Strattec Security Corp.
Annual Report 2017

Plain-text annual report

2 0 1 7 A n n u a l R e p o r t R E A DY F O R T H E R O A D A H E A D. READY FOR THE ROAD AHEAD. EXPANDING OUR PRODUCT FAMILY WITH A NEW FACILITY IN LEON, MEXICO. STRATTEC STRATEGIC FOCUS EFFICIENT USE OF CAPITAL This annual report contains a significant amount of information about the activity and results of our efforts. It is valuable to clearly articulate the guiding principles which drive the thinking behind our day-to- day decisions and the establishment of our long term strategic direction. COLLABORATION For nearly two decades, we have successfully partnered with Witte Automotive and ADAC Automotive under the brand name of VAST, which is an acronym for Vehicle Access System Technology. We share ideas, expenses, and product development and support each other with manufacturing capabilities. It has resulted in a family of related products and worldwide support to better serve our customers. To better describe our partnership, we are now in the process of re-branding the name to VAST Automotive Group. GLOBALIZATION To service our customers in the automotive industry, we must be able to offer global support. In addition to STRATTEC’s production facilities in the USA and Mexico, through our VAST partnership, our global footprint to support customer needs includes China, India, Germany, Czech Republic, Bulgaria, Brazil, Japan and Korea. Economic Value Added (EVA®) is fundamental to our decision making. Not only are we looking at opportunities to grow our profitability, but we also place significant consideration on the amount of assets needed to achieve our goals. We are mindful of our true cost of capital, not just the prevailing interest rate. Our focus typically has a five year time horizon, which is consistent with the expected life of many vehicle platforms. While we may suffer less than desirable returns in the early years of the investment, we plan for an attractive return over the life of the project. SHARING SUCCESS STRATTEC associates have an opportunity to earn a bonus primarily based on corporate performance. Rewards are calculated using EVA® principles of continuous improvement and generating returns in excess of our cost of capital. In acting like owners, there are years when bonuses are paid and years when bonuses are not paid. ACT LIKE OWNERS STRATTEC is organized with business units featuring clear bottom line responsibility. Each has their own advisory board of directors. We try to duplicate customer/ supplier relationships between departments. 2 0 1 7 A N N U A L R E P O R T STRATTEC SECURITY CORPORATION (“STRATTEC” or the “Company”) designs, develops, manufactures and markets automotive access control products including mechanical locks and keys, electronically enhanced locks and keys, steering column and instrument panel ignition lock housings, latches, power sliding side door systems, power lift gate systems, power deck lid systems, door handles and related products for North American automotive customers. We also supply global automotive manufacturers through a unique strategic relationship with WITTE Automotive of Velbert, Germany and ADAC Automotive of Grand Rapids, Michigan. Under this relationship STRATTEC, WITTE and ADAC market each company’s products to global customers under the “VAST” brand name. Our products are shipped to customer locations in the United States, Canada, Mexico, Europe, South America, Korea, China and India, and we provide full service and aftermarket support. C O N T E N T S LETTER TO THE SHAREHOLDERS 2 FINANCIAL HIGHLIGHTS 4 COMPANY DESCRIPTION 5 STRATTEC EQUIPPED VEHICLE LIST 13 MANAGEMENT’S DISCUSSION AND ANALYSIS 14 FINANCIAL STATEMENTS 34 REPORT OF MANAGEMENT 59 REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 60 FINANCIAL SUMMARY PERFORMANCE GRAPH 62 64 DIRECTORS / OFFICERS / SHAREHOLDERS’ INFORMATION 65 P R O S P E C T I V E I N F O R M AT I O N A number of the matters and subject areas discussed in this Annual Report (see above “Contents” section) contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as “anticipate,” “believe,” “would,” “expect,” “intend,” “may,” “planned,” “potential,” “should,” “will,” and “could.” These include statements regarding expected future financial results, product offerings, global expansion, liquidity needs, financing ability, planned capital expenditures, management's or the Company’s expectations and beliefs, and similar matters discussed in the Letter to the Shareholders, Company’s Management’s Discussion and Analysis, and other sections of this Annual Report. The discussions of such matters and subject areas are qualified by the inherent risks and uncertainties surrounding future expectations generally, and also may materially differ from the Company’s actual future experience. The Company’s business, operations and financial performance are subject to certain risks and uncertainties, which could result in material differences in actual results from the Company’s current expectations. These risks and uncertainties include, but are not limited to, general economic conditions, in particular relating to the automotive industry, customer demand for the Company’s and its customers’ products, competitive and technological developments, customer purchasing actions, changes in warranty provisions and customers’ product recall policies, foreign currency fluctuations, costs of operations and other matters described under “Risk Factors” in the Management’s Discussion and Analysis section of this report. In addition, such uncertainties and other operational matters are discussed further in the Company’s quarterly and annual report filings with the Securities and Exchange Commission. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this Annual Report and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances occurring after the date of this Annual Report. 2 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 L E T T E R T O T H E S H A R E H O L D E R S Dear STRATTEC Shareholders, As a company, we were not satisfied with Fiscal 2017’s performance, both from an earnings and an EVA® perspective. While making progress in certain areas, it was not reflected in our scorecard. Because our financial operating results did not reach satisfactory hurdle rates this past year, we are committed to doing better next year and there are good reasons why this should happen. Fiscal 2017’s profits were reduced due to sizable investments in product engineering that we were making for upcoming production releases. Other impacts came from situations where we could have done better or initiatives which didn’t materialize due to factors beyond our control. For example, our 2015 investment in India was based on aggressive growth plans by our customers. Now General Motors and Ford are either pulling out or cutting back in India. Our efforts toward diversification of technology and markets have not been successful. We originally invested in STRATTEC Advanced Logic to bring new technology to the automotive market while at the same time leveraging our aftermarket distribution system into new non-automotive markets. Fingerprint recognition technology is still promising, but the path to profitability has proved to be much more costly than planned. The business suffered from higher expenses, delayed product launches and slower than expected market acceptance. Without the impact of STRATTEC Advanced Logic, our Earnings Per Share would have been improved by over 20%. Capital expenditures were above normal because of the construction of our new joint venture facility in Leon, Mexico plus the need for new equipment throughout our operations to support additional capacity and new product programs. We are excited about the recent completion of the construction phase of the Leon plant. It is designed to manufacture painted door handles for both existing and future customers currently in, or moving to that region. The start-up costs of building a new factory impacted us throughout Fiscal 2017. We expect these costs to continue over the next two fiscal years, but at a declining rate as we ramp up production. There has been a significant migration of automotive assembly to the central part of Mexico. Ultimately, our investment there will result in a significant increase in sales for ADAC-STRATTEC de Mexico. A C T I O N S For Fiscal 2018, we are focused on efficiently launching new business already won, fine tuning processes, cutting marginally profitable business, reducing costs and making capital investments to insure quality and improve efficiency. We have already taken a number of actions which will have predictable and positive impacts on our profitability in 2018. Effective July 1, we are no longer funding the losses of STRATTEC Advanced Logic. The burden of funding has been shifted to our joint venture partners who are actively trying to move the business forward. A program is now in place to help us better understand the soft costs related to managing and producing some older products. As a result, an initiative is currently underway to phase out and/or institute substantial price increases for products which require inordinate amounts of support. 3 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 L E T T E R T O T H E S H A R E H O L D E R S We have recently reduced salaried headcount to better align our organization with current strategies. While it is always difficult to separate loyal and talented Associates from the company, it is an action that needed to be taken. By realigning priorities, we have freed up talented people to work on more critical projects. A new corporate team has been created to focus on cost reduction and process improvement. It is expected to ultimately generate significant benefits to our bottom line. After winning record amounts of new business in Fiscal Year 2016, this year we were faced with very challenging timelines for design and production. I want to thank our Associates for their efforts to satisfy our customers’ needs and expectations. However, as part of this effort, we were faced with unusually high costs of external engineering services to execute on the new business. Those high engineering costs will not have to be repeated this year as we shift from a design phase to a production phase. Instead of costing money, production will begin to benefit us with additional sales and margin. Lastly, we restructured our organization to ensure that our design and manufacturing processes meet stricter quality standards. A comprehensive Quality Improvement Plan was developed and is currently being implemented. The benefits of those changes are now just beginning to be realized. VA S T VAST (Vehicle Access System Technology) is a unique partnership between STRATTEC and two privately owned companies, WITTE Automotive of Velbert Germany and ADAC Automotive of Grand Rapids, Michigan. We are now in the process of re-branding ourselves as the VAST Automotive Group, which is a better description of our partnership and our global business. Our jointly owned business in China remains strong and is showing good results. We are also seeing the benefits from better coordination between VAST China and the other VAST locations throughout the world. We are pleased with the progress made by our organizations in leveraging our collective strengths, technologies and global footprint. S U M M A RY We have already taken actions to grow our business, focus our strategies and find ways to be more cost efficient and become more profitable. I appreciate the efforts of nearly 4000 STRATTEC Associates for working hard and taking steps to create a bright future for all of us. We are committed to make Fiscal 2018 a better year and to position ourselves for continued growth in profitability. On behalf of your Board of Directors, your management team and myself, thank you, our fellow shareholders, for your continuing support during a year of less favorable results. Sincerely, Frank J. Krejci President & Chief Executive Officer 4 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 F I N A N C I A L H I G H L I G H T S ( I N M I L L I O N S ) Net Sales Gross Profit Income from Operations Net Income Attributable to STRATTEC Total Assets Total Debt STRATTEC Shareholders’ Equity 2017 $417.3 60.2 13.7 7.2 2016 2015 $411.5 $401.4 64.8 72.7 20.9 31.1 20.7 273.7 242.2 230.8 20.0 10.0 140.3 30.0 151.1 139.3 9.1 E C O N O M I C VA L U E A D D E D ( E VA ®) We believe that EVA® represents an accurate measure of STRATTEC’s overall performance and shareholder value. All U.S. associates and many of our Mexico-based salaried associates participate in incentive plans that are based upon our ability to add economic value to the enterprise. The EVA® performance for 2017 was a negative $2.4 million which represents a $4.5 million reduction from 2016. (For further explanation of our EVA® Plan, see our 2017 definitive Proxy Statement.) Net Operating Profit After Cash-Basis Taxes Average Monthly Net Capital Employed Cost of Capital Capital Charge Economic Value Added $129.1 __10% $ 10.5 12.9 $ (2.4) EVA® is not a traditional financial measurement under U.S. GAAP and may not be similar to EVA® calculations used by other companies. However, STRATTEC believes the reporting of EVA® provides investors with greater visibility of economic profit. The following is a reconciliation of the relevant GAAP financial measures to the non-GAAP measures used in the calculation of STRATTEC’s EVA®. Net Operating Profit After Cash-Basis Taxes: 2017 Net Income Attributable to STRATTEC as Reported Deferred Tax Provision Other Net Operating Profit After Cash-Basis Taxes $ 7.2 1.9 1.4 $ 10.5 Average Monthly Net Capital Employed: Total STRATTEC Shareholders’ Equity as Reported at July 2, 2017 $151.1 Long-Term Liabilities 33.1 Long-Term Assets – Other than Property, Plant and Equipment (33.1) (22.6) Other $128.5 Net Capital Employed At July 2, 2017 _ 0.6 Impact of 12 Month Average $129.1 Average Monthly Net Capital Employed EVA® is a registered trademark of Stern, Stewart & Co. C O M PA N Y D E S C R I P T I O N 5 B A S I C B U S I N E S S STRATTEC SECURITY CORPORATION designs, develops, manufactures and markets automotive access control products including mechanical locks and keys, electronically enhanced locks and keys, steering column and instrument panel ignition lock housings, latches, power sliding side door systems, power lift gate systems, power deck lid systems, door handles and related products for North American automotive customers. We also supply global automotive manufacturers through a unique strategic joint venture relationship with WITTE Automotive of Velbert, Germany and ADAC Automotive of Grand Rapids, Michigan called VAST Automotove Group (“VAST”). Under this relationship STRATTEC, WITTE and ADAC market each company’s products to global customers under the VAST brand name. Our products are shipped to customer locations in the United States, Canada, Mexico, Europe, South America, Korea, China and India, and we provide full service and aftermarket support. ADAC-STRATTEC de Mexico received a 2017 World Excellence Award from the Ford Motor Company t r o p e R l a u n n A C E T T A R T S 7 1 0 2 Harley-Davidson Motorcycle Key H I S T O RY The product line that became STRATTEC was part of Briggs & Stratton Corporation’s founding business in 1908. In 1995, STRATTEC was spun off from Briggs & Stratton through a tax-free distribution to the then-existing Briggs & Stratton shareholders and has been an independent public company for over twenty-two years. Our history in the automotive security business spans almost 110 years. STRATTEC has been the world’s largest producer of automotive locks and keys since the late 1920s, and we currently maintain a dominant share of the North American markets for these products. P R O D U C T S Lock Cylinder Our traditional products are lock sets (locks and keys) for cars and light trucks. Typically, two keys are provided with each vehicle lockset. Most of the vehicles we currently supply are using keys with sophisticated radio frequency identification technology for additional theft prevention. Keys with remote entry devices integrated into a single unit and bladeless electronic keys have been added to our product line and are gaining in popularity. Ignition lock housings represent a growing access control product for us. These housings are the mating part for our ignition locks and typically are part of the steering column structure, although there are instrument panel-mounted versions for certain vehicle applications. These housings are either die cast Key Fob from zinc or injection molded plastic and may include electronic components for theft deterrent systems. We are also developing additional access control products, including trunk latches, lift gate latches, tailgate latches, hood latches, side door latches and related hardware. With our acquisition of Delphi Corporation’s Power Products Group in fiscal 2009, we are now supplying power access devices for sliding side doors, lift gates and trunk lids. Through Steering Column Locking Mechanism 6 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 C O M PA N Y D E S C R I P T I O N a joint venture formed with ADAC Automotive during fiscal 2007, we also supply door handle components and related vehicle access hardware. To maintain a strong focus on each of these access control products, we have Product Business Managers who oversee the product’s entire life cycle, including product concept, application, manufacturing, warranty analysis, service/aftermarket, and financial/commercial Key Fob issues. The Product Business Managers work closely with our sales organization, our engineering group, and our manufacturing operations to assure their products are receiving the right amount of quality attention so that their value to STRATTEC and the market place is enhanced. Trunk Latch M A R K E T S We are a direct supplier to OEM automotive and light truck manufacturers as well as other transportation-related manufacturers. Our largest customers are Fiat Chrysler Automobiles, General Motors Company and Ford Motor Company. Our access control product mix varies by customer, but generally our overall sales tend to be highest in lock and key, followed by power access (produced by STRATTEC Power Access), ignition lock housings, the door handle and trim components produced by ADAC-STRATTEC de Mexico and latch mechanisms. Power Sliding Door Direct sales to various OEMs represented approximately 74% of our total sales for fiscal 2017. The remainder of our revenue is received primarily through sales to the OEM service channels, the aftermarket and Tier 1 automotive supplier customers, and sales of certain products to non-automotive commercial customers. Sales to our major automotive customers, both OEM and Tier 1, are coordinated through direct sales personnel located in our Detroit-area office. Sales are also facilitated through daily interaction between our Program Managers, Application Engineers and other product engineering personnel. Sales to other OEM customers are accomplished through a combination of our sales personnel located in Detroit and personnel in our Milwaukee headquarters office. The majority of our OEM products are sold in North America. While some exporting is done to Tier 1 and automotive assembly plants in Europe, Asia and South America, we are in the process of expanding our presence in these markets and elsewhere through the Vehicle El Paso Distribution Service Warehouse Access Systems Technology LLC (VAST LLC) joint venture we jointly own with WITTE Automotive and ADAC Automotive. VAST is described in more detail on pages 8 and 9. OEM service and replacement parts are sold to the OEM’s own service operations. In addition, we distribute our components and security products to the automotive aftermarket through approximately 50 authorized wholesale distributors, as well as other marketers and users of component parts, including export customers. Increasingly, our products find their way into the retail channel, specifically the hardware store channel. Our ability to provide a full line of keys to that channel has been accomplished through the introduction of the STRATTEC “XL” key line. This extension to our line includes keys 7 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 C O M PA N Y D E S C R I P T I O N that we currently do not supply on an OEM basis, including keys for Toyota, Honda and other popular domestic and import vehicles. This extended line of keys enables automotive repair specialists to satisfy consumer needs for repair or replacement parts. Our aftermarket activities are serviced through a warehousing operation in El Paso, Texas. C U S T O M E R S A L E S F O C U S To bring the proper focus to the relationships with our major Trunk Latch customers, we have seven customer-focused teams, each with a Director of Sales, one or two Engineering Program Managers and various Customer Application Engineers. In addition to customer teams for General Motors, Ford and Fiat Chrysler, we currently have teams for New Domestic Vehicle Manufacturers (primarily the Japanese and Korean automotive manufactures), Driver Control/Ignition Lock Housing customers, Tier 1 customers, and Service and Aftermarket customers. Sales and engineering for ADAC-STRATTEC LLC are supported by our partner in this joint venture, ADAC Automotive. Each Sales Director is responsible for the overall relationship between STRATTEC and a specific customer group. Program Managers are responsible for coordinating cross functional activities while managing new product programs for their customers. Push Button Start P R O D U C T E N G I N E E R I N G F O C U S To best serve our customers’ product needs, STRATTEC’s engineering resources are organized into groups which focus on specific access control applications. We currently have six engineering groups: Locks and Keys, Aftermarket, Latches, Power Access Devices, Driver Control/Ignition Lock Housings and Electrical. Each group has a Product Business Manager, an Engineering Manager and a complement of skilled engineers who design and develop products for specific applications. In doing this, each engineering group works closely with the Customer teams, Engineering Program Managers, and Application Engineers. STRATTEC manufactures this Maserati electronic key fob. Underlying this organization is a formalized product development process to identify and meet customer needs in the shortest possible time. By following this streamlined development system, we shorten product lead times, tighten our response to market changes and provide our customers with the optimum value solution to their security/access control requirements. STRATTEC is also ISO/TS 16949 and ISO 14001 certified. This means we embrace the philosophy that quality should exist not only in the finished product, but in every step of our processes as well. Aston Martin vehicles use an electronic key fob and mating docking station developed by STRATTEC exclusively for Aston Martin. C O M PA N Y D E S C R I P T I O N 8 O P E R AT I O N S A significant number of the components that go into our products are manufactured at our headquarters in Milwaukee, Wisconsin. This facility produces zinc die cast components, Milwaukee Headquarters and Manufacturing Facility stampings and milled key blades. We have three owned production facilities currently in operation in Juarez, Mexico operating as STRATTEC de Mexico. Plant No. 1 houses assembly operations for locksets and ignition lock housings. Plant No. 2 was built during fiscal 2009 to replace a leased facility. It houses our key finishing and plastic injection molding operations, as well as dedicated space for the assembly operations of ADAC- STRATTEC de Mexico. Plant No. 3 was purchased in fiscal 2015 and houses both latch and power access assembly operations for STRATTEC Power Access de Mexico. Plant No. 4 is currently under construction in Leon, Mexico and will house our custom paint system for door handles and assembly for ADAC- STRATTEC de Mexico. This facility is planned to be operational during the first quarter of fiscal year 2018. STRATTEC de Mexico (Plant 1) - Assembly Facility t r o p e R l a u n n A C E T T A R T S 7 1 0 2 A D VA N C E D D E V E L O P M E N T Research and development activities are centered around a dedicated research engineering staff we call our Advanced Development Group. This group has the responsibility for developing future products that will keep us in the forefront of the markets we serve. We primarily focus on electronic and mechanical access control products and modularization of related access/security control components. Once our Advanced Development Group establishes a proof-of-concept product utilizing new technology, any further product development is then shifted to our engineering groups for commercialization and product applications. V E H I C L E A C C E S S S Y S T E M S T E C H N O L O G Y L L C ( VA S T ) STRATTEC de Mexico (Plant 2) - Key Finishing and Injection Molding Assembly Facility ADAC-STRATTEC de Mexico STRATTEC de Mexico (Plant 3) - Latch and Power Access Assembly STRATTEC POWER ACCESS de Mexico In fiscal 2001, we entered into a formal alliance with WITTE-Velbert GmbH, an automotive supplier based in Germany which designs, develops, manufactures and markets automotive access control products for European-based customers. This alliance consisted of two initiatives. The first was a set of legal agreements which allowed STRATTEC to manufacture and market WITTE’s core products in North America, and WITTE to manufacture and market STRATTEC’s core products in Europe. The second initiative was a 50:50 joint venture, C O M PA N Y D E S C R I P T I O N 9 ADAC-STRATTEC de Mexico (Plant 4) - Painted Door Handle and Assembly Facility VAST Auburn Hills, Michigan Facility WITTE-STRATTEC LLC, to invest in operations with local partners in strategic markets outside of Europe and North America. In February of 2006, we announced the expansion of this alliance and related joint venture with the addition of a third partner, ADAC Plastics, Inc. ADAC, of Grand Rapids, Michigan, adds North American expertise in door handles, a part of WITTE’s core product line that STRATTEC did not support, and an expertise in color- matched painting of these components. With the expansion of the alliance, we can offer a full range of access control related products available on a global basis to support customer programs. To identify this powerful combination of independent companies focused on working together, we renamed the joint venture Vehicle Access Systems Technology LLC (VAST LLC). We now refer to the combination of the alliance structure and joint venture as “VAST Automotive Group” (VAST). WITTE is now called WITTE Automotive, and ADAC is now doing business as ADAC Automotive. We have adopted a common graphic image in which we share a logo mark and colors, and a specific VAST logo used on the partners’ printed and electronic presentation materials. What is now VAST made investments with a local partner in Brazil in September, 2001, and local partners in China in March, 2002. However, during fiscal 2010, VAST LLC purchased the remaining 40 percent interest of its local partners in the China venture. VAST China is now wholly owned by VAST LLC and had annual net sales of approximately $128 million during fiscal 2017. This was an important step which gives STRATTEC a one-third interest in VAST China’s activities in the important growing Chinese/Asian market. In March, 2014, VAST LLC Seat-back Latches Glove Box Lock Cylinders Rear Compartment Lock Cylinders Ignition Lock Cylinders, Keys, Fobs and Push Button Start Options Ignition Lock Housings Hood Latches Power Liftgates and Trunk Lids Power and Manual Rear Compartment Latches t r o p e R l a u n n A C E T T A R T S 7 1 0 2 Door Handles Door Latches Door Lock Cylinders Power Sliding Doors VAST partner products STRATTEC and STRATTEC POWER ACCESS products C O M PA N Y D E S C R I P T I O N purchased the remaining 49 percent interest of its local partner in Brazil, which had annual net sales of approximately $1 million during fiscal 2017. On April 30, 2015 VAST LLC executed a purchase agreement to become a 50:50 Joint Venture partner with Minda Management Services Limited, an affiliate of both Minda Corporation Limited and Spark Minda, Ashok Minda Group of New Delhi, India (collectively, “Minda”). VAST acquired a fifty percent equity interest in the former Minda-Valeo Security Systems joint venture entity, based in Pune, India, for approximately $12 million. This joint venture entity was renamed Minda-VAST Access Systems (“Minda-VAST”). Minda-VAST has operations in Pune and Delhi and had annual sales of approximately $34 million during fiscal year 2017. Minda is a leading manufacturer of security & access products and handles, for both OEMs and the aftermarket in India. VAST is the embodiment of STRATTEC’s, WITTE’s and ADAC’s globalization strategy. We are developing VAST as a global brand with which we are jointly pursuing business with identified global customers. Those identified customers are General Motors, Ford, Fiat/Chrysler, Volkswagen, Honda, Toyota, Renault/Nissan and Hyundai/Kia. To manage our customer relationships and coordinate global ventures and activities, we have established a VAST Management Group led by a President. The Management Group includes three Vice Presidents, one each from WITTE, STRATTEC and ADAC. With the focus provided by this Management Group, VAST is able to manage global programs with a single point of contact for customers, with the added advantage of providing regional support from the partners’ operating entities. Combined with VAST LLC’s ventures in China and Brazil, and sales/engineering offices in Japan and Korea, this structure establishes our global footprint. G L O B A L P R E S E N C E 1 0 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 1 1 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 C O M PA N Y D E S C R I P T I O N S T R AT T E C L E G A L O W N E R S H I P S T R U C T U R E I N C L U D I N G VA S T STRATTEC Advanced Logic (Delaware LLC) 49% (B) Actuator Systems STRATTEC Power Access LLC (Delaware LLC) 20% (A) 80% 51% ADAC STRATTEC LLC (Delaware LLC) (A) 51% 49% WITTE Velbert GmbH & Co. Kg (E. Witte, WITTE-Velbert) STRATTEC SECURITY CORPORATION (Wisconsin Corporation) ADAC Plastic Inc. (DBA ADAC Automotive) (Michigan Corporation) 331/3 % 331/3 % 331/3 % Vehicle Access Systems Technology LLC (Delaware LLC) 100% 100% 100% 100% 50% (B) (A) STRATTEC Entities consolidated with a non-controlling interest. (B) Entities recorded by STRATTEC on the equity method of accounting via “Equity Earnings (Loss)” A D A C - S T R AT T E C d e M E X I C O During fiscal 2007, we formed a new entity with ADAC Automotive called ADAC-STRATTEC LLC including a wholly owned Mexican subsidiary ADAC-STRATTEC de Mexico (ASdM). The purpose of this joint venture is to produce certain ADAC and STRATTEC products utilizing ADAC’s plastic molding injection expertise and STRATTEC’s assembly capability. ASdM currently operates out of defined space in STRATTEC de Mexico Plant No. 2 located in Juarez, Mexico. Products from this joint venture include non-painted door handle components and exterior trim components for OEM customers producing in North America. STRATTEC owns 51% of this joint venture and its financial results are consolidated into STRATTEC’s financial statements. In our fiscal years ending 2017 and 2016, ASdM was profitable and represented $67.7 and $61.4 million, respectively, of our consolidated net sales. STRATTEC de Mexico Plant No. 4 is currently under construction in Leon, Mexico and will house our custom paint system for door handles and assembly for ADAC-STRATTEC de Mexico. This facility is planned to be operational during the first quarter of fiscal year 2018. STRATTEC has introduced the BOLT line of products, the world’s first codeable padlock. In a simple one- step process, users can code the padlock to their vehicle key. This provides significant convenience by reducing the number of keys users need to secure their lockers, storage sheds and vehicle accessories such as tool boxes, trailer hitches, etc. You can buy this product direct at www.boltlock.com. 1 2 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 C O M PA N Y D E S C R I P T I O N S T R AT T E C P O W E R A C C E S S L L C During fiscal year 2009, we formed a new subsidiary with WITTE Automotive called STRATTEC POWER ACCESS LLC (SPA) to acquire the North American business of the Delphi Power Products Group. WITTE is a 20 percent minority owner. SPA in turn owns a Mexican subsidiary, STRATTEC POWER ACCESS de Mexico. The purpose of this subsidiary is to produce power access devices for sliding side doors, lift gates and trunk lids. STRATTEC POWER ACCESS de Mexico currently operates out of defined space in STRATTEC de Mexico Plant No. 3 located in Juarez, Mexico. Financial results for SPA are consolidated in STRATTEC’s financial statements. For fiscal years ending 2017 and 2016, SPA was profitable and represented $84.5 and $83.7 million, respectively, of our consolidated net sales. S T R AT T E C A D VA N C E D L O G I C L L C During the fourth quarter of fiscal year 2013, we formed a new joint venture with Actuator Systems LLC called NextLock LLC subsequently renamed STRATTEC Advanced Logic. The initial capitalization of the joint venture was $1.5 million. The purpose of this joint venture is to assemble and sell the next generation of biometric security products based upon the residential and commercial designs of Actuator Systems. This joint venture had minimal sales activity in both fiscal 2017 and 2016. During fiscal year 2015, STRATTEC Advanced Logic signed a marketing agreement with Westinghouse Security Products to sell under the Westinghouse brand name (see also www.westinghousesecurity.com). STRATTEC owns 51% of this joint venture and its financial results are accounted for on the equity method of accounting. During fiscal 2018, we, along with our joint venture partner, intend to wind down and discontinue operating the business of STRATTEC Advanced Logic. S E A S O N A L N AT U R E O F T H E B U S I N E S S The manufacturing of components used in automobiles is driven by the normal peaks and valleys associated with the automotive industry. Typically, the months of July and August are relatively slow as summer vacation shutdowns and model year changeovers occur at the automotive assembly plants. September volumes increase rapidly as each new model year begins. This volume strength continues through October and into early November. As the holiday and winter seasons approach, the demand for automobiles slows, as does production. March usually brings a major sales and production increase, which then continues through most of June. This results in our first fiscal quarter sales and operating results typically being our weakest, with the remaining quarters being more consistent. E C O N O M I C VA L U E C O M M I T M E N T The underlying philosophy of our business and the means by which we measure our performance is Economic Value Added (EVA®). Simply stated, economic value is created when our business enterprise yields a return greater than the cost of capital we and our shareholders have invested in STRATTEC. The amount by which our return exceeds the cost of our capital is EVA®. In line with this philosophy, EVA® bonus plans are in effect for all of our U.S. associates, outside directors and many of our Mexico-based salaried associates as an incentive to help positively drive the economic value of our business. STRATTEC’s significant market presence is the result of over a 100-year commitment to creating quality products and systems that are responsive to changing needs. As technologies advance and markets grow, STRATTEC retains that commitment to meeting and exceeding the expectations of our customers, and providing economic value to our shareholders. V E H I C L E L I S T 1 3 2 0 1 8 V E H I C L E S We are proud to be associated with many of the quality vehicles produced in North America and elsewhere. The following model year 2018 cars and light trucks are equipped with STRATTEC products. PA S S E N G E R C A R S Acura NSX Acura TLX Aston Martin DB 11* Aston Martin Rapide * Aston Martin Vantage * Buick Excelle * Buick GL8 * Buick LaCrosse * Buick Verano Buick Regal * Cadillac ATS * Cadillac CT6* Cadillac CTS Cadillac XTS * Chevrolet Bolt Chevrolet Camaro Chevrolet Corvette Chevrolet Cruze * Chevrolet Impala Chevrolet Malibu Chevrolet Sonic * Chevrolet Spin * Chevrolet Volt Chrysler 300 Dodge Challenger Dodge Charger Dodge Viper SRT Ford Fiesta Ford Focus Ford Fusion Ford GT Ford Ka * Ford Mustang Ford Taurus Honda Civic Lincoln MKS Lincoln MKZ Maserati Ghibli * Maserati Quattroporte * Opel Astra * Opel BEV Opel Cascada * Opel Insignia * Opel Meriva * Opel Zafira * Tesla Model S Tesla Model X Tesla Model 3 Volkswagon Jetta L I G H T T R U C K S , VA N S A N D S P O R T U T I L I T Y V E H I C L E S Acura MDX Acura RDX Buick Enclave Buick Encore* Buick Envision* Cadillac Escalade Cadillac Escalade ESV Cadillac XT5 Chevrolet Bolt EV Chevrolet Captiva * Chevrolet Colorado * Chevrolet Equinox Chevrolet Express Van Chevrolet Silverado Pickup Chevrolet Suburban Chevrolet Tahoe Chevrolet Trail Blazer * Chevrolet Trax * Chevrolet Traverse Chrysler Pacifica Dodge Durango Dodge Grand Caravan Dodge Journey Fiat Freemont Ford C-Max * Ford Ecosport Ford Edge Ford Escape Ford Expedition Ford Explorer Ford Flex Ford F-Series Pickup Ford F-Series Super Duty Pickup Ford Transit * GMC Acadia GMC Terrain GMC Canyon * GMC Savana GMC Sierra Pickup GMC Yukon and Yukon XL Honda CRV Honda Odyssey Jeep Cherokee Jeep Compass Jeep Grand Cherokee Jeep Wrangler/Wrangler Unlimited Kia Sedona * Lincoln MKC Lincoln MKT Lincoln MKX Lincoln Navigator Maserati Levante Ram 1500/2500/3500 Pickup Volkswagon Tiguan * Vehicles produced outside of North America, or both in and outside North America. t r o p e R l a u n n A C E T T A R T S 7 1 0 2 1 4 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S The following Discussion and Analysis should be read in conjunction with STRATTEC SECURITY CORPORATION’s accompanying Financial Statements and Notes thereto. Unless otherwise indicated, all references to years or quarters refer to fiscal years or fiscal quarters of STRATTEC. E X E C U T I V E O V E R V I E W Historically, a significant portion of our total net sales are to domestic automotive OEMs (General Motors, Ford and Fiat Chrysler). During the past two decades these customers lost North American market share to the New Domestic automotive manufacturers (primarily the Japanese and Korean automotive manufacturers). In addition to our dependence on our customers’ maintaining their market share, our financial performance depends in large part on conditions in the overall automotive industry, which in turn, are dependent upon the U.S. and global economies. During fiscal years 2017, 2016 and 2015, the above domestic automotive OEMs together represented 60 percent, 63 percent and 65 percent, respectively, of our total net sales. During fiscal years 2017 and 2016, we experienced stronger sales demand for our components from our major North American customers noted above as it relates to light trucks and both sport utility and car based utility vehicles in comparison to passenger cars, which was likely influenced by lower gas prices. If gas prices continue to remain low over the next year, we anticipate this consumer buying trend will continue. Fiscal 2017 net sales were $417 million compared to $401 million in 2016 and $411 million in 2015. Net income attributable to STRATTEC for fiscal 2017 was $7.2 million compared to $9.1 million in 2016 and $20.7 million in 2015. The financial health of our three largest customers continues to improve. General Motors, Ford and Fiat Chrysler continued to report profitable results after implementing significant restructuring plans that modified their cost structures by closing manufacturing facilities, reducing benefits and wages and eliminating certain models and brands in 2009 and 2010. With the new United Auto Workers contracts signed in the United States during November 2015, our major customers will be migrating passenger car production from the United States into Mexico over the next 3-5 years to improve their overall profitability on these vehicles. STRATTEC and our joint venture partner ADAC Automotive are currently building a new production facility in Leon, Mexico to capture these new opportunities as it relates to painted door handles and assemblies in the Mexican market. As we look out into the future, the July 2017 projections from our third-party forecasting service indicate that North American light vehicle production will show steady to flat improvement for the next five years. By model year, based on these projections we are expecting a 2017 build of 17.8 million vehicles, 17.7 million vehicles for 2018, 17.5 million vehicles for 2019, 18.2 million vehicles for 2020 and 18.7 million vehicles for 2021. As part of this third party projection, General Motors Company and the Ford Motor Company are expected to experience flat vehicle production volumes in their production levels during this time period. Fiat Chrysler, however, is expected to slightly decrease production as they eliminate or reduce passenger car production on certain models during this time horizon. Of course, all of these forecasts are subject to variability based on what happens in the overall North American and global economies, especially as it relates to the current levels of employment, availability of consumer credit, home equity values, fluctuating fuel prices, changes in customer preferences regarding product quality issues, including related to recall and product warranty coverage issues, and other key factors that we believe could determine whether consumers can or will purchase new vehicles. Focus and Strategy Going Forward STRATTEC’s long-term strategy is focused on maximizing long-term shareholder value by driving profitable growth. Our management believes productivity improvements and cost reductions are critical to our competitiveness, while enhancing the value we deliver to our customers. In order to accomplish this, we have been pursuing, and we intend to continue to pursue over the foreseeable future, the following objectives as summarized below: • Streamline and standardize processes to increase productivity and improve the quality of our products • Maintain a disciplined and flexible cost structure to leverage scale and optimize asset utilization and procurement • Maintain our strong financial position by deploying capital spending targeted for growth and productivity improvement • Leverage the “VAST Brand” with customer relationships to generate organic growth from global programs • Offer our customers innovative products and cost savings solutions to meet their changing demands • Explore and execute targeted mergers and acquisitions with a disciplined due diligence approach and critical financial analysis to drive shareholder value 1 5 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S We use several key performance indicators to gauge progress toward achieving these objectives. These indicators include net sales growth, operating margin improvement, return on capital employed and cash flow from operations. R E S U LT S O F O P E R AT I O N S 2017 Compared to 2016 Years Ended July 2, 2017 $417.3 July 3, 2016 $401.4 Net Sales (millions of dollars) Net Sales to each of our customers or customer groups in the current year and prior year were as follows (millions of dollars): Years Ended Fiat Chrysler Automobiles General Motors Company Ford Motor Company Tier 1 Customers Commercial and Other OEM Customers Hyundai / Kia Total July 2, 2017 $100.6 88.6 62.3 72.4 60.3 33.1 $417.3 July 3, 2016 $115.9 79.9 57.3 67.3 49.3 31.7 $401.4 Net sales were $417.3 million in 2017 compared to $401.4 million in 2016. Our 2017 fiscal year was the typical 52 weeks while our 2016 fiscal year was 53 weeks. The impact of the additional week of customer shipments during the prior year increased 2016 sales by approximately $7.5 million. Sales to Fiat Chrysler Automobiles in the current year decreased in comparison to the prior year due to lower customer vehicle production volume and lower content on components we supply, in particular on the Chrysler 200, which was discontinued in December 2016, and lower volume during 2017 on the new Chrysler Pacifica Minivan. Increased sales to General Motors Company in the current year over the prior year was attributed to higher customer production volumes and content on vehicles for which we supply components, partially offset by agreed upon price reductions that became effective as of the start of the 2016 calendar year. Increased sales to Ford Motor Company in the current year as compared to the prior year were attributed to increased product content on locksets and latches, in particular for the F-150 pick-up truck. Sales to Tier 1 Customers and Commercial and other OEM Customers during the current year increased in comparison to the prior year as a result of higher electronic content and volume. These customers primarily represent purchasers of vehicle access control products, such as latches, fobs, driver controls, and door handles and related components that have been developed in recent years to complement our historic core business of locks and keys. The increased sales to Hyundai / Kia in the current year over the prior year were due to higher levels of production on the Kia Sedona minivan for which we supply components. Cost of Goods Sold (millions of dollars) $357.2 July 2, 2017 Years Ended July 3, 2016 $336.6 Direct material costs are the most significant component of our cost of goods sold and comprised $236.1 million or 66.1 percent of cost of goods sold in the current year compared to $224.9 million or 66.8 percent of cost of goods sold in the prior year. This increase in our direct material costs of $20.6 million or 6.1 percent was due to increased sales volumes in the current year as compared to the prior year and increased scrap and sorting costs resulting from internal manufacturing process quality issues incurred in the current year as compared to the prior year as well as current year obsolescence costs related to inventory intended for STRATTEC Advanced Logic, LLC (“SAL LLC”), our biometric joint venture. The remaining components of cost of goods sold consist of labor and overhead costs which increased $9.4 million or 8.4 percent to $121.1 million in the current year from $111.7 million in the prior year as the variable portion of these costs increased due to the increase in sales volumes between years. Additionally, the current year as compared to the prior year included higher payroll, benefit, outside service, and maintenance costs related to quality improvement initiatives undertaken during the current year, higher than expected production and expediting costs to meet certain customer schedules, higher royalty costs associated with sales of service parts to aftermarket customers, higher wage costs for our Mexico operations resulting from wage increases implemented to encourage work force retention in consideration of the peso devaluation, and start-up costs related to our new Leon, Mexico facility. These costs were partially offset by a reduction of approximately $5.8 million in the U.S. dollar value of our Mexican operations due to a favorable Mexican peso to U.S. dollar exchange rate between these years as well as a reduction in warranty 1 6 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S expense provisions. The average U.S. dollar/Mexican peso exchange rate increased to approximately 19.29 pesos to the dollar in the current year from approximately 17.22 pesos to the dollar in the prior year. Warranty recoveries and expense provision reversals in the current year totaled $843,000 compared to expense provisions of $583,000 in the prior year. Gross Profit (millions of dollars) Gross Profit as a percentage of net sales Years Ended July 2, 2017 $60.2 14.4% July 3, 2016 $64.8 16.1% The reduction in gross profit and gross profit as a percentage of net sales in the current year as compared to the prior year were the result of agreed upon customer price reductions that became effective at the start of the 2016 calendar year, a less favorable sales mix in the current year as compared to the prior year, which current year included a lower percentage of sales in the power access and OEM service product lines as compared to the prior year period reducing gross profit margins in the current year period, increased costs related to quality improvement initiatives undertaken during the current year, higher than expected production and expediting costs to meet certain customer schedules, higher royalty costs associated with sales of service parts to aftermarket customers, higher wage costs for our Mexican operations, and start-up costs incurred related to our new Leon, Mexico facility, all of which were partially offset by a favorable Mexican peso to U.S. dollar exchange rate affecting the cost of our Mexican operations and a reduction in warranty expense provisions during the current year as compared to the prior year, all as discussed above. Engineering, Selling and Administrative Expenses in the current year and prior year were as follows: Expenses (millions of dollars) Expenses as a percentage of net sales Years Ended July 2, 2017 $46.5 11.1% July 3, 2016 $43.9 10.9% Engineering, selling and administrative expenses increased approximately $2.6 million between years while the prior year included an additional week of expense as a result of the 53 week fiscal year. The increase in these costs in the current year as compared to the prior year was due to higher new product program development costs for which we are utilizing third party vendors for a portion of the development work. Income from operations in the current year was $13.7 million compared to $20.9 million in the prior year. This decrease was the result of reduced gross profit margins during 2017 as well as an increase in engineering, selling and administrative expenses in the current year as compared to the prior year, all as discussed above. The equity earnings (loss) of joint ventures was comprised of the following in the current year and prior year (thousands of dollars): Vehicle Access Systems Technology LLC STRATTEC Advanced Logic, LLC Years Ended July 2, 2017 July 3, 2016 $ 2,593 (1,927) $ 666 $ (639) (1,596) $(2,235) Our Vehicle Access Systems Technology LLC (“VAST LLC”) joint ventures in China and India continue to report profitable operating results while our joint venture in Brazil continues to report losses due to the weak automotive build in that region. The 2016 equity loss of joint ventures for VAST LLC included a $6 million impairment charge related to its Minda-VAST Access Systems joint venture in India. STRATTEC’s portion of this impairment charge totaled $2 million. STRATTEC is not the primary beneficiary and does not control SAL LLC. Accordingly, our investment in SAL LLC is accounted for using the equity method. Even though we maintain a 51 percent ownership interest in SAL LLC, effective with our fiscal 2015 fourth quarter, 100 percent of the funding for SAL LLC was being made through loans from STRATTEC to SAL LLC. Therefore, STRATTEC began recognizing 100 percent of the losses of SAL LLC up to our committed financial support. During fiscal 2018, we, along with our joint venture partner, intend to wind down and discontinue operating the business of SAL LLC. 1 7 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Included in other income, net in the current year and prior year were the following items (thousands of dollars): Foreign Currency Transaction Gain Unrealized Gain (Loss) on Mexican Peso Forward Contracts Realized Loss on Mexican Peso Forward Contracts Rabbi Trust Gain (Loss) Other Years Ended July 2, 2017 $1,128 July 3, 2016 $2,559 2,010 (1,650) 296 523 $2,307 (889) (1,196) (41) 235 $ 668 Foreign currency transaction gains and losses resulted from activity associated with foreign denominated assets held by our Mexican subsidiaries. We entered into the Mexican peso currency forward contracts during fiscal 2016 and 2017 to minimize earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. Unrealized gains and losses recognized as a result of mark-to-market adjustments as of July 2, 2017 may or may not be realized, depending upon the actual Mexican peso to U.S. dollar exchange rates experienced during the balance of the contract period. The Rabbi Trust assets fund our amended and restated supplemental executive retirement plan. The investments held in the Trust are considered trading securities. Our effective income tax rate for 2017 was 26.1 percent compared to 26.4 percent in 2016. Our income tax provision for each of 2017 and 2016 was affected by the non-controlling interest portion of our pre-tax income. The non-controlling interest impacts the effective tax rate as our ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entities are taxed as partnerships for U.S. tax purposes. 2016 Compared to 2015 Net Sales (millions of dollars) Years Ended July 3, 2016 $401.4 June 28, 2015 $411.5 Net Sales to each of our customers or customer groups in 2016 and 2015 were as follows (millions of dollars): Years Ended Fiat Chrysler Automobiles General Motors Company Ford Motor Company Tier 1 Customers Commercial and Other OEM Customers Hyundai / Kia Total July 3, 2016 $115.9 79.9 57.3 67.3 49.3 31.7 $401.4 June 28, 2015 $116.9 105.8 45.5 71.3 41.7 30.3 $411.5 Net sales were $401.4 million in 2016 compared to $411.5 million in 2015. Our 2016 fiscal year was 53 weeks while our 2015 fiscal year was the typical 52 weeks. The impact of the additional week of customer shipments during 2016 increased sales by approximately $7.5 million. The overall reduction in sales in 2016 as compared to 2015 was due to increased service parts sales to General Motors during 2015, as well as 2016 customer vehicle production volume reductions on models for which we supply components, temporary shut-downs at customer production facilities, and agreed upon customer price reductions. The decreased sales to Fiat Chrysler Automobiles in 2016 were due to reduced product content on certain vehicle models for which we supply components. Additionally, during 2016, Fiat Chrysler Automobiles temporarily shutdown production at its Sterling Heights, Michigan and Toluca, Mexico assembly plants which are primarily responsible for the production of the Chrysler 200 and Dodge Journey due to reduced sales demand for these vehicles. This shutdown reduced our sales by $8.9 million during 2016. These impacts were mostly offset by an increase in 2016 in Chrysler Pacifica minivan production volumes for which we supply components. During 2015, Fiat Chrysler implemented a temporary shutdown at its Windsor, Canada assembly plant to re-tool for production of the new Chrysler Pacifica minivan, which shutdown decreased our sales to Fiat Chrysler by $18 million. The negative effect of that shutdown was partially offset by increased service sales during 2015 in comparison to 2016. The decrease in sales to General Motors Company in 2016 was attributed to incremental service parts sales of $34 million shipped in 2015 for parts used to support a recall campaign. Those incremental sales did not continue during 2016. In addition, 2016 included $2.0 million of agreed upon price reductions, which began January 1, 2016 while 2015 included a $3.3 million sales concession that we granted to 1 8 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S General Motors during 2015. Increased sales to Ford Motor Company in 2016 were attributed to higher vehicle production volumes and content on models for which we supply components, in particular for components we supply for F-150 pick-up trucks. Sales to Tier 1 Customers during 2016 decreased in comparison to 2015 due to lower production volume on passenger cars for which we supply driver control and door handle components. Sales to commercial and other OEM Customers during 2016 increased in comparison to 2015. These customers represent purchasers of vehicle access control products, such as latches, fobs, driver controls, and door handles and related components that we have developed in recent years to complement our historic core business of locks and keys. The increase in sales to Hyundai / Kia in 2016 was principally due to higher levels of sales on the Kia Sedona minivan for which we supply components. Cost of Goods Sold (millions of dollars) Years Ended July 3, 2016 June 28, 2015 $336.6 $338.8 Direct material costs are the most significant component of our cost of goods sold and comprised $224.9 million or 66.8 percent of cost of goods sold in 2016 compared to $217.1 million or 64.1 percent of cost of goods sold in 2015. The increase in material costs year over year of $7.8 million or 3.6 percent was impacted by our product sales mix in 2016 as compared to 2015. 2016 included increased sales of power access products as compared to 2015. Power access products typically have a higher purchased content percentage as compared to our other access control products. In addition, increased scrap costs in 2016 associated with new product launches contributed to the year over year increase in material costs. The remaining components of cost of goods sold consist of labor and overhead costs which decreased $10.0 million or 8.2 percent in 2016 as compared to 2015 as the variable portion of these costs decreased due to the reduced sales volumes in 2016. In addition, 2016 included a year-over-year decrease in customer warranty provisions of $8.4 million as 2015 included provisions for expected warranty payments to be settled in future periods, a reduction of approximately $8.7 million in the U.S. dollar value of our Mexican operations due to a favorable Mexican peso to U.S. dollar exchange rate and a reduction of approximately $2.4 million in expense provisions for the accrual of bonuses under our incentive bonus plans between years. Additionally, during 2015, a lump sum bonus totaling $311,000 was paid to our Milwaukee represented hourly workers resulting from the ratification of a new 4-year labor contract. The average U.S. dollar/Mexican peso exchange rate increased to approximately 17.22 pesos to the dollar in 2016 from approximately 14.34 pesos to the dollar in 2015. These favorable impacts were partially offset by higher depreciation expense in 2016, increased 2016 manufacturing start-up costs associated with new product launches, and higher costs during 2016 associated with diversifying our products portfolio. Gross Profit (millions of dollars) Gross Profit as a percentage of net sales $64.8 16.1% July 3, 2016 June 28, 2015 $72.7 17.7% Years Ended The reduction in gross profit in 2016 as compared to 2015 was the result of the reduction in sales partially offset by the reduction in cost of goods sold as discussed above. The reduction in gross profit as a percentage of net sales in 2016 as compared to 2015 was the result of reduced sales of service parts related to the General Motors customer recall campaign noted above, which typically have higher gross profit margins as compared to gross profit margins on parts sold for new vehicle production, agreed upon customer price reductions that became effective at the start of the 2016 calendar year, reduced customer production volumes resulting in less favorable absorption of our fixed manufacturing costs, higher depreciation expense, increased 2016 manufacturing start-up costs associated with new product launches and higher costs associated with diversifying our products portfolio. These unfavorable impacts to the gross profit margin as a percentage of net sales were partially offset by a decrease in expense provisions for the accrual of bonuses under our incentive bonus plans, a reduction in the U.S. dollar value of the cost of our Mexican operations due to a favorable Mexican peso to U.S. dollar exchange rate between these years and a lump sum bonus paid to our Milwaukee represented hourly workers during 2015 resulting from the ratification of a new 4-year labor contract, all as discussed above. Engineering, Selling and Administrative Expenses in 2016 and 2015 were as follows: Expenses (millions of dollars) Expenses as a percentage of net sales Years Ended July 3, 2016 $43.9 10.9% June 28, 2015 $41.5 10.1% 1 9 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Engineering, selling and administrative expenses increased approximately $2.4 million between periods. Higher selling and engineering costs associated with current product programs, an additional week of expense during 2016 as a result of the 53 week fiscal year and higher engineering costs for new programs for which we are utilizing third party vendors for a portion of the development work were partially offset by a reduction of $1.9 million in expense provisions for the accrual of bonuses under our incentive bonus plans in 2016 as compared to 2015. Income from operations in 2016 was $20.9 million compared to $31.1 million in 2015. This decrease was the result of reduced sales and reduced gross profit margins during 2016 as well as an increase in engineering, selling and administrative expenses, all as discussed above. The equity (loss) earnings of joint ventures was comprised of the following in 2016 and 2015 (thousands of dollars): Years Ended July 3, 2016 June 28, 2015 Vehicle Access Systems Technology LLC STRATTEC Advanced Logic, LLC $ (639) (1,596) $ (2,235) $1,251 (2,039) $ (788) The 2016 equity loss of joint ventures for Vehicle Access Systems Technology LLC included a $6 million impairment charge related to its Minda-VAST Access Systems joint venture in India. STRATTEC’s portion of this impairment charge totaled $2 million. STRATTEC is not the primary beneficiary and does not control STRATTEC Advanced Logic, LLC (“SAL LLC”). Accordingly, our investment in SAL LLC is accounted for using the equity method. Even though we maintain a 51 percent ownership interest in SAL LLC, effective with our fiscal 2015 fourth quarter, 100 percent of the funding for SAL LLC was being made through loans from STRATTEC to SAL LLC. Therefore, STRATTEC began recognizing 100 percent of the losses of SAL LLC up to our committed financial support, which losses included write-offs of fixed assets and inventory totaling $381,000 in 2015. In addition, the following losses were included in our 2016 and 2015 Equity (Loss) Earnings of Joint Ventures for SAL LLC (thousands of dollars): Loss on Guarnantee of SAL LLC Vendor Contract Loss on Loan to SAL LLC Loss on Guarantee of SAL LLC Credit Facility Years Ended July 3, 2016 June 28, 2015 $ - 225 247 $ 472 $ 123 100 488 $ 711 Effective November 1, 2014, a license agreement was signed with Westinghouse allowing SAL LLC to do business as Westinghouse Security. Payments required under this license agreement were guaranteed by STRATTEC. As of July 3, 2016 and June 28, 2015, STRATTEC had recorded a liability equal to the estimated fair value of the guarantee of these payments of $250,000, which amount was equal to the future payments required to be made under the license agreement as of these dates. STRATTEC’s proportionate share of the guarantee of these payments based on our ownership percentage in SAL LLC totaled $127,000, and accordingly, our investment in SAL LLC was increased by this amount as of July 3, 2016 and June 28, 2015. Our joint venture partner did not guarantee their proportionate share of the payments required under the license agreement. As a result, in 2015, STRATTEC recorded a loss of $123,000 which was equal to our partner’s proportionate share, based upon their ownership interest in the joint venture, of the fair value of the STRATTEC guarantee. During the fourth quarter of 2015, a loan was made from STRATTEC to SAL LLC in support of operating expenses and working capital needs. As of June 28, 2015, the outstanding loan amount totaled $100,000. A valuation reserve of $100,000 was recorded related to this loan as of June 28, 2015. During 2016, additional loans totaling $225,000 were made from STRATTEC to SAL LLC in support of operating expenses and working capital needs. An additional valuation reserve of $225,000 was recorded related to the additional loans during 2016. As of July 3, 2016, the outstanding loan amount totaled $325,000, which was fully offset by a valuation reserve of $325,000. SAL LLC had a $1.5 million revolving credit facility with BMO Harris Bank N.A. with a maturity date of February 16, 2016 (the “SAL Credit Facility”), which was fully guaranteed by STRATTEC. Outstanding borrowings under the SAL Credit Facility as of February 16, 2016 and June 28, 2015 totaled $1.5 million and $995,000, respectively. SAL LLC did not have cash available to pay the outstanding debt balance as of the maturity date. Therefore, STRATTEC made a payment of $1.5 million on its guarantee on February 16, 2016. Prior to making the guarantee payment, STRATTEC had a recorded liability related to the guarantee of $1.5 million and $995,000 at February 16, 2016 and June 28, 2015, respectively, which amounts were equal to the estimated fair value of the 2 0 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S guarantee as of these dates. STRATTEC’s proportionate share of the guarantee based on our ownership percentage in SAL LLC totaled $765,000 and $507,000, respectively, as of February 16, 2016 and June 28, 2015, and accordingly, our investment in SAL LLC included these amounts as of these dates. Our joint venture partner did not guarantee their proportionate share of the SAL Credit Facility. As a result, we recorded a loss equal to our partner’s proportionate share of the fair value of the STRATTEC guarantee based upon our partner’s ownership interest in the joint venture of $488,000 during fiscal 2015 and $247,000 during 2016. Included in other income, net in 2016 and 2015 were the following items (thousands of dollars): Foreign Currency Transaction Gain Unrealized Loss on Peso Forward Contracts Realized Loss on Peso Forward Contracts Rabbi Trust (Loss) Gain Other Years Ended July 3, 2016 $2,559 June 28, 2015 $3,075 (889) (1,196) (41) 235 $ 668 - - 96 _ 310 $3,481 Foreign currency transaction gains resulted from activity associated with foreign denominated assets held by our Mexican subsidiaries. We entered into the Mexican peso currency forward contracts during fiscal 2016 to minimize earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. Unrealized losses recognized as a result of mark-to-market adjustments as of July 3, 2016 may or may not be realized, depending upon the actual Mexican peso to U.S. dollar exchange rates experienced during the balance of the contract period. The Rabbi Trust assets fund our amended and restated supplemental executive retirement plan. The investments held in the Trust are considered trading securities. Our effective income tax rate for 2016 was 26.4 percent compared to 27.6 percent in 2015. Our income tax provision for 2015 was affected by a lower statutory tax rate for income subject to tax in Mexico as compared to the statutory tax rate for income subject to tax in the U.S. as well as a net reduction in our liability for unrecognized tax benefits of approximately $852,000. Our income tax provision for each of 2016 and 2015 was affected by the non-controlling interest portion of our pre-tax income. The decrease in the effective tax rate between periods was the result of a year-over-year increase in the non-controlling interest percentage of our pre-tax income. The non-controlling interest impacts the effective tax rate as ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entities are taxed as partnerships for U.S. tax purposes. L I Q U I D I T Y A N D C A P I TA L R E S O U R C E S Outstanding Receivable Balances from Major Customers Our primary source of cash flow is from our major customers, which include Fiat Chrysler Automobiles LLC, General Motors Company and Ford Motor Company. As of the date of filing this Annual Report with the Securities and Exchange Commission, all of our customers are making payments on their outstanding accounts receivable in accordance with the payment terms included on their purchase orders. A summary of our outstanding receivable balances from our major customers as of July 2, 2017 was as follows (millions of dollars): Fiat Chrysler Automobiles $ 17.1 General Motors Company $ 13.4 $ 8.6 Ford Motor Company Cash Balances in Mexico We earn a portion of our operating income in Mexico. During 2017, we changed our assertion regarding the permanent reinvestment of earnings from two of our Mexican subsidiaries. Prior to 2017, the accumulated undistributed earnings from such subsidiaries were considered to be permanently reinvested in Mexico. During 2017, the strength of the U.S. dollar to the Mexican peso significantly decreased the U.S. tax cost associated with a distribution from the Mexican subsidiaries as compared to the U.S. tax cost associated with such a distribution in prior periods. Consequently, we changed our assertion regarding the permanent reinvestment of earnings from these Mexican subsidiaries. Such earnings are no longer considered permanently reinvested. We repatriated $15.8 million from Mexico to the U.S. during 2017. As of July 2, 2017, $948,000 of our $8.4 million cash and cash equivalents balance was held in Mexico. These funds, with some restrictions and tax implications, are available for repatriation as deemed necessary. M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S 2 1 Cash Flow Analysis Cash Flows from (millions of dollars): Operating Activities Investing Activities Financing Activities July 2, 2017 $ 23.1 $ (39.5) 9.2 $ Years Ended July 3, 2016 $ 8.2 $ (25.3) $ 7.2 June 28, 2015 $ 31.5 $ (30.8) $ 5.8 The increase in cash provided by operating activities between 2016 and 2017 reflected a net decrease in working capital requirements between the two years of $21.7 million, with the net decrease in our working capital requirements being made up of the following working capital changes (millions of dollars): Accounts Receivable Inventories Customer Tooling Other Assets Accounts Payable and Other Liabilities Increase (Decrease) in Working Capital Requirements Change 2016 2017 $ (3.4) $ 5.1 $ 1.7 $ (7.1) $ 3.9 $ (3.2) $ 1.1 $ 3.5 $ 4.6 $ (4.1) $ 6.0 $ 1.9 $ (5.2) $ 3.0 $ (8.2) The year over year change in the accounts receivable balances reflected a larger increase in accounts receivable balances during 2016 as compared to 2017. Higher sales during the fourth quarter of 2016 as compared to the fourth quarter of 2015 caused receivable balances to increase during fiscal 2016. The increase in the receivable balance during 2017 was the result of sales being more heavily weighted to the end of the fourth quarter of 2017 as compared to the fourth quarter of 2016. The year over year change in inventory reflected an increase in inventory balances as of July 3, 2016, which was the result of lower sales of parts we supply for certain customer vehicle programs towards the end of fiscal 2016. The year over year change in customer tooling balances, which consisted of costs incurred for the development of tooling that will be directly reimbursed by the customer whose parts are produced from the tool, was the result of the timing of tooling development spending required to meet customer production requirements and related customer reimbursements. The year over year change in other assets was the result of a reduction in the income tax recoverable balance in 2017 as compared to an increase in the income tax recoverable balance in 2016, which changes were based on the required income tax provision and the timing and amounts of Federal and state tax payments made. The year over year change in the accounts payable and other liability balances was impacted by changes in accounts payable balances, accrued salaries and benefits balances and warranty reserve balances. The year over year change in accounts payable and accrued liability balances reflected a decrease in working capital requirements in 2017 compared to an increase in working capital requirements in 2016. 2017 included an increase in accounts payable balances of $7.2 million, due to obtaining a change in payment terms from 30 days to 45 days with several large vendors and the timing of purchases and payments with our vendors based on normal payment terms, and an increase of $1.8 million in accrued payroll and benefit liabilities mostly due to an increase in wages and benefits in Mexico, as discussed above under Analysis of Results of Operations. These impacts were partially offset by $2.8 million of customer warranty payments during 2017, which were previously accrued, as well as $843,000 of reversals during 2017 of previously accrued customer warranty accruals. 2016 included cash payments made under our incentive bonus plans of $5.2 million and $3.2 million of customer warranty payments, which were previously accrued, partially offset by an increase in accounts payable balances of $4.6 million as a result of the timing of purchases and payments with our vendors based on normal payment terms. Other significant cash payments impacting net cash provided by operating activities during both the current year and prior year periods included cash contributions made to our qualified pension plan and cash payments made for Federal, state and foreign income taxes. Cash contributions made to our qualified pension plan totaled $5.0 million during 2017 compared to $3.0 million during 2016. Net cash payments and recoveries for Federal, state and foreign income taxes totaled $318,000 during 2017 compared to $4.7 million during 2016. The decrease in cash provided by operating activities between 2015 and 2016 reflected a net increase in working capital requirements between the two years of $23.4 million, with the increase in our working capital requirements being made up of the following working capital changes (millions of dollars): Accounts Receivable Inventories Customer Tooling Other Assets Accounts Payable and Other Liabilities Increase (Decrease) in Working Capital Requirements Change 2015 $ 14.3 $ (9.2) $ (0.4) $ 4.3 $ 5.3 $ (1.8) $ 2.7 $ 3.3 $ 1.5 $ 1.5 2016 $ 5.1 $ 3.9 $ 3.5 $ 6.0 $ 3.0 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 2 2 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S The year over year change in the accounts receivable balances reflected an increase in accounts receivable balances during 2016 compared to a reduction in accounts receivable balances during 2015. Receivable balances were increased at the start of the 2015 fiscal year as a result of $11 million of additional service parts sales in conjunction with General Motors’ recall campaign during the fourth quarter of 2014. The receivable balances related to the additional service parts sales were collected during 2015 reducing the accounts receivable balances during fiscal 2015. Additionally, higher sales during the fourth quarter of 2016 as compared to the fourth quarter of 2015 caused receivable balances to increase during fiscal 2016. The year over year change in customer tooling balances, which consisted of costs incurred for the development of tooling that will be directly reimbursed by the customer whose parts are produced from the tool, was the result of the timing of tooling development spending required to meet customer production requirements and related customer reimbursements. The year over year change in other assets was the result of a larger increase in the income tax recoverable balance in 2016 as compared to 2015, which was based on the required income tax provision and the timing and amounts of Federal and state tax payments made. The year over year change in the accounts payable and other liability balances was impacted by changes in accounts payable balances, accrued salaries and benefits balances and warranty reserve balances. The year over year change in accounts payable balances decreased working capital requirements $12.8 million between years. The changes in the accounts payable balances during each of the 2016 and 2015 years resulted from the timing of purchases and payments with our vendors based on normal payment terms. Additionally, increased accounts payable balances at June 2014 related to the General Motors’ recall campaign which were paid during 2015 increased the 2015 working capital requirements. The year over year change in accrued payroll and benefits balances increased working capital requirements $2.9 million between years as the accrual of bonuses under our incentive bonus program decreased between years. The provision for bonuses under our incentive bonus plans decreased $4.2 million between years while actual cash payments made decreased $2.1 million between years. The year over year change in warranty reserve balances increased working capital requirements $11.4 million between years. Warranty provisions decreased $8.4 million between years while warranty payments increased $2.6 million between years. Other significant cash payments impacting net cash provided by operating activities during both 2016 and 2015 included cash contributions made to our qualified pension plan and cash payments made for Federal, state and foreign income taxes. Cash contributions made to our qualified pension plan totaled $3.0 million during both 2016 and 2015. Cash payments made for Federal, state and foreign income taxes totaled $4.7 million during 2016 compared to $14.8 million during 2015. Net cash used by investing activities of $39.5 million during 2017, $25.3 million during 2016 and $30.8 million during 2015 included capital expenditures of $37.0 million, $23.5 million and $26.1 million, respectively. Capital expenditures during each year were made in support of requirements for new product programs and the upgrade and replacement of existing equipment. The 2017 and 2016 capital expenditures included $12.8 million and $7.0 million, respectively for the purchase of land, equipment and the construction of a new facility in Leon, Mexico, which is expected to be used primarily to paint and assemble door handle products by ADAC-STRATTEC LLC. See further discussion related to this new facility under Future Capital Expenditures below. The 2015 capital expenditures included $2.1 million and $4.5 million for the purchase of additional facilities in Juarez, Mexico and Auburn Hills, Michigan, respectively. The Michigan building is being used as a sales and engineering office and replaced two then leased facilities in Michigan. The Juarez, Mexico building is being used as an additional facility to support current operations and was acquired in anticipation of both new and potential business awards in Mexico. Net cash used by investing activities during 2017, 2016 and 2015 also included an investment in our VAST LLC joint venture of $400,000, $220,000 and $4.4 million, respectively. The 2017 and 2016 investments were made for the purpose of funding general operating expenses for Sistema de Acesso Veicular Ltda (formerly known as VAST do Brasil). The 2015 investment was made in support of the acquisition of a fifty percent equity interest in a joint venture entity, Minda VAST Access Systems, based in Pune, India, and in support of general operating expenses for the Brazilian entity. Additionally, during 2016, a $1.5 million investment in SAL LLC was made as the result of the payment on a guarantee of their debt facility. Loans were made by each partner, STRATTEC, WITTE and ADAC to our joint venture, VAST LLC, totaling $215,000 for each partner in 2015. The loans were made in support of VAST LLC’s purchase of the non-controlling interest in the Brazilian entity and in support of funding general operating expenses of the Brazilian entity. Repayments of this outstanding loan balance totaling $100,000 were made from VAST LLC to each partner during both 2017 and 2016. Loans were made from STRATTEC to SAL LLC totaling $2.2 million during 2017, $225,000 during 2016 and $100,000 during 2015 in support of operating expenses and working capital needs. Net cash provided by financing activities of $9.2 million during 2017 included $36.0 million of borrowings under credit facilities, $241,000 of proceeds from stock purchases and option plan exercises, $21,000 in excess tax benefits from option plan exercises, and $2.9 million in non-controlling interest contributions to ADAC-STRATTEC LLC in accordance with the ADAC-STRATTEC debt facility provisions, partially offset by $26 million for repayments of borrowings under credit facilities, $2.0 million for regular quarterly dividend payments to shareholders and $2.0 million for dividend payments to non-controlling interests in our subsidiaries. Net cash provided by financing activities of $7.2 million during 2016 included $26.5 million of borrowings under credit facilities, $473,000 of proceeds from stock purchases and option plan exercises and $170,000 in excess tax benefits from option plan 2 3 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S exercises, partially offset by $16.5 million for repayments of borrowings under credit facilities, $1.9 million for regular quarterly dividend payments to shareholders and $1.6 million for dividend payments to non-controlling interests in our subsidiaries. Net cash provided by financing activities of $5.8 million during 2015 included $9.0 million of borrowings under credit facilities, $553,000 of proceeds from stock purchases and option plan exercises and $367,000 in excess tax benefits from option plan exercises, partially offset by $1.5 million for repayments of borrowings under credit facilities, $1.7 million for regular quarterly dividend payments to shareholders and $882,000 for dividend payments to non- controlling interests in our subsidiaries. Qualified Defined Benefit Pension Plan Our qualified defined benefit pension plan balance, included in other long-term assets in our accompanying Consolidated Balance Sheets, totaled $13.1 million at July 2, 2017 and $72,000 at July 3, 2016. The change in the other long-term assets balance related to this plan during 2017 was the result of the net impact of pension contributions, the actuarially calculated pension expense, reclassification adjustments from accumulated other comprehensive loss and the impact of the change in the year-end funded status of the plan, which was impacted by excess asset returns and contributions. The 2017 pre-tax changes in plan assets and benefit obligations related to this plan recognized in other comprehensive income increased our other long-term asset balance by approximately $9.2 million at July 2, 2017 compared to July 3, 2016. The resulting tax impact decreased our deferred income tax asset balance by $3.4 million at July 2, 2017 in comparison to the balance as of July 3, 2016. VAST LLC Cash Requirements We currently anticipate that both VAST China and Minda-VAST Access Systems have adequate debt facilities in place over the next fiscal year to cover the future operating and capital requirements of each business. During 2017 and 2016, capital contributions totaling $1.2 million and $660,000, respectively were made to VAST LLC for purposes of funding operations in Brazil. STRATTEC’s portion of the capital contributions totaled $400,000 in 2017 and $220,000 in 2016. During 2015, capital contributions totaling $13.2 million were made to VAST LLC in support of the acquisition of a fifty percent equity interest in a joint venture entity, Minda VAST Access Systems, based in Pune, India, and in support of general operating expenses for Sistema de Acesso Veicular Ltda. STRATTEC’s portion of the capital contributions totaled $4.4 million. Loans were made by each partner, STRATTEC, WITTE and ADAC, to VAST LLC totaling $215,000 for each partner in 2015. The loans were made in support of VAST LLC’s purchase of the non-controlling interest in the Brazilian entity and in support of funding operating costs of the Brazilian entity. Additionally, we anticipate the Brazilian entity will require a capital contribution of approximately $750,000 collectively by all VAST partners to fund operations during fiscal 2018. STRATTEC’s portion of the capital contributions is anticipated to be $250,000. ADAC-STRATTEC LLC Cash Requirements As discussed under Future Capital Expenditures included herein, ADAC-STRATTEC de Mexico (ASdM), a wholly owned subsidiary of ADAC-STRATTEC LLC, which is a joint venture between STRATTEC SECURITY CORPORATION and ADAC Automotive, is in the process of constructing a new manufacturing facility in Leon, Mexico. Total capital expenditures required for the land, facility, paint system and assembly equipment is expected to total approximately $26 million. During 2017 and 2016, capital expenditures for the land, facility and equipment totaled $12.8 million and $7.0 million, respectively. Financing of the required capital expenditures is being completed through a combination of partner capital contributions, bank loans and current operating cash flow. As a result, effective April 27, 2016 the ADAC-STRATTEC Credit Facility was amended to increase the available borrowings under this credit facility from $10 million to $20 million, which was subsequently further increased to $25 million effective June 26, 2017. Under the terms of the amended credit agreement, a capital contribution to ADAC-STRATTEC LLC of $6 million collectively from STRATTEC and ADAC was completed during 2017. STRATTEC’s portion of the required capital contribution was $3.06 million. STRATTEC Advanced Logic, LLC Cash Requirements Beginning with the fourth quarter of fiscal year 2015, STRATTEC provided 100 percent of the financial support to fund the start-up operating losses of SAL LLC due to our partner’s inability to contribute capital to this joint venture. We anticipate STRATTEC will fund 100 percent of the operating costs through the first quarter of fiscal year 2018, which will total approximately $250,000 prior to the anticipated closure of SAL LLC. During fiscal 2018, we, along with our joint venture partner, intend to wind down and discontinue operating the business of SAL LLC. Future Capital Expenditures We anticipate capital expenditures will be approximately $27 million in fiscal 2018 in support of requirements for new product programs, the upgrade and replacement of existing equipment and the completion of the construction of the new facility in Leon, Mexico. On March 17, 2016, ASdM, a wholly owned subsidiary of ADAC-STRATTEC LLC, which is a joint venture between STRATTEC SECURITY CORPORATION and ADAC Automotive, purchased land in Leon, Mexico. ASdM is in the process of constructing a new manufacturing facility on this land. This facility is expected to be used primarily to paint and assemble door handle products and is expected to be completed during our September 2017 fiscal quarter. Currently, the ADAC-STRATTEC LLC joint venture has net sales of approximately $68 million. With newly awarded customer business, we anticipate net sales will increase to approximately $110 million within the next two years. Total capital expenditures required for the land, facility, paint system and assembly equipment is expected to total approximately $26 2 4 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S million. During 2017, capital expenditures for the land, facility and equipment totaled $12.8 million. Capital expenditures made through July 2, 2017 for the land, facility and equipment totaled $19.8 million. Financing of the required capital expenditures is being completed through a combination of partner capital contributions, bank loans and current operating cash flow. Stock Repurchase Program Our Board of Directors has authorized a stock repurchase program to buy back outstanding shares of our common stock. Shares authorized for buy back under the program totaled 3,839,395 at July 2, 2017. A total of 3,655,322 shares have been repurchased over the life of the program through July 2, 2017, at a cost of approximately $136.4 million. No shares were repurchased during fiscal 2017 or 2016. Additional repurchases may occur from time to time and are expected to continue to be funded by cash flow from operations and current cash balances. At this time, we anticipate minimal or no stock repurchase activity in fiscal year 2018. Credit Facilities and Guarantees STRATTEC has a $30 million secured revolving credit facility (the “STRATTEC Credit Facility”) with BMO Harris Bank N.A. ADAC-STRATTEC LLC has a $25 million secured revolving credit facility (the “ADAC-STRATTEC Credit Facility”) with BMO Harris Bank N.A., which is guaranteed by STRATTEC. The credit facilities both expire August 1, 2020. Borrowings under either credit facility are secured by our U.S. cash balances, accounts receivable, inventory and fixed assets located in the U.S. Interest on borrowings under both credit facilities is at varying rates based, at our option, on LIBOR plus 1.0 percent or the bank’s prime rate. Both credit facilities contain a restrictive financial covenant that requires the applicable borrower to maintain a minimum net worth level. The ADAC-STRATTEC Credit Facility includes an additional restrictive financial covenant that requires the maintenance of a minimum fixed charge coverage ratio. The ADAC-STRATTEC Credit Facility also required that a capital contribution to ADAC-STRATTEC LLC of $6 million collectively from STRATTEC and ADAC be completed by September 30, 2016. This capital contribution was completed as required. As of July 2, 2017, we were in compliance with all financial covenants required by these credit facilities. STRATTEC’s portion of this capital contribution totaled $3.06 million. Outstanding borrowings under the STRATTEC Credit Facility totaled $16.0 million at July 2, 2017 and $11.5 million at July 3, 2016. The average outstanding borrowings and weighted average interest rate on the STRATTEC Credit Facility loans were approximately $12.5 million and 1.8 percent, respectively, during 2017. The average outstanding borrowings and weighted average interest rate on the STRATTEC Credit Facility loans were approximately $7.6 million and 1.5 percent, respectively, during 2016. Outstanding borrowings under the ADAC-STRATTEC Credit Facility totaled $14.0 million at July 2, 2017 and $8.5 million at July 3, 2016. The average outstanding borrowings and weighted average interest rate on the ADAC-STRATTEC Credit Facility loans were approximately $10.9 million and 1.8 percent, respectively, during 2017. The average outstanding borrowings and weighted average interest rate on the ADAC-STRATTEC Credit Facility loans were approximately $4.4 million and 1.3 percent, respectively, during 2016. We believe that the credit facilities are adequate, along with existing cash flows from operations, to meet our anticipated capital expenditure, working capital, dividend, and operating expenditure requirements. SAL LLC maintains a license agreement with Westinghouse allowing SAL LLC to do business as Westinghouse Security. STRATTEC guaranteed all payments due to Westinghouse under this license agreement. As of July 2, 2017, STRATTEC has a recorded liability related to this guarantee of $250,000, which amount is equal to the amount of future payments required under the license agreement and the estimated fair value of the guarantee as of July 2, 2017. See further discussion under Equity Earnings (Loss) of Joint Ventures included in Notes to Condensed Consolidated Financial Statements herein. Inflation and Other Changes in Prices Over the past several years, we have been impacted by rising health care costs, which have increased our cost of associate medical coverage. A portion of these increases have been offset by plan design changes and associate wellness initiatives. We have also been impacted by increases in the market price of zinc, nickel silver, and brass and inflation in Mexico, which impacts the U. S. dollar costs of our Mexican operations. We have negotiated raw material price adjustment clauses with certain, but not all, of our customers to offset some of the market price fluctuations in the cost of zinc. We own and operate manufacturing operations in Mexico. As a result, a portion of our manufacturing costs are incurred in Mexican pesos, which causes our earnings and cash flows to fluctuate due to changes in the U.S. dollar/Mexican peso exchange rate. We executed contracts with Bank of Montreal that provide for bi-weekly and monthly Mexican peso currency forward contracts for a portion of our estimated peso denominated operating costs. These peso currency forward contracts include settlement dates that began on October 16, 2015 and end on June 15, 2018. No forward contracts were in place during fiscal 2015. Our objective in entering into these currency forward contracts is to minimize our earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. The Mexican peso forward contracts are not used for speculative purposes and are not designated as hedges. As a result, all currency forward contracts are recognized in our accompanying consolidated financial statements at fair value and changes in the fair value are reported in current earnings as part of Other Income, net. The following table quantifies the outstanding Mexican peso forward contracts as of July 2, 2017 (thousands of dollars, except average forward contractual exchange rates): 2 5 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Effective Dates Notional Amount July 15, 2017 - June 15, 2018 $12,000 Average Forward Contractual Exchange Rate 20.37 Fair Value $1,121 Buy MXP/Sell USD The fair market value of all outstanding Mexican peso forward contracts in the accompanying Consolidated Balance Sheets was as follows (thousands of dollars): July 2, 2017 July 3, 2016 Not Designed as Hedging Instruments: Other Current Assets: Mexican Peso Forward Contracts $1,121 Other Long-term Assets: Mexican Peso Forward Contracts Other Current Liabilities: Mexican Peso Forward Contracts $ $ - - $ - $107 $996 The pre-tax effects of the Mexican peso forward contracts are included in Other Income, net in the accompanying Consolidated Statements of Operations and Comprehensive Income and consisted of the following (thousands of dollars): Not Designated as Hedging Instruments: Realized Loss Unrealized Loss Unrealized Gain July 2, 2017 $1,650 $ - $2,010 Years Ended July 3, 2016 $ 1,196 889 $ - $ June 28, 2015 $ - $ - $ - C O N T R A C T U A L O B L I G AT I O N S A N D C O M M I T M E N T S Contractual obligations were as follows as of July 2, 2017 (thousands of dollars): Payments Due By Period Contractual Obligation Total $ 1,680 Operating Leases Other Purchase Obligations 30,009 Guarantees 250 Pension and Postretirement Less Than 1 Year $ 884 17,413 250 Obligations (a) Total _ 3,598 $35,537 _ 3,598 $22,145 1-3 Years 3-5 Years $ 796 12,596 - _ - $13,392 $ - - - _ _ - $ - More Than 5 Years $ - - - _ __- $ - (a) As disclosed in our Notes to Financial Statements, estimated cash funding related to our pension and postretirement benefit plans is expected to total $3.6 million in 2018. Because the timing of funding related to these plans beyond 2018 is uncertain, and is dependent on future movements in interest rates and investment returns, changes in laws and regulations, and other variables, pension and postretirement outflows beyond 2018 have not been included in the table above. Refer to the discussion of Commitments and Contingencies included in Notes to Financial Statements included within this 2017 Annual Report for further information related to purchase obligations. Liabilities recognized for uncertain tax benefits of $610,000 are not presented in the table above due to uncertainty as to amounts and timing regarding future payments. STRATTEC has a $30 million secured revolving credit facility with BMO Harris Bank N. A. ADAC- STRATTEC LLC has a $25 million secured revolving credit facility with BMO Harris Bank N.A., which is guaranteed by STRATTEC. Borrowings under the STRATTEC credit facility totaled $16.0 million at July 2, 2017. Borrowings under the ADAC-STRATTEC credit facility totaled $14.0 million at July 2, 2017. The credit facilities both expire on August 1, 2020. J O I N T V E N T U R E S A N D M A J O R I T Y O W N E D S U B S I D I A R I E S We participate in certain Alliance Agreements with WITTE Automotive (“WITTE”) and ADAC Automotive (“ADAC”). WITTE, of Velbert, Germany, is a privately held automotive supplier. WITTE designs, manufactures and markets automotive components, including locks and keys, hood latches, rear compartment latches, seat back latches, door handles and specialty fasteners. WITTE’s primary market for these products has been Europe. ADAC, of Grand Rapids, Michigan, is a privately held automotive supplier and manufactures engineered products, including door handles and other automotive trim parts, utilizing plastic injection molding, automated painting and various assembly processes. The Alliance Agreements include a set of cross-licensing agreements for the manufacture, distribution and sale of WITTE products by STRATTEC and ADAC in North America, and the manufacture, distribution and sale of STRATTEC and ADAC products by WITTE in Europe. Additionally, a joint venture company, Vehicle Access Systems Technology LLC (“VAST LLC”), in which WITTE, STRATTEC and ADAC each hold a one-third equity interest, exists to seek opportunities to manufacture and sell each company’s products in areas of the world outside of North America and Europe. VAST LLC has investments in Sistema de Veicular Ltda, VAST Fuzhou, VAST Great Shanghai, 2 6 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S VAST Shanghai Co. and Minda-VAST Access Systems. Sistema de Acesso Veicular Ltda is located in Brazil and services customers in South America. VAST Fuzhou, VAST Great Shanghai and VAST Shanghai Co. (collectively known as VAST China), provide a base of operations to service each partner’s automotive customers in the Asian market. VAST LLC also maintains branch offices in South Korea and Japan in support of customer sales and engineering requirements. Effective April 30, 2015, VAST LLC executed an agreement with Minda Management Services Limited to become a 50:50 joint venture partner in the former Minda-Valeo Security Systems joint venture entity, based in Pune, India. This joint venture entity was renamed Minda- VAST Access Systems (“Minda-VAST”). Minda Management Services Limited is an affiliate of both Minda Corporation Limited and Spark Minda, Ashok Minda Group of New Delhi, India (collectively “Minda”). Minda and its affiliates cater to the needs of all major car, motorcycle, commercial vehicle, tractor and off-road vehicle manufacturers in India. They are a leading manufacturer in the Indian marketplace of security and access products, handles, automotive safety, restraint systems, driver information and telematics systems for both OEMs and the aftermarket. The VAST LLC investments are accounted for using the equity method of accounting. The activities related to the VAST LLC joint ventures resulted in equity earnings of joint ventures to STRATTEC of approximately $2.6 million during 2017, equity loss of joint ventures to STRATTEC of approximately $639,000 during 2016 and equity earnings of joint ventures to STRATTEC of approximately $1.3 million during 2015. The 2016 equity loss of joint ventures for VAST LLC included a $6 million impairment charge related to its Minda-VAST Access Systems joint venture in India. STRATTEC’s portion of this impairment charge for 2016 totaled $2 million. During 2017 and 2016, capital contributions totaling $1.2 million and $660,000, respectively, were made to VAST LLC for purposes of funding operations in Brazil. STRATTEC’s portion of the capital contributions totaled $400,000 in 2017 and $220,000 in 2016. During 2015, cash capital contributions totaling $13.2 million were made to VAST LLC in support of the acquisition of the 50 percent joint venture interest in Minda-VAST and in support of general operating expenses for the Brazilian entity. STRATTEC’s portion of the cash capital contributions totaled $4.4 million. ADAC-STRATTEC LLC, a Delaware limited liability company, was formed in fiscal year 2007 to support injection molding and door handle assembly operations in Mexico. ADAC-STRATTEC LLC was 51 percent owned by STRATTEC and 49 percent owned by ADAC for all periods presented in this report. An additional Mexican entity, ADAC-STRATTEC de Mexico, is wholly owned by ADAC-STRATTEC LLC. ADAC-STRATTEC LLC’s financial results are consolidated with the financial results of STRATTEC and resulted in increased net income to STRATTEC of approximately $3.1 million in 2017, $2.9 million in 2016 and $2.6 million in 2015. In accordance with the provisions of the ADAC-STRATTEC Credit Facility a capital contribution to ADAC- STRATTEC LLC of $6 million collectively from STRATTEC and ADAC was completed during 2017. STRATTEC’s portion of this capital contribution totaled $3.06 million. No capital contributions to ADAC-STRATTEC LLC were made during 2016 or 2015. STRATTEC POWER ACCESS LLC (“SPA”) was formed in fiscal year 2009 to supply the North American portion of the power sliding door, lift gate and deck lid system access control products which were acquired from Delphi Corporation. SPA was 80 percent owned by STRATTEC and 20 percent owned by WITTE for all periods presented in this report. An additional Mexican entity, STRATTEC POWER ACCESS de Mexico, is wholly owned by SPA. The financial results of SPA are consolidated with the financial results of STRATTEC and resulted in increased net income to STRATTEC of approximately $2.6 million in 2017, increased net income to STRATTEC of approximately $2.0 million in 2016 and reduced net income to STRATTEC of approximately $269,000 in 2015. SAL LLC was formed in fiscal 2013 to introduce a new generation of biometric security products based upon the designs of Actuator Systems LLC, our partner and the owner of the remaining ownership interest. SAL LLC was 51 percent owned by STRATTEC for all periods presented in this report. Our investment in SAL LLC, for which we exercise significant influence but do not control and are not the primary beneficiary, is accounted for using the equity method. The activities related to SAL LLC resulted in an equity loss of joint ventures to STRATTEC of approximately $1.9 million in 2017, $1.6 million in 2016 and $2.0 million in 2015. Effective with our fiscal 2015 fourth quarter, 100 percent of the funding for SAL LLC was being made through loans from STRATTEC to SAL LLC and through STRATTEC’s guarantee of the SAL Credit Facility which is discussed herein. Therefore, effective with our fiscal 2015 fourth quarter, even though STRATTEC maintains a 51 percent ownership interest in SAL LLC, STRATTEC began recognizing 100 percent of the losses of SAL LLC up to our committed financial support through Equity Earnings (Loss) of Joint Ventures in the accompanying Consolidated Statements of Income and Comprehensive Income. In addition, the equity loss of joint ventures for SAL LLC included the following for the periods presented (thousands of dollars): Loss on Guarantee of SAL LLC Vendor Contract Loss on Loan to SAL LLC Loss on Guarantee of SAL LLC Credit Facility Years Ended July 2, 2017 July 3, 2016 June 28, 2015 $ $ - - $ - $ - $225 $123 $100 $247 $488 2 7 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S During fiscal 2018, we, along with our joint venture partner, intend to wind down and discontinue operating the business of SAL LLC. See further discussion under Equity (Loss) Earnings of Joint Ventures included in Notes to Financial Statements herein. OTHER MATTERS The Affordable Care Act (“ACA”), which was enacted in 2010 and is being phased in over several years, significantly affects the provision of both health care services and benefits in the United States. The ACA may impact our cost of providing our U.S. employees and retirees with health insurance and/or benefits and may also impact various other aspects of our business. The ACA did not have a material impact on our fiscal 2017, 2016 or 2015 financial results. However, we are continuing to assess the potential impact of the ACA under the new administration in Washington DC on our health care benefit costs. CRITICAL ACCOUNTING POLICIES We believe the following represents our critical accounting policies: Pension Benefits – Pension obligations and costs are developed from actuarial valuations. The determination of the obligation and expense for pension benefits is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in the accompanying Notes to Financial Statements and include, among others, the discount rate, expected long-term rate of return on plan assets, retirement age and rates of increase in compensation. We evaluate and update all of the assumptions annually on June 30, the measurement date. Refer to the accompanying Notes to Financial Statements for the impact of the pension plans on our financial statements. We determine the discount rate used to measure plan liabilities using prevailing market rates of a large population of high-quality, non-callable, corporate bonds currently available that, if the obligation was settled at the measurement date, would provide the necessary future cash flows to pay the benefit obligation when due. Using this methodology, we determined a discount rate of 3.91 percent to be appropriate as of July 2, 2017, which is an increase of 0.12 percentage points from the discount rate of 3.79 percent used at June 30, 2016. The impact of this change decreased our year-end 2017 projected pension benefit obligations by approximately $2.0 million and the year-end 2017 accumulated pension benefit obligations by approximately $2.0 million. This change is also expected to decrease our 2018 pension expense by $142,000. Our pension expense increases as the discount rate decreases. Lowering our 2017 discount rate assumption by 50 basis points would have increased our 2017 pension expense by approximately $612,000. A significant element in determining our pension expense is the expected return on plan assets. Our assumption for the expected return on plan assets is based on historical results for similar allocations among asset classes and was 6.5 percent for 2015, 5.45 percent for 2016 and 5.45 percent for 2017. This assumption remained at 5.45 percent for 2018. The changes to this assumption reduced the expected return on plan assets by approximately $1.1 million in 2015 and resulted in no change in 2016 and 2017. Refer to the accompanying Notes to Financial Statements for additional information on how this rate was determined. Pension expense increases as the expected rate of return on plan assets decreases. Lowering the 2017 expected rate of return assumption for our plan assets by 50 basis points would have increased our 2017 pension expense by approximately $561,000. The difference between the expected return and actual return on plan assets is deferred and, under certain circumstances, amortized over future years of service. Therefore, the deferral of past asset gains and losses ultimately affects future pension expense. This is also the case with changes to actuarial assumptions, including discount rate assumptions, pay rate assumptions, mortality assumptions, turnover assumptions and other demographic assumptions. As of June 30, 2017, we had $28 million of net unrecognized pension actuarial losses, which included deferred asset losses of $2 million and unrecognized postretirement actuarial losses of $4 million. These amounts represent potential future pension and postretirement expenses that would be amortized over average future service periods. The average remaining service period is about 8 years for the pension and postretirement plans. As of June 30, 2015, we converted to the RP-2014 Blue Collared Mortality Table with Improvement Scale MP-2014. This change increased our 2016 pension expense by $715,000. During fiscal years 2017, 2016 and 2015, we contributed $5 million, $3 million and $3 million, respectively, to our qualified pension plan. As discussed in the accompanying Notes to Financial Statements, our Board of Directors approved a resolution to terminate the qualified pension plan. The actual date of the termination of the qualified pension plan is 2 8 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S subject to regulatory approvals, and, therefore, will not be known until we receive such approvals. We will contribute to the Trust Fund for the Qualified Pension Plan as necessary to ensure there are sufficient assets to provide all Qualified Pension Plan benefits as required by the PBGC. The amount of future contributions has not yet been determined. We have evaluated the potential impact of the Pension Protection Act (the “PPA”), which was passed into law on August 17, 2006, including funding stabilization relief passed subsequent to the PPA (collectively, the "Acts"), on our future pension plan funding requirements based on current market conditions. The Acts have not had and are not anticipated to have in future periods a material effect on our level of future funding requirements or on our liquidity and capital resources. While we believe that the assumptions used to determine our pension obligations and expenses are appropriate, significant differences in the actual experience or significant changes in the assumptions may materially affect the amounts of these obligations and our related future expense for these obligations. Liability for Uncertain Tax Positions – We are subject to income taxation in many jurisdictions around the world. Significant management judgment is required in the accounting for income tax contingencies because the outcomes are often difficult to determine. We are required to measure and recognize uncertain tax positions that we have taken or expect to take in our income tax returns. The benefit of an uncertain tax position can only be recognized in the financial statements if management concludes that it is more likely than not that the position will be sustained with the tax authorities. For a position that is likely to be sustained, the benefit recognized in the financial statements is measured at the largest amount that is greater than 50 percent likely of being realized. A reserve is established for the difference between a position taken in an income tax return and the amount recognized in the financial statements. Refer to the discussion of Income Taxes included in the Notes to Financial Statements included within this 2017 Annual Report. Other Reserves – We have reserves such as an environmental reserve, a warranty reserve and an excess and obsolete inventory reserve. These reserves require the use of estimates and judgment with regard to risk exposure, ultimate liability and net realizable value. Environmental Reserve – We have a liability recorded related to the estimated costs to remediate a site at our Milwaukee facility, which was contaminated by a solvent spill from a former above ground solvent storage tank occurring in 1985. The recorded environmental liability balance involves judgment and estimates. Our reserve estimate is based on a third party assessment of the costs to adequately cover the cost of active remediation of the contamination at this site. Actual costs might vary from this estimate for a variety of reasons including changes in laws and changes in the assessment of the level of remediation actually required at this site. Therefore, future changes in laws or the assessment of the level of remediation required could result in changes in our estimate of the required liability. Refer to the discussion of Commitments and Contingencies included in the Notes to Financial Statements included within this 2017 Annual Report. Warranty Reserve – We have a warranty liability recorded related to our exposure to warranty claims in the event our products fail to perform as expected, and we may be required to participate in the repair costs incurred by our customers for such products. The recorded warranty liability balance involves judgment and estimates. Our liability estimate is based on an analysis of historical warranty data as well as current trends and information, including our customers’ recent extension or expansion of their warranty programs. Actual warranty costs might differ from estimates due to the level of actual claims varying from our claims experience and estimates and final negotiations and settlements reached with our customers. Therefore, future actual claims experience could result in changes in our estimates of the required liability. Refer to the discussion of Warranty Reserve under Organization and Summary of Significant Accounting Policies included in the Notes to Financial Statements included within this 2017 Annual Report. Excess and Obsolete Inventory Reserve – We record a reserve for excess and obsolete inventory based on historical and estimated future demand and market conditions. The reserve level is determined by comparing inventory levels of individual materials and parts to historical usage and estimated future sales by analyzing the age of the inventory in order to identify specific material and parts that are unlikely to be sold. Technical obsolescence and other known factors are also considered in evaluating the reserve level. Actual future write-offs of inventory may differ from estimates and calculations used to determine reserve levels due to changes in customer demand, changes in technology and other factors. Refer to the discussion of Inventories under Organization and Summary of Significant Accounting Policies included in the Notes to Financial Statements included within this 2017 Annual Report. We believe the reserves discussed above are estimated using consistent and appropriate methods. However, changes to the assumptions could materially affect the recorded reserves. 2 9 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S NEW ACCOUNTING STANDARDS In May 2014, the FASB issued an update to the accounting guidance for the recognition of revenue arising from contracts with customers. The update supersedes most current revenue recognition guidance and outlines a single comprehensive model for revenue recognition based on the principle that an entity should recognize revenue in an amount that reflects the expected consideration to be received in the exchange of goods and services. The guidance update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The guidance permits two methods of adoption: the full retrospective method, which requires retrospective restatement of each prior reporting period presented, or the cumulative catch-up transition method, which requires the cumulative effect of initially applying the guidance be recognized at the date of initial application. We currently anticipate adopting the standard using the full retrospective method. The guidance update is effective for annual reporting periods beginning after December 15, 2017 and becomes effective for us at the beginning of our 2019 fiscal year. We do not anticipate early adoption. Our ability to adopt using the full retrospective method is dependent on system readiness and the completion of our analysis of information necessary to restate prior period financial statements. While we are continuing to assess all potential impacts of the application of the standard to STRATTEC, we currently do not expect that the adoption of this pronouncement will have a material impact on our consolidated financial statements. In August 2014, the FASB issued an update to the accounting guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new guidance requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. This accounting update is effective for annual and interim periods beginning on or after December 15, 2016, with early adoption permitted. We do not expect that the adoption of this pronouncement will have a material impact on our consolidated financial statements. In July 2015, the FASB issued an accounting standard to simplify the measurement of inventory by changing the subsequent measurement guidance from the lower of cost or market to the lower of cost and net realizable value for inventory. The standard update is effective for fiscal years beginning after December 15, 2016 and interim periods within those years, and early adoption is permitted. The standard is to be applied prospectively. We do not expect that the adoption of this pronouncement will have a material impact on our consolidated financial statements. In February 2016, the FASB issued an update to the accounting guidance for leases. The update increases the transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about leasing arrangements. The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those years. We do not expect that the adoption of this pronouncement will have a material impact on our consolidated financial statements. In March 2016, the FASB issued an update to the accounting guidance for share- based payments. The update simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification of such items in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those years. We do not expect that the adoption of this pronouncement will have a material impact on our consolidated financial statements. In August 2016, the FASB issued an update to the accounting guidance on the classification of certain cash receipts and cash payments. The update aims to eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years. We do not expect that the adoption of this pronouncement will have a material impact on our consolidated financial statements. In March 2017, the FASB issued an update to the accounting guidance for the presentation of net periodic pension cost and net periodic postretirement benefit cost. The update requires the service cost component of net periodic benefit cost be reported in the same line items as other compensation costs arising from services rendered by the pertinent employees during the applicable period. The remaining components of net periodic benefit cost are required to be presented separately from the service cost component outside a subtotal of income from operations. Additionally, the update allows only the service cost component to be eligible for capitalization when applicable. The guidance requires retrospective restatement for each period presented for the presentation of the service cost component and the other components of net periodic 3 0 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S benefit cost in the income statement and prospective application for the capitalization of the service cost component of net periodic benefit cost. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years, with early adoption permitted. We anticipate early adoption beginning with the interim periods of our fiscal 2018. We anticipate the adoption of this guidance will result in the reclassification of expense within our Consolidated Statements of income and Comprehensive Income for the years ended July 2, 2017 and July 3, 2016 from cost of goods sold and engineering, selling and administrative expenses to other income, net of approximately $1.1 million and $1.3 million, respectively. RISK FACTORS We recognize we are subject to the following risk factors based on our operations and the nature of the automotive industry in which we operate: Loss of Significant Customers, Vehicle Content, Vehicle Models and Market Share – Sales to General Motors Company, Ford Motor Company and Fiat Chrysler Automobiles represented approximately 60 percent of our annual net sales (based on fiscal 2017 results) and, accordingly, these customers account for a significant percentage of our outstanding accounts receivable. The contracts with these customers provide for supplying the customer’s requirements for a particular model. The contracts do not specify a specific quantity of parts. The contracts typically cover the life of a model, which averages approximately four to five years. Components for certain customer models may also be “market tested” annually. Therefore, the loss of any one of these customers, the loss of a contract for a specific vehicle model, a reduction in vehicle content, the early cancellation of a specific vehicle model, technological changes or a significant reduction in demand for certain key models could occur, and if so, could have a material adverse effect on our existing and future revenues and net income. Our major customers also have significant under-funded legacy liabilities related to pension and postretirement health care obligations. The loss in our major customers’ North American automotive market share to the New Domestic automotive manufacturers (primarily the Japanese and Korean automotive manufacturers) and/or a significant decline in the overall market demand for new vehicles may ultimately result in severe financial difficulty for these customers, including bankruptcy. If our major customers cannot fund their operations, we may incur significant write- offs of accounts receivable, incur impairment charges or require restructuring actions. Production Slowdowns by Customers – Our major customers and many of their suppliers were significantly impacted by the recession of 2008/2009. Many of our major customers instituted production cuts during our fiscal 2009 and 2010. While production subsequently increased after the cuts made in 2009, additional economic slowdowns could bring about new production cuts which could have a material adverse effect on our existing and future revenues and net income. Financial Distress of Automotive Supply Base – During calendar years 2009 and 2010, deteriorating automotive industry conditions adversely affected STRATTEC and our supply base. Lower production levels at our major customers, volatility in certain raw material and energy costs and the global credit market crisis resulted in severe financial distress among many companies within the automotive supply base. During the above time frame, several automotive suppliers filed for bankruptcy protection or ceased operations. The potential continuation or renewal of financial distress within the supply base and suppliers’ inability to obtain credit from lending institutions could lead to commercial disputes and possible supply chain interruptions. In addition, the potential for future adverse industry conditions may require us to provide financial assistance or other measures to ensure uninterrupted production. The continuation or renewal of these industry conditions could have a material adverse effect on our existing and future revenues and net income. Shortage of Raw Materials or Components Supply – In the event of catastrophic acts of nature such as fires, tsunamis, hurricanes and earthquakes or a rapid increase in production demands, either we or our customers or other suppliers may experience supply shortages of raw materials or components. This could be caused by a number of factors, including a lack of production line capacity or manpower or working capital constraints. In order to manage and reduce the costs of purchased goods and services, we and others within our industry have been rationalizing and consolidating our supply base. As a result, there is greater dependence on fewer sources of supply for certain components and materials used in our products, which could increase the possibility of a supply shortage of any particular component. If any of our customers experience a material supply shortage, either directly or as a result of supply shortages at another supplier, that customer may halt or limit the purchase of our products. Similarly, if we or one of our own suppliers experience a supply shortage, we may become unable to produce the affected products if we cannot procure the components from another source. Such production interruptions could impede a ramp-up in vehicle production and could have a material adverse effect on our business, results of operations and financial condition. We consider the production capacities and financial condition of suppliers in our selection process, and expect that they will meet our delivery requirements. However, there can be no assurance that strong demand, capacity limitations, shortages of raw materials, labor disputes or other problems will not result in any shortages or delays in the supply of components to us. 3 1 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Cost Reduction – There is continuing pressure from our major customers to reduce the prices we charge for our products. This requires us to generate cost reductions, including reductions in the cost of components purchased from outside suppliers. If we are unable to generate sufficient production cost savings in the future to offset pre- programmed price reductions, our gross margin and profitability will be adversely affected. Cyclicality and Seasonality in the Automotive Market – The automotive market is cyclical and is dependent on consumer spending, on the availability of consumer credit and to a certain extent, on customer sales incentives. Economic factors adversely affecting consumer demand for automobiles and automotive production, such as rising fuel costs, could adversely impact our net sales and net income. We typically experience decreased sales and operating income during the first fiscal quarter of each year due to the impact of scheduled customer plant shut-downs in July and new model changeovers during that period. Foreign Operations – We own and operate manufacturing operations in Mexico. As discussed above under “Joint Ventures and Majority Owned Subsidiaries”, we also have joint venture and majority owned investments in Mexico, Brazil, China and India. As these operations continue to expand, their success will depend, in part, on our and our partners’ ability to anticipate and effectively manage certain risks inherent in international operations, including: enforcing agreements and collecting receivables through certain foreign legal systems, payment cycles of foreign customers, compliance with foreign tax laws, general economic and political conditions in these countries and compliance with foreign laws and regulations. The success of these joint venture operations may be impacted by our partners’ ability to influence business decisions and therefore the operating results of the joint ventures could be adversely impacted. These influences, as well as conflicts or disagreements with our joint venture partners, could negatively impact the operations and financial results of our joint venture investments, which could have an adverse impact on our financial results. In addition, failure of our partners to be able to continue to fund their portion of the joint venture operations could have a material adverse effect on the financial condition and financial results of our joint venture investments, which could have a material adverse effect on our financial results. The joint venture investments in China generated losses in 2012 and 2013 due to relocation costs associated with moves to a new facility and start-up costs associated with a new product line. These relocation costs and start-up costs have been financed internally and externally by VAST China. Additionally, our VAST LLC joint venture in Brazil continues to report losses due to the weak automotive build in that region. The impact of any future planned capital expenditures or future expansion by VAST LLC in China, Brazil and India, may result in the need for additional future capital contributions to fund the operations of these joint venture investments. Currency Exchange Rate Fluctuations – Our sales are denominated in U.S. dollars. We have manufacturing operations in Mexico, and as a result, a portion of our manufacturing costs are incurred in Mexican pesos. Therefore, fluctuations in the U.S. dollar/Mexican peso exchange rate may have a material effect on our profitability, cash flows, financial position, and may significantly affect the comparability of our results between financial periods. Any depreciation in the value of the U.S. dollar in relation to the value of the Mexican peso will adversely affect the cost of our Mexican operations when translated into U.S. dollars. Similarly, any appreciation in the value of the U.S. dollar in relation to the value of the Mexican peso will decrease the cost of our Mexican operations when translated into U.S. dollars. Sources of and Fluctuations in Market Prices of Raw Materials – Our primary raw materials are high-grade zinc, brass, nickel silver, aluminum, steel and plastic resins. These materials are generally available from a limited number of suppliers, but we have chosen to concentrate our sourcing with one primary vendor for each commodity or purchased component. We believe our sources of raw materials are reliable and adequate for our needs. However, the development of future sourcing issues related to using existing or alternative raw materials and the global availability of these materials as well as significant fluctuations in the market prices of these materials may have an adverse effect on our financial results if the increased raw material costs cannot be recovered from our customers. Given the significant financial impact on us relating to changes in the cost of our primary raw materials, commencing with fiscal 2008 and thereafter, we began quoting quarterly material price adjustments for changes in our zinc costs in our negotiations with our customers. Our success in obtaining these quarterly price adjustments in our customer contracts is dependent on separate negotiations with each customer. It is not a standard practice for our customers to include such price adjustments in their contracts. We have been successful in obtaining quarterly price adjustments in some of our customer contracts. However, we have not been successful in obtaining the adjustments with all of our customers. 3 2 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Disruptions Due to Work Stoppages and Other Labor Matters – Our major customers and many of their suppliers have unionized work forces. Work stoppages or slow- downs experienced by our customers or their suppliers could result in slow-downs or closures of assembly plants where our products are included in assembled vehicles. For example, strikes by a critical supplier called by the United Auto Workers led to extended shut-downs of most of General Motors’ North American assembly plants in February 2008 and in 1998. A material work stoppage experienced by one or more of our customers could have an adverse effect on our business and our financial results. In addition, all production associates at our Milwaukee facility are unionized. A sixteen-day strike by these associates in June 2001 resulted in increased costs as all salaried associates worked with additional outside resources to produce the components necessary to meet customer requirements. The current contract with our unionized associates is effective through September 17, 2018. We may encounter further labor disruption and we may also encounter unionization efforts in our other plants or other types of labor conflicts, any of which could have an adverse effect on our business and our financial results. Labor contracts between General Motors Company, Ford Motor Company and Fiat Chrysler Automobiles and their unionized associates under the United Auto Workers union expire in October and November 2019. In addition, their respective labor agreements with the Canadian auto workers union expire in September and October 2020. Labor disruptions encountered by our customers during the contract period could have an adverse effect on our business and our financial results. Compliance Related to Regulations Related to Conflict Minerals – We are required to disclose the use of tin, tantalum, tungsten and gold (collectively, “conflict minerals”) mined from the Democratic Republic of the Congo and adjoining countries (the “covered countries”) if a conflict mineral(s) is necessary to the functionality of a product manufactured, or contracted to be manufactured, by us. We may determine, as part of our compliance efforts, that certain products or components we obtain from our suppliers could contain conflict minerals. If we are unable to conclude that all our products are free from conflict minerals originating from covered countries, this could have a negative impact on both our existing and future business, reputation and/or results of operations. We may also encounter challenges to satisfy customers who require that our products be certified as conflict free, which could place us at a competitive disadvantage if we are unable to substantiate such a claim. Compliance with these rules could also affect the sourcing and availability of some of the minerals used in the manufacture of products or components we obtain from our suppliers, including our ability to obtain products or components in sufficient quantities and/or at competitive prices to sell to our customers. Environmental, Safety and Other Regulations – We are subject to Federal, state, local and foreign laws and other legal requirements related to the generation, storage, transport, treatment and disposal of materials as a result of our manufacturing and assembly operations. These laws include, among others, the Resource Conservation and Recovery Act (as amended), the Clean Air Act (as amended) and the Comprehensive Environmental Response, Compensation and Liability Act (as amended). We have an environmental management system that is ISO- 14001 certified. We believe that our existing environmental management system is adequate for current and anticipated operations and we have no current plans for substantial capital expenditures in the environmental area. An environmental reserve was established in 1995 for estimated costs to remediate a site at our Milwaukee facility. The site was contaminated from a former above-ground solvent storage tank, located on the east side of the facility. The contamination occurred in 1985 and is being monitored in accordance with Federal, state and local requirements. We do not currently anticipate any material adverse impact on our results of operations, financial condition or competitive position as a result of compliance with Federal, state, local and foreign environmental laws or other related legal requirements. However, risk of environmental liability and changes associated with maintaining compliance with environmental laws is inherent in the nature of our business and there is no assurance that material liabilities or changes could not arise. Highly Competitive Automotive Supply Industry – The automotive component supply industry is highly competitive. Some of our competitors are companies, or divisions or subsidiaries of companies, that are larger than STRATTEC and have greater financial, global and technology capabilities. Our products may not be able to compete successfully with the products of these other companies, which could result in loss of customers and, as a result, decreased sales and profitability. Some of our major customers have previously announced that they will be reducing their supply base. This could potentially result in the loss of these customers and consolidation within the supply base. The loss of any of our major customers could have a material adverse effect on our existing and future net sales and net income. In addition, our competitive position in the North American automotive component supply industry could be adversely affected in the event that we are unsuccessful in making strategic investments, acquisitions or alliances or in establishing joint ventures that would enable us to expand globally, in particular, with the VAST Automotive Group and their ability to fund and service global vehicle platforms. We principally compete for new business at the beginning of the development of new models and upon the redesign of existing models by our major customers. New model development generally begins two to five years prior to the marketing of such new 3 3 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S models to the public. The failure to obtain new business on new models or to retain or increase business on redesigned existing models could adversely affect our business and financial results. In addition, as a result of relatively long lead times for many of our components, it may be difficult in the short-term for us to obtain new sales to replace any unexpected decline in the sale of existing products. Finally, we may incur significant product development expense in preparing to meet anticipated customer requirements which may not be recovered. Program Volume and Pricing Fluctuations – We incur costs and make capital expenditures for new program awards based upon certain estimates of production volumes over the anticipated program life for certain vehicles. While we attempt to establish the price of our products for variances in production volumes, if the actual production of certain vehicle models is significantly less than planned, our net sales and net income may be adversely affected. We cannot predict our customers’ demands for the products we supply either in the aggregate or for particular reporting periods. Investments in Customer Program Specific Assets – We make investments in machinery and equipment used exclusively to manufacture products for specific customer programs. This machinery and equipment is capitalized and depreciated over the expected useful life of each respective asset. Therefore, the loss of any one of our major customers, the loss of specific vehicle models or the early cancellation of a vehicle model could result in impairment in the value of these assets which may have a material adverse effect on our financial results. STRATTEC Advanced Logic, LLC Joint Venture – As discussed under Joint Ventures and Majority Owned Subsidiaries herein, we maintain a 51 percent ownership interest in a joint venture, STRATTEC Advanced Logic, LLC, which was formed to introduce a new generation of biometric security products based upon the designs of Actuator Systems LLC, our partner and the owner of the remaining ownership interest in SAL LLC. The success of this joint venture operation has been impacted by the failure of our partner to be able to continue to fund their portion of the joint venture operations, which has had an adverse impact on our financial results. Furthermore, conflicts or disagreements with our joint venture partner, could negatively impact the operations and financial results of our joint venture investment, which could have an adverse impact on our financial results. The biometric security business is highly competitive. Some of the companies in the biometric security business are significantly larger than SAL LLC and have greater financial and technology capabilities. Our products may not be able to compete successfully both on price and technology features within our markets. As a result of some of these factors, during fiscal 2018, we, along with our joint venture partner, intend to wind down and discontinue operating the business of SAL LLC. Warranty Claims – We are exposed to warranty claims in the event that our products fail to perform as expected, and we may be required to participate in the repair costs incurred by our customers for such products. Our largest customers have recently extended and/or expanded their warranty protection for their vehicles. Other automotive OEMs have similarly extended and/or expanded their warranty programs. We are engaged in ongoing discussions with our customers regarding warranty information and potential claims. The results of these discussions could result in additional warranty charges/claims in future periods. Depending on the nature of and the volume of vehicles involved in the potential warranty claims, these charges could be material to our financial statements. The extended and/or expanded warranty trend may also result in higher cost recovery claims by OEMs from suppliers whose products incur a higher rate of warranty claims above an OEM derived nominal level. Prior to fiscal 2010, we had experienced relatively low warranty charges from our customers due to our commercial arrangements and improvements in the quality, reliability and durability of our products. Due to our largest customers’ extension and/or expansion of their warranty protection programs and demands for higher warranty cost sharing arrangements from their suppliers in their terms and conditions of purchase, including STRATTEC, we increased our provision to cover warranty exposures since fiscal year 2010. In 2015, our increased warranty provision was the result of various known or expected customer warranty issues outstanding and estimated future warranty costs to be incurred as of June 2015 for which amounts were reasonably estimable. As additional information becomes available, actual results may differ from recorded estimates. If our customers demand higher warranty-related cost recoveries, or if our products fail to perform as expected, it could have a material adverse impact on our results of operations and financial condition. Cyber Vulnerability – Cyber attacks or security breaches could compromise confidential, business critical information, cause a disruption in our operations or harm our reputation. While we have a cyber security monitoring program, a significant cyber attack could result in loss of critical business information and/or could negatively impact our operations, any of which could have a negative impact on our financial results. 3 4 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 C O N S O L I D AT E D S TAT E M E N T S O F I N C O M E A N D C O M P R E H E N S I V E I N C O M E (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NET SALES Cost of goods sold GROSS PROFIT Engineering, selling, and administrative expenses INCOME FROM OPERATIONS Interest income Equity earnings (loss) of joint ventures Interest expense Other income, net INCOME BEFORE PROVISION FOR INCOME TAXES AND NON-CONTROLLING INTEREST Provision for income taxes NET INCOME Net income attributable to non-controlling interest NET INCOME ATTRIBUTABLE TO Years Ended July 2, 2017 July 3, 2016 June 28, 2015 $417,325 357,163 60,162 46,460 13,702 136 666 (417) 2,307 16,394 4,284 12,110 $401,419 336,594 64,825 43,917 20,908 25 (2,235) (176) 668 19,190 _ 5,068 14,122 $411,475 338,815 72,660 41,534 31,126 185 (788) (71) 3,481 33,933 _ 9,382 24,551 4,913 4,973 3,897 STRATTEC SECURITY CORPORATION $ 7,197 $ 9,149 $ 20,654 COMPREHENSIVE INCOME: NET INCOME Currency translation adjustments, net of tax Pension and postretirement plan funded status adjustment, net of tax TOTAL OTHER COMPREHENSIVE INCOME (LOSS) COMPREHENSIVE INCOME Comprehensive income attributable to $ 12,110 (426) 5,768 5,342 17,452 $ 14,122 (5,248) (5,880) (11,128) 2,994 $ 24,551 (5,133) (1,851) (6,984) 17,567 non-controlling interest COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO STRATTEC SECURITY CORPORATION 5,470 4,659 3,574 $ 11,982 $ (1,665) $ 13,993 EARNINGS PER SHARE ATTRIBUTABLE TO STRATTEC SECURITY CORPORATION: BASIC DILUTED AVERAGE SHARES OUTSTANDING: BASIC DILUTED $ 2.01 $ 1.96 $ $ 2.55 2.51 $ $ 5.80 5.66 3,588 3,670 3,559 3,621 3,515 3,604 The accompanying Notes to Financial Statements are an integral part of these Consolidated Statements of Income and Comprehensive Income. 3 5 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 C O N S O L I D AT E D B A L A N C E S H E E T S ( I N T H O U S A N D S , E X C E P T S H A R E A M O U N T S A N D P E R S H A R E A M O U N T S ) ASSETS CURRENT ASSETS: Cash and cash equivalents Receivables, less allowance for doubtful accounts of $500 at July 2, 2017 and July 3, 2016 Inventories, net Customer tooling in progress, net Income taxes recoverable Other current assets Total current assets INVESTMENT IN JOINT VENTURES DEFERRED INCOME TAXES OTHER LONG-TERM ASSETS PROPERTY, PLANT AND EQUIPMENT, NET LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable Accrued liabilities: Payroll and benefits Environmental Warranty Other Total current liabilities COMMITMENTS AND CONTINGENCIES – see note beginning on page 51 BORROWINGS UNDER CREDIT FACILITIES ACCRUED PENSION OBLIGATIONS ACCRUED POSTRETIREMENT OBLIGATIONS OTHER LONG-TERM LIABILITIES SHAREHOLDERS’ EQUITY: Common stock, authorized 12,000,000 shares, $.01 par value, issued 7,216,103 shares at July 2, 2017 and 7,188,363 shares at July 3, 2016 Capital in excess of par value Retained earnings Accumulated other comprehensive loss Less: Treasury stock at cost (3,619,487 shares at July 2, 2017 and 3,622,506 shares at July 3, 2016) Total STRATTEC SECURITY CORPORATION shareholders’ equity Non-controlling interest Total shareholders’ equity July 2, 2017 July 3, 2016 $ 8,361 $ 15,477 64,933 35,476 11,544 1,987 6,704 129,005 16,840 256 16,022 111,591 $273,714 63,726 38,683 6,971 3,826 _ 5,768 134,451 14,168 5,387 3,021 85,149 $242,176 $ 39,679 $ 32,416 13,055 1,308 5,550 8,303 67,895 30,000 1,492 1,003 610 72 93,813 225,913 (32,888) (135,822) 151,088 21,626 172,714 $273,714 11,210 1,365 9,228 9,996 64,215 20,000 1,466 1,262 721 72 92,076 220,728 (37,673) (135,871) 139,332 15,180 154,512 $242,176 The accompanying Notes to Financial Statements are an integral part of these Consolidated Balance Sheets. 3 6 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 C O N S O L I D AT E D S TAT E M E N T S O F S H A R E H O L D E R S ’ E Q U I T Y (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Total Common Stock Capital in Excess of Par Value Accumulated Other Retained Comprehensive Earnings Loss Treasury Non-Controlling Stock Interest BALANCE June 29, 2014 $134,903 $71 $87,054 $194,498 $ (20,198) $ (135,919) $ 9,397 Net income Currency translation adjustments Pension and postretirement funded status adjustment, net of tax of $1,087 Cash dividends declared ($0.48 per share) Cash dividends paid to non-controlling interests of subsidiaries Stock-based compensation and 24,551 (5,133) (1,851) (1,710) (882) - - - - - - - - - - 20,654 - - (4,810) - (1,851) (1,710) - - - - - - - - 3,897 (323) - - (882) shortfall tax benefit Stock option exercises Employee stock purchases 1,970 474 79 - - - 1,970 474 62 - - - - - - - - 17 - - - BALANCE June 28, 2015 $152,401 $71 $89,560 $213,442 $ (26,859) $ (135,902) $12,089 Net income 14,122 Currency translation adjustments (5,248) Pension and postretirement funded status adjustment, net of tax of $3,454 Cash dividends declared (5,880) ($0.52 per share) Cash dividends paid to non-controlling interests of subsidiaries Stock-based compensation and shortfall tax benefit Stock option exercises Employee stock purchases BALANCE July 3, 2016 Net income Currency translation adjustments Pension and postretirement funded status adjustment, net of tax of $3,387 Cash dividends declared ($0.56 per share) Cash dividends paid to non-controlling interests of subsidiaries Contribution from non-controlling interests of subsidiaries Stock-based compensation and shortfall tax benefit Stock option exercises Employee stock purchases BALANCE July 2, 2017 (1,863) (1,568) 12,110 (426) 5,768 (2,012) (1,964) 2,940 1,601 79 106 $172,714 - - - - - - - - - - 9,149 - - (4,934) - (5,880) (1,863) - - - - - - - - 4,973 (314) - - (1,568) 2,075 364 109 $154,512 - 1 - $72 2,075 363 78 - - - - - - - - 31 - - - $92,076 $220,728 $ (37,673) $ (135,871) $15,180 - - - - - - - - - $ 72 - - - - - - 7,197 - - (983) - 5,768 (2,012) - - - - - - - - - - - 4,913 557 - - (1,964) 2,940 1,601 79 57 - - - - - - - - 49 - - - $93,813 $225,913 $ (32,888) $ (135,822) $21,626 The accompanying Notes to Financial Statements are an integral part of these Consolidated Statements of Shareholders’ Equity. C O N S O L I D AT E D S TAT E M E N T S O F C A S H F L O W S ( I N T H O U S A N D S ) 3 7 July 2, 2017 Years Ended July 3, 2016 June 28, 2015 CASH FLOWS FROM OPERATING ACTIVITIES Net Income Adjustments to reconcile net income to net cash provided by operating activities: Equity (earnings) loss of joint ventures Depreciation and amortization Foreign currency transaction (gain) loss Unrealized (gain) loss on peso forward contracts Loss (gain) on disposition of property, plant and equipment Deferred income taxes Stock based compensation expense Change in operating assets and liabilities: Receivables Inventories Other assets Accounts payable and accrued liabilities Other, net Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Investment in joint ventures Loan to joint ventures Repayments from loan to joint ventures Additions to property, plant and equipment Proceeds received on sale of property, plant and equipment Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under credit facilities Repayments under credit facilities Exercise of stock options and employee stock purchases Excess tax benefits from stock-based compensation Contribution from non-controlling interest of subsidiaries Dividends paid to non-controlling interests of subsidiaries Dividends paid Net cash provided by financing activities FOREIGN CURRENCY IMPACT ON CASH NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS Beginning of year End of year SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION CASH PAID DURING THE PERIOD FOR: Income taxes Interest NON-CASH INVESTING ACTIVITIES: Change in capital expenditures in accounts payable Guarantee of joint venture revolving credit facility Guarantee of joint venture contract $12,110 $14,122 $24,551 (666) 11,418 (1,128) (2,010) 213 1,851 1,508 (1,707) 3,207 (6,499) 5,168 (323) 23,142 (400) (2,230) 100 (37,010) 2 (39,538) 36,000 (26,000) 241 21 2,940 (1,964) (2,012) 9,226 54 2,235 10,121 (2,559) 889 (17) 3,027 1,625 (5,129) (3,897) (9,481) (3,003) 285 8,218 (1,720) (225) 100 (23,496) 76 (25,265) 26,500 (16,500) 473 170 - (1,568) (1,865) 7,210 (381) 788 8,815 (3,075) - 154 (3,330) 1,323 9,155 (4,284) (1,482) (1,463) 307 31,459 (4,384) (315) - (26,097) 1 _ (30,795) 9,000 (1,500) 553 367 - (882) (1,711) 5,827 (552) (7,116) (10,218) 5,939 15,477 $ 8,361 25,695 $15,477 19,756 $25,695 $ $ 318 350 $ (99) - $ - $ $ 4,699 $ 157 $ 2,625 $ 505 - $ $14,754 $ 47 $ $ $ 136 995 250 The accompanying Notes to Financial Statements are an integral part of these Consolidated Statements of Cash Flows. t r o p e R l a u n n A C E T T A R T S 7 1 0 2 3 8 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 N O T E S T O F I N A N C I A L S TAT E M E N T S ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES STRATTEC SECURITY CORPORATION designs, develops, manufactures and markets automotive access control products including mechanical locks and keys, electronically enhanced locks and keys, steering column and instrument panel ignition lock housings, latches, power sliding side door systems, power lift gate systems, power deck lid systems, door handles and related products for primarily North American automotive customers. We also supply global automotive manufacturers through a unique strategic relationship with WITTE Automotive (“WITTE”) of Velbert, Germany and ADAC Automotive (“ADAC”) of Grand Rapids, Michigan. Under this relationship, STRATTEC, WITTE and ADAC market the products of each company to global customers under the “VAST” brand name (as more fully described herein). STRATTEC products are shipped to customer locations in the United States, Canada, Mexico, Europe, South America, Korea, China and India, and we provide full service and aftermarket support for each partner’s products. We also maintain a 51 percent interest in a joint venture, STRATTEC Advanced Logic, LLC (“SAL LLC”), which exists to introduce a new generation of biometric security products based on the designs of Actuator Systems, our partner and the owner of the remaining ownership interest. The accompanying consolidated financial statements reflect the consolidated results of STRATTEC SECURITY CORPORATION, its wholly owned Mexican subsidiary, STRATTEC de Mexico, and its majority owned subsidiaries, ADAC-STRATTEC, LLC and STRATTEC POWER ACCESS LLC. STRATTEC SECURITY CORPORATION is located in Milwaukee, Wisconsin. STRATTEC de Mexico is located in Juarez, Mexico. ADAC-STRATTEC, LLC and STRATTEC POWER ACCESS LLC have operations in El Paso, Texas and Juarez and Leon, Mexico. Equity investments in Vehicle Access Systems Technology LLC (“VAST LLC”) and SAL LLC for which we exercise significant influence but do not control and are not the primary beneficiary, are accounted for using the equity method. VAST LLC consists primarily of three wholly owned subsidiaries in China, one wholly owned subsidiary in Brazil and one joint venture entity in India. SAL LLC is located in El Paso, Texas. We have only one reporting segment. The significant accounting policies followed in the preparation of these financial statements, as summarized in the following paragraphs, are in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). Principles of Consolidation and Presentation: The accompanying consolidated financial statements include the accounts of STRATTEC SECURITY CORPORATION, its wholly owned Mexican subsidiary and its majority owned subsidiaries. Equity investments for which STRATTEC exercises significant influence but does not control and is not the primary beneficiary are accounted for using the equity method. All significant inter-company transactions and balances have been eliminated. New Accounting Standards: In May 2014, the FASB issued an update to the accounting guidance for the recognition of revenue arising from contracts with customers. The update supersedes most current revenue recognition guidance and outlines a single comprehensive model for revenue recognition based on the principle that an entity should recognize revenue in an amount that reflects the expected consideration to be received in the exchange of goods and services. The guidance update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The guidance permits two methods of adoption: the full retrospective method, which requires retrospective restatement of each prior reporting period presented, or the cumulative catch-up transition method, which requires the cumulative effect of initially applying the guidance be recognized at the date of initial application. We currently anticipate adopting the standard using the full retrospective method. The guidance update is effective for annual reporting periods beginning after December 15, 2017 and becomes effective for us at the beginning of our 2019 fiscal year. We do not anticipate early adoption. Our ability to adopt using the full retrospective method is dependent on system readiness and the completion of our analysis of information necessary to restate prior period financial statements. While we are continuing to assess all potential impacts of the application of the standard to STRATTEC, we currently do not expect that the adoption of this pronouncement will have a material impact on our consolidated financial statements. In August 2014, the FASB issued an update to the accounting guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new guidance requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. This accounting update is effective for annual and interim periods beginning on or after December 15, 2016, with early adoption permitted. We do not expect that the adoption of this pronouncement will have a material impact on our consolidated financial statements. In July 2015, the FASB issued an accounting standard to simplify the measurement of inventory by changing the subsequent measurement guidance from the lower of cost or market to the lower of cost and net realizable value for inventory. The standard update is effective for fiscal years beginning after December 15, 2016 and interim periods within those years, and early adoption is permitted. The standard is to be applied prospectively. We do not expect that the adoption of this pronouncement will have a material impact on our consolidated financial statements. In February 2016, the FASB issued an update to the accounting guidance for leases. The update increases the transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about leasing arrangements. The guidance is 3 9 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 N O T E S T O F I N A N C I A L S TAT E M E N T S effective for fiscal years beginning after December 15, 2018 and interim periods within those years. We do not expect that the adoption of this pronouncement will have a material impact on our consolidated financial statements. In March 2016, the FASB issued an update to the accounting guidance for share-based payments. The update simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification of such items in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those years. We do not expect that the adoption of this pronouncement will have a material impact on our consolidated financial statements. In August 2016, the FASB issued an update to the accounting guidance on the classification of certain cash receipts and cash payments. The update aims to eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years. We do not expect that the adoption of this pronouncement will have a material impact on our consolidated financial statements. In March 2017, the FASB issued an update to the accounting guidance for the presentation of net periodic pension cost and net periodic postretirement benefit cost. The update requires the service cost component of net periodic benefit cost be reported in the same line items as other compensation costs arising from services rendered by the pertinent employees during the applicable period. The remaining components of net periodic benefit cost are required to be presented separately from the service cost component outside a subtotal of income from operations. Additionally, the update allows only the service cost component to be eligible for capitalization when applicable. The guidance requires retrospective restatement for each period presented for the presentation of the service cost component and the other components of net periodic benefit cost in the income statement and prospective application for the capitalization of the service cost component of net periodic benefit cost. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years, with early adoption permitted. We anticipate early adoption beginning with the interim periods of our fiscal 2018. We anticipate the adoption of this guidance will result in the reclassification of expense within our Consolidated Statements of Income and Comprehensive Income for the years ended July 2, 2017 and July 3, 2016 from cost of goods sold and engineering, selling and administrative expenses to other income, net of approximately $1.1 million and $1.3 million, respectively. Fiscal Year: Our fiscal year ends on the Sunday nearest June 30. The years ended July 2, 2017, July 3, 2016 and June 28, 2015 are comprised of 52, 53 and 52 weeks, respectively. Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses for the periods presented. These estimates and assumptions could also affect the disclosure of contingencies. Actual results and outcomes may differ from management’s estimates and assumptions. Cash and Cash Equivalents: Cash and cash equivalents include all short-term investments with an original maturity of three months or less due to the short-term nature of the instruments. Excess cash balances are placed in short-term commercial paper. Derivative Instruments: We own and operate manufacturing operations in Mexico. As a result, a portion of our manufacturing costs are incurred in Mexican pesos, which causes our earnings and cash flows to fluctuate due to changes in the U.S. dollar/Mexican peso exchange rate. We executed contracts with Bank of Montreal that provide for bi-weekly and monthly Mexican peso currency forward contracts for a portion of our estimated peso denominated operating costs. These peso currency forward contracts include settlement dates that began on October 16, 2015 and end on June 15, 2018. No forward contracts were in place during fiscal 2015. Our objective in entering into these currency forward contracts is to minimize our earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. The Mexican peso forward contracts are not used for speculative purposes and are not designated as hedges. As a result, all currency forward contracts are recognized in our accompanying consolidated financial statements at fair value and changes in the fair value are reported in current earnings as part of Other Income, net. The following table quantifies the outstanding Mexican peso forward contracts as of July 2, 2017 (thousands of dollars, except average forward contractual exchange rates): Effective Dates Notional Amount July 15, 2017 - June 15, 2018 $12,000 Average Forward Contractual Exchange Rate 20.37 Fair Value $1,121 Buy MXP/Sell USD The fair market value of all outstanding Mexican peso forward contracts in the accompanying Consolidated Balance Sheets was as follows (thousands of dollars): Not designated as hedging Instruments: Other current assets: Mexican peso forward contracts Other long-term assets: Mexican peso forward contracts Other current liabilities: Mexican peso forward contracts July 2, 2017 July 3, 2016 $1,121 $ $ - - $ - $107 $996 4 0 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 N O T E S T O F I N A N C I A L S TAT E M E N T S The pre-tax effects of the Mexican peso forward contracts on the accompanying Consolidated Statements of Income and Comprehensive Income consisted of the following (thousands of dollars): Not Designated as Hedging Instruments: Realized loss Unrealized loss Unrealized gain July 2, 2017 $1,650 $ - $2,010 Other Income, net Years Ended July 3, 2016 $1,196 $ 889 - $ June 28, 2015 $ - $ - $ - Fair Value of Financial Instruments: The fair value of our cash and cash equivalents, accounts receivable, accounts payable and borrowings under our credit facilities approximated their book value as of July 2, 2017 and July 3, 2016. Fair Value is defined as the exchange price that would be received for an asset or paid for a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. There is an established fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable. Level 1 – Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real- time quotes for transactions in active exchange markets involving identical assets. Level 2 – Inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly. These are typically obtained from readily-available pricing sources for comparable instruments. Level 3 – Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own assumptions of the data that market participants would use in pricing the asset or liability, based on the best information available in the circumstances. The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of July 2, 2017 and July 3, 2016 (thousands of dollars): July 2, 2017 Total Level 1 Level 3 Level 2 July 3, 2016 Total Level 1 Level 2 Level 3 Assets: Rabbi Trust Assets: Stock index funds: Small cap Mid cap Large cap International Fixed income funds Cash and cash equivalents Mexican peso forward contracts Total assets at fair $ 382 391 519 541 763 - $ - - - - - 3 $ $ - $ 382 391 - 519 - - 541 - 763 $ 356 357 498 389 700 - 3 - - - - - - 3 - 1,121 - 1,121 - 107 value $2,596 $1,124 $ - $3,720 $2,300 $110 $ - $ 356 - 357 - 498 - 389 - 700 - 3 - $ - 107 $2,410 Liabilities: Mexico peso forward contracts $ - $ - $ - $ - $ - $996 $ - $ 996 The Rabbi Trust assets fund our amended and restated supplemental executive retirement plan and are included in Other Long-Term Assets in the accompanying Consolidated Balance Sheets. Refer to discussion of Mexican peso forward contracts under Derivative Instruments above. The fair value of the Mexican peso forward contracts considers the remaining term, current exchange rate and interest rate differentials between the two currencies. There were no transfers between Level 1 and Level 2 assets during 2017 or 2016. Receivables: Receivables consist primarily of trade receivables due from Original Equipment Manufacturers in the automotive industry and locksmith distributors relating to our service and aftermarket sales. We evaluate the collectability of receivables based on a number of factors. An allowance for doubtful accounts is recorded for significant past due receivable balances based on a review of the past due items, general economic conditions and the industry as a whole. Changes in the allowance for doubtful accounts were as follows (thousands of dollars): Year ended July 2, 2017 Year ended July 3, 2016 Year ended June 28, 2015 Balance, Beginning of Year $500 $500 $500 Provision for Doubtful Accounts - $ $ - $ - Net Write-Offs $ - $ - - $ Balance, End of Year $500 $500 $500 4 1 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 N O T E S T O F I N A N C I A L S TAT E M E N T S Inventories: Inventories are comprised of material, direct labor and manufacturing overhead, and are stated at the lower of cost or market using the first-in, first-out (“FIFO”) cost method of accounting. Inventories consisted of the following (thousands of dollars): Finished products Work in process Purchased materials Excess and obsolete reserve Inventories, net July 2, 2017 $ 9,976 9,328 20,682 39,986 (4,510) $35,476 July 3, 2016 $10,137 8,291 23,055 41,483 (2,800) $38,683 We record a reserve for excess and obsolete inventory based on historical and estimated future demand and market conditions. The reserve level is determined by comparing inventory levels of individual materials and parts to historical usage and estimated future sales by analyzing the age of the inventory in order to identify specific materials and parts that are unlikely to be sold. Technical obsolescence and other known factors are also considered in evaluating the reserve level. The activity related to the excess and obsolete inventory reserve was as follows (thousands of dollars): Year ended July 2, 2017 Year ended July 3, 2016 Year ended June 28, 2015 Balance, Beginning of Year $2,800 $2,300 $2,150 Provision Charged to Expense $2,718 $ 844 $ 655 Amounts Written Off $1,008 $ 344 $ 505 Balance, End of Year $4,510 $2,800 $2,300 Customer Tooling in Progress: We incur costs related to tooling used in component production and assembly. Costs for development of certain tooling, which will be directly reimbursed by the customer whose parts are produced from the tool, are accumulated on the balance sheet and are then billed to the customer. The accumulated costs are billed upon formal acceptance by the customer of products produced with the individual tool. Other tooling costs are not directly reimbursed by the customer. These costs are capitalized and amortized over the life of the related product based on the fact that the related tool will be used over the life of the supply arrangement. To the extent that estimated costs exceed expected reimbursement from the customer we recognize a loss. Repair and Maintenance Supply Parts: We maintain an inventory of repair and maintenance supply parts in support of operations. This inventory includes critical repair parts for all production equipment as well as general maintenance items. The inventory of critical repair parts is required to avoid disruptions in our customers’ just-in-time production schedules due to a lack of spare parts when equipment break-downs occur. All required critical repair parts are on hand when the related production equipment is placed in service and maintained to satisfy the customer model life production and service requirements, which may be 12 to 15 years. As repair parts are used, additional repair parts are purchased to maintain a minimum level of spare parts inventory. Depending on maintenance requirements during the life of the equipment, excess quantities of repair parts arise. Excess quantities are kept on hand and are not disposed of until the equipment is no longer in service. A repair and maintenance supply parts reserve is maintained to recognize the normal adjustment of inventory for obsolete and slow moving supply and maintenance parts. The adequacy of the reserve is reviewed periodically in relation to the repair parts inventory balances. The gross balance of the repair and maintenance supply parts inventory was approximately $3.7 million at July 2, 2017 and $3.2 million at July 3, 2016. The repair and maintenance supply parts inventory balance is included in Other Current Assets in the accompanying Consolidated Balance Sheets. The activity related to the repair and maintenance supply parts reserve was as follows (thousands of dollars): Year ended July 2, 2017 Year ended July 3, 2016 Year ended June 28, 2015 Balance, Beginning of Year $700 $620 $585 Provision Charged to Expense $438 $366 $348 Amounts Written Off $238 $286 $313 Balance, End of Year $900 $700 $620 4 2 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 N O T E S T O F I N A N C I A L S TAT E M E N T S Intangibles: Intangible assets that have defined useful lives were acquired in the purchase of the power sliding door, lift gate and deck lid system access control products from Delphi Corporation in 2009 and consist of patents, engineering drawings and software. The intangible assets balance is included in Other Long-Term Assets in the accompanying Consolidated Balance Sheets. The carrying value and accumulated amortization for these assets were as follows (thousands of dollars): Patents, engineering drawings and software Less: accumulated amortization July 2, 2017 $ 890 (849) $ 41 July 3, 2016 $ 890 (750) $ 140 The remaining useful life of the intangible assets in the table above is approximately 0.4 years. Intangible amortization expense was $99,000 for each of the years ended July 2, 2017, July 3, 2016 and June 28, 2015. Intangible amortization expense is expected to be $41,000 in fiscal year 2018 and zero thereafter. Property, Plant and Equipment: Property, plant and equipment are stated at cost. Property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets as follows: Classification Land improvements Buildings and improvements Machinery and equipment Expected Useful Lives 20 years 15 to 35 years 3 to 15 years Property, plant and equipment consisted of the following (thousands of dollars): Land and improvements Buildings and improvements Machinery and equipment Less: accumulated depreciation July 2, 2017 $ 4,732 36,046 210,741 251,519 (139,928) $111,591 $ July 3, 2016 4,686 29,361 182,812 216,859 (131,710) $ 85,149 Depreciation expense was as follows for the periods indicated (thousands of dollars): 2017 2016 2015 Depreciation Expense $11,319 $10,022 $ 8,716 The gross and net book value of property, plant and equipment located outside of the United States, primarily in Mexico, were as follows (thousands of dollars): Gross book value Net book value July 2, 2017 $130,166 $ 69,652 July 3, 2016 $ 97,537 $ 43,954 Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment recognized is measured by the excess of the carrying amount of the asset over the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less estimated costs to sell. There were no impairments recorded in the years ended July 2, 2017, July 3, 2016 or June 28, 2015. Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and betterments, which significantly extend the useful lives of existing plant and equipment, are capitalized and depreciated. Upon retirement or disposition of plant and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in income. 4 3 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 N O T E S T O F I N A N C I A L S TAT E M E N T S Supplier Concentrations: The following inventory purchases were made from major suppliers during each fiscal year noted: Fiscal Year 2017 2016 2015 Percentage of Inventory Purchases 39% 36% 27% Number of Suppliers 7 6 5 We have long-term contracts or arrangements with most of our suppliers to guarantee the availability of raw materials and component parts. Labor Concentrations: We had approximately 3,892 full-time associates of which approximately 275 or 7.1 percent were represented by a labor union at July 2, 2017. The associates represented by a labor union account for all production associates at our Milwaukee facility. The current contract with the unionized associates is effective through September 17, 2018. Revenue Recognition: Revenue is recognized upon the shipment of products, which is when title passes, payment terms are final, we have no remaining obligations and the customer is required to pay. Revenue is recognized net of estimated returns and discounts, which is recognized as a deduction from revenue at the time of the shipment. Price concessions agreed to with customers are recorded as a reduction of sales at the later of when revenue related to the specific sales is recognized or the date at which the price concessions are offered and committed to. Research and Development Costs: Expenditures relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed as incurred. Research and development expenditures were approximately $4.6 million in 2017, $430,000 in 2016 and $280,000 in 2015. Other Income, Net: Net other income included in the accompanying Consolidated Statements of Income and Comprehensive Income primarily included foreign currency transaction gains and losses, realized and unrealized gains and losses on our Mexican peso currency forward contracts and Rabbi Trust gains. Foreign currency transaction gains and losses resulted from activity associated with foreign denominated assets held by our Mexican subsidiaries. We entered into the Mexican peso currency forward contracts during fiscal 2016 and 2017 to minimize earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. The Rabbi Trust assets fund our amended and restated supplemental executive retirement plan. The investments held in the Trust are considered trading securities. The impact of these items for the periods presented was as follows (thousands of dollars): Foreign currency transaction gain Rabbi Trust gain (loss) Unrealized gain (loss) on Mexican peso forward contracts Realized loss on Mexican peso forward contracts Other July 2, 2017 $ 1,128 296 2,010 (1,650) 523 $ 2,307 Years Ended July 3, 2016 $2,559 (41) (889) (1,196) 235 $ 668 June 28, 2015 $3,075 96 - - 310 $3,481 Self Insurance Plans: We have self-insured medical and dental plans covering all eligible U.S. associates. The claims handling process for the self-insured plans are managed by a third-party administrator. Stop-loss insurance coverage limits our liability on a per individual per calendar year basis. The per individual per calendar year stop-loss limit was $150,000 in each calendar year 2014 through 2017. Effective January 1, 2011, under Health Care Reform, there is no lifetime maximum for overall benefits. The expected ultimate cost for claims incurred under the self-insured medical and dental plans as of the applicable balance sheet date is not discounted and is recognized as an expense on our Consolidated Statements of Income and Comprehensive Income. The expected ultimate cost of claims is estimated based upon the aggregate liability for reported claims and an estimated liability for claims incurred but not reported, which is based on an analysis of historical data, current health care trends and information available from the third-party administrator. As additional information becomes available, actual results may differ from recorded estimates, which may require us to adjust the amount of our estimated liability for claims incurred but not reported. The expected ultimate cost for claims incurred under the self-insured medical and dental plans that has not been paid as of the applicable balance sheet date is included in Accrued Liabilities: Payroll and Benefits in our accompanying Consolidated Balance Sheets. Changes in the balance sheet amounts for self-insured plans were as follows (thousands of dollars): Year ended July 2, 2017 Year ended July 3, 2016 Year ended June 28, 2015 Balance, Beginning of Year $420 $420 $420 Provision Charged to Expense $5,796 $5,032 $4,756 Payments $5,796 $5,032 $4,756 Balance, End of Year $420 $420 $420 4 4 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 N O T E S T O F I N A N C I A L S TAT E M E N T S Warranty Reserve: We have a warranty liability recorded related to our known and potential exposure to warranty claims in the event our products fail to perform as expected, and in the event we may be required to participate in the repair costs incurred by our customers for such products. The recorded warranty liability balance involves judgment and estimates. Our liability estimate is based on an analysis of historical warranty data as well as current trends and information, including our customers’ recent extension and/or expansion of their warranty programs. In recent fiscal periods, our largest customers have extended their warranty protection for their vehicles and have since demanded higher warranty cost sharing arrangements from their suppliers in their terms and conditions to purchase, including from STRATTEC. During 2017 and 2016, the warranty liability was reduced as a result of settlement payments of previously accrued customer warranty issues. The 2015 warranty provision included various known or expected customer warranty issues and estimated future warranty costs to be incurred as of June 2015 for which amounts were reasonably estimable. As additional information becomes available, actual results may differ from recorded estimates, which may require us to adjust the amount of our warranty provision. Changes in the warranty reserve were as follows (thousands of dollars): Year ended July 2, 2017 Year ended July 3, 2016 Year ended June 28, 2015 Balance, Beginning of Year $ 9,228 $11,835 $ 3,462 (Recoveries) Provision Charged to Expense $ (843) $ 583 $8,975 Payments $ 2,835 $3,190 $ 602 Balance, End of Year $ 5,550 $ 9,228 $11,835 Foreign Currency Translation: The financial statements of our foreign subsidiaries and equity investees are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and the average exchange rate for each applicable period for sales, costs and expenses. Foreign currency translation adjustments are included as a component of accumulated other comprehensive loss. Foreign currency transaction gains and losses are included in other income, net in the accompanying Consolidated Statements of Income and Comprehensive Income. Accumulated Other Comprehensive Loss: Accumulated other comprehensive loss was comprised of the following (thousands of dollars): Unrecognized pension and postretirement benefit liabilities, net of tax Foreign currency translation, net of tax July 2, 2017 July 3, 2016 June 28, 2015 $18,750 14,138 $32,888 $24,518 13,155 $37,673 $18,638 8,221 $26,859 The following tables summarize the changes in accumulated other comprehensive loss (“AOCL”) for the years ended July 2, 2017 and July 3, 2016 (thousands of dollars): Year Ended July 2, 2017 Foreign Currency Translation Adjustments Retirement and Postretirement Plans Balance July 3, 2016 Other comprehensive loss before reclassifications Income tax Net other comprehensive loss before reclassifications Reclassifications: Prior service credits (A) Actuarial gains (A) Total reclassifications before tax Income Tax Net reclassifications Other comprehensive loss (income) Other comprehensive income attributable to non-controlling interest Balance July 2, 2017 $13,155 534 (108) 426 - - - - - 426 (557) $14,138 $24,518 (6,142) 2,272 (3,870) 753 (3,766) (3,013) 1,115 (1,898) (5,768) - $18,750 Total $37,673 (5,608) 2,164 (3,444) 753 (3,766) (3,013) 1,115 (1,898) (5,342) (557) $32,888 4 5 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 N O T E S T O F I N A N C I A L S TAT E M E N T S Year Ended July 3, 2016 Foreign Currency Translation Adjustments Retirement and Postretirement Plans Balance June 28, 2015 Other comprehensive loss before reclassifications Income Tax Net other comprehensive loss before reclassifications Reclassifications: Prior service credits (A) Actuarial gains (A) Total reclassifications before tax Income Tax Net reclassifications Other comprehensive loss Other comprehensive loss attributable to non-controlling interest Balance July 3, 2016 $ 8,221 5,248 _ ____- 5,248 - - - - - 5,248 314 $13,155 $18,638 11,640 (4,307) 7,333 753 (3,059) (2,306) 853 (1,453) 5,880 - $24,518 Total $26,859 16,888 (4,307) 12,581 753 (3,059) (2,306) 853 (1,453) 11,128 314 $37,673 (A) Amounts reclassified are included in the computation of net periodic benefit cost, which is included in Cost of Goods Sold and Engineering, Selling and Administrative expenses in the accompanying Consolidated Statements of Income and Comprehensive Income. See the Note Retirement Plans and Postretirement Costs in these notes to financial statements. Accounting For Stock-Based Compensation: We maintain an omnibus stock incentive plan. This plan provides for the granting of stock options, shares of restricted stock and stock appreciation rights. The Board of Directors has designated 1,850,000 shares of common stock available for the grant of awards under the plan. Remaining shares available to be granted under the plan as of July 2, 2017 were 204,939. Awards that expire or are cancelled without delivery of shares become available for re-issuance under the plan. We issue new shares of common stock to satisfy stock option exercises. Nonqualified and incentive stock options and shares of restricted stock have been granted to our officers, outside directors and specified associates under the stock incentive plan. Stock options granted under the plan may not be issued with an exercise price less than the fair market value of the common stock on the date the option is granted. Stock options become exercisable as determined at the date of grant by the Compensation Committee of our Board of Directors. The options expire 10 years after the grant date unless an earlier expiration date is set at the time of grant. The options vest 1 to 4 years after the date of grant. Shares of restricted stock granted under the plan are subject to vesting criteria determined by the Compensation Committee of our Board of Directors at the time the shares are granted and have a minimum vesting period of one year from the date of grant. Restricted shares granted prior to August 2014 have voting and dividend rights, regardless of whether the shares are vested or unvested. Restricted shares granted during August 2014 and thereafter have voting rights, regardless of whether the shares are vested or unvested, but only have the right to receive cash dividends after such shares become vested. Prior to August 2016, the restricted stock grants issued vest or vested 3 to 5 years after the date of grant. As of August 2016, restricted stock grants issued vest 1 to 5 years after the date of grant. The fair value of each stock option grant was estimated as of the date of grant using the Black- Scholes pricing model. The resulting compensation cost for fixed awards with graded vesting schedules is amortized on a straight-line basis over the vesting period for the entire award. The expected term of awards granted is determined based on historical experience with similar awards, giving consideration to the contractual terms and vesting schedules. The expected volatility is determined based on our historical stock prices over the most recent period commensurate with the expected term of the award. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term commensurate with the expected term of the award. Expected pre-vesting option forfeitures are based primarily on historical data. The fair value of each restricted stock grant was based on the market price of the underlying common stock as of the date of grant. The resulting compensation cost is amortized on a straight line basis over the vesting period. We record stock based compensation only for those awards that are expected to vest. Unrecognized compensation cost as of July 2, 2017 related to stock options and restricted stock granted under the plan was as follows (thousands of dollars): Stock options granted Restricted stock granted Compensation Cost $ 14 $1,461 Weighted Average Period over which Cost is to be Recognized (in years) 0.1 1.0 4 6 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 N O T E S T O F I N A N C I A L S TAT E M E N T S Unrecognized compensation cost will be adjusted for any future changes in estimated and actual forfeitures. Cash received from stock option exercises and the related income tax benefit were as follows (thousands of dollars): Fiscal Year 2017 2016 2015 Cash Received from Stock Option Exercises $ 136 $ 364 $ 474 Income Tax Benefit $ 25 $ 196 $ 458 The intrinsic value of stock options exercised and the fair value of stock options vested were as follows (thousands of dollars): Intrinsic value of options exercised Fair value of stock options vested July 2, 2017 $ 115 $ 566 Years Ended July 3, 2016 $ 529 $ 331 June 28, 2015 $1,375 $ 382 The grant date fair values and assumptions used to determine compensation expense recorded in the accompanying financial statements were as follows: Options Granted During Weighted average grant date fair value: 2015 Options issued at grant date market value Options issued above grant date market value $ 34.93 n/a Assumptions: Risk free interest rates Expected volatility Expected dividend yield 0.62% Expected term (in years) 1.90% 57.83% 6.0 No options were granted during the fiscal year ended July 2, 2017 and July 3, 2016. The range of options outstanding as of July 2, 2017 was as follows: Number of Options Outstanding/Exercisable Weighted Average Exercise Price Outstanding/Exercisable Weighted Average Remaining Contractual Life Outstanding (In Years) $10.92-$18.49 $26.53-$38.71 $79.73 42,214/42,214 87,284/87,284 9,010/- $15.36/$15.36 $30.72/$30.72 $79.73/$- $29.23/$25.71 2.2 5.2 7.1 Income Taxes: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases and operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and operating loss carry-forwards are expected to be recovered, settled or utilized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. We recognize the benefit of an income tax position only if it is more likely than not (greater than 50 percent) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit is recognized. The tax benefits recognized are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. Additionally, we accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. Interest and penalties on uncertain tax positions are classified in the Provision for Income Taxes in the accompanying Consolidated Statements of Income and Comprehensive Income. INVESTMENT IN JOINT VENTURES AND MAJORITY OWNED SUBSIDIARIES We participate in certain Alliance Agreements with WITTE Automotive (“WITTE”) and ADAC Automotive (“ADAC”). WITTE, of Velbert, Germany, is a privately held automotive supplier. WITTE designs, manufactures and markets automotive components, including locks 4 7 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 N O T E S T O F I N A N C I A L S TAT E M E N T S and keys, hood latches, rear compartment latches, seat back latches, door handles and specialty fasteners. WITTE’s primary market for these products has been Europe. ADAC, of Grand Rapids, Michigan, is a privately held automotive supplier and manufactures engineered products, including door handles and other automotive trim parts, utilizing plastic injection molding, automated painting and various assembly processes. The Alliance Agreements include a set of cross-licensing agreements for the manufacture, distribution and sale of WITTE products by STRATTEC and ADAC in North America, and the manufacture, distribution and sale of STRATTEC and ADAC products by WITTE in Europe. Additionally, a joint venture company, Vehicle Access Systems Technology LLC (“VAST LLC”), in which WITTE, STRATTEC and ADAC each hold a one-third equity interest, exists to seek opportunities to manufacture and sell each company’s products in areas of the world outside of North America and Europe. VAST LLC has investments in Sistema de Veicular Ltda, VAST Fuzhou, VAST Great Shanghai, VAST Shanghai Co. and Minda-VAST Access Systems. Sistema de Acesso Veicular Ltda is located in Brazil and services customers in South America. VAST Fuzhou, VAST Great Shanghai and VAST Shanghai Co. (collectively known as VAST China), provide a base of operations to service our automotive customers in the Asian market. VAST LLC also maintains branch offices in South Korea and Japan in support of customer sales and engineering requirements. Effective April 30, 2015, VAST LLC executed an agreement with Minda Management Services Limited to become a 50:50 joint venture partner in the former Minda-Valeo Security Systems joint venture entity, based in Pune, India. This joint venture entity was renamed Minda-VAST Access Systems (“Minda-VAST”). Minda Management Services Limited is an affiliate of both Minda Corporation Limited and Spark Minda, Ashok Minda Group of New Delhi, India (collectively “Minda”). Minda and its affiliates cater to the needs of all major car, motorcycle, commercial vehicle, tractor and off-road vehicle manufacturers in India. They are a leading manufacturer in the Indian marketplace of security and access products, handles, automotive safety, restraint systems, driver information and telematics systems for both OEMs and the aftermarket. The VAST LLC investments are accounted for using the equity method of accounting. The activities related to the VAST LLC joint ventures resulted in equity earnings of joint ventures to STRATTEC of approximately $2.6 million during 2017, equity loss of joint ventures to STRATTEC of approximately $639,000 during 2016 and equity earnings of joint ventures to STRATTEC of approximately $1.3 million during 2015. The 2016 equity loss of joint ventures for VAST LLC included a $6.0 million impairment charge related to its Minda-VAST Access Systems joint venture in India. STRATTEC’s portion of this impairment charge for 2016 totaled $2.0 million. During 2017 and 2016, capital contributions totaling $1.2 million and $660,000, respectively, were made to VAST LLC for purposes of funding operations in Brazil. STRATTEC’s portion of the capital contributions totaled $400,000 in 2017 and $220,000 in 2016. During 2015, cash capital contributions totaling $13.2 million were made to VAST LLC in support of the acquisition of the 50 percent joint venture interest in Minda-VAST and in support of general operating expenses for the Brazilian entity. STRATTEC’s portion of the cash capital contributions totaled $4.4 million. ADAC-STRATTEC LLC, a Delaware limited liability company, was formed in fiscal year 2007 to support injection molding and door handle assembly operations in Mexico. ADAC- STRATTEC LLC was 51 percent owned by STRATTEC and 49 percent owned by ADAC for all periods presented in this report. An additional Mexican entity, ADAC-STRATTEC de Mexico, is wholly owned by ADAC-STRATTEC LLC. ADAC-STRATTEC LLC’s financial results are consolidated with the financial results of STRATTEC and resulted in increased net income to STRATTEC of approximately $3.1 million in 2017, $2.9 million in 2016 and $2.6 million in 2015. In accordance with the provisions of the ADAC-STRATTEC Credit Facility a capital contribution to ADAC-STRATTEC LLC of $6 million collectively from STRATTEC and ADAC was completed during 2017. STRATTEC’s portion of this capital contribution totaled $3.06 million. No capital contributions to ADAC-STRATTEC LLC were made during 2016 or 2015. STRATTEC POWER ACCESS LLC (“SPA”) was formed in fiscal year 2009 to supply the North American portion of the power sliding door, lift gate and deck lid system access control products which were acquired from Delphi Corporation. SPA was 80 percent owned by STRATTEC and 20 percent owned by WITTE for all periods presented in this report. An additional Mexican entity, STRATTEC POWER ACCESS de Mexico, is wholly owned by SPA. The financial results of SPA are consolidated with the financial results of STRATTEC and resulted in increased net income to STRATTEC of approximately $2.6 million in 2017, increased net income to STRATTEC of approximately $2.0 million in 2016 and reduced net income to STRATTEC of approximately $269,000 in 2015. SAL LLC was formed in fiscal 2013 to introduce a new generation of biometric security products based upon the designs of Actuator Systems LLC, our partner and the owner of the remaining ownership interest. SAL LLC was 51 percent owned by STRATTEC for all periods presented in this report. Our investment in SAL LLC, for which we exercise significant influence but do not control and are not the primary beneficiary, is accounted for using the equity method. The activities related to SAL LLC resulted in an equity loss of joint ventures to STRATTEC of approximately $1.9 million in 2017, $1.6 million in 2016 and $2.0 million in 2015. Effective with our fiscal 2015 fourth quarter, 100 percent of the funding for SAL LLC was being made through loans from STRATTEC to SAL LLC and through STRATTEC’s guarantee of the SAL Credit Facility which is discussed herein. Therefore, effective with our fiscal 2015 fourth quarter, even though STRATTEC maintains a 51 percent ownership interest in SAL LLC, 4 8 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 N O T E S T O F I N A N C I A L S TAT E M E N T S STRATTEC began recognizing 100 percent of the losses of SAL LLC up to our committed financial support through Equity Earnings (Loss) of Joint Ventures in the accompanying Consolidated Statements of Income and Comprehensive Income. In addition, the equity loss of joint ventures for SAL LLC included the following for the periods presented (thousands of dollars): Loss on guarantee of SAL LLC vendor contract Loss on loan to SAL LLC Loss on guarantee of SAL LLC credit facility July 2, 2017 Years Ended July 3, 2016 June 28, 2015 $ $ $ - - - - $ $ 225 $ 247 $ 123 $ 100 $ 488 During fiscal 2018, we, along with our joint venture partner, intend to wind down and discontinue operating the business of SAL LLC. STRATTEC’s joint venture investments are included in the accompanying Consolidated Balance Sheets as follows (thousands of dollars): Investment in Joint Ventures: Investment in VAST LLC Other Current Liabilities: Investment in SAL LLC July 2, 2017 July 3, 2016 $16,840 $14,168 $ 463 $ 1,265 EQUITY EARNINGS (LOSS) OF JOINT VENTURES As discussed above under the note Investment in Joint Ventures and Majority Owned Subsidiaries, we hold a one-third ownership interest in VAST LLC, for which we exercise significant influence but do not control and are not the primary beneficiary. Our investment in VAST LLC is accounted for using the equity method. The following are summarized statements of operations and summarized balance sheet data for VAST LLC (thousands of dollars): Net sales Cost of goods sold Gross profit Engineering, selling and administrative expense Impairment charge Income (loss) from operations Other income (expense), net Income (loss) before provision for income taxes Provision for income taxes Net income (loss) STRATTEC’s share of VAST LLC net income (loss) Intercompany profit eliminations STRATTEC’s equity earnings (loss) July 2, 2017 $128,963 101,910 27,053 19,710 - 7,343 1,662 9,005 1,235 $ 7,770 $ 2,590 3 Years Ended July 3, 2016 $114,338 94,060 20,278 15,866 6,000 (1,588) (115) (1,703) 168 $ (1,871) $ (624) (15) June 28, 2015 $124,929 105,132 19,797 16,155 - 3,642 123 3,765 41 $ 3,724 $ 1,241 10 of VAST LLC $ 2,593 $ (639) $ 1,251 4 9 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 N O T E S T O F I N A N C I A L S TAT E M E N T S Cash and cash equivalents Receivables, net Inventories, net Other current assets Total current assets Property, plant and equipment, net Other long-term assets Total assets Current liabilities Long-term liabilities Total liabilities Net assets July 2, 2017 $ 11,757 41,942 15,185 11,782 80,666 31,017 12,850 $124,533 July 3, 2016 $ 6,584 24,557 13,500 13,007 57,648 26,557 11,086 $95,291 $ 70,753 2,960 $ 73,713 $50,462 2,019 $52,481 $ 50,820 $42,810 STRATTEC’s share of VAST LLC net assets $ 16,940 $14,270 The 2016 equity loss of joint ventures for VAST LLC included a $6 million impairment charge related to its Minda-VAST Access Systems joint venture in India. STRATTEC’s portion of this impairment charge in 2016 totaled $2 million. As discussed above under the note Investment in Joint Ventures and Majority Owned Subsidiaries, we hold a 51 percent ownership interest in a joint venture company, SAL LLC, which exists to introduce a new generation of biometric security products based upon the designs of Actuator Systems LLC, our partner. SAL LLC had a $1.5 million revolving credit facility with BMO Harris Bank N.A. with a maturity date of February 16, 2016, which was fully guaranteed by STRATTEC. Outstanding borrowings under the SAL Credit Facility as of February 16, 2016 totaled $1.5 million. SAL LLC did not have cash available to pay the outstanding debt balance as of the maturity date. Therefore, STRATTEC made a payment of $1.5 million on its guarantee on February 16, 2016. Prior to making the guarantee payment, STRATTEC had recorded a liability related to the guarantee of $1.5 million at February 16, 2016. STRATTEC’s proportionate share of the guarantee based on our ownership percentage in SAL LLC totaled $765,000 as of February 16, 2016, and accordingly, our investment in SAL LLC included this amount as of this date. Our joint venture partner did not guarantee their proportionate share of the SAL Credit Facility. As a result, we recorded a loss equal to our partner’s proportionate share of the fair value of the STRATTEC guarantee based upon our partner’s ownership interest in the joint venture of $488,000 during fiscal 2015 and $247,000 during 2016. This loss is included in Equity Earnings (Loss) of Joint Ventures for 2016 and 2015, as applicable, in the accompanying Consolidated Statements of Income and Comprehensive Income. SAL LLC is considered a variable interest entity based on the STRATTEC guarantee and additional loans from STRATTEC as discussed below. STRATTEC is not the primary beneficiary and does not control the entity. Accordingly, our investment in SAL LLC is accounted for using the equity method. SAL LLC maintains a license agreement with Westinghouse allowing SAL LLC to do business as Westinghouse Security. Payments due to Westinghouse under the license agreement were guaranteed by STRATTEC. As of July 2, 2017 and July 3, 2016, STRATTEC had recorded a liability equal to the estimated fair value of the future payments due under this guarantee of $250,000. This liability is included in the accompanying Consolidated Balance Sheets in Accrued Liabilities: Other as of July 2, 2017 and in Other Long- term Liabilities as of July 3, 2016. STRATTEC’s proportionate share of the guarantee of these payments based on our ownership percentage in SAL LLC totals $127,000, and accordingly, our investment in SAL LLC was increased by this amount as of July 2, 2017 and July 3, 2016. Our joint venture partner did not guarantee their proportionate share of the payments required under the license agreement. As a result, STRATTEC recorded a loss of $123,000 which is equal to our partner’s proportionate share, based upon their ownership interest in the joint venture, of the fair value of the STRATTEC guarantee. This loss is included in Equity Earnings (Loss) of Joint Ventures for 2015 in the accompanying Consolidated Statements of Income and Comprehensive Income. Loans were made from STRATTEC to SAL LLC in support of operating expenses and working capital needs. The outstanding loan amounts totaled $2.6 million and $325,000 as of July 2, 2017 and July 3, 2016, respectively. As of July 2, 2017, the outstanding loan amount was eliminated against STRATTEC’s negative investment in SAL LLC in the preparation of the consolidated financial statements. Even though we maintain a 51 percent ownership interest in SAL LLC, effective with our fiscal 2015 fourth quarter, 100 percent of the funding for SAL LLC was being made by loans from STRATTEC to SAL LLC. Therefore, STRATTEC began recognizing 100 percent of the losses of SAL LLC up to our committed financial 5 0 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 N O T E S T O F I N A N C I A L S TAT E M E N T S support through Equity Earnings (Loss) of Joint Ventures in the accompanying Consolidated Statements of Income and Comprehensive Income effective with our fiscal 2015 fourth quarter. The following are summarized statements of operations and summarized balance sheet data for SAL LLC (thousands of dollars): Net sales Cost of goods sold Gross (loss) profit Engineering, selling and administrative expense Loss from operations Other expense, net Net loss July 2, 2017 $ 369 610 (241) 1,534 (1,775) (155) $ (1,930) STRATTEC’s share of SAL LLC loss Loss on guarantee of SAL LLC vendor contract Loss on loan to SAL LLC Loss on guarantee of SAL LLC credit facility STRATTEC’s equity loss of SAL LLC $(1,927) - - - $(1,927) Years Ended July 3, 2016 $ 603 382 221 1,311 (1,090) (34) $ (1,124) $ (1,124) - (225) (247) $(1,596) June 28, 2015 $ 49 450 (401) 1,492 (1,893) (4) $(1,897) $(1,328) (123) (100) (488) $(2,039) Cash and cash equivalents Receivables, net Inventories, net Total assets Current liabilities Net liabilities STRATTEC’s share of SAL LLC net liabilities July 2, 2017 $ 11 11 345 $ 367 $ 3,189 $ (2,822) July 3, 2016 $ 21 60 283 $ 364 $ 1,256 (892) $ $ (1,439) $ (455) During fiscal 2018, we, along with our joint venture partner, intend to wind down and discontinue operating the business of SAL LLC. We have sales of component parts to VAST LLC and SAL LLC, purchases of component parts from VAST LLC, expenses charged to VAST LLC for engineering and accounting services and expenses charged from VAST LLC to STRATTEC for general headquarter expenses. The following tables summarize the related party transactions with VAST LLC and SAL LLC for the periods indicated (thousands of dollars): Sales to VAST LLC Sales to SAL LLC Purchases from VAST LLC Expenses charged to VAST LLC Expenses charged from VAST LLC Accounts receivable from VAST LLC Accounts receivable from SAL LLC (A) Current loan receivable from SAL LLC (A) Long-term loan receivable from VAST LLC Accounts payable to VAST LLC July 2, 2017 $ 1,966 $ 234 $ 245 $ 843 $ 1,134 July 2, 2017 - $ - $ $ - $ 300 - $ Years Ended July 3, 2016 304 $ $ 363 $ 149 $ 1,034 $ 1,526 July 3, 2016 $ $ $ $ $ 55 450 325 400 213 June 28, 2015 $2,298 $ 157 $ 164 $ 832 $1,825 (A) As of July 2, 2017, outstanding loan and accounts receivable balances due from SAL LLC to STRATTEC totaled $2.6 million and $185,000, respectively. As of July 2, 2017, these outstanding balances have been offset against our investment in SAL LLC, which is included in Other Current Liabilities in the Consolidated Balance Sheet. As of July 3, 2016, a valuation allowance was established for the full amount of the outstanding loan balance of $325,000 due from SAL LLC to STRATTEC. CREDIT FACILITIES STRATTEC has a $30 million secured revolving credit facility (the “STRATTEC Credit Facility”) with BMO Harris Bank N.A. ADAC-STRATTEC LLC has a $25 million secured revolving credit facility (the “ADAC-STRATTEC Credit Facility”) with BMO Harris Bank N.A., which is guaranteed by STRATTEC. The credit facilities both expire on August 1, 2020. Borrowings under either credit facility are secured by our 5 1 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 N O T E S T O F I N A N C I A L S TAT E M E N T S U.S. cash balances, accounts receivable, inventory and fixed assets located in the U.S. Interest on borrowings under both credit facilities is at varying rates based at our option, on the LIBOR plus 1.0 percent or the bank’s prime rate. Both credit facilities contain a restrictive financial covenant that requires the applicable borrower to maintain a minimum net worth level. The ADAC-STRATTEC Credit Facility includes an additional restrictive financial covenant that requires the maintenance of a minimum fixed charge coverage ratio. The ADAC-STRATTEC Credit Facility also required that a capital contribution to ADAC-STRATTEC LLC of $6 million collectively from STRATTEC and ADAC be completed by September 30, 2016. This capital contribution was completed as required. STRATTEC’s portion of the capital contribution totaled $3.06 million. As of July 2, 2017, we were in compliance with all financial covenants required by these credit facilities. Outstanding borrowings under the credit facilities referenced in the above paragraph as of the end of 2017 and 2016 were as follows (thousands of dollars): STRATTEC Credit Facility ADAC-STRATTEC Credit Facility July 2, 2017 $16,000 $14,000 July 3, 2016 $11,500 $ 8,500 Average outstanding borrowings and the weighted average interest rate under each such credit facility during 2017 and 2016 were as follows (thousands of dollars): Average Outstanding Borrowings Weighted Average Interest Rate Years Ended Years Ended July 3, 2016 July 2, 2017 1.5% STRATTEC Credit Facility $12,490 1.3% ADAC-STRATTEC Credit Facility $10,865 July 2, 2017 1.8% 1.8% July 3, 2016 $7,608 $4,443 We believe that the credit facilities referenced above are adequate, along with existing cash balances and cash flow from operations, to meet our anticipated capital expenditure, working capital, dividend and operating expenditure requirements. COMMITMENTS AND CONTINGENCIES We are from time to time subject to various legal actions and claims incidental to our business, including those arising out of alleged defects, alleged breaches of contracts, product warranties, intellectual property matters and employment related matters. It is our opinion that the outcome of such matters will not have a material adverse impact on the consolidated financial position, results of operations or cash flows of STRATTEC. With respect to warranty matters, although we cannot ensure that the future costs of warranty claims by customers will not be material, we believe our established reserves are adequate to cover potential warranty settlements. We have a reserve for estimated costs to remediate an environmental contamination site at our Milwaukee facility. The site was contaminated by a solvent spill, which occurred in 1985, from a former above ground solvent storage tank located on the east side of the facility. The reserve was initially established in 1995. Due to changing technology and related costs associated with active remediation of the site, in fiscal 2010 the reserve was adjusted based on updated third party estimates to adequately cover the cost for active remediation of the contamination. Additionally, in fiscal 2016, STRATTEC obtained updated third party estimates for adequately covering the cost of active remediation of this contamination. Based upon the updated estimates, no further adjustment to the reserve was required. From 1995 through July 2, 2017, costs of approximately $567,000 have been incurred related to the installation of monitoring wells on the property and ongoing monitoring costs. We monitor and evaluate the site with the use of groundwater monitoring wells that are installed on the property. An environmental consultant samples these wells one or two times a year to determine the status of the contamination and the potential for remediation of the contamination by natural attenuation, the dissipation of the contamination over time to concentrations below applicable standards. If such sampling evidences a sufficient degree of and trend toward natural attenuation of the contamination, we may be able to obtain a closure letter from the regulatory authorities resolving the issue without the need for active remediation. If a sufficient degree and trend toward natural attenuation is not evidenced by sampling, a more active form of remediation beyond natural attenuation may be required. The sampling has not yet satisfied all of the requirements for closure by natural attenuation. As a result, sampling continues and the reserve remains at an amount to reflect the estimated cost of active remediation. The reserve is not measured on a discounted basis. We believe, based on findings-to-date and known environmental regulations, that the environmental reserve of $1.3 million at July 2, 2017, is adequate. At July 2, 2017, we had purchase commitments related to the construction of a new ADAC-STRATTEC de Mexico manufacturing facility in Leon, Mexico, which is expected to be used primarily to paint and assemble door handle products, paint equipment to be installed and used at this new facility, zinc, other 5 2 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 N O T E S T O F I N A N C I A L S TAT E M E N T S purchased parts and natural gas. We also had minimum rental commitments under non-cancelable operating leases with a term in excess of one year. The purchase and minimum rental commitments are payable as follows (thousands of dollars): Fiscal Year 2018 2019 2020 2021 2022 Rental expense under all non-cancelable operating leases was as follows (thousands of dollars): Fiscal Year 2017 2016 2015 Rental Expense $ 704 $ 691 993 $ Minimum Rental Commitments $884 $606 $190 $ - - $ Purchase Commitments $17,413 $ 8,699 $ 3,897 - $ - $ INCOME TAXES The provision for income taxes consisted of the following (thousands of dollars): Currently payable: Federal State Foreign Deferred tax provision (benefit) July 2, 2017 Years Ended July 3, 2016 June 28, 2015 $ 228 3 2,202 2,433 1,851 $ 4,284 $ 18 130 1,893 2,041 3,027 $5,068 $9,891 657 2,164 12,712 (3,330) $9,382 The items accounting for the difference between income taxes computed at the Federal statutory tax rate and the provision for income taxes were as follows: U.S. statutory rate State taxes, net of Federal tax benefit Foreign subsidiaries U.S. taxation on non-U.S. earnings Research and development tax credit Non-controlling interest Other July 2, 2017 35.0% 1.2 (1.1) 3.8 (2.7) (9.9) (0.2) 26.1% Years Ended July 3, 2016 34.0% 1.3 0.6 - - (9.3) (0.2) 26.4% June 28, 2015 34.7% 0.7 (1.3) - - (4.1) (2.4) 27.6% The components of deferred tax assets were as follows (thousands of dollars): July 2, 2017 July 3, 2016 Unrecognized pension and postretirement benefit plan liabilities Accrued warranty Payroll-related accruals Stock-based compensation Inventory reserve Environmental reserve Repair and maintenance supply parts reserve Allowance for doubtful accounts NOL/credit carry-forwards Postretirement obligations Accumulated depreciation Accrued pension obligations Joint Ventures Other $11,191 925 2,605 1,488 1,249 484 333 185 1,669 (405) (6,034) (14,483) 808 241 256 $ $14,579 1,376 2,108 1,258 873 505 259 185 145 (227) (6,135) (13,197) 1,706 1,952 $ 5,387 5 3 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 N O T E S T O F I N A N C I A L S TAT E M E N T S Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. Federal foreign tax credit carry-forwards at July 2, 2017 resulted in future benefits of approximately $1.4 million and expire in 2027. State operating loss and credit carry-forwards at July 2, 2017 resulted in future benefits of approximately $269,000 and expire at varying times between 2024 and 2031. A valuation allowance of $267,000 has been recorded as of July 2, 2017, due to our assessment of the future realization of certain credit carry-forward benefits. We do not currently anticipate having sufficient state taxable income to offset these credit carry-forwards. Foreign income before the provision for income taxes was $5.3 million in 2017, $6.0 million in 2016 and $5.9 million in 2015. The income tax provision for 2017 included $424,000 related to the recognition of a deferred tax liability resulting from a change in assertion regarding the permanent reinvestment of earnings from two of our Mexican subsidiaries. Prior to 2017, the accumulated undistributed earnings from such subsidiaries were considered to be permanently reinvested in Mexico. Accordingly, we did not previously record deferred income taxes on these earnings in our financial statements. During 2017, the strength of the U.S. dollar to the Mexican peso significantly decreased the U.S. tax cost associated with a distribution from the Mexican entities as compared to the U.S. tax cost associated with such a distribution in prior periods. Consequently, we changed our assertion regarding the permanent reinvestment of earnings from these Mexican subsidiaries. Such earnings are no longer considered permanently reinvested. We repatriated $15.8 million from Mexico to the U.S. during 2017, recognized the deferred tax liability resulting from the change in assertion, and concluded that, with some restrictions and tax implications, the remaining current and future accumulated undistributed earnings of these subsidiaries will be available for repatriation as deemed necessary. The total liability for unrecognized tax benefits was $610,000 as of July 2, 2017 and $471,000 as of July 3, 2016 and was included in Other Long-term Liabilities in the accompanying Consolidated Balance Sheets. This liability includes approximately $571,000 of unrecognized tax benefits at July 2, 2017 and $441,000 at July 3, 2016 and approximately $39,000 of accrued interest at July 2, 2017 and $30,000 at July 3, 2016. This liability does not include an amount for accrued penalties. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was approximately $143,000 at July 2, 2017 and $20,000 at July 3, 2016. We recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows for the years ended July 2, 2017 and July 3, 2016 (thousands of dollars): Unrecognized tax benefits, beginning of year Gross increases – tax positions in prior years Gross decreases – tax positions in prior years Gross increases – current period tax positions Tax years closed Unrecognized tax benefits, end of year Years Ended July 2, 2017 $ 441 28 - 177 (75) $ 571 July 3, 2016 $ 437 - (3) 71 (64) $ 441 We or one of our subsidiaries files income tax returns in the United States (Federal), Wisconsin (state), Michigan (state) and various other states, Mexico and other foreign jurisdictions. Tax years open to examination by tax authorities under the statute of limitations include fiscal 2014 through 2017 for Federal, fiscal 2011 through 2017 for most states and calendar 2012 through 2016 for foreign jurisdictions. RETIREMENT PLANS AND POSTRETIREMENT COSTS We have a qualified, noncontributory defined benefit pension plan (“Qualified Pension Plan”) covering substantially all U.S. associates employed by us before January 1, 2010. Benefits under the Qualified Pension Plan are based on credited years of service and final average compensation. Our policy is to fund the Qualified Pension Plan with at least the minimum actuarially computed annual contribution required under the Employee Retirement Income Security Act of 1974 (ERISA). Plan assets consist primarily of listed equity and fixed income securities. Effective December 31, 2009, the Board of Directors amended the Qualified Pension Plan to freeze benefit accruals and future eligibility. The Board of Directors has approved the termination of the Qualified Pension Plan with a proposed termination date of December 31, 2017. The termination of the Qualified Pension Plan is contingent upon receipt of an IRS determination letter that the Qualified Pension Plan was qualified upon termination and approval by the Pension Benefit Guaranty Corporation (“PBGC”). The date the termination will be approved and benefits can be distributed will not be known until we receive all required regulatory approvals. We intend to submit our request to the IRS for a determination letter that the Qualified Pension Plan is qualified upon termination prior to the end of the 2017 calendar year. Depending on the time receipt of IRS and PBGC approval, we intend to distribute Qualified 5 4 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 N O T E S T O F I N A N C I A L S TAT E M E N T S Pension Plan assets prior to the end of the 2018 calendar year. Additionally, in connection with preparing for the termination of the Qualified Pension Plan, we have amended the plan to provide that participants are 100 percent vested in their accrued benefits as of the effective date of the plan termination, to adopt a new standard for disability benefits that will apply when the plan’s assets are distributed due to the termination, to add a lump sum distribution for employees and terminated vested participants who are not in payment status when Qualified Pension Plan assets are distributed due to the termination and to make certain other conforming amendments to the Qualified Pension Plan to comply with applicable laws that may be required by the IRS or may be deemed necessary or advisable to improve the administration of the Qualified Pension Plan or facilitate its termination and liquidation. We will contribute to the Trust Fund for the Qualified Pension Plan as necessary to ensure there are sufficient assets to provide all Qualified Pension Plan benefits as required by the PBGC. The financial impact of the Qualified Pension Plan termination will be recognized as a settlement of the Qualified Pension Plan liabilities. The settlement date and related financial impact have not yet been determined. We have historically had in place a noncontributory supplemental executive retirement plan (“SERP”), which prior to January 1, 2014 was a nonqualified defined benefit plan that essentially mirrored the Qualified Pension Plan, but provided benefits in excess of certain limits placed on our Qualified Pension Plan by the Internal Revenue Code. As noted above, we froze our Qualified Pension Plan effective as of December 31, 2009 and the SERP provided benefits to participants as if the Qualified Pension Plan had not been frozen. Because the Qualified Pension Plan was frozen and because new employees were not eligible to participate in the Qualified Pension Plan, our Board of Directors adopted amendments to the SERP on October 8, 2013 that were effective as of December 31, 2013 to simplify the SERP calculation. The SERP is funded through a Rabbi Trust with BMO Harris Bank N.A. Under the amended SERP, participants received an accrued lump-sum benefit as of December 31, 2013 which was credited to each participant’s account. Subsequent to December 31, 2013, each eligible participant receives a supplemental retirement benefit equal to the foregoing lump sum benefit, plus an annual benefit accrual equal to 8 percent of the participant’s base salary and cash bonus, plus annual credited interest on the participant’s account balance. All then current participants as of December 31, 2013 are fully vested in their account balances with any new individuals participating in the SERP effective on or after January 1, 2014 being subject to a five year vesting period. The SERP, which is considered a defined benefit plan under applicable rules and regulations of the Internal Revenue Code, will continue to be funded through use of a Rabbi Trust to hold investment assets to be used in part to fund any future required lump sum benefit payments to participants. The Rabbi Trust assets had a value of $2.6 million at July 2, 2017 and $2.3 million at July 3, 2016, and are included in Other Long-Term Assets in the accompanying Consolidated Balance Sheets. The projected benefit obligation under the amended SERP was $1.8 million at both July 2, 2017 and July 3, 2016. The SERP liabilities are included in the pension tables below. However, the Rabbi Trust assets are excluded from the tables as they do not qualify as plan assets. We also sponsor a postretirement health care plan for all U.S. associates hired prior to June 1, 2001. The expected cost of retiree health care benefits is recognized during the years the associates who are covered under the plan render service. Effective January 1, 2010, an amendment to the postretirement health care plan limited the benefit for future eligible retirees to $4,000 per plan year and the benefit is further subject to a maximum five year coverage period based on the associate’s retirement date and age. The postretirement health care plan is unfunded. Amounts included in accumulated other comprehensive loss, net of tax, at July 2, 2017, which have not yet been recognized in net periodic benefit cost were as follows (thousands of dollars): Prior service cost (credit) Net actuarial loss Pension and SERP $ 7 17,279 $ 17,286 Postretirement $ (768) 2,232 $ 1,464 Prior service cost (credit) and unrecognized net actuarial losses included in accumulated other comprehensive loss at July 2, 2017 which are expected to be recognized in net periodic benefit cost (credit) in fiscal 2018, net of tax, for the pension, SERP and postretirement plans are as follows (thousands of dollars): Prior service cost (credit) Net actuarial loss Pension and SERP 7 $ 1,282 $ 1,289 Postretirement (481) $ 302 (179) $ 5 5 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 N O T E S T O F I N A N C I A L S TAT E M E N T S The following tables summarize the pension, SERP and postretirement plans’ income and expense, funded status and actuarial assumptions for the years indicated (thousands of dollars). We use a June 30 measurement date for our pension and postretirement plans. Pension and SERP Benefits Years Ended July 3, June 28, 2016 July 2, 2017 2015 Postretirement Benefits Years Ended July 3, June 28, 2015 2016 July 2, 2017 COMPONENTS OF NET PERIODIC BENEFIT COST (CREDIT): Service cost Interest cost Expected return on plan assets Amortization of prior service cost (credit) Amortization of unrecognized net loss Net periodic benefit cost (credit) 3,926 (5,854) 11 $ 54 $ 50 $ 64 4,173 4,387 (6,174) (5,509) 11 11 3,228 2,443 2,775 $1,365 $1,382 $ 849 $ 13 $ 12 $ 55 - (764) 14 114 - (764) 538 616 693 57 $ (158) $ 87 - (764) (49) $ Pension and SERP Benefits 2017 2016 Postretirement Benefits 2016 2017 WEIGHTED-AVERAGE ASSUMPTIONS: Benefit Obligations: Discount rate Rate of compensation increases - SERP Net Periodic Benefit Cost: Discount rate Expected return on plan assets Rate of compensation increases - SERP 3.91% 3.0% 3.79% 5.45% 3.0% CHANGE IN PROJECTED BENEFIT OBLIGATION: Benefit obligation at beginning of year Service cost Interest cost Actuarial (gain) loss Benefits paid Benefit obligation at end of year $106,152 54 3,926 (4,342) (4,524) $101,266 CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year $104,460 7,574 5,014 (4,524) $112,524 Actual return on plan assets Employer contribution Benefits paid Fair value of plan assets at end of year Funded status–prepaid (accrued) 3.79% 3.0% 4.53% 5.45% 3.0% $ 99,329 50 4,387 6,783 (4,397) $106,152 $105,472 371 3,014 (4,397) $104,460 3.91% n/a 3.79% n/a n/a 3.79% n/a 4.53% n/a n/a $ 1,602 13 55 (80) (322) $ 1,268 $ - - 322 (322) $ - $ 2,179 12 87 (281) (395) $ 1,602 $ - - 395 (395) $ - benefit obligations $ 11,258 $ (1,692) $ (1,268) $ (1,602) AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE SHEETS: Other long-term assets Accrued payroll and benefits (current liabilities) Accrued benefit obligations (long-term liabilities) Net amount recognized $ 13,082 $ 72 $ - $ - (332) (299) (265) (340) (1,492) $ 11,258 (1,465) $ (1,692) (1,003) $ (1,268) (1,262) $ (1,602) CHANGES IN PLAN ASSETS AND BENEFIT OBLIGATIONS RECOGNIZED IN OTHER COMPREHENSIVE INCOME: Net periodic benefit cost (credit) Net actuarial (gain) loss Amortization of prior service (cost) credits Amortization of unrecognized net loss Total recognized in other comprehensive (income) loss, before tax Total recognized in net periodic benefit cost and other comprehensive (income) loss, before tax $ 1,365 (6,063) (11) (3,228) $ 1,382 11,921 (11) (2,443) $ (158) (80) 764 (538) $ (49) (281) 764 (616) (9,302) 9,467 146 (133) $ (7,937) $ 10,849 $ (12) $ (182) N O T E S T O F I N A N C I A L S TAT E M E N T S The pension benefits have a separately determined accumulated benefit obligation, which is the actuarial present value of benefits based on service rendered and current and past compensation levels. This differs from the projected benefit obligation in that it includes no assumptions about future compensation levels. The following table summarizes the accumulated benefit obligations and projected benefit obligations for the pension and SERP (thousands of dollars): Accumulated benefit obligation Projected benefit obligation Pension SERP July 2, 2017 $99,442 $99,442 July 3, 2016 $104,388 $104,388 July 2, 2017 $1,591 $1,824 July 3, 2016 $1,435 $1,764 For measurement purposes as it pertains to the estimated obligation associated with retirees prior to January 1, 2012, a 7.2 percent annual rate increase in the per capita cost of covered health care benefits was assumed for fiscal 2018; the rate was assumed to decrease gradually to 4.5 percent by the year 2025 and remain at that level thereafter. The health care cost trend assumption has a minimal effect on our postretirement benefit amounts reported. A 1% change in the health care cost trend rates would have the following effects (thousands of dollars): Effect on total of service and interest cost components in fiscal 2017 Effect on postretirement benefit obligation as of July 2, 2017 1% Increase $ - $ 7 1% Decrease $ - $ (7) We employ a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of short and long-term plan liabilities, plan funded status and corporate financial condition. The investment portfolio primarily contains a diversified blend of equity and fixed income investments. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks, as well as growth and value style managers, and small, mid and large market capitalizations. The investment portfolio does not include any real estate holdings. The investment policy of the plan prohibits investment in STRATTEC stock. Investment risk is measured and monitored on an ongoing basis through periodic investment portfolio reviews, annual liability measurements and periodic asset/liability studies. The pension plan weighted-average asset allocations by asset category were as follows for 2017 and 2016: Equity investments Fixed-income investments Cash Total Target Allocation 35% 30 35 100% July 2, 2017 38% 56 6 100% July 3, 2016 38% 27 35 100% The following is a summary, by asset category, of the fair value of pension plan assets at the June 30, 2017 and June 30, 2016 measurement dates (thousands of dollars): June 30, 2017 Level 1 Level 2 Level 3 $ - $ 7,233 $ Asset Category Cash and cash equivalents Equity securities/funds: Total June 30, 2016 Level 1 Level 2 Level 3 Total - $ 36,706 - $ 7,233 $ - $36,706 $ Small cap Mid cap Large cap International Fixed income: 1,008 12,414 19,961 8,941 - - - - - 1,008 - 12,414 - 19,961 - 8,941 1,714 12,341 18,678 7,132 - - - - - 1,714 - 12,341 - 18,678 - 7,132 Bond funds/bonds Total 5,718 57,249 - 62,967 4,837 23,052 - 27,889 - $112,524 $ 44,702 $59,758 $ - $104,460 $ 48,042 $64,482 $ 5 6 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 There were no transfers in or out of Level 3 investments during the measurement year ended June 30, 2017. The expected long-term rate of return on U.S. pension plan assets used to calculate net periodic benefit cost was 5.45 percent for 2018 and 2017. The target asset allocation is 35 percent public equity and 65 percent fixed income/cash. The 5.45 percent is approximated by applying returns of 10 percent on public equity and 3 percent on fixed income/cash to the target allocation. The actual historical returns are also relevant. Annualized returns for periods ended June 30, 2017 were 5.22 percent for 5 years, 3.71 percent for 10 years, 4.83 percent for 15 years, 4.96 percent for 20 years, 5.90 percent for 25 years and 6.33 percent for 30 years. We expect to contribute approximately $3.0 million to our qualified pension plan, $333,000 to our SERP and $265,000 to our postretirement health care plan in fiscal 2018. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid during the fiscal years noted below (thousands of dollars): 2018 2019 2020 2021 2022 2023-2027 Pension and SERP Benefits $ 5,308 $ 5,304 $ 5,668 $ 6,239 $ 6,257 $29,998 Postretirement Benefits $ 265 $ 217 $ 164 $ 146 $ 132 $ 315 5 7 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 N O T E S T O F I N A N C I A L S TAT E M E N T S All U.S. associates may participate in our 401(k) Plan. We contribute 100 percent up to the first 5 percent of eligible compensation that a participant contributes to the plan. Our contributions to the 401(k) Plan were as follows (thousands of dollars): Company contributions SHAREHOLDERS’ EQUITY July 2, 2017 $ 1,805 Years Ended July 3, 2016 $ 1,783 June 28, 2015 $ 1,729 We have 12,000,000 shares of authorized common stock, par value $.01 per share, with 3,596,616 and 3,565,857 shares outstanding at July 2, 2017 and July 3, 2016, respectively. Holders of our common stock are entitled to one vote for each share on all matters voted on by shareholders. Our Board of Directors authorized a stock repurchase program to buy back up to 3,839,395 outstanding shares of our common stock as of July 2, 2017. As of July 2, 2017, 3,655,322 shares have been repurchased under this program at a cost of approximately $136.4 million. No shares were repurchased under this program during 2017 or 2016. EARNINGS PER SHARE (“EPS”) Basic earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding during the applicable period. Diluted earnings per share is computed on the basis of the weighted average number of shares of common stock plus the potential dilutive common shares outstanding during the applicable period using the treasury stock method. Potential dilutive common shares include outstanding stock options and unvested restricted stock awards. A reconciliation of the components of the basic and diluted per share computations follows (in thousands, except per share amounts): Net income attributable to STRATTEC Less: Income attributable to participating securities Net income attributable to common shareholders Weighted average shares of common stock outstanding Incremental shares – stock based compensation Diluted weighted average shares of common stock outstanding Basic earnings per share Diluted earnings per share July 2, 2017 $ 7,197 1 $ 7,196 Years Ended July 3, 2016 $ 9,149 58 $ 9,091 June 28, 2015 $20,654 258 $20,396 3,588 82 3,670 $ 2.01 $ 1.96 3,559 62 3,621 $ $ 2.55 2.51 3,515 89 3,604 $ $ 5.80 5.66 We consider unvested restricted stock that provides the holder with a non-forfeitable right to receive dividends to be a participating security. Options to purchase shares of common stock that were excluded from the calculation of diluted earnings per share because their inclusion would have been antidilutive were as follows: Years Ended July 2, 2017 July 3, 2016 June 28, 2015 Number of Options Excluded 9,010 9,010 10,000 STOCK OPTION AND PURCHASE PLANS A summary of stock option activity under our stock incentive plan was as follows: Balance at June 29, 2014 Granted Exercised Terminated Balance at June 28, 2015 Exercised Terminated Balance at July 3, 2016 Exercised Balance at July 2, 2017 Exercisable as of: July 2, 2017 July 3, 2016 June 28, 2015 Shares 185,242 10,000 (22,746) (8,589) 163,907 (16,909) (2,000) 144,998 (6,490) 138,508 129,498 103,798 91,103 Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) $24.73 $79.73 $20.83 $37.43 $27.97 $21.55 $17.59 $28.86 $20.96 $29.23 $25.71 $21.39 $19.86 4.4 4.2 4.6 4.1 $1,361 $1,361 $ 2,174 $4,592 Options granted at a price greater than the market value on the date of grant included in the table above were as follows: Shares Exercise price 2015 10,000 $79.73 No options were granted during either fiscal 2017 or 2016. 5 8 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 N O T E S T O F I N A N C I A L S TAT E M E N T S A summary of restricted stock activity under our stock incentive plan was as follows: Nonvested Balance at June 29, 2014 Granted Vested Forfeited Nonvested Balance at June 28, 2015 Granted Vested Forfeited Nonvested Balance at July 3, 2016 Granted Vested Forfeited Nonvested Balance at July 2, 2017 Shares 63,600 25,000 (18,100) (4,150) 66,350 28,750 (20,300) (3,050) 71,750 27,150 (21,250) (1,800) 75,850 Weighted Average Grant Date Fair Value $28.64 $70.90 $23.02 $45.71 $45.03 $69.02 $23.69 $59.92 $60.05 $43.87 $37.53 $58.24 $60.61 We have an Employee Stock Purchase Plan to provide substantially all U.S. full-time associates an opportunity to purchase shares of STRATTEC common stock through payroll deductions. A participant may contribute a maximum of $5,200 per calendar year to the plan. On the last day of each month or if such date is not a trading day on the most recent previous trading day, participant account balances are used to purchase shares of our common stock at the average of the highest and lowest reported sales prices of a share of STRATTEC common stock on the NASDAQ Global Market on such date. A total of 100,000 shares may be issued under the plan. Shares issued from treasury stock under the plan totaled 3,019 at an average price of $34.88 during 2017, 1,948 at an average price of $55.77 during 2016 and 1,038 at an average price of $76.06 during 2015. A total of 64,165 shares remain available for purchase under the plan as of July 2, 2017. EXPORT SALES Total export sales, sales from the United States to locations outside of the United States, are summarized as follows (thousands of dollars and percent of total net sales): Export sales July 2, 2017 Years Ended July 3, 2016 Net Sales $160,275 % 38% Net Sales $152,728 % 38% June 28, 2015 Net Sales $141,584 % 34% Countries for which customer sales account for ten percent or more of total net sales are summarized as follows (thousands of dollars and percent of total net sales): July 2, 2017 Years Ended July 3, 2016 Net Sales $ 73,481 % 18% Net Sales $ 74,310 % 19% June 28, 2015 Net Sales $ 60,987 % 15% Export sales into Canada PRODUCT SALES Sales by product group were as follows (thousands of dollars and percent of total net sales): Keys & locksets Power access Door handles & exterior trim Driver controls Aftermarket & OE service Latches Other July 2, 2017 Net Sales $114,938 84,457 67,722 56,983 47,216 35,307 10,702 $417,325 % 28% 20 16 14 11 8 3 100% Years Ended July 3, 2016 Net Sales $113,765 83,747 61,376 55,955 48,200 28,023 10,353 $401,419 % 28% 21 15 14 12 7 3 100% June 28, 2015 Net Sales $114,287 68,078 60,864 57,894 78,717 24,320 7,315 $411,475 % 28% 16 15 14 19 6 2 100% SALES AND RECEIVABLE CONCENTRATION Sales to our largest customers were as follows (thousands of dollars and percent of total net sales): Fiat Chrysler Automobiles General Motors Company Ford Motor Company July 2, 2017 Net Sales $100,575 88,624 62,314 $251,513 % 24% 21 15 60% Years Ended July 3, 2016 Net Sales $115,858 79,893 57,317 $253,068 % 29% 20 14 63% June 28, 2015 Net Sales $116,914 105,809 45,415 $268,138 % 28% 26 11 65% Receivables from our largest customers were as follows (thousands of dollars and percent of gross receivables): Fiat Chrysler Automobiles General Motors Company Ford Motor Company July 2, 2017 July 3, 2016 Receivables $ 17,107 13,395 8,644 $ 39,146 % 26% 21 13 60% Receivables % 28% $ 18,103 21 13,090 11 6,863 60% $ 38,056 R E P O R T S 5 9 R E P O R T O N M A N A G E M E N T ’ S A S S E S S M E N T O F I N T E R N A L C O N T R O L O V E R F I N A N C I A L R E P O R T I N G STRATTEC SECURITY CORPORATION is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this annual report. The consolidated financial statements and notes included in this annual report have been prepared in conformity with accounting principles generally accepted in the United States of America and necessarily include some amounts that are based on management’s best estimates and judgments. We, as management of STRATTEC SECURITY CORPORATION, are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation. The Audit Committee of the Company’s Board of Directors, consisting entirely of independent directors, meets regularly with management and the independent registered public accounting firm, and reviews audit plans and results, as well as management’s actions taken in discharging responsibilities for accounting, financial reporting, and internal control. Deloitte & Touche LLP, independent registered public accounting firm, has direct and confidential access to the Audit Committee at all times to discuss the results of their examinations. Management assessed the Corporation’s system of internal control over financial reporting as of July 2, 2017, in relation to criteria for effective internal control over financial reporting as described in Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the assessment, management concluded that, as of July 2, 2017, its system of internal control over financial reporting was effective and met the criteria of the Internal Control – Integrated Framework. Deloitte & Touche LLP, independent registered public accounting firm, has issued an attestation report on the Corporation’s internal control over financial reporting, which is included herein. Frank J. Krejci President and Chief Executive Officer Patrick J. Hansen Senior Vice President and Chief Financial Officer t r o p e R l a u n n A C E T T A R T S 7 1 0 2 R E P O R T S 6 0 R E P O R T O F I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G F I R M To the Board of Directors and Shareholders of STRATTEC SECURITY CORPORATION: We have audited the internal control over financial reporting of STRATTEC SECURITY CORPORATION and subsidiaries (the “Company”) as of July 2, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report on Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements 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 financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 2, 2017, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended July 2, 2017 of the Company and our report dated September 7, 2017 expressed an unqualified opinion on those consolidated financial statements. t r o p e R l a u n n A C E T T A R T S 7 1 0 2 Deloitte & Touche LLP Milwaukee, Wisconsin September 7, 2017 R E P O R T S 6 1 R E P O R T O F I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G F I R M To the Board of Directors and Shareholders of STRATTEC SECURITY CORPORATION: We have audited the accompanying consolidated balance sheets of STRATTEC SECURITY CORPORATION and subsidiaries (the “Company”) as of July 2, 2017 and July 3, 2016, and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended July 2, 2017. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements 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 also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of STRATTEC SECURITY CORPORATION and subsidiaries as of July 2, 2017 and July 3, 2016, and the results of their operations and their cash flows for the three years in the period ended July 2, 2017, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of July 2, 2017, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 7, 2017 expressed an unqualified opinion on the Company’s internal control over financial reporting. Deloitte & Touche LLP Milwaukee, Wisconsin September 7, 2017 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 6 2 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 F I N A N C I A L S U M M A RY FIVE-YEAR FINANCIAL SUMMARY The financial data for each period presented below reflects the consolidated results of STRATTEC SECURITY CORPORATION, its wholly owned Mexican subsidiary and its majority owned subsidiaries. Fiscal years 2013 through 2015 have been retrospectively adjusted for the adoption of an update to an accounting standard issued by the FASB which simplifies the presentation of deferred taxes in a classified statement of financial position by requiring that deferred tax assets and liabilities be classified as non- current. The information below should be read in conjunction with “Management’s Discussion and Analysis,” and the Financial Statements and Notes thereto included elsewhere herein. The following data are in thousands of dollars except per share amounts. Fiscal Years 2017 2016 2015 2014 2013 $417,325 60,162 $401,419 64,825 $411,475 72,660 $348,419 65,798 $298,179 53,866 INCOME STATEMENT DATA Net sales Gross profit Engineering, selling and administrative expenses 46,460 43,917 41,534 39,274 34,934 Loss on settlement of pension obligation Income from operations Interest income Equity earnings (loss) of joint ventures Interest expense Other income, net Income before taxes and non-controlling interest Provision for income taxes Net income Net income attributable to non-controlling interest Net income attributable to - - - - 2,144 13,702 136 20,908 25 31,126 185 26,524 106 16,788 21 666 (417) 2,307 16,394 4,284 12,110 (2,235) (176) 668 19,190 5,068 14,122 (788) (71) 3,481 33,933 9,382 24,551 957 (45) 272 27,814 8,674 19,140 (225) (34) 329 16,879 5,366 11,513 4,913 4,973 3,897 2,716 2,138 STRATTEC SECURITY CORPORATION $ 7,197 $ 9,149 $ 20,654 $ 16,424 $ 9,375 Earnings per share attributable to STRATTEC SECURITY CORPORATION: Basic Diluted Cash dividends declared per share BALANCE SHEET DATA Net working capital Total assets Long-term liabilities Total STRATTEC SECURITY CORPORATION Shareholders’ equity $ $ 2.01 1.96 $ $ 2.55 2.51 $ 0.56 $ 0.52 $ $ $ 5.80 5.66 $ $ 4.70 4.59 0.48 $ 0.44 $ $ $ 2.77 2.72 0.40 $ 61,110 $273,714 $ 33,105 $ 70,236 $242,176 $ 23,449 $ 63,871 $230,834 $ 13,698 $ 64,705 $207,909 $ 7,743 $ 51,507 $168,491 $ 5,886 $151,088 $139,332 $140,312 $125,506 $104,218 F I N A N C I A L S U M M A RY QUARTERLY FINANCIAL DATA (UNAUDITED) The following data are in thousands of dollars except per share amounts. 2017 2016 Quarter Net Sales Gross Profit First Second Third Fourth TOTAL $100,244 98,945 109,706 108,430 $417,325 First Second Third Fourth(1) TOTAL $ 96,513 102,511 94,048 108,347 $401,419 $14,605 13,495 17,403 14,659 $60,162 $16,499 18,610 14,521 15,195 $64,825 Net Income Attributable to STRATTEC Earnings Per Share Basic Diluted Cash Dividends Declared Per Share Market Price Per Share High Low $ 1,542 398 3,482 1,775 $ 7,197 $ 3,273 3,403 1,889 584 $ 9,149 $ 0.43 0.11 0.97 0.49 $ 2.01 $ 0.92 0.95 0.53 0.16 $2.55 $ 0.42 0.11 0.95 0.48 $ 1.96 $ 0.90 0.93 0.52 0.16 $2.51 $ 48.86 $ 44.00 $ 44.43 $ 39.10 $34.76 $31.05 $25.65 $23.00 $ 78.79 $ 71.61 $ 60.00 $ 60.38 $60.19 $55.17 $44.62 $39.38 $0.14 0.14 0.14 0.14 $0.56 $0.13 0.13 0.13 0.13 $0.52 (1) Our 2016 fiscal fourth quarter was impacted by approximately $2.0 million of equity loss of joint ventures resulting from a $6 million impairment charge recognized by VAST LLC related to its Minda-VAST Access Systems joint venture in India. STRATTEC’s portion of this impairment charge totaled $2 million. Registered shareholders of record at July 2, 2017, were 1,227. 6 3 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 P E R F O R M A N C E G R A P H The chart below shows a comparison of the cumulative return since July 1, 2012 had $100 been invested at the close of business on July 1, 2012 in STRATTEC Common Stock, the NASDAQ Composite Index (all issuers), and the Dow Jones U.S. Auto Parts Index. COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN* Among STRATTEC SECURITY CORPORATION, The NASDAQ Composite Index and The Dow Jones U.S. Auto Parts Index 7/1/12 6/30/13 6/29/14 6/28/15 7/3/16 7/2/17 STRATTEC SECURITY CORPORATION** 100.00 180.67 322.17 344.73 209.64 178.10 NASDAQ Composite Index 100.00 117.69 155.50 177.19 173.36 221.11 Dow Jones U.S. Auto Parts Index 100.00 143.45 194.98 210.20 183.15 225.95 * $100 invested on 7/1/12 in stock or in index, including reinvestment of dividends. Indexes calculated on a month-end basis. **The Friday fiscal year end closing price (i.e. the last trading day prior to our fiscal year end) of STRATTEC Common Stock on June 29, 2012 was $21.04, the closing price on June 28, 2013 was $37.36, the closing price on June 27, 2014 was $66.06, the closing price on June 26, 2015 was $70.26, the closing price on July 1, 2016 was $42.33 and the closing price on June 30, 2017 was $35.40. 6 4 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 6 5 t r o p e R l a u n n A C E T T A R T S 7 1 0 2 D I R E C T O R S / O F F I C E R S S H A R E H O L D E R S ’ I N F O R M AT I O N STRATTEC Board of Directors: (Left to Right) Frank J. Krejci, Thomas W. Florsheim, Jr., Michael J. Koss, David R. Zimmer, Harold M. Stratton II S H A R E H O L D E R S ’ I N F O R M AT I O N Annual Meeting The Annual Meeting of Shareholders will convene at 8:00 a.m. (CDT) on October 10, 2017, at the Holiday Inn Milwaukee Riverfront, 4700 North Port Washington Road, Milwaukee, WI 53212 Common Stock STRATTEC SECURITY CORPORATION common stock is traded on the NASDAQ Global Market under the symbol: STRT. Form 10-K You may receive a copy of the STRATTEC SECURITY CORPORATION Form 10-K, filed with the Securities and Exchange Commission, by writing to the Secretary at STRATTEC SECURITY CORPORATION, 3333 West Good Hope Road, Milwaukee, WI 53209. Corporate Governance To review the Company’s corporate governance, board committee charters and code of business ethics, please visit the “Corporate Governance” section of our website at www.strattec.com. Shareholder Inquiries Communications concerning the transfer of shares, lost certificates or changes of address should be directed to the Transfer Agent. Transfer Agent and Registrar Wells Fargo Bank, N.A. Shareholder Services 1110 Centre Pointe Curve Suite 101 Mendota Heights, MN 55120-4100 1-800-468-9716 STRATTEC Corporate Officers: (Left to Right) Richard P. Messina, Patrick J. Hansen, Brian J. Reetz, Frank J. Krejci, Al-Waleed H. Hamdan, Rolando J. Guillot B O A R D O F D I R E C T O R S Harold M. Stratton II, 69 Chairman of the Board Frank J. Krejci, 67 President and Chief Executive Officer Thomas W. Florsheim, Jr., 59 Chairman and Chief Executive Officer of Weyco Group, Inc. Director of Weyco Group, Inc. Michael J. Koss, 63 Chairman, President and Chief Executive Officer of Koss Corporation Director of Koss Corporation David R. Zimmer, 71 Retired Managing Partner of Stonebridge Business Partners C O R P O R AT E O F F I C E R S Frank J. Krejci, 67 Patrick J. Hansen, 58 Senior Vice President-Chief Financial Officer, Treasurer and Secretary Rolando J. Guillot, 49 Senior Vice President-Operations Brian J. Reetz, 59 Vice President-Security Products Richard P. Messina, 51 Vice President-Global Sales and Access Products Al-Waleed H. Hamdan, 49 Vice President-Product Management S T R A T T E C S E C U R I T Y C O R P O R A T I O N H E A D Q U A R T E R S : 3 3 3 3 W E S T G O O D H O P E R O A D , M I L W A U K E E , W I 5 3 2 0 9 P H O N E 4 1 4 . 2 4 7 . 3 3 3 3 w w w . s t r a t t e c . c o m 

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