACTIVITIESBorrowings under credit facility3,250-- Repayments under credit facility(1,000)-- Exercise of stock options and employee stock purchases8238290 Excess tax benefits from stock-based compensation270412 Dividends paid to non-controlling interests of subsidiaries(1,331)(400)-Dividends paid(1,352)(1,341)(3,989)Repayment of loan from related parties-(1,850)(1,150)Net cash provided by (used in) financing activities660(3,505)(5,037)FOREIGN CURRENCY IMPACT ON CASH(116)240(159)NET INCREASE (DECREASE)IN CASH AND CASH EQUIVALENTS2,820237(4,617)CASH AND CASH EQUIVALENTSBeginning of year 17,48717,25021,867End of year$20,307$17,487$17,250SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONIncome taxes paid $ 3,701$2,721$1,394Interest paid$ 42$ 115$ 188The accompanying Notes to Financial Statements are an integral part of these Consolidated Statements ofCash Flows.During the year ended July 1, 2012, a non-cash event was recorded whereby the outstanding loan to jointventure principal and accrued interest amounts of $1.5 million and $112,000, respectively, were terminatedand converted into additional capital contributions in the joint ventureinvestment.NOTES TO FINANCIAL STATEMENTS2013STRATTECAnnualReport31ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESSTRATTEC SECURITY CORPORATION designs, develops, manufactures and markets automotiveaccess 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 NorthAmerican automotive customers. We also supply global automotive manufacturers through a uniquestrategic relationship with WITTE Automotive of Velbert, Germany and ADAC Automotive of Grand Rapids,Michigan. Under this relationship, STRATTEC, WITTE and ADAC market the products of each company toglobal customers under the “VAST” brand name (as more fully described herein). During 2013, we acquireda51 percent ownership interest in NextLock LLC, a newly formed joint venture which will introduce a newgeneration of biometric security products based upon the designs of Actuator Systems LLC, our partnerand the owner of the remaining 49 percent interest. We anticipate shipment of new biometric securityproducts to begin in the second half of our 2014 fiscal year through this new NextLock joint venture.STRATTEC products are shipped to customer locations in the United States, Canada, Mexico, Europe,South America, Korea and China, and we provide full service and aftermarket support for our products.The accompanying consolidated financial statements reflect the consolidated results of STRATTECSECURITY CORPORATION, its wholly owned Mexican subsidiary, STRATTEC de Mexico, and its majorityowned subsidiaries, ADAC-STRATTEC, LLC and STRATTEC POWER ACCESS LLC. STRATTECSECURITY CORPORATION is located in Milwaukee, Wisconsin. STRATTEC de Mexico is located inJuarez, Mexico. ADAC-STRATTEC, LLC and STRATTEC POWER ACCESS LLC have operations in ElPaso, Texas and Juarez, Mexico. Equity investments in Vehicle Access Systems Technology LLC (“VASTLLC”) and NextLock LLC for which we exercise significant influence but do not control and arenot theprimary beneficiary, are accounted for using the equity method. VAST LLC consists primarily of threewholly owned subsidiaries in China and one joint venture in Brazil. NextLock LLC is located in El Paso,Texas. We have only one reporting segment.The significant accounting policies followed in the preparation of these financial statements, assummarized in the following paragraphs, are in conformity with accounting principles generally acceptedin the United States of America (U.S. GAAP).Principles of Consolidation and Presentation:The accompanying consolidated financialstatements include the accounts of STRATTEC SECURITY CORPORATION, its wholly owned Mexicansubsidiary, and its majority owned subsidiaries. Equity investments for which STRATTEC exercisessignificant influence but does not control and is not the primary beneficiary are accounted for usingthe equity method. All significant inter-company transactions and balances have been eliminated.New Accounting Standard:In February 2013, the Financial Accounting Standards Board("FASB") issued Accounting Standards Update (“ASU” or “Update”) 2013-02, “Comprehensive Income:Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”, which adds newdisclosure requirements for items reclassified out of accumulated other comprehensive income (“AOCI”).The Update is effective for annual reporting periods beginning after December 15, 2012 and requires thatwe present either in a single note or parenthetically on the face of the financial statements, the effect ofsignificant amounts reclassified from each component of AOCI based on its source and the incomestatement line items affected by the reclassification. We do not expect these new disclosure requirementsto have a significant impact on our Consolidated Financial Statements.Fiscal Year:Our fiscal year ends on the Sunday nearest June 30. The years ended June 30, 2013,July 1, 2012 and July 3, 2011 are comprised of 52, 52 and 53 weeks, respectively.Use of Estimates:The preparation of financial statements in conformity with U.S. GAAP requiresmanagement to make estimates and assumptions that affect the reported amounts of assets, liabilities,revenues and expenses for the periods presented. These estimates and assumptions could also affect thedisclosureof contingencies. Actual results and outcomes may differ from management’s estimates andassumptions.Cash and Cash Equivalents:Cash and cash equivalents include all short-term investments withan original maturity of three months or less due to the short-term natureof the instruments. Excess cashbalances are placed in a money market account at a high quality financial institution. As of June 30, 2013,$9.2 million of our $20.3 million cash and cash equivalents balance was held by our foreign subsidiaries inMexico and is deemed to be permanently reinvested.Derivative Instruments:Weown and operate manufacturing operations in Mexico. As a result, aportion of our manufacturing costs areincurred in Mexican pesos, which causes our earnings and cashflows to fluctuate as a result of changes in the U.S. dollar / Mexican peso exchange rate. In January, 2011and August, 2011, we entered into agreements with Bank of Montreal that provided for two weeklyMexican peso currency option contracts to cover a portion of our weekly estimated peso denominatedoperating costs. The contracts with Bank of Montreal expired June 28, 2013. The two weekly optioncontracts werefor equivalent notional amounts. The contracts that wereeffective during fiscal 2011 and2012 expired July 6, 2012, and provided for the purchase of Mexican pesos at a U.S. dollar / Mexican pesoexchange rate of 11.85 if the spot rate at the weekly expiry date was below 11.85 or for the purchase ofMexican pesos at a U.S. dollar / Mexican peso exchange rate of 12.85 if the spot rate at the weekly expirydate was above 12.85. Additional contracts that were effective during fiscal 2013 expired June 28, 2013and provided for the purchase of Mexican pesos at an average U.S. dollar / Mexican peso exchange rate2013STRATTECAnnualReport32of 12.40 if the spot rate at the weekly expiry date was below an average of 12.40 or for the purchase ofMexican pesos at an average U.S. dollar / Mexican peso exchange rate of 13.40 if the spot rate at the weeklyexpiry date was above an average of 13.40. Our objective in entering into these currency option contractswas to minimize our earnings volatility resulting from changes in exchange rates affecting the U.S. dollar costofour Mexican operations. The Mexican peso option contracts were not used for speculative purposes andwere not designated as hedges. As a result, all currency option contracts were recognized in our accompanyingconsolidated financial statements at fair value and changes in the fair value of the currency option contractswere reported in current earnings as part of Other Income, net. The premiums paid and received under theweekly Mexican peso currency option contracts netted to zero. As a result, premiums related to the contractsdid not impact our earnings. No Mexican peso currency option contracts were outstanding as of June 30, 2013.The fair market value of all outstanding Mexican peso option contracts in the accompanyingConsolidated Balance Sheets was as follows (thousands of dollars):June 30, 2013July 1, 2012Not Designated as Hedging Instruments:Other current liabilities:Mexican peso option contracts$-$(395)The pre-tax effects of the Mexican peso option contracts on the accompanying ConsolidatedStatements of Income and Comprehensive Income (Loss) consisted of the following (thousands of dollars):Other Income, netJune 30, 2013July 1, 2012Not Designated as Hedging Instruments:Realized Gain$27$ 18Realized (loss)$(39)$(438)Unrealized gain (loss)$395$(640)Fair Value of Financial Instruments:The fair value of our cash and cash equivalents, accountsreceivable, accounts payable, and borrowings under credit facility approximated book value as of June30, 2013 and July 1, 2012. Fair Value is defined as the exchange price that would be received for an assetor paid for a liability (an exit price) in the principal or most advantageous market for the asset or liability inan orderly transaction between market participants on the measurement date. Valuation techniques usedto measurefair value must maximize the use of observable inputs and minimize the use of unobservableinputs. There is an established fair value hierarchy based on three levels of inputs, of which the first twoareconsidered observable and the last unobservable. Level 1 – Quoted prices in active markets foridentical assets or liabilities. These aretypically obtained from real-time quotes for transactions in activeexchange markets involving identical assets. Level 2 – Inputs, other than quoted prices included withinLevel 1, which areobservable for the asset or liability, either directly or indirectly. These are typicallyobtained from readily-available pricing sources for comparable instruments. Level 3 – Unobservableinputs, wherethere is little or no market activity for the asset or liability. These inputs reflect the reportingentity’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 ourfinancial assets and liabilities measured at fair value on a recurring basis as of June 30, 2013 and July 1,2012 (thousands of dollars):June 30, 2013 July 1, 2012 Level 1Level 2Level 3TotalLevel 1Level 2Level 3TotalAssets:Rabbi Trust Assets:Stock Index Funds:Small Cap$ 115$ -$- $ 115$ 209$ -$- $ 209Mid Cap114-- 114206-- 206Large Cap115-- 115640-- 640U.S. Treasury Securities --- -2,512-- 2,512Cash and Cash Equivalents1,193-- 1,193806-- 806Mexican peso option contracts-----80-80Total assets at fair value $1,537$ -$- $1,537$4,373$80$- $4,453Liabilities:Mexican peso option contracts$-$ -$- $ -$ -$475$- $ 475NOTES TO FINANCIAL STATEMENTSNOTES TO FINANCIAL STATEMENTS2013STRATTECAnnualReport33The Rabbi Trust assets fund our supplemental executive retirement plan and are included inOther Current Assets in the accompanying Consolidated Balance Sheets. The Rabbi Trust assets areclassified as Level 1 assets. Refer to discussion of Mexican peso option contracts under DerivativeInstruments above. The fair value of the Mexican Peso option contracts are based on an optionpricing model that considers the remaining term, current exchange rate and volatility of the underlyingforeign currency base. There were no transfers between Level 1 and Level 2 assets during 2013.Receivables:Receivables consist primarily of trade receivables due from Original EquipmentManufacturers in the automotive industry and locksmith distributors relating to our service andaftermarket sales. We evaluate the collectability of receivables based on a number of factors. Anallowance for doubtful accounts is recorded for significant past due receivable balances based on areview of the past due items, general economic conditions and the industry as a whole. Changes inthe allowance for doubtful accounts were as follows (thousands of dollars):Balance,Provision NetBalance,Beginningfor Doubtful(Write-Offs)End ofof Year AccountsRecoveriesYearYear ended June 30, 2013$500$ -$ -$500Year ended July 1, 2012$400$116$ (16)$500Year ended July 3, 2011$400$ -$ -$400Inventories:Inventories are comprised of material, direct labor and manufacturing overhead,and arestated at the lower of cost or market using the first-in, first-out (“FIFO”) cost method ofaccounting. Inventories consisted of the following (thousands of dollars):June 30, 2013July 1, 2012Finished products$6,966$5,313Work in process6,1645,659Purchased materials 12,68211,56425,81222,536Excess and obsolete reserve (1,500)(1,300)Inventories, net$24,312$21,236Werecordareserve for excess and obsolete inventory based on historical and estimated futuredemand and market conditions. The reserve level is determined by comparing inventory levels ofindividual materials and parts to historical usage and estimated future sales by analyzing the age ofthe inventory in order to identify specific materials and parts that are unlikely to be sold. Technicalobsolescence and other known factors arealso considered in evaluating the reserve level. The activityrelated to the excess and obsolete inventory reserve was as follows (thousands of dollars):Balance,ProvisionBalance,BeginningCharged toAmountsEnd ofof Year ExpenseWritten OffYearYear ended June 30, 2013$1,300$511$311$1,500Year ended July 1, 2012$1,200$385$285$1,300Year ended July 3, 2011$1,418$334$552$1,200Customer Tooling in Progress:We incur costs related to tooling used in componentproduction and assembly. Costs for development of certain tooling, which will be directly reimbursed bythe customer whose parts are produced from the tool, are accumulated on the balance sheet and arethen billed to the customer. The accumulated costs are billed upon formal acceptance by the customerof products produced with the individual tool. Other tooling costs are not directly reimbursed by thecustomer.These costs arecapitalized and amortized over the life of the related product based on thefact that the related tool will be used over the life of the supply arrangement. To the extent thatestimated costs exceed expected reimbursement from the customer we will recognize a loss.NOTES TO FINANCIAL STATEMENTS2013STRATTECAnnualReport34Repair and Maintenance Supply Parts:We maintain an inventory of repair and maintenancesupply parts in support of operations. This inventory includes critical repair parts for all productionequipment as well as general maintenance items. The inventory of critical repair parts is required toavoid disruptions in our customers’ just-in-time production schedules due to a lack of spare partswhen equipment break-downs occur. All required critical repair parts are on hand when the relatedproduction equipment is placed in service and maintained to satisfy the customer model life productionand service requirements, which may be 12 to 15 years. As repair parts are used, additional repairparts are purchased to maintain a minimum level of spare parts inventory. Depending on maintenancerequirements during the life of the equipment, excess quantities of repair parts arise. Excess quantitiesare kept on hand and are not disposed of until the equipment is no longer in service. A repair andmaintenance supply parts reserve is maintained to recognize the normal adjustment of inventory forobsolete and slow moving supply and maintenance parts. The adequacy of the reserve is reviewedperiodically in relation to the repair parts inventory balances. The gross balance of the repair andmaintenance supply parts inventory was approximately $2.0 million at June 30, 2013 and $1.9 millionat July 1, 2012. The repair and maintenance supply parts inventory balance is included in Other CurrentAssets in the accompanying Consolidated Balance Sheets. The activity related to the repair andmaintenance supply parts reserve was as follows (thousands of dollars):Balance,ProvisionBalance,BeginningCharged toAmountsEnd ofof Year ExpenseWritten OffYearYear ended June 30, 2013$500$195$195$500Year ended July 1, 2012$695$200$395$500Year ended July 3, 2011$680$ 78$63$695Intangibles:Intangible assets that have defined useful lives acquired in the purchase of the DelphiPower Products business in 2009 consist of patents, engineering drawings and software. The intangibleassets balance is included in Other Long-term Assets in the accompanying Consolidated Balance Sheets.The carrying value and accumulated amortization were as follows (thousands of dollars):June 30, 2013July 1, 2012Patents, engineering drawings and software$890$890Less: accumulated amortization(453)(354)$437$536The remaining useful life of the intangible assets in the table above is approximately 4.4 years.Intangible amortization expense was $99,000 for each of the years ended June 30, 2013, July 1, 2012and July 3, 2011. Intangible amortization expense is expected to be $99,000 in each of fiscal year2014through 2017 and $41,000 in fiscal 2018.Property, Plant and Equipment: Property, plant and equipment are stated at cost. Property,plant and equipment are depreciated on a straight-line basis over the estimated useful lives of theassets as follows:ClassificationExpected Useful LivesLand improvements20 yearsBuildings and improvements20 to 35 yearsMachinery and equipment3 to 10 yearsProperty, plant and equipment consisted of the following (thousands of dollars):June 30, 2013July 1, 2012Land and improvements$3,417$2,809Buildings and improvements19,37118,522Machinery and equipment140,649130,683163,437152,014Less: accumulated depreciation(112,022)(105,684)$51,415$46,330Depreciation expense for the years ended June 30, 2013, July 1, 2012 and July 3, 2011 totaledapproximately $7.4 million, $6.7 million and $6.5 million, respectively.The gross and net book value of property, plant and equipment located outside of the UnitedStates, primarily in Mexico, were as follows (thousands of dollars):June 30, 2013July 1, 2012Gross book value$70,809$62,497Net book value$25,777$20,434NOTES TO FINANCIAL STATEMENTS2013STRATTECAnnualReport35Long-lived assets are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be heldand used is measured by a comparison of the carrying amount of an asset to future net undiscountedcash flows expected to be generated by the asset. If an asset is considered to be impaired, theimpairment recognized is measured by the excess of the carrying amount of the asset over the fair valueof the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value, lessestimated costs to sell. There were no impairments recorded in the years ended June 30, 2013, July 1,2012 or July 3, 2011.Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures formajor renewals and betterments, which significantly extend the useful lives of existing plant andequipment, are capitalized and depreciated. Upon retirement or disposition of plant and equipment, thecost and related accumulated depreciation are removed from the accounts and any resulting gain or lossis recognized in income.Supplier Concentrations:The following inventory purchases were made from major suppliers during each fiscal year noted: Percentage of Number ofFiscal YearInventory PurchasesSuppliers201338%7201241%14201140%11We have long-term contracts or arrangements with most of our suppliers to guarantee theavailability of raw materials and component parts.Labor Concentrations:We had approximately 2,670 full-time associates of which approximately225 or 8.4 percent were represented by a labor union at June 30, 2013. The associates represented by alabor union account for all production associates at our Milwaukee facility. The current contract with theunionized associates is effective through June 29, 2014.Revenue Recognition:Revenue is recognized upon the shipment of products, which is whentitle passes, payment terms are final, we have no remaining obligations and the customer is required topay. Revenue is recognized net of estimated returns and discounts, which is recognized as a deductionfrom revenue at the time of the shipment.Research and Development Costs:Expenditures relating to the development of new productsand processes, including significant improvements and refinements to existing products, are expensedas incurred. Research and development expenditures were approximately $1.3 million in 2013, $1.2million in 2012, and $1.5 million in 2011.Other Income, Net:Net other income included in the accompanying Consolidated Statements ofIncome and Comprehensive Income (Loss) primarily includes foreign currency transaction gains andlosses, realized and unrealized gains and losses on Mexican peso option contracts and Rabbi Trustgains. Foreign currency transaction gains and losses resulted from activity associated with foreigndenominated assets held by our Mexican subsidiaries. We entered into the Mexican peso currencyoption contracts to minimize earnings volatility resulting from changes in exchange rates affecting theU.S. dollar cost of our Mexican operations. The Rabbi Trust funds our supplemental executive retirementplan. The investments held in the Trust are considered trading securities. The impact of these items forthe periods presented was as follows (thousands of dollars):Years EndedJune 30, 2013July 1, 2012July 3, 2011Foreign currency transaction (loss) gain $(395)$1,369$ (836)Rabbi Trust gain 16424384Unrealized gain (loss) on Mexican peso option contracts 395(640)245Realized (loss) gain on Mexican peso option contracts (12)(420)33Other 177249394$329$ 582$220Self Insurance Plans:We have self-insured medical and dental plans covering all eligible U.S.associates. The claims handling process for the self-insured plans aremanaged by a third partyadministrator. Stop-loss insurance coverage limits our liability on a per individual per calendar year basis.The per individual per calendar year stop-loss limit was $150,000 in each calendar year 2010 through2013. Prior to January 1, 2011, each covered individual could receive up to $2 million in total benefitsduring his or her lifetime. Effective January 1, 2011, under Health CareReform, thereis no lifetimemaximum for overall benefits.NOTES TO FINANCIAL STATEMENTS2013STRATTECAnnualReport36The expected ultimate cost for claims incurred under the self-insured medical and dental plans as ofthe balance sheet date is not discounted and is recognized as an expense. The expected ultimate cost ofclaims is estimated based upon the aggregate liability for reported claims and an estimated liability for claimsincurred but not reported, which is based on analysis of historical data, current trends and informationavailable from our third-party administrator. The expected ultimate cost for claims incurred under the self-insured medical and dental plans that has not been paid as of the balance sheet date is included in theaccrued payroll and benefits liabilities amount in our accompanying Consolidated Balance Sheets.Changes in the balance sheet amounts for self-insured plans were as follows (thousands of dollars):Balance,ProvisionBalance,BeginningCharged toEnd ofof Year ExpensePaymentsYearYear ended June 30, 2013$320$3,948$3,848$420Year ended July 1, 2012$320$4,148$4,148$320Year ended July 3, 2011$320$3,077$3,077$320Warranty Reserve:We have a warranty liability recorded related to our exposure to warrantyclaims in the event our products fail to perform as expected, and we may be required to participate inthe repair costs incurred by our customers for such products. The recorded warranty liability balanceinvolves judgment and estimates. Our liability estimate is based on an analysis of historical warrantydata as well as current trends and information, including our customers’ recent extension of theirwarranty programs. In recent fiscal periods, our largest customers have extended their warrantyprotection for their vehicles and have since demanded higher warranty cost sharing arrangementsfrom their suppliers, including STRATTEC. As a result of these actions, during 2012, and 2011 weincreased our provision to cover these exposures. Moreover,in 2011, the warranty provision wasincreased by $1.15 million as a result of our share of the cost associated with a customer’s specificwarranty claim involving our product. The current year warranty provision credit includes the impact offavorable adjustments for warranty claims settled during the year.Changes in the warranty reserve were as follows (thousands of dollars):Balance,ProvisionBalance,BeginningCharged (Credited)End ofof Year to ExpensePaymentsYearYear ended June 30, 2013$4,958$(404)$2,054$2,500Year ended July 1, 2012$3,856$2,050$ 948$4,958Year ended July 3, 2011$1,718$2,807$ 669$3,856Foreign Currency Translation:The financial statements of our foreign subsidiaries and equityinvestees are translated into U.S. dollars using the exchange rate at each balance sheet date for assetsand liabilities and the average exchange rate for each applicable period for sales, costs and expenses.Foreign currency translation adjustments areincluded as a component of other accumulatedcomprehensive loss. Foreign currency transaction gains and losses are included in other income, net inthe accompanying Consolidated Statement of Income and Comprehensive Income (loss). Accumulated Other Comprehensive Loss:Accumulated other comprehensive loss iscomprised of the following (thousands of dollars):June 30, 2013July 1, 2012July 3, 2011Unrecognized pension and postretirementbenefit liabilities, net of tax$18,944$31,762$19,772Foreign currency translation3,2683,9951,978$22,212$35,757$21,750Deferred taxes have not been provided for the foreign currency translation adjustments.Accounting For Stock-Based Compensation:Wemaintain an omnibus stock incentive plan.This plan provides for the granting of stock options, shares of restricted stock and stock appreciationrights. The Boardof Directors has designated 1,700,000 shares of common stock available for thegrant of awards under the plan. Remaining shares available to be granted under the plan as of June 30,2013 were153,993. Awards that expire or are cancelled without delivery of shares become available forre-issuance under the plan. We issue new shares of common stock to satisfy stock option exercises. Nonqualified and incentive stock options and shares of restricted stock have been granted to our officers, outside directors and specified associates under the stock incentive plan. Stock options NOTES TO FINANCIAL STATEMENTS2013STRATTECAnnualReport37granted under the plan may not be issued with an exercise price less than the fair market value of thecommon stock on the date the option is granted. Stock options become exercisable as determined atthe date of grant by the Compensation Committee of our Board of Directors. The options expire 5 to 10years after the grant date unless an earlier expiration date is set at the time of grant. The options vest 1to 4 years after the date of grant. Shares of restricted stock granted under the plan are subject tovesting criteria determined by the Compensation Committee of our Board of Directors at the time theshares are granted and have a minimum vesting period of three years from the date of grant. Restrictedshares granted have voting and dividend rights, regardless of whether the shares are vested orunvested. The restricted stock grants issued to date vest 3 years after the date of grant.The fair value of each stock option grant was estimated as of the date of grant using the Black-Scholes pricing model. The resulting compensation cost for fixed awards with graded vestingschedules is amortized on a straight-line basis over the vesting period for the entire award. Theexpected term of awards granted is determined based on historical experience with similar awards,giving consideration to the contractual terms and vesting schedules. The expected volatility isdetermined based on our historical stock prices over the most recent period commensurate with theexpected term of the award. The risk-free interest rate is based on U.S. Treasury zero-coupon issueswith a remaining term commensurate with the expected term of the award. Expected pre-vestingoption forfeitures are based primarily on historical data. The fair value of each restricted stock grantwas based on the market price of the underlying common stock as of the date of grant. The resultingcompensation cost is amortized on a straight line basis over the vesting period. We record stock basedcompensation only for those awards that are expected to vest.As of June 30, 2013, therewas $550,000 of total unrecognized compensation cost related tostock options granted under the plan. This cost is expected to be recognized over a weighted averageperiod of 10 months. As of June 30, 2013, there was $479,000 of total unrecognized compensationcost related to unvested restricted stock grants outstanding under the plan. This cost is expected to berecognized over a weighted average period of 11 months. Total unrecognized compensation cost willbe adjusted for any futurechanges in estimated and actual forfeitures.Cash received from option exercises was $770,000 in 2013 and $28,000 in each of fiscal year2012 and 2011. The related income tax benefit was $421,000 in 2013, $9,000 in 2012 and $18,000 in2011, respectively.The intrinsic value of stock options exercised and the fair value of stock options vested were asfollows (in thousands of dollars):Years EndedJune 30, 2013July 1, 2012July 3, 2011Intrinsic value of options exercised$1,110$26$44Fair value of stock options vested$266$ 268$293The grant date fair values and assumptions used to determine compensation expense were as follows:Options Granted During201320122011Weighted average grant date fair value:Options issued at grant date market valuen/an/a n/aOptions issued above grant date market value $ 10.48 $ 10.29 $ 7.48Assumptions:Risk free interest rates0.95%1.23% 1.08%Expected volatility57.58%59.88% 59.89%Expected dividend yield 1.69% 1.74%1.54%Expected term (in years)6.06.04.0The range of options outstanding as of June 30, 2013 was as follows:Number of OptionsWeighted Average ExerciseWeighted Average RemainingOutstanding/ExercisablePrice Outstanding/ExercisableContractual Life Outstanding(In Years)$10.92-$25.64224,955/93,455$20.34/$14.846.3$56.08-$63.2546,500/46,500$60.33/$60.331.2$27.19/$29.95Income Taxes: Income taxes are accounted for under the asset and liability method. Deferredtax assets and liabilities are recognized for the future tax consequences attributable to differencesbetween the financial statement carrying amounts of assets and liabilities and their respective taxbases and operating loss carry-forwards. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in which those temporary differences and operating loss carryforwards are expected to be recovered, settled or utilized. The effecton deferred tax assets and liabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it ismore likely than not that a tax benefit will not be realized. We recognize the benefit of an income taxposition only if it is more likely than not (greater than 50 percent) that the tax position will be sustainedupon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit isrecognized. The tax benefits recognized are measured based on the largest benefit that has a greater than50 percent likelihood of being realized upon ultimate settlement. Additionally, we accrue interest andrelated penalties, if applicable, on all tax exposures for which reserves have been established consistentwith jurisdictional tax laws. Interest and penalties on uncertain tax positions are classified in the Provisionfor Income Taxes in the Consolidated Statements of Income and Comprehensive Income (Loss).INVESTMENT IN JOINT VENTURES AND MAJORITY OWNED SUBSIDIARIESWe participate in certain Alliance Agreements with WITTE Automotive (“WITTE”) and ADAC Automotive(“ADAC”). WITTE, of Velbert, Germany, is a privately held automotive supplier. WITTE designs, manufacturesand markets automotive components, including locks and keys, hood latches, rear compartment latches,seat back latches, door handles and specialty fasteners. WITTE’s primary market for these products hasbeen Europe. ADAC, of Grand Rapids, Michigan, is a privately held automotive supplier and manufacturesengineered products, including door handles and other automotive trim parts, utilizing plastic injectionmolding, automated painting and various assembly processes. The Alliance agreements include a set of cross-licensing agreements for the manufacture, distributionand sale of WITTE products by STRATTEC and ADAC in North America, and the manufacture, distributionand sale of STRATTEC and ADAC products by WITTE in Europe. Additionally, a joint venture company,Vehicle Access Systems Technology LLC (“VAST LLC”), in which WITTE, STRATTEC and ADAC each hold aone-third interest, exists to seek opportunities to manufacture and sell the companies’ products in areas ofthe world outside of North America and Europe. VAST do Brasil, a joint venture between VAST LLC and Ifer do Brasil Ltda., services customers in SouthAmerica. VAST Fuzhou, VAST Great Shanghai and VAST China Co. (collectively known as VAST China),provides a base of operations to service our automotive customers in the Asian market. VAST LLC alsomaintains branch offices in South Korea and Japan in support of customer sales and engineering requirements.The VAST LLC investments areaccounted for using the equity method of accounting. The activitiesrelated to the VAST LLC joint ventures resulted in equity loss of joint ventures to STRATTEC of approximately$147,000 during 2013 and $1.1 million during 2012, and equity earnings of joint ventures to STRATTEC ofapproximately $1.2 million during 2011. During 2012 our joint ventures in China and Brazil continued to incurrelocation costs associated with moves to new facilities and start-up costs associated with a new productline. These relocation costs and start-up costs continued for VAST China primarily during the first half of2013. These items resulted in STRATTEC incurring an equity loss of joint ventures in both 2013 and 2012. Inaddition, the 2012 equity loss also included a goodwill impairment charge relating to VAST China.STRATTEC’s portion of this impairment charge amounted to $284,000. Effective November 20, 2009, VASTLLC purchased the 40 percent non-controlling interest owned by its former partners in the joint ventures inChina. Initially, a loan of $2.5 million was made by each partner, STRATTEC, WITTE and ADAC, to fund aportion of the purchase price. In December 2009, $1 million of each partner’sloan balance was repaid.During 2012, each partner’s outstanding principal and accrued interest balance of $1.5 million and $112,000,respectively, were terminated and converted to additional capital contributions by each partner in VAST LLC.During each of 2013 and 2012, cash capital contributions totaling $600,000 weremade to VAST LLC insupport of general operating expenses. STRATTEC’s portion of the cash capital contributions during eachyear totaled $200,000. In fiscal year 2007, we established a new entity with ADAC forming ADAC-STRATTEC LLC, a Delawarelimited liability company.The joint venturewas created to establish injection molding and door handleassembly operations in Mexico. STRATTEC holds a 51 percent interest in ADAC-STRATTEC LLC. A Mexicanentity, ADAC-STRATTEC de Mexico, exists and is wholly owned by ADAC-STRATTEC LLC. ADAC-STRATTEC LLC’s financial results are consolidated with the financial results of STRATTEC and resulted inincreased net income to STRATTEC of approximately $1.1 million in 2013, approximately $1.7 million in2012, and approximately $910,000 in 2011.Effective November 30, 2008, STRATTEC established a new entity,STRATTEC POWER ACCESS LLC(“SPA”), which is 80 percent owned by STRATTEC and 20 percent owned by WITTE. SPA supplies the NorthAmerican portion of the power sliding door,lift gate and deck lid system access control products which wereacquired from Delphi Corporation. The financial results of SPA are consolidated with the financial results ofSTRATTEC and resulted in increased net income to STRATTEC of approximately $1.0 million in 2013,approximately $2.6 million in 2012, and approximately $2.5 million in 2011.NOTES TO FINANCIAL STATEMENTS2013STRATTECAnnualReport38NOTES TO FINANCIAL STATEMENTS2013STRATTECAnnualReport39On April 5, 2013, we acquired a 51 percent ownership interest in NextLock LLC, a newly formedjoint venture which will introduce a new generation of biometric security products based upon thedesigns of Actuator Systems LLC, our partner and the owner of the remaining 49 percent interest. Theinitial capitalization of the NextLock joint venture totaled $1.5 million. STRATTEC’s portion of the initialcapitalization totaled $765,000. During the first half of fiscal 2014, we anticipate the NextLock jointventure will incur start-up costs and losses. We anticipate shipments of the new biometric securityproducts to begin during the second half of fiscal 2014. The equity investment in NextLock for whichwe exercise significant influence but do not control and are not the primary beneficiary, is accountedfor using the equity method. The activities related to NextLock resulted in equity loss of joint venturesto STRATTEC of approximately $78,000 during 2013.Investment in Joint Ventures in the accompanying Consolidated Balance Sheets consisted of thefollowing (in thousands of dollars):June 30, 2013July 1, 2012Investment in VAST LLC$8,479$8,139Investment in NextLock LLC687-$9,166$8,139EQUITY (LOSS) EARNINGS OF JOINT VENTUREAs discussed under Investment in Joint Ventures and Majority Owned Subsidiaries, we hold a one-thirdinterest in VAST LLC, for which we exercise significant influence but do not control and are not the primarybeneficiary. Our investment in VAST LLC is accounted for using the equity method. The following aresummarized statements of operations and summarized balance sheet data for VAST LLC (thousands of dollars):Years EndedJune 30, 2013July 1, 2012July 3, 2011Net sales$92,388$76,373$78,002Cost of goods sold76,75965,21163,286Gross profit15,62911,16214,716Engineering, selling and administrative expense17,27014,9309,527(Loss) income from operations(1,641)(3,768)5,189Other income (expense), net497246(247)(Loss) income before provision forIncome taxes(1,144)(3,522)4,942(Benefit) provision for income taxes(690)(297)1,202Net (loss) income$ (454)$ (3,225)$ 3,740STRATTEC’s share of VAST LLC net(loss) income$(151)$ (1,075)$ 1,247Intercompany profit eliminations 44(1)STRATTEC’s equity (loss) earningsof VAST LLC$(147)$ (1,071)$ 1,246June 30, 2013July 1, 2012Cash and cash equivalents$ 3,801$5,622Receivables, net23,59416,025Inventories, net10,69317,756Other current assets7,89210,207Total current assets45,98049,610Property, plant and equipment, net23,47020,753Other long-term assets4,2183,585Total assets$73,668$73,948Current liabilities$36,128$37,843Long-term liabilities11,80811,381Total liabilities$47,936$49,224Net assets$25,732$24,724STRATTEC’s share of net assets$8,577$8,241CREDIT FACILITIES AND GUARANTEESSTRATTEC has a $25 million secured revolving credit facility (the “STRATTEC Credit Facility”) withBMO Harris Bank N.A. The STRATTEC Credit Facility expires August 1, 2014. ADAC-STRATTEC LLC has a$5 million secured revolving credit facility (the “ADAC-STRATTEC Credit Facility”) with BMO Harris BankN.A, which is guaranteed by STRATTEC. The ADAC-STRATTEC Credit Facility expires June 28, 2015. Anyborrowings under either of the credit facilities will be secured by our U.S. cash balances, accountsreceivable, inventory and fixed assets located in the U.S. Interest on borrowings under these credit facilitiesis at varying rates based, at our option, on the London Interbank Offering Rate plus 1.0 to 1.75 percent orthe bank’s prime rate. Both credit facilities contain a restrictive financial covenant that requires themaintenance of a minimum net worth level. The ADAC-STRATTEC Credit Facility includes an additionalrestrictive financial covenant that requires the maintenance of a minimum fixed charge coverage ratio.There were no outstanding borrowings under the STRATTEC Credit Facility at June 30, 2013 or July 1, 2012.There were no borrowings under the STRATTEC Credit Facility during 2013, 2012 or 2011. Borrowingsunder the ADAC-STRATTEC Credit Facility totaled $2.25 million at June 30, 2013. The average outstandingborrowings and weighted average interest rate on the ADAC-STRATTEC Credit Facility loans wereapproximately $1.7 million and 1.99 percent, respectively, during fiscal 2013. There were no borrowingsunder the ADAC-STRATTEC Credit Facility during 2012 or 2011. We believe that the credit facilities areadequate, along with existing cash balances and cash flow from operations, to meet our anticipated capitalexpenditure, working capital, dividend and operating expenditure requirements.COMMITMENTS AND CONTINGENCIESWehave a reserve for estimated costs to remediate an environmental contamination site at ourMilwaukee facility.The site was contaminated by a solvent spill, which occurred in 1985, from a formerabove ground solvent storage tank located on the east side of the facility. The reserve was initiallyestablished in 1995. Due to changing technology and related costs associated with active remediation of thesite, in fiscal 2010 the reserve was adjusted based on updated third party estimates to adequately cover thecost for active remediation of the contamination. From 1995 through June 30, 2013, costs of approximately$460,000 have been incurred related to the installation of monitoring wells on the property and ongoingmonitoring costs. We monitor and evaluate the site with the use of groundwater monitoring wells that areinstalled on the property. An environmental consultant samples these wells one or two times a year todetermine the status of the contamination and the potential for remediation of the contamination by naturalattenuation, the dissipation of the contamination over time to concentrations below applicable standards. Ifsuch sampling evidences a sufficient degree of and trend toward natural attenuation of the contamination,we may be able to obtain a closure letter from the regulatory authorities resolving the issue without the needfor active remediation. If a sufficient degree and trend toward natural attenuation is not evidenced bysampling, a more active form of remediation beyond natural attenuation may be required. The sampling hasnot yet satisfied all of the requirements for closure by natural attenuation. As a result, sampling continuesand the reserve remains at an amount to reflect the estimated cost of active remediation. The reserve is notmeasured on a discounted basis. Webelieve, based on findings-to-date and known environmentalregulations, that the environmental reserve of $1.4 million at June 30, 2013, is adequate.At June 30, 2013, we had purchase commitments for zinc, aluminum, other purchased parts andnatural gas totaling approximately $11.5 million payable in 2014, $8.8 million payable in 2015 and $2.2million payable in 2016. Minimum rental commitments under all non-cancelable operating leases with a termin excess of one year are payable as follows: 2014-$526,000; 2015-$302,000. Rental expense under all non-cancelable operating leases totaled approximately $604,000 in 2013, $723,000 in 2012 and $783,000 in 2011.INCOME TAXESThe provision for income taxes consisted of the following (thousands of dollars):201320122011Currently payableFederal$(561)$2,116$1,181State185219167Foreign1,8951,2001,3691,5193,5352,717Deferred tax provision (benefit)3,84754(177)$5,366$3,589$2,540NOTES TO FINANCIAL STATEMENTS2013STRATTECAnnualReport40NOTES TO FINANCIAL STATEMENTS2013STRATTECAnnualReport41The items accounting for the difference between income taxes computed at the Federal statutorytax rate and the provision for income taxes were as follows:201320122011U.S. statutory rate34.0%34.1%34.0%State taxes, net of Federal tax benefit2.0(0.1)0.4Foreign subsidiaries(2.2)(3.7)(1.9)Non-controlling interest(3.1)(7.3)(7.2)Valuation allowance(1.0)- 0.5Other2.1(0.3)(0.7)31.8%22.7%25.1%The components of deferred tax assets and (liabilities) were as follows (thousands of dollars):June 30, 2013July 1, 2012Deferred income taxes–current:Repair and maintenance supply parts reserve$ 185$190Payroll-related accruals1,7891,589Environmental reserve523546Inventory reserve486437Allowance for doubtful accounts185190Accrued warranty7031,663Other3967814,2675,396Valuation allowance-(177)$4,267$5,219Deferred income taxes–noncurrent:Accrued pension obligations$(10,572)$(9,482)Unrecognized pension and postretirementbenefit plan liabilities11,30519,467Accumulated depreciation(4,256)(3,023)Stock-based compensation854842Postretirement obligations325728NOL/credit carry-forwards159153Other1,1761,057$(1,009)$9,742Deferred income tax balances reflect the effects of temporary differences between the carryingamounts of assets and liabilities and their tax basis and are stated at enacted tax rates expected to be ineffect when taxes areactually paid or recovered.State operating loss and credit carry-forwards at June 30, 2013 resulted in futurebenefits ofapproximately $159,000. These operating loss carry-forwards expire starting 2014 through 2024. We believethat it is morelikely than not that the results of future operations will generate sufficient taxable income andforeign source income to realize the deferred tax assets. Foreign income before the provision for income taxes was $6.0 million in 2013, $5.3 million in 2012and $3.6 million in 2011. No provision for Federal income taxes was made on earnings of foreignsubsidiaries and joint ventures that are considered permanently invested or that would be offset byforeign tax credits upon distribution. Such undistributed earnings at June 30, 2013 wereapproximately$26.6 million.The total liability for unrecognized tax benefits was $1.7 million as of June 30, 2013 and was included inOther Long-term Liabilities in the accompanying Consolidated Balance Sheets, and $1.7 million as of July 1,2012 and was included in Accrued Liabilities: Income Taxes in the accompanying Consolidated BalanceSheets. This liability includes approximately $1.5 million of unrecognized tax benefits at June 30, 2013 and$1.5 million at July 1, 2012 and approximately $195,000 of accrued interest at June 30, 2013 and $187,000at July 1, 2012. This liability does not include an amount for accrued penalties. The amount of unrecognizedtax benefits that, if recognized, would affect the effective tax rate was approximately $1.0 million at June 30,2013 and $1.2 million at July 1, 2012. We recognize interest and penalties related to unrecognized taxbenefits in the provision for income taxes.NOTES TO FINANCIAL STATEMENTS2013STRATTECAnnualReport42Areconciliation of the beginning and ending amount of unrecognized tax benefits is as follows forthe years ended June 30, 2013 and July 1, 2012 (thousands of dollars):Year EndedJune 30, 2013July 1, 2012Unrecognized tax benefits, beginning of year$1,541$1,500Gross increases – tax positions in prior years--Gross decreases – tax positions in prior years(47)(2)Gross increases – current period tax positions5143Tax Years Closed(35)-Unrecognized tax benefits, end of year$1,510$1,541We or one of our subsidiaries files income tax returns in the United States (Federal), Wisconsin(state), Michigan (state) and various other states, Mexico and other foreign jurisdictions. Tax yearsopen to examination by tax authorities under the statute of limitations include fiscal 2006 through2013 for Federal, fiscal 2009 through 2013 for most states and calendar 2008 through 2012 forforeign jurisdictions. RETIREMENT PLANS AND POSTRETIREMENT COSTSWe have a qualified, noncontributory defined benefit pension plan covering substantially all U.S.associates. Benefits are based on years of service and final average compensation. Our policy is to fund atleast the minimum actuarially computed annual contribution required under the Employee Retirement IncomeSecurity Act of 1974 (ERISA). Plan assets consist primarily of listed equity and fixed income securities.Effective January 1, 2010, an amendment to the qualified defined benefit pension plan discontinued thebenefit accruals for salary increases and credited service rendered after December 31, 2009.We have a noncontributory supplemental executive retirement plan (“SERP”), which is anonqualified defined benefit plan that essentially mirrors the qualified plan, but provides benefits inexcess of certain limits placed on our qualified retirement plan by the Internal Revenue Code. The SERPwill pay supplemental pension benefits to certain key associates upon retirement based upon theassociates’ years of service and compensation. The SERP is being funded through a Rabbi Trust withBMO Harris Bank N.A. During fiscal 2013, SERP benefits of approximately $5.8 million were cash settledusing Rabbi Trust assets and current cash balances. We incurred a settlement charge to operations ofapproximately $2.1 million pre-tax as a result of a requirement to expense a portion of the unrealizedactuarial losses due to the settlement of the SERP obligation. The charge had no effect on our aggregateequity balance because the unrealized actuarial losses werepreviously recognized during prior periods inaccumulated other comprehensive loss. Accordingly, the effect of the settlement charge on our retainedearnings was offset by a corresponding reduction in accumulated other comprehensive loss. The RabbiTrust assets had a value of $1.5 million at June 30, 2013 and $4.4 million at July 1, 2012. The RabbiTrust assets are included in Other Current Assets in the accompanying Consolidated Balance Sheets.The projected benefit obligation was $1.5 million at June 30, 2013 and $7.2 million at July 1, 2012. TheSERP liabilities are included in the pension tables below. However, the Rabbi Trust assets are excludedfrom the table as they do not qualify as plan assets.We also sponsor a postretirement health care plan for all U.S. associates hired prior to June 1,2001. The expected cost of retiree health care benefits is recognized during the years the associateswho are covered under the plan render service. Effective January 1, 2010, an amendment to thepostretirement health care plan limited the benefit for future eligible retirees to $4,000 per plan year andis subject to a maximum five year coverage period based on the associate’s retirement date and age.The postretirement health care plan is unfunded.Amounts included in accumulated other comprehensive loss, net of tax, at June 30, 2013, whichhave not yet been recognized in net periodic benefit cost are as follows (thousands of dollars):Pension and SERP BenefitsPostretirement BenefitsPrior service cost (credit)$37$(2,662)Net actuarial loss17,2564,313$17,293$ 1,651Included in accumulated other comprehensive loss at June 30, 2013 are prior service costs of$12,000 ($7,000 net of tax) and unrecognized net actuarial losses of $2.7 million ($1.7 million net of tax)which are expected to be recognized in pension and SERP net periodic benefit cost during fiscal 2014. Included in accumulated other comprehensive loss at June 30, 2013 are prior service credits of$764,000 ($474,000 net of tax) and unrecognized net actuarial losses of $847,000 ($525,000 net of tax)which are expected to be recognized in postretirement net periodic benefit cost during fiscal 2014.The following tables summarize the pension, SERP and postretirement plans’ income and expense,funded status and actuarial assumptions for the years indicated (thousands of dollars). We use a June 30measurement date for our pension and postretirement plans.NOTES TO FINANCIAL STATEMENTS2013STRATTECAnnualReport43Pension and SERP BenefitsPostretirement Benefits201320122011201320122011COMPONENTS OF NET PERIODIC BENEFIT COST:Service cost$216$ 150$ 70$15$ 11$10Interest cost4,4474,7844,692181227275Expected return on plan assets(6,126)(6,411)(6,445)---Amortization of prior service cost (credit)121212(764)(764)(764)Amortization of unrecognized net loss4,4532,4142,504898673645Settlement loss2,144-----Net periodic benefit cost$5,146$949$833$ 330$ 147$166Pension and SERP BenefitsPostretirement BenefitsJune 30,July 1,June 30,July 1,2013201220132012WEIGHTED-AVERAGE ASSUMPTIONS:Benefit Obligations:Discount rate5.02%4.56%5.02%4.56%Expected return on plan assets7.5%7.5%n/an/aRate of compensation increases - SERP3.0%3.0%n/an/aNet Periodic Benefit Cost:Discount rate4.56%5.57%4.56%5.57%Expected returnon plan assets7.5%7.8%n/an/aRate of compensation increases - SERP3.0%3.0%n/an/aPension and SERP BenefitsPostretirement Benefits2013201220132012CHANGE IN PROJECTED BENEFIT OBLIGATION:Benefit obligation at beginning of year$103,383$ 89,609$ 4,475$ 4,586Service cost2161501511Interest cost4,4474,784181227 Actuarial (gain) loss(8,381)12,663239917Benefits paid(9,750)(3,823)(1,370)(1,266)Benefit obligation at end of year$89,915$103,383$3,540$4,475CHANGE IN PLAN ASSETS:Fair value of plan assets at beginning of year$79,517$83,023$-$ -Actual return on plan assets11,914(1,683)--Employer contribution8,7532,0001,3701,266Benefits paid(9,750)(3,823)(1,370)(1,266)Fair value of plan assets at end of year$90,434$79,517$-$-Funded status–prepaid (accrued) benefit obligations$519$(23,866)$ (3,540)$(4,475)AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE SHEETS:Other long-term assets$1,983$-$-$ -Accrued payroll and benefits(current liabilities)-(5,664)(823)(1,010)Accrued benefit obligations(long-term liabilities)(1,464)(18,202)(2,717)(3,465)Net amount recognized$519$(23,866)$(3,540)$(4,475)CHANGES IN PLAN ASSETS AND BENEFIT OBLIGATIONS RECOGNIZED IN OTHER COMPREHENSIVE INCOME:Net periodic benefit cost$5,146$949$330$147Net actuarial (gain) loss(14,170)20,756238917Amortization of prior service (cost) credits(12)(12)764764Amortization of unrecognized net loss(6,597)(2,414)(898)(673)Total recognized in other comprehensiveincome, before tax(20,779)18,3301041,008Total recognized in net periodic benefit cost and other comprehensive income$ (15,633)$ 19,279$434$1,155NOTES TO FINANCIAL STATEMENTS2013STRATTECAnnualReport44The pension benefits have a separately determined accumulated benefit obligation, which is theactuarial present value of benefits based on service rendered and current and past compensation levels.This differs from the projected benefit obligation in that it includes no assumptions about futurecompensation levels. The following table summarizes the accumulated benefit obligations and projectedbenefit obligations for the pension and SERP (thousands of dollars):PensionSERPJune 30,2013July 1,2012June 30,2013July 1,2012Accumulated benefit obligation$88,451$96,167$1,020$6,629Projected benefit obligation$88,451$96,167$1,464$7,216For measurement purposes, a 7.5 percent annual rate increase in the per capita cost of covered healthcare benefits was assumed for fiscal 2014; the rate was assumed to decrease gradually to 5 percent by the year2018 and remain at that level thereafter relating to retirees prior to January 1, 2010.The health care cost trend assumption has a significant effect on the postretirement benefit amountsreported. A 1% change in the health care cost trend rates would have the following effects (thousands of dollars):1% Increase1% DecreaseEffect on total of service and interest cost components in fiscal 2013$ 3$ (3)Effect on postretirement benefit obligation as of June 30, 2013$59$(57)We employ a total return investment approach whereby a mix of equities and fixed income investments areused to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is establishedthrough careful consideration of short and long-term plan liabilities, plan funded status and corporate financialcondition. The investment portfolio primarily contains a diversified blend of equity and fixed income investments.Furthermore, equity investments are diversified across U.S. and non-U.S. stocks, as well as growth and valuestyle managers, and small, mid and large market capitalizations. The investment portfolio does not include anyrealestate holdings, but has a small allocation to hedge funds. The investment policy of the plan prohibitsinvestment in STRATTEC stock. Investment risk is measured and monitored on an ongoing basis throughperiodic investment portfolio reviews, annual liability measurements and periodic asset/liability studies. Thepension plan weighted-average asset allocations by asset category are as follows:Target AllocationJune 30,2013July 1,2012Equity investments70%64%64%Fixed-income investments303032Other-64Total100%100%100%The following is a summary,by asset category,of the fair value of pension plan assets at the June 30,2013 and June 30, 2012 measurement dates (thousands of dollars):June 30, 2013 June 30, 2012 Level 1Level 2Level 3TotalLevel 1Level 2Level 3TotalAsset CategoryCash and cash equivalents$-$ 4,572$ - $ 4,572$ 3,411$ -$ - $ 3,411Equity Securities/Funds:Small Cap13,681-- 13,68110,707-- 10,707Mid Cap9,048-- 9,0488,404-- 8,404Large Cap18,039--18,03917,872-- 17,872 International17,600-- 17,60013,650-- 13,650Fixed IncomeBond Funds/Bonds1,02421,383- 22,40722,313-- 22,313Hedge Funds --5,0875,087--3,1603,160Total$59,392$25,955$ 5,087 $90,434$76,357$ -$ 3,160 $79,517The following table summarizes the changes in Level 3 investments for the pension plan assets (thousands of dollars):RealizedFair ValueNet Purchasesand UnrealizedFair ValueJune 30, 2012 and SalesGain, netJune 30, 2013Hedge Funds$3,160$1,420$507$5,087There were no transfers in or out of Level 3 investments during the year ended June 30, 2013.The expected long-term rate of returnon U.S. pension plan assets used to calculate the year-end 2013projected benefit obligation was 7.5 percent. The target asset allocation is 70 percent public equity and 30percent fixed income. The 7.5 percent is approximated by applying returns of 9.5 percent on public equity and 3percent on fixed income to the target allocation. The actual historical returns are also relevant. Annualizedreturns for periods ended June 30, 2013 were 5.33 percent for 5 years, 7.28 percent for 10 years, 5.65 percentfor 15 years, 7.53 percent for 20 years, 8.26 percent for 25 years and 9.32 percent for 30 years.We expect to contribute approximately $3 million to our qualified pension plan and $823,000 to ourpostretirement health careplan in fiscal 2014. Wedo not expect to make contributions to our SERP in fiscal2014. The following benefit payments, which reflect expected future service, as appropriate, are expected to bepaid (thousands of dollars):NOTES TO FINANCIAL STATEMENTS2013STRATTECAnnualReport45Pension and SERP BenefitsPostretirement Benefits2014$4,318$8232015$ 5,269$ 7242016 $ 5,030$ 5942017$ 5,240$ 4912018$ 5,463$ 3922019-2023$30,903$797All U.S. associates may participate in our 401(k) Plan. We contribute 100 percent up to the first 5percent of eligible compensation that a participant contributes to the plan. Our contributions to the 401(k)Plan totaled approximately $1.5 million in 2013, $1.4 million in 2012 and $1.3 million in 2011.SHAREHOLDERS’ EQUITYWe have 12,000,000 shares of authorized common stock, par value $.01 per share, with 3,372,029 and3,303,784 shares outstanding at June 30, 2013 and July 1, 2012, respectively. Holders of our common stockare entitled to one vote for each share on all matters voted on by shareholders.Our Board of Directors authorized a stock repurchase program to buy back up to 3,839,395 outstandingshares as of June 30, 2013. As of June 30, 2013, 3,655,322 shares have been repurchased under this programat a cost of approximately $136.4 million. EARNINGS PER SHARE (“EPS”)Basic earnings per share is computed on the basis of the weighted average number of shares ofcommon stock outstanding during the period. Diluted earnings per share is computed on the basis of theweighted average number of shares of common stock plus the potential dilutive common sharesoutstanding during the period using the treasury stock method. Potential dilutive common shares includeoutstanding stock options and restricted stock awards. A reconciliation of the components of the basicand diluted per share computations follows (in thousands, except per share amounts):201320122011Net Income Attributable to STRATTEC$9,375$8,793$5,418Less: Income Attributable to Participating Securities171--Net Income Attributable to Common Shareholders$9,204$8,793$5,418Weighted Average Shares of Common Stock Outstanding 3,3273,3003,285Incremental Shares – Stock based Compensation523038Diluted Weighted Average Shares of Common Stock Outstanding3,3793,3303,323Basic Earnings Per Share$2.77$2.66$1.65Diluted Earnings Per Share$ 2.72$2.64$1.63Net earnings available to participating securities werenot significant in 2012 and 2011. Weconsider unvestedrestricted stock that provides the holder with a non-forfeitable right to receive dividends to be a participating security.As of June 30, 2013, options to purchase 248,000 shares of common stock were excluded from the calculation ofdiluted earnings per share because their inclusion would have been anti-dilutive. As of July 1, 2012, options to purchase248,000 shares of common stock were excluded from the calculation of diluted earnings per share because theirinclusion would have been anti-dilutive. As of July 3, 2011, options to purchase 142,000 shares of common stock wereexcluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.STOCK OPTION AND PURCHASE PLANSAsummary of stock option activity under our stock incentive plan was as follows:Weighted Weighted AverageAggregateAverageRemainingIntrinsic ValueSharesExercise PriceContractual Term (in years)(in thousands)Balance at June 27, 2010297,650$33.01Granted40,000$22.47Exercised(2,600)$10.92Expired(37,650)$60.36Balance at July 3, 2011297,400$28.32Granted40,000$26.53Exercised(2,600)$10.92Expired(2,000)$37.58Balance at July 1, 2012332,800$28.19Granted40,000$25.64Exercised(55,845)$13.78Expired(41,500)$52.68Terminated(4,000)$17.59Balance at June 30, 2013271,455$27.195.4$3,830Exercisable as of:June 30, 2013139,955$29.954.4$2,104July 1, 2012192,700$33.694.5$702July 3, 2011155,800$38.374.8$479Available for grant as of June 30, 2013153,993NOTES TO FINANCIAL STATEMENTS2013STRATTECAnnualReport46Options granted at a price greater than the market value on the date of grant included in the table abovetotaled 40,000 at an exercise price of $25.64 in 2013, 40,000 at an exercise price of $26.53 in 2012 and 40,000at an exercise price of $22.47 in 2011. Asummary of restricted stock activity under our stock incentive plan was as follows:Weighted AverageGrant DateSharesFair ValueNonvested Balance at June 27, 201027,500$29.90Granted20,000$20.66Vested (8,600)$47.78Nonvested Balance at July 3, 201138,900$21.19Granted20,000$23.01Vested(9,300)$29.00Forfeited(200)$23.01Nonvested Balance at July 1, 201249,400$20.45Granted24,150$23.69Vested(10,400)$15.44Forfeited (1,900)$25.49Nonvested Balance at June 30, 201361,250$22.42We have an Employee Stock Purchase Plan to provide substantially all U.S. full-time associates anopportunity to purchase shares of STRATTEC common stock through payroll deductions. A participant maycontribute a maximum of $5,200 per calendar year to the plan. On the last day of each month or if suchdate is not a trading day on the most recent previous trading day, participant account balances are used topurchase shares of our common stock at the average of the highest and lowest reported sales prices of ashare of STRATTEC common stock on the NASDAQ Global Market. A total of 100,000 shares may beissued under the plan. Shares issued from treasury stock under the plan totaled 2,000 at an average priceof $26.88 during 2013, 2,406 at an average price of $22.17 during 2012 and 2,323 at an average price of$26.78 during 2011. A total of 71,351 shares are available for purchase under the plan as of June 30, 2013.EXPORT SALESExport sales aresummarized below (thousands of dollars): 2013 2012 2011Export Sales$111,159$102,022 $103,232Percent of Net Sales37%37%40%These sales were primarily to automotive manufacturing assembly plants in Canada, China,Mexico and Korea.SALES AND RECEIVABLE CONCENTRATIONSales to our largest customers were as follows (thousands of dollars and percent of total net sales):201320122011Sales%Sales%Sales%General Motors Company$56,97219%$ 64,58823%$ 63,61724%FordMotor Company44,77315%33,85412%26,93010%Chrysler Group LLC 95,47632%90,79633%80,88931%$197,22166%$189,23868%$171,43666%Receivables from our largest customers were as follows (thousands of dollars and percent of grossreceivables):June 30,2013July 1,2012Receivables%Receivables%General Motors Company$ 8,67218%$10,23023%Ford Motor Company6,53314%5,73813%Chrysler Group LLC15,69833%14,15731%$30,90365%$30,12567%REPORTS2013STRATTECAnnualReport47REPORT ON MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTINGSTRATTEC SECURITY CORPORATION is responsible for the preparation, integrity, andfair presentation of the consolidated financial statements included in this annual report. Theconsolidated financial statements and notes included in this annual report have beenprepared in conformity with accounting principles generally accepted in the United States ofAmerica and necessarily include some amounts that are based on management’s bestestimates and judgments. We, as management of STRATTEC SECURITY CORPORATION, are responsible forestablishing and maintaining effective internal control over financial reporting that isdesigned to produce reliable financial statements in conformity with United States generallyaccepted accounting principles. The system of internal control over financial reporting as itrelates to the financial statements is evaluated for effectiveness by management and testedfor reliability through a program of internal audits. Actions are taken to correct potentialdeficiencies as they are identified. Any system of internal control, no matter how welldesigned, has inherent limitations, including the possibility that a control can becircumvented or overridden and misstatements due to error or fraud may occur and not bedetected. Also, because of changes in conditions, internal control effectiveness may varyover time. Accordingly,even an effective system of internal control will provide onlyreasonable assurance with respect to financial statement preparation.The Audit Committee of the Company’sBoardof Directors, consisting entirely ofindependent directors, meets regularly with management and the independent registeredpublic accounting firm, and reviews audit plans and results, as well as management’sactions taken in discharging responsibilities for accounting, financial reporting, and internalcontrol. Deloitte & Touche LLP,independent registered public accounting firm, has directand confidential access to the Audit Committee at all times to discuss the results of theirexaminations.Management assessed the Corporation’ssystem of internal control over financialreporting as of June 30, 2013, in relation to criteria for effective internal control over financialreporting as described in Internal Control – Integrated Framework,issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO). Based on theassessment, management concluded that, as of June 30, 2013, its system of internalcontrol over financial reporting was effective and met the criteria of the Internal Control –Integrated Framework.Deloitte & Touche LLP, independent registered public accountingfirm, has issued an attestation report on the Corporation’s internal control over financialreporting, which is included herein.Patrick J. Hansen Senior Vice President and Chief Financial OfficerFrank J. KrejciPresident andChief Executive OfficerREPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRMTo the Board of Directors and Shareholders of STRATTEC SECURITY CORPORATION:We have audited the internal control over financial reporting of STRATTEC SECURITYCORPORATION and subsidiaries (the “Company”) as of June 30, 2013, based on criteriaestablished in Internal Control — Integrated Frameworkissued by the Committee ofSponsoring Organizations of the Treadway Commission. The Company’s management isresponsible for maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting, included in theaccompanying Report on Management’s Assessment of Internal Control over FinancialReporting. Our responsibility is to express an opinion on the Company’s internal control overfinancial reporting based on our audit.We conducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effective internal controlover financial reporting was maintained in all material respects. Our audit included obtainingan understanding of internal control over financial reporting, assessing the risk that amaterial weakness exists, testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides a reasonablebasis for our opinion. Acompany’sinternal control over financial reporting is a process designed by,or underthe supervision of, the company’s principal executive and principal financial officers, orpersons performing similar functions, and effected by the company’sboardof directors,management, and other personnel to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) provide reasonableassurance that transactions arerecorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, and that receiptsand expenditures of the company are being made only in accordance with authorizations ofmanagement and directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or disposition of thecompany’sassets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, includingthe possibility of collusion or improper management override of controls, materialmisstatements due to error or fraud may not be prevented or detected on a timely basis.Also, projections of any evaluation of the effectiveness of the internal control over financialreporting to futureperiods aresubject to the risk that the controls may become inadequatebecause of changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internalcontrol over financial reporting as of June 30, 2013, based on the criteria established inInternal Control — Integrated Frameworkissued by the Committee of SponsoringOrganizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board(United States), the consolidated financial statements as of andfor the year ended June 30, 2013 of the Company and our report dated September 9, 2013expressed an unqualified opinion on those consolidated financial statements.Deloitte & Touche LLP Milwaukee, Wisconsin September 9, 2013REPORTS2013STRATTECAnnualReport48REPORTS2013STRATTECAnnualReport49REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Shareholders of STRATTEC SECURITY CORPORATION:We have audited the accompanying consolidated balance sheets of STRATTECSECURITY CORPORATION and subsidiaries (the “Company”) as of June 30, 2013 and July 1,2012,and the related consolidated statements of income and comprehensive income (loss),shareholders’ equity, and cash flows for each of the three years in the period ended June 30,2013. These consolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidated financialstatements based on our audits.We conducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the consolidated financialstatements are free of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. An audit alsoincludes assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.In our opinion, such consolidated financial statements present fairly,in all materialrespects, the financial position of STRATTEC SECURITY CORPORATION and subsidiariesas of June 30, 2013 and July 1, 2012, and the results of their operations and their cashflows for the three years in the period ended June 30, 2013, in conformity with accountingprinciples generally accepted in the United States of America.We have also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the Company’s internal control over financialreporting as of June 30, 2013, based on the criteria established in Internal Control —Integrated Frameworkissued by the Committee of Sponsoring Organizations of theTreadway Commission and our report dated September 9, 2013 expressed an unqualifiedopinion on the Company’sinternal control over financial reporting.Deloitte & Touche LLP Milwaukee, Wisconsin September 9, 2013FIVE-YEAR FINANCIAL SUMMARYThe financial data for each period presented below reflects the consolidated results of STRATTECSECURITY CORPORATION and its wholly owned Mexican subsidiary and its majority ownedsubsidiaries. Fiscal year 2009 has been retrospectively adjusted for the adoption of a new accountingstandard issued by the Financial Accounting Standards Board (FASB) related to non-controllinginterests in consolidated financial statements. The information below should be read in conjunction with“Management’s Discussion and Analysis,” and the Financial Statements and Notes thereto includedelsewhere herein. The following data are in thousands of dollars except per share amounts.Fiscal Years20132012201120102009INCOME STATEMENT DATANet sales$298,179$279,234$260,933$207,964$126,097Gross profit 53,86650,26342,16333.04213.240Engineering, selling, and administrative expenses34,93433,92033,44329,93925,480Loss on settlement of pension obligation 2,144----Impairment charge---223-Environmental reserve adjustment ---(1,125)-Provision for (recovery of)doubtful accounts---(421)500Income (loss) from operations16,78816,3438,7204,426(12,740)Interest income216911986731Equity (loss) earnings of joint ventures(225)(1,071)1,2461,008245Interest expense(34)(81)(175)(225)(164)Other income, net329582220312804Income (loss) beforetaxes andnon-controlling interest16,87915,84210,1305,607(11,124)Provision (benefit) for income taxes5,3663,5892,5401,666(4,222)Net income (loss)11,51312,2537,5903,941(6,902)Net income (loss) attributable tonon-controlling interest2,1383,4602,172520(780)Net income (loss) attributable toSTRATTEC SECURITY CORPORATION$9,375$8,793$5,418$ 3,421$ (6,122)Earnings (Loss) per share:Basic$2.77$ 2.66$1.65$1.05$ (1.87)Diluted$2.72$ 2.64$1.63$ 1.04$ (1.86)Cash dividends declared per share$0.40$ 0.40$1.20$-$0.30BALANCE SHEET DATANet working capital$55,774$ 44,318$43,414$43,777$41,710Total assets$169,500$166,038$148,088$145,002$128,189Long-term liabilities$6,895$ 21,667$7,036$22,982$ 24,784Total STRATTEC SECURITYCORPORATION Shareholders’ equity$104,218$80,552$86,215$74,126$ 71,418FINANCIAL SUMMARY2013STRATTECAnnualReport50FINANCIAL SUMMARY / PERFORMANCE GRAPH2013STRATTECAnnualReport51QUARTERLY FINANCIAL DATA (UNAUDITED)The following data are in thousands of dollars except per share amounts.Market Price Per ShareQuarterNet SalesGross ProfitBasicDilutedHighLow2013First$70,807$13,713$2,670$0.79$ 0.78$24.50$20.20Second72,24312,3072,3940.710.70$25.00$21.06Third74,65813,2211,0940.320.32$31.83$25.00Fourth80,47114,6253,2170.940.92$42.30$28.00TOTAL$298,179$53,866$ 9,375$2.77$2.722012First$ 66,377$11,504$1,282$0.39$0.39$27.37$20.69Second65,88611,2401,5480.470.47$25.71$19.18Third70,60813,0522,7280.830.82$24.73$18.87Fourth76,36314,4673,2350.980.97$23.24$19.40TOTAL$279,234$50,263$8,793$2.66$2.64Registered shareholders of record at June 30, 2013, were 1,654.PERFORMANCE GRAPHThe chart below shows a comparison of the cumulative return since June 29, 2008 had$100 been invested at the close of business on June 29, 2008 in STRATTEC Common Stock,the NASDAQ Composite Index (all issuers), and the Dow Jones U.S. Auto Parts Index.6/29/086/28/096/27/107/3/117/1/126/30/13STRATTEC**100.0040.3463.8763.7164.58116.19NASDAQ Composite Index100.0080.5693.30124.28132.47155.74Dow Jones U.S. Auto Parts Index100.0073.0993.50157.44121.47174.25*$100 invested on 6/29/08 in stock or index-including reinvestment of dividends. Indexes calculated on a month-end basis..**The Friday fiscal year end closing price of STRATTEC Common Stock on June 27, 2008 was $34.99, the closing price onJune 26, 2009 was $13.90, the closing price on June 25, 2010 was $22.01, the closing price on July 1, 2011 was $21.13,theclosing price on June 29, 2012 was $21.04 and the closing price on June 28, 2013 was $37.36.COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN*Among STRATTEC SECURITY CORPORATION, The NASDAQ Composite Index and The Dow Jones U.S. Auto Parts IndexCash Dividends Declared Per Share$0.100.30--$0.40$0.100.100.10 0.10$0.40EarningsPer ShareNet Income Attributable to STRATTEC2013STRATTECAnnualReport52DIRECTORS / OFFICERSSHAREHOLDERS’ INFORMATIONBOARD OF DIRECTORSHarold M. Stratton II, 65Chairman of the BoardFrank J. Krejci, 63President and Chief Executive OfficerThomas W.Florsheim, Jr., 55Chairman and Chief Executive Officer ofWeyco Group, Inc. Director of Weyco Group, Inc. Michael J. Koss, 59President and Chief Executive Officer of Koss Corporation Director of Koss CorporationDavid R. Zimmer, 67Retired Managing Partner ofStonebridge Business Partners STRATTEC Board of Directors: (Left to Right) Frank J. Krejci, Thomas W. Florsheim, Jr.,Michael J. Koss, David R. Zimmer, Harold M. Stratton II CORPORATE OFFICERSFrank J. Krejci, 63Patrick J. Hansen, 54Senior Vice President-Chief FinancialOfficer, Treasurer and SecretaryRolando J. Guillot, 45Vice President-Mexican OperationsKathryn E. Scherbarth, 57Vice President-Milwaukee OperationsBrian J. Reetz, 55Vice President-Security ProductsRichard P. Messina, 47Vice President-Access ProductsSHAREHOLDERS’INFORMATIONAnnual MeetingThe Annual Meeting of Shareholders willconvene at 8:00 a.m. (CDT) on October 8, 2013, at the Radisson Hotel, 7065 North Port Washington Road,Milwaukee, WI 53217Common StockSTRATTEC SECURITY CORPORATIONcommon stock is traded on the NASDAQGlobal Market under the symbol: STRT.Form 10-KYou may receive a copy of theSTRATTEC SECURITY CORPORATIONForm 10-K, filed with the Securities andExchange Commission, by writing to theSecretary at STRATTEC SECURITYCORPORATION, 3333 W. Good HopeRoad,Milwaukee, WI 53209.Corporate GovernanceTo review the Company’s corporategovernance,board committee chartersand code of business ethics, please visitthe “Corporate Governance” section ofour Web site at www.strattec.com.Shareholder InquiriesCommunications concerning the transferof shares, lost certificates or changes ofaddress should be directedto theTransfer Agent.Transfer Agent and RegistrarWells Fargo Bank, N.A.Shareholder Services1110 Centre Pointe CurveSuite 101Mendota Heights, MN 55120-41001.800.468.9716STRATTEC SECURITY CORPORATION3333 WEST GOOD HOPE ROADMILWAUKEE, WI 53209PHONE 414.247.3333 FAX 414.247.3329www.strattec.com

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