Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
 	 	 	
þ	 	Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934	
For the fiscal year ended July 3, 2011.
 	 	 	
o	 	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934	
Commission File Number 0-25150
STRATTEC SECURITY CORPORATION
(Exact name of registrant as specified in its charter)
 	 	 	
Wisconsin	 	39-1804239	
 	 	 	
(State of Incorporation)	 	(I.R.S. Employer Identification No.)	
3333 West Good Hope Road, Milwaukee, WI 53209
(Address of principal executive offices)
(414) 247-3333

(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 	 	 	
Title of each class	 	Name of exchange on which registered	
 	 	 	
Common Stock, $.01 par value	 	The NASDAQ Stock Market	
Securities registered pursuant to Section 12(g) of the Act:
None

(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes  þ  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes  þ  No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  þ  Yes  o  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  o  Yes  o  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K.  þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 	 	 	 	 	 	 	
Large accelerated filer o	 	Accelerated filer þ	 	Non-accelerated filer o	 	Smaller Reporting Company þ	
 	 	(do not check if a smaller reporting company)	
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ  No
The aggregate market value of the voting Common Stock held by non-affiliates of the registrant as of December 26, 2010 (the last business day of the Registrant’s most recently completed second quarter), was approximately $102,672,000 (based upon the last reported sale price of the Common Stock at December 26, 2010, on the NASDAQ Global Market). Shares of common stock held by any executive officer or director of the registrant have been excluded from this computation because such persons may be deemed to be affiliates. This determination of affiliate status is not a conclusive determination for other purposes.
On August 13, 2011, there were outstanding 3,289,660 shares of the Registrant’s $.01 par value Common Stock.
Documents Incorporated by Reference
 	 	 	
 	 	Part of the Form 10-K	
Document	 	into which incorporated	
Portions of the Annual Report to Shareholders for the fiscal year ended July 3, 2011	 	I, II, IV	
 	 	 	
Portions of the Proxy Statement dated September 8, 2011, for the Annual Meeting of Shareholders to be held on October 11, 2011.	 	III	

 

TABLE OF CONTENTS
 	 	 	 	 	 	 	 	 	
PART I	
 	Item 1. Business	
 	Item 1A. Risk Factors	
 	Item 1B. Unresolved Staff Comments	
 	Item 2. Properties	
 	Item 3. Legal Proceedings	
 	Item 4. [Removed and Reserved]	
PART II	
 	Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	
 	Item 6. Selected Financial Data	
 	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	
 	Item 7A. Quantitative and Qualitative Disclosures About Market Risk	
 	Item 8. Financial Statements and Supplementary Data	
 	Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	
 	Item 9A. Controls and Procedures	
 	Item 9B. Other Information	
PART III	
 	Item 10. Directors and Executive Officers and Corporate Governance	
 	Item 11. Executive Compensation	
 	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	
 	Item 13. Certain Relationships and Related Transactions and Director Independence	
 	Item 14. Principal Accountant Fees and Services	
PART IV	
 	Item 15. Exhibits and Financial Statement Schedules	
SIGNATURES	
EXHIBIT INDEX TO ANNUAL REPORT	
Exhibit 10.3	
Exhibit 10.4	
Exhibit 13	
Exhibit 23.1	
Exhibit 23.2	
Exhibit 31.1	
Exhibit 31.2	
Exhibit 32	

Table of Contents
PROSPECTIVE INFORMATION
A number of the matters and subject areas discussed in this Form 10-K as well as in portions of the Company’s 2011 Annual Report to Shareholders and the Company’s Proxy Statement, dated September 8, 2011, which are incorporated herein by reference, 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,” or the negative of these terms or words of similar meaning. These statements include expected future financial results, product offerings, global expansion, liquidity needs, financing ability, planned capital expenditures, management’s or the Company’s expectations and beliefs, and similar matters discussed, or otherwise incorporated herein by reference, in this Form 10-K. 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, consumer demand for the Company’s and its customers’ products, competitive and technological developments, customer purchasing actions, foreign currency fluctuations, costs of operations (including fluctuations in the cost of raw materials) and other matters described under “Risk Factors” in the Management’s Discussion and Analysis section of the Company’s 2011 Annual Report to Shareholders, which is incorporated herein by reference in Part I, Item 1A of this report and in the Company’s other 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 Form 10-K and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances occurring after the date of this Form 10-K.

2

Table of Contents
PART I
Item 1. Business
The information set forth under “Company Description” which appears on pages 5 through 11 of the Company’s 2011 Annual Report to Shareholders is incorporated herein by reference. For information as to export sales, see the information set forth under “Notes to Financial Statements-Export Sales” included on page 46 of the Company’s 2011 Annual Report to Shareholders, which is incorporated herein by reference.
Emerging Technologies
Automotive vehicle access systems, which are both theft deterrent and consumer friendly, are trending toward electro-mechanical devices. Electronic companies are developing user identification systems such as bio-systems, card holder (transmitter) systems, etc., while mechanical locks, keys, housings, and latches are evolving to accommodate electronics. The Company believes it is positioning itself as a vehicle access control supplier by building its product, engineering and manufacturing expertise in the required electro-mechanical products, which include vehicle access latches, keys with remote entry electronic systems, and ignition interface systems with passive start capabilities.
These technologies benefit the Company by increasing the potential customer base as a Tier 2 supplier while maintaining Tier 1 status on some product lines and adding additional product line availability.
Sources and Availability of Raw Materials
The Company’s primary raw materials are high-grade zinc, brass, nickel silver, steel, aluminum and plastic resins. These materials are generally available from a number of suppliers, but the Company has chosen to concentrate its sourcing with one primary vendor for each commodity. The Company believes its sources for raw materials are very reliable and adequate for its needs. The Company has not experienced any significant long term supply problems in its operations and does not anticipate any significant supply problems in the foreseeable future. See further discussion under “Risk Factors-Sources of and Fluctuations in Market Prices of Raw Materials” included on page 25 of the Company’s 2011 Annual Report to Shareholders, which is incorporated herein by reference.
Patents, Trademarks and Other Intellectual Property
The Company believes that the success of its business will not only result from the technical competence, creativity and marketing abilities of its employees but also from the protection of its intellectual property through patents, trademarks and copyrights. As part of its ongoing research, development and manufacturing activities, the Company has a policy of seeking patents on new products, processes and improvements when appropriate.
Although, in the aggregate, the intellectual property discussed herein are of considerable importance to the manufacturing and marketing of many of its products, the Company does not consider any single patent or trademark or group of patents or trademarks to be material to its business as a whole, except for the STRATTEC and STRATTEC with logo trademarks.
The Company also relies upon trade secret protection for its confidential and proprietary information. The Company maintains confidentiality agreements with its key executives. In addition, the Company enters into confidentiality agreements with selected suppliers, consultants and associates as appropriate to evaluate new products or business relationships pertinent to the success of the Company. However, there can be no assurance that others will not independently obtain similar information and techniques or otherwise gain access to the Company’s trade secrets or that the Company can effectively protect its trade secrets.
Dependence Upon Significant Customers
A very significant portion of the Company’s annual sales are to General Motors Company, Ford Motor Company, and Chrysler Group LLC. These three customers accounted for approximately 66 percent of the Company’s net sales in 2011, 67 percent of the Company’s net sales in 2010 and 66 percent of the Company’s net sales in 2009. Further information regarding sales to the Company’s largest customers is set forth under the caption “Risk Factors — Loss of Significant Customers, Vehicle Content, Vehicle Models and Market Share” and “Risk Factors — Production Slowdowns for Customers” included on page 24 of the Company’s 2011 Annual Report to Shareholders and “Notes to Financial Statements-Sales and Receivable Concentration” included on page 46 of the Company’s 2011 Annual Report to Shareholders, all of which are incorporated herein by reference.

3

Table of Contents
The products sold to these customers are model specific, fitting only certain defined applications. Consequently, the Company is highly dependent on its major customers for their business, and on these customers’ ability to produce and sell vehicles which utilize the Company’s products. The Company has enjoyed good relationships with General Motors Company, Chrysler Group LLC, Ford Motor Company and other customers in the past, and expects to do so in the future. However, a significant change in the purchasing practices of, or a significant loss of volume from, one or more of these customers could have a detrimental effect on the Company’s financial performance. We cannot provide any assurance that any lost sales volume could be replaced despite historical relationships with our customers.
Sales and Marketing
The Company provides its customers with engineered locksets, steering column lock housings, seatback and secondary latches, power sliding door systems, power liftgate systems, power decklids and other access products which are unique to specific vehicles. Any given vehicle will typically take 1 to 3 years of development and engineering design time prior to being offered to the public. The locksets, lock housings, power liftgates, power sliding door and other power access systems, and latches are designed concurrently with the vehicle. Therefore, commitment to the Company as the production source occurs 1 to 3 years prior to the start of production. The Company employs an engineering staff that assists in providing design and technical solutions to its customers. The Company believes that its engineering expertise is a competitive advantage and contributes toward its strong market position. For example, the Company believes it regularly provides innovative design proposals for its product offerings to its customers that will improve customer access, vehicle security system quality, theft deterrence and system cost.
The typical process used by automotive manufacturers in selecting a lock, lock housing, power liftgate, power sliding door and other power access systems, or latch supplier is to offer the business opportunity to the Company and several of the Company’s competitors. Each competitor will pursue the opportunity, doing its best to provide the customer with the most attractive proposal. Price pressure is strong during this process but once an agreement is reached, a commitment is made for each year of the product program. Typically, price reductions resulting from productivity improvement by the Company are included in the contract and are estimated in evaluating each of these opportunities by the Company. A blanket purchase order, a contract indicating a specified part will be supplied at a specified price during a defined time period, is issued by customers for each model year. Production quantity releases or quantity commitments are made to that purchase order for weekly deliveries to the customer. As a consequence and because the Company is a “Just-in-Time” supplier to the automotive industry, it does not maintain a backlog of orders in the classic sense for future production and shipment.

4

Table of Contents
Competition
The Company competes with domestic and foreign-based competitors on the basis of custom product design, engineering support, quality, delivery and price. While the number of direct competitors is currently relatively small, the automotive manufacturers actively encourage competition between potential suppliers. The Company has a large share of the North American market for its lock and key, housing, power liftgate, power sliding door, and latch products because of its ability to provide optimal value, which is a beneficial combination of price, quality, technical support, program management, innovation and aftermarket support. In order to reduce lockset or housing, power liftgate, power sliding door, and latch product production costs while still offering a wide range of technical support, the Company utilizes assembly operations and certain light manufacturing operations in Mexico, which results in lower labor costs as compared to the United States.
As locks and keys become more sophisticated and involve additional electronics, competitors with specific electronic expertise may emerge to challenge the Company. To address this, the Company has strengthened its electrical engineering knowledge and service. It is also working with several electronics suppliers to jointly develop and supply these advanced products.
The Company’s lockset, housing and power access competitors include Huf North America, Ushin-Ortech, Tokai-Rika, Alpha-Tech, Valeo, Honda Lock, Shin Chang, Magna, Edscha, Stabilus, Aisin, Brose, Mitsuba, Ohi, Kiekert, Inteva and Gecom. For additional information related to competition, see the information set forth under “Risk Factors-Highly Competitive Automotive Supply Industry” included on page 26 of the Company’s 2011 Annual Report to Shareholders, which is incorporated herein by reference.
Research and Development
The Company engages in research and development activities pertinent to automotive access control. A major area of focus for research is the expanding role of vehicle access via electronic interlocks and modes of communicating authorization data between consumers and vehicles. Development activities include new products, applications and product performance improvements. In addition, specialized data collection equipment is developed to facilitate increased product development efficiency and continuous quality improvements. For fiscal years 2011, 2010, and 2009, the Company spent approximately $1.5 million, $900,000, and $670,000, respectively, on research and development. The Company believes that, historically, it has committed sufficient resources to research and development and will continue to invest in the future as required to support additional product programs associated with both existing and new customers. Patents are pursued and will continue to be pursued as appropriate to protect the Company’s interests resulting from these activities.
Customer Tooling
The Company incurs costs related to tooling used in component production and assembly. Some of these costs are reimbursed by customers who then own the tools involved. See the information set forth under “Notes to Financial Statements-Customer Tooling in Progress” included on page 34 of the Company’s 2011 Annual Report to Shareholders, which is incorporated herein by reference.
Environmental Compliance
As is the case with other manufacturers, the Company is subject to Federal, state, local and foreign laws and other legal requirements relating to the generation, storage, transport, treatment and disposal of materials as a result of its manufacturing and assembly operations. These laws include the Resource Conservation and Recovery Act (as amended), the Clean Air Act (as amended), the Clean Water Act of 1990 (as amended) and the Comprehensive Environmental Response, Compensation and Liability Act (as amended). The Company has an environmental management system that is ISO-14001 certified. The Company believes that its existing environmental management system is adequate and it has no current plans for substantial capital expenditures in the environmental area.
As discussed in “Notes to Financial Statements-Commitments and Contingencies” included on page 40 of the Company’s 2011 Annual Report to Shareholders, which is incorporated herein by reference, a site at the Company’s Milwaukee facility is contaminated by a solvent spill from a former above-ground solvent storage tank located on the east side of the facility, which occurred in 1985. This situation is being monitored by the Company.
The Company does not currently anticipate any materially adverse impact on its financial statements or competitive position as a result of compliance with Federal, state, local and foreign environmental laws or other legal requirements. However, risk of environmental liability and charges associated with maintaining compliance with environmental laws is inherent in the nature of the Company’s business and there is no assurance that material liabilities or charges could not arise.

5

Table of Contents
Employees
At July 3, 2011, the Company had approximately 2,556 full-time employees, of which approximately 216 or 8.5 percent were represented by a labor union, which accounts for all production associates at the Company’s Milwaukee facility. In October 2009, a new contract with the unionized associates was ratified and is effective through June 29, 2014. During June 2001, there was a 16-day strike by the represented employees at the Company’s Milwaukee facility. Further information regarding the strike, work stoppages and other labor matters are discussed under “Risk Factors-Disruptions Due to Work Stoppages and Other labor Matters” included on page 25 of the Company’s 2011 Annual Report to Shareholders, which is incorporated herein by reference.
Available Information
The Company maintains its corporate website at www.strattec.com and makes available, free of charge, through this website its code of business ethics, annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports that the Company files with, or furnishes to, the Securities and Exchange Commission (the “Commission”) as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Commission. The Company is not including all the information contained on or available through its website as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K. However, this report includes (or incorporates by reference) all material information about the Company that is included on the Company’s website which is otherwise required to be included in this report.
Item 1A. Risk Factors
The information set forth under “Risk Factors” which appears on pages 23 through 26 of the Company’s 2011 Annual Report to Shareholders is incorporated herein by reference. The risks described in the section “Risk Factors” in the Company’s 2011 Annual Report to Shareholders are not the only risks the Company faces. Additional risks that the Company does not yet know of or that it currently thinks are immaterial may also impair its business operations. If any of the events or circumstances described in those risks actually occur, the Company’s business, financial condition or results of operations could be materially adversely affected. In such cases, the trading price of the Company’s common stock could decline.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company has three manufacturing plants, one warehouse, and one sales office. These facilities are described as follows:
 	 	 	 	 	 	 	 	 	 	
Location	 	Type	 	Sq. Ft.	 	 	Owned or Leased	 	
Milwaukee, Wisconsin	 	Headquarters and General Offices; Component Manufacturing and Service Parts Distribution	 	 	352,000	 	 	Owned	 	
Juarez, Chihuahua Mexico	 	Subsidiary Offices and Assembly	 	 	97,000	 	 	Owned	 	
Juarez, Chihuahua Mexico	 	Subsidiary Offices, Key Finishing, Injection Molding and Assembly Operations	 	 	140,000	 	 	Owned	 	
El Paso, Texas	 	Finished Goods Warehouse	 	 	54,060	 	 	Leased	**	
Troy, Michigan	 	Sales and Engineering Office for Detroit Customer Area	 	 	18,900	 	 	Leased	**	
Troy, Michigan	 	Engineering Development Lab	 	 	7,450	 	 	Leased	**	
 	 	 	
**	 	Leased unit within a complex.	
The Company believes that its production facilities will be adequate for the foreseeable future.
Item 3. Legal Proceedings
In the normal course of business the Company may be involved in various legal proceedings from time to time. The Company does not believe it is currently involved in any claim or action the ultimate disposition of which would have a material adverse effect on the Company’s financial statements.
Item 4. [Removed and Reserved]

6

Table of Contents
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s Board of Directors authorized a stock repurchase program on October 16, 1996, and the program was publicly announced on October 17, 1996. The Board of Directors has periodically increased the number of shares authorized for repurchase under the program. At July 3, 2011, the number of shares of the Company’s common stock authorized for repurchase under the program totaled 3,839,395. The program currently authorizes the repurchase of the Company’s common stock from time to time, directly or through brokers or agents, and has no expiration date. Over the life of the repurchase program through July 3, 2011, a total of 3,655,322 shares have been repurchased at a cost of approximately $136.4 million. No shares were repurchased during the quarter or year ended July 3, 2011.
The Company’s common stock is traded on the NASDAQ Global Market under the symbol “STRT.”
The information set forth under “Financial Summary — Quarterly Financial Data (Unaudited)” included on page 51 of the Company’s 2011 Annual Report to Shareholders is incorporated herein by reference.
Item 6. Selected Financial Data
The information set forth under “Five Year Financial Summary” which appears on page 50 of the Company’s 2011 Annual Report to Shareholders is incorporated herein by reference. Such information should be read along with the Company’s financial statements and the notes to those financial statements and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” incorporated by reference elsewhere herein.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information set forth under “Management’s Discussion and Analysis” which appears on pages 13 through 26 of the Company’s 2011 Annual Report to Shareholders is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk is limited to fluctuations in raw material commodity prices and foreign currency exchange rate risk associated with STRATTEC’s foreign operations. We do not utilize financial instruments for trading purposes. We have not had outstanding borrowings with third parties since December 1997. There is, therefore, currently no significant exposure to market risk for changes in interest rates. To the extent that we incur future borrowings under our line of credit, we would be subject to interest rate risk related to such borrowings.
We are subject to exposure from changes in foreign currency exchange rates related to the U.S. dollar costs of our manufacturing operations in Mexico. A portion of our manufacturing costs are incurred in Mexican pesos. Our earnings and cash flows are subject to fluctuations as a result of changes in the U.S. dollar / Mexican peso exchange rate. Effective January 2011, we entered into agreements with Bank of Montreal that provide for two weekly Mexican peso currency option contracts for a portion of our weekly estimated peso denominated operating costs through July 6, 2012. The weekly option contracts are for equivalent notional amounts. One provides for the purchase of Mexican pesos at a U.S. dollar / Mexican peso exchange rate of 11.85 if the spot rate at the weekly expiry date is below 11.85. The second provides for the purchase of Mexican pesos at a U.S. dollar / Mexican peso exchange rate of 12.85 if the spot rate at the weekly expiry date is above 12.85. Our objective in entering into these currency option contracts is to minimize our earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. Effective August 2011, we entered into additional agreements with Bank of Montreal that provide for two weekly Mexican peso currency option contracts covering a portion of our estimated peso denominated operating costs for the period July 6, 2012 through June 28, 2013. The notional amounts of the additional weekly contracts are $100,000 each. One set of agreements provide for the purchase of Mexican pesos at an average U.S. dollar / Mexican peso exchange rate of 12.40 if the average spot rate at the weekly expiry date is below 12.40. The second provide for the purchase of Mexican pesos at an average U.S. dollar / Mexican peso exchange rate of 13.40 if the average spot rate at the weekly expiry date is above 13.40. The Mexican peso option contracts are not used for speculative purposes and are not designated as hedges, and as a result, all currency option contracts are recognized in our accompanying condensed consolidated financial statements at fair value and changes in the fair value of the currency option contracts are reported in current earnings as part of Other (Expense) Income, net. The premium to be paid and received under the two Mexican peso currency option contracts net, and as a result, premiums related to the contracts did not impact earnings.

7

Table of Contents
The following table quantifies the outstanding Mexican peso currency option contracts and the corresponding impact on the value of these instruments assuming a 10 percent appreciation / depreciation of the U.S. dollar relative to the Mexican peso on July 3, 2011 (thousands of dollars):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	Foreign Exchange	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	Gain/(Loss) From:	 	
 	 	Notional	 	 	Option Contractual	 	 	 	 	 	 	10% Appreciation	 	 	10% Depreciation	 	
 	 	Amount	 	 	Exchange Rate	 	 	Fair Value	 	 	of U.S. Dollar	 	 	of U.S. Dollar	 	
Buy MXP/Sell USD	 	$	14,061	 	 	 	11.85	 	 	$	414	 	 	$	(389	)	 	$	1,586	 	
Buy MXP/Sell USD	 	$	14,061	 	 	 	12.85	 	 	$	(169	)	 	$	(281	)	 	$	169	 	
The fair market value of all outstanding Mexican peso option contracts in the accompanying Consolidated Balance Sheets was as follows (thousands of dollars):
 	 	 	 	 	 	 	 	 	
 	 	Other Current Assets	 	
 	 	July 3, 2011	 	 	June 27, 2010	 	
Not Designated as Hedging Instruments:	 	 	 	 	 	 	 	 	
Mexican Peso Option Contracts	 	$	245	 	 	$	—	 	
The pre-tax effects of the Mexican peso option contracts on the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss) consisted of the following (in thousands):
 	 	 	 	 	 	 	 	 	
 	 	Other Income, net	 	
 	 	July 3, 2011	 	 	June 27, 2010	 	
Not Designated as Hedging Instruments:	 	 	 	 	 	 	 	 	
Mexican Peso Option Contracts — Unrealized Gain	 	$	414	 	 	$	—	 	
Mexican Peso Option Contracts — Realized Gain	 	 	33	 	 	 	—	 	
Mexican Peso Option Contracts — Unrealized Loss	 	 	(169	)	 	 	—	 	
Mexican Peso Option Contracts — Realized Loss	 	 	—	 	 	 	—	 	
See “Risk Factors — Currency Exchange Rate Fluctuations” and “Risk Factors — Sources of and Fluctuations in Market Prices of Raw Materials” included on page 25 of the Company’s 2011 Annual Report to Shareholders, which is incorporated herein by reference, for more information.
Item 8. Financial Statements and Supplementary Data
The financial statements, together with the report thereon of Deloitte & Touche LLP dated September 8, 2011, the report of management on internal control over financial reporting and the report of Deloitte & Touche LLP on internal control over financial reporting dated September 8, 2011, which appear on pages 47 through 49 of the Company’s 2011 Annual Report to Shareholders, are incorporated herein by reference. The reports of Deloitte & Touche LLP and Grant Thornton LLP are included on pages 12 and 13 in this Form 10-K Report.
Our quarterly results of operations included under “Financial Summary-Quarterly Financial Data (Unaudited)” which appears on page 51 of the Company’s 2011 Annual Report to Shareholders is incorporated herein by reference.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
On February 23, 2010, the Company dismissed Grant Thornton LLP as its independent public accountants and appointed Deloitte & Touche LLP as its new independent public accountants. The decision to dismiss Grant Thornton LLP and to retain Deloitte & Touche LLP was approved by the Company’s Audit Committee on February 23, 2010.
Grant Thornton’s reports on the Company’s consolidated financial statements for each of the fiscal years ended June 28, 2009 and June 29, 2008 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.
During the Company’s two most recent fiscal years and through February 23, 2010, there were no disagreements with Grant Thornton on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Grant Thornton’s satisfaction, would have caused them to make reference to the subject matter in connection with their report on the Company’s consolidated financial statements for such years; and there were no reportable events, as listed in Item 304(a)(1)(v) of SEC Regulation S-K.
During the fiscal years ended June 28, 2009 and June 29, 2008, and the subsequent interim period through February 23, 2010, the Company did not consult with Deloitte & Touche regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of SEC Regulation S-K.

8

Table of Contents
Item 9A. Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Security and Exchange Commission’s rules and forms, and that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company carried out an evaluation as of the end of the period covered by this report, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report at reaching a level of reasonable assurance. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company has designed its disclosure controls and procedures to reach a level of reasonable assurance of achieving the desired control objectives.
There was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended July 3, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The report of management required under this Item 9A is included on page 47 of the Company’s 2011 Annual Report to Shareholders under the heading “Report on Management’s Assessment of Internal Control over Financial Reporting” and is incorporated herein by reference.
The attestation report required under this Item 9A is included on page 48 of the Company’s 2011 Annual Report to Shareholders under the heading “Report of Independent Registered Public Accounting Firm” and is incorporated herein by reference.
Item 9B. Other Information
Not applicable.

9

Table of Contents
PART III
Item 10. Directors and Executive Officers and Corporate Governance
The information included in the Company’s Proxy Statement, dated September 8, 2011, under “Proposal: Election of Directors,” “Corporate Governance Matters-Code of Business Ethics,” “Audit Committee Matters-Audit Committee Financial Expert,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance”, and “Corporate Governance Matters-Director Nominations” is incorporated herein by reference.
The Audit Committee of the Company’s Board of Directors is an “audit committee” for purposes of Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the Audit Committee consist of three outside independent Directors, David R. Zimmer, Audit Committee Chairman, Robert Feitler, and Michael J. Koss.
Item 11. Executive Compensation
The information included in the Company’s Proxy Statement, dated September 8, 2011, under “Director Compensation” and “Executive Compensation” is incorporated herein by reference.
The information incorporated by reference from “Report of Compensation Committee” in the Company’s Proxy Statement, dated September 8, 2011, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filing.
 	 	 	
Item 12.	 	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	
The information included in the Company’s Proxy Statement, dated September 8, 2011, under “Security Ownership” is incorporated herein by reference.
Equity Compensation Plan Information
The following table summarizes share information, as of July 3, 2011, for the Company’s Stock Incentive Plan.

 	 	Number of	 	 	 	 	 	 	Number of	 	
 	 	common shares to be	 	 	 	 	 	 	common shares	 	
 	 	issued upon exercise	 	 	Weighted-average	 	 	available for future	 	
 	 	of outstanding	 	 	exercise price of	 	 	issuance under	 	
 	 	options,	 	 	outstanding options,	 	 	equity	 	
Plan Category	 	warrants, and rights	 	 	warrants, and rights	 	 	compensation plans	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Equity compensation plans approved by shareholders	 	 	297,400	 	 	$	28.32	 	 	 	228,543	 	
Equity compensation plans not approved by shareholders	 	 	—	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	
Total	 	 	297,400	 	 	$	28.32	 	 	 	228,543	 	
 	 	 	 	 	 	 	 	 	 	
Item 13. Certain Relationships and Related Transactions and Director Independence
The information included in the Company’s Proxy Statement, dated September 8, 2011, under “Transactions With Related Persons” and “Corporate Governance Matters-Director Independence” is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information included in the Company’s Proxy Statement, dated September 8, 2011, under “Audit Committee Matters-Fees of Independent Registered Public Accounting Firm” is incorporated herein by reference.

10

Table of Contents
PART IV
Item 15. Exhibits and Financial Statement Schedules
 	(a)	 	The following documents are filed as part of this report:	

 	(1)(i)	 	Financial Statements — The following financial statements of the Company, included on pages 27 through 49 of the Company’s 2011 Annual Report to Shareholders, are incorporated by reference in Item 8 of this Form 10-K annual report:	
 	 	 	 	
 	 	 	Reports of Independent Registered Public Accounting Firm (Deloitte & Touche LLP)	
 	 	 	 	
 	 	 	Consolidated Balance Sheets — as of July 3, 2011 and June 27, 2010	
 	 	 	 	
 	 	 	Consolidated Statements of Operations and Comprehensive Income (Loss) — years ended July 3, 2011, June 27, 2010 and June 28, 2009	
 	 	 	 	
 	 	 	Consolidated Statements of Shareholders’ Equity — years ended July 3, 2011, June 27, 2010 and June 28, 2009	
 	 	 	 	
 	 	 	Consolidated Statements of Cash Flows — years ended July 3, 2011, June 27, 2010 and June 28, 2009	
 	 	 	 	
 	 	 	Notes to Financial Statements	

 	(ii)	 	The following are included at pages 12 and 13 in this Form 10-K Report.	
 	 	 	 	
 	 	 	Report of Independent Registered Public Accounting Firm (Deloitte & Touche LLP — as of July 3, 2011 and for each of the two years in the period ended July 3, 2011)	
 	 	 	 	
 	 	 	Report of Independent Registered Public Accounting Firm (Grant Thornton LLP —for the year ended June 28, 2009)	
 	 	 	 	
 	(2)	 	Financial Statement Schedule	
 	 	 	 	
 	 	 	All schedules have been omitted because they are not applicable or are not required, or because the required information has been included in the Financial Statements or Notes thereto.	
 	 	 	 	
 	(3)	 	Exhibits. See “Exhibit Index” beginning on page 15.	

 	(b)	 	Exhibits	
 	 	 	 	
 	 	 	See “Exhibit Index” and the exhibits attached hereto or previously filed as described in the “Exhibit Index” beginning on page 15.	
 	 	 	 	
 	(c)	 	Financial Statement Schedules	
 	 	 	 	
 	 	 	None required.	

11

Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 3, 2011 and June 27, 2010, and the related consolidated statements of operations and comprehensive income shareholders’ equity, and cash flows for the two years in the period ended July 3, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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 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 the Company as of July 3, 2011 and June 27, 2010, and the results of their operations and their cash flows for the two years in the period ended July 3, 2011 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 3, 2011, based on the criteria established in  Internal Control — Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 8, 2011 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
September 8, 2011

12

Table of Contents
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders of STRATTEC SECURITY CORPORATION:
We have audited the accompanying consolidated statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows of STRATTEC SECURITY CORPORATION (a Wisconsin Corporation) and subsidiaries, (the “Company”) for the year ended June 28, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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 the 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and the cash flows of STRATTEC SECURITY CORPORATION and subsidiaries for the year ended June 28, 2009 in conformity with accounting principles generally accepted in the United States of America.
As discussed in the “Organization and Summary of Significant Accounting Policies” footnote to the accompanying consolidated financial statements, the Company changed its method of accounting for noncontrolling interests due to the adoption of the guidance on noncontrolling interests in consolidated financial statements and applied this change retrospectively.
/s/ GRANT THORNTON LLP
Milwaukee, Wisconsin
August 24, 2009
(except for the footnote titled, “Organization and Summary of Significant Accounting Policies”, as to which the date is September 1, 2010)

13

Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 	 	 	 	 	
 	STRATTEC SECURITY CORPORATION
 	 	
 	By:  	/s/ Harold M. Stratton II  	 	
 	 	Harold M. Stratton II 	 	
 	 	Chairman and Chief Executive Officer 	 	
Date: September 8, 2011
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 	 	 	 	 	
Signature	 	Title	 	Date	
 	 	 	 	 	
/s/ Harold M. Stratton II
  Harold M. Stratton II	 	Chairman, Chief Executive Officer, and Director (Principal Executive Officer)	 	September 8, 2011	
 	 	 	 	 	
/s/ Frank J. Krejci
  Frank J. Krejci	 	President, Chief Operating Officer, and Director	 	August 23, 2011	
 	 	 	 	 	
/s/ Michael J. Koss
  Michael J. Koss	 	Director 	 	August 23, 2011	
 	 	 	 	 	
/s/ Robert Feitler	 	Director	 	August 23, 2011	
  Robert Feitler	 	 	 	 	
 	 	 	 	 	
/s/ David R. Zimmer
  David R. Zimmer	 	Director 	 	August 23, 2011	
 	 	 	 	 	
/s/ Patrick J. Hansen
  Patrick J. Hansen	 	Senior Vice President, Chief Financial Officer, Secretary and Treasurer
(Principal Financial and Accounting Officer)	 	September 8, 2011	

14

Table of Contents
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-K
 	 	 	 	 	 	 	
Exhibit	 	 	 	 	
 	3.1	(1)	 	Amended and Restated Articles of Incorporation of the Company	 	*	
 	 	 	 	 	 	 	
 	3.2	(2)	 	By-laws of the Company	 	*	
 	 	 	 	 	 	 	
 	4.1	(4)	 	Credit Agreement, dated as of August 1, 2011, between STRATTEC SECURITY CORPORATION and BMO Harris Bank N.A., as lender	 	*	
 	 	 	 	 	 	 	
 	4.2	(4)	 	Security Agreement, dated as of August 1, 2011, made by STRATTEC SECURITY CORPORATION in favor of BMO Harris Bank N.A., as lender	 	*	
 	 	 	 	 	 	 	
 	10.1	(2)**	 	Amended STRATTEC SECURITY CORPORATION Stock Incentive Plan	 	*	
 	 	 	 	 	 	 	
 	10.2	(2)**	 	Form of Restricted Stock Grant Agreement	 	*	
 	 	 	 	 	 	 	
 	10.3	**	 	Amended STRATTEC SECURITY CORPORATION Economic Value Added Bonus Plan for Executive Officers and Senior Managers	 	 	
 	 	 	 	 	 	 	
 	10.4	**	 	Amended STRATTEC SECURITY CORPORATION Economic Value Added Bonus Plan for Non-employee Members of the Board of Directors	 	 	
 	 	 	 	 	 	 	
 	10.5	(5)**	 	Amended STRATTEC SECURITY CORPORATION Supplemental Executive
Retirement Plan	 	*	
 	 	 	 	 	 	 	
 	10.6	(5)**	 	Employment Agreement between the Company and Harold M. Stratton II, Frank J. Krejci, Patrick J. Hansen, Rolando J. Guillot, Kathryn E. Scherbarth, Dennis A. Kazmierski, Brian J. Reetz and Richard P. Messina made as of May 5, 2010.	 	*	
 	 	 	 	 	 	 	
 	10.7	(5)**	 	Change of Control Employment Agreement between the Company and Harold M. Stratton II, Frank J. Krejci, Patrick J. Hansen, Rolando J. Guillot, Kathryn E. Scherbarth, Dennis A. Kazmierski, Brian J. Reetz and Richard P. Messina made as of May 5, 2010.	 	*	
 	 	 	 	 	 	 	
 	13	 	 	Annual Report to Shareholders for the year ended July 3, 2011	 	 	
 	 	 	 	 	 	 	
 	16	(6)	 	Letter Regarding Change in Auditors	 	*	
 	 	 	 	 	 	 	
 	21	(3)	 	Subsidiaries of the Company	 	*	
 	 	 	 	 	 	 	
 	23.1	 	 	Consent of Independent Registered Public Accounting Firm dated September 8, 2011	 	 	
 	 	 	 	 	 	 	
 	23.2	 	 	Consent of Independent Registered Public Accounting Firm dated September 8, 2011	 	 	
 	 	 	 	 	 	 	
 	31.1	 	 	Rule 13a-14(a) Certification for Harold M. Stratton II, Chairman and Chief Executive Officer	 	 	
 	 	 	 	 	 	 	
 	31.2	 	 	Rule 13a-14(a) Certification for Patrick J. Hansen, Chief Financial Officer	 	 	
 	 	 	 	 	 	 	
 	32	(7)	 	18 U.S.C. Section 1350 Certifications	 	 	

*	 	Previously filed	
 	 	 	
**	 	Management contract or compensatory plan or arrangement	
 	 	 	
(1)	 	Incorporated by reference from Amendment No. 2 to the Form 10 filed on February 6, 1995.	
 	 	 	
(2)	 	Incorporated by reference from the exhibit to the Form 8-K filed on October 7, 2005.	
 	 	 	
(3)	 	Incorporated by reference from the exhibit to the June 29, 2008 Form 10-K filed on August 29, 2008.	
 	 	 	
(4)	 	Incorporated by reference from the exhibit to the Form 8-K filed on August 4, 2011.	
 	 	 	
(5)	 	Incorporated by reference from the exhibit to the March 28, 2010 Form 10-Q filed on May 6, 2010.	
 	 	 	
(6)	 	Incorporated by reference from the exhibit to the Form 8-K filed on March 1, 2010.	
 	 	 	
(7)	 	This certification is not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.	

15

Exhibit 10.3
ECONOMIC VALUE ADDED BONUS PLAN
FOR
EXECUTIVE OFFICERS
AND
SENIOR MANAGERS
Effective February 27, 1995
As Amended August 24, 1999, August 21, 2001, October 23, 2001,
May 20, 2003, August 17, 2004, October 4, 2005, August 22, 2006,
August 24, 2007, October 7, 2008 and July 4, 2011

 

 
ECONOMIC VALUE ADDED PLAN
FOR
EXECUTIVE OFFICERS
AND
SENIOR MANAGERS
TABLE OF CONTENTS
 	 	 	 	 	
 	 	Page	 	
 	 	 	 	 	
I. Plan Objectives	 	 	1	 	
 	 	 	 	 	
II. Plan Administration	 	 	1	 	
 	 	 	 	 	
III. Definitions	 	 	1	 	
 	 	 	 	 	
IV. Eligibility	 	 	5	 	
 	 	 	 	 	
V. Individual Participation Levels	 	 	6	 	
 	 	 	 	 	
VI. Performance Factors	 	 	6	 	
 	 	 	 	 	
VII. Change in Status During Plan Year	 	 	9	 	
 	 	 	 	 	
VIII. Bonus Paid and Bonus Bank	 	 	10	 	
 	 	 	 	 	
IX. Administrative Provisions	 	 	14	 	
 	 	 	 	 	
X. Miscellaneous	 	 	15	 	

 

 
I.	 	PLAN OBJECTIVES	

 	A.	 	To promote the maximization of shareholder value over the long term by providing incentive compensation to key employees of STRATTEC SECURITY CORPORATION (the “Company”) in a form which is designed to financially reward participants for an increase in the value of the Company.	

 	B.	 	To provide competitive levels of compensation to enable the Company to attract and retain people who are able to exert a significant impact on the value of the Company to its shareholders.	
 	 	 	 	
 	C.	 	To encourage teamwork and cooperation in the achievement of Company goals.	

II.	 	PLAN ADMINISTRATION	
The Compensation Committee of the Board of Directors (the “Compensation Committee”) shall be responsible for the design, administration, and interpretation of the Plan, subject to the Administrative Provisions contained in Article IX.
III.	 	DEFINITIONS	

 	A.	 	“Accrued Bonus” means the bonus, which may be negative or positive, which is calculated in the manner set forth in Section V.A.	
 	 	 	 	
 	B.	 	“Actual EVA” means the EVA as calculated for the relevant Plan Year.	
 	 	 	 	
 	C.	 	“Base Salary” means:	

 	(1)	 	For Participants who are employed by the Company and STRATTEC POWER ACCESS LLC, all wages paid in the Plan Year, excluding employment signing bonuses, EVA bonus payments, reimbursement or other expense allowances, imputed income, value of fringe benefits (cash and non-cash), moving reimbursements, welfare benefits and special payments.	
 	 	 	 	
 	(2)	 	For Participants who are employed by the STRATTEC de Mexico S.A. de C.V., and ADAC-STRATTEC de MEXICO, “Base Salary” includes regular salary, holidays and vacations	

 

 
 	 	 	paid during the Plan Year. Base salary does not include overtime, profit sharing, Christmas bonuses, vacation premiums, signing bonuses, EVA bonus payments, reimbursements and other expense allowances, imputed income, the value of fringe benefits (cash and non-cash), moving reimbursements and special payments.	

 	D.	 	“Capital” means the Company’s average monthly operating capital for the Plan Year, calculated as follows:	

 	 	 	Current Assets	
 	 	 	 	
 	+	 	Bad Debt Reserve	
 	 	 	 	
 	+	 	LIFO Reserve	
 	 	 	 	
 	-	 	Future Income Tax Benefits	
 	 	 	 	
 	-	 	Current Noninterest-Bearing Liabilities	
 	 	 	 	
 	+	 	Property, Plant, Equipment, (Net)	
 	 	 	 	
 	-	 	Construction in Progress	
 	 	 	 	
 	(+/-)	 	Unusual Capital Items	

 	E.	 	“Capital Charge” means the deemed opportunity cost of employing Capital in the Company’s business, determined as follows:	
Capital Charge = Capital x Cost of Capital
 	F.	 	“Code” means the Internal Revenue Code of 1986, as amended from time to time, and as interpreted by applicable regulations and rulings.	
 	 	 	 	
 	G.	 	“Company” means STRATTEC SECURITY CORPORATION. The Company’s Compensation Committee may act on behalf of the Company with respect to this Plan.	
 	 	 	 	
 	H.	 	“Cost of Capital” means the weighted average of the cost of equity and the after tax cost of debt for the relevant Plan Year. For Plan administration purposes, it is assumed the Company’s capital structure will be 80% Equity and 20% Debt. The Cost of Capital will be initially set at 10% for fiscal year 2008 and reviewed by the Compensation Committee prior to each Plan Year thereafter, consistent with the following methodology:	

 	(a)	 	Cost of Equity = Risk Free Rate + (Business Risk Index x Average Equity Risk Premium)	

 	(b)	 	Debt Cost of Capital = Debt Yield x (1 - Tax Rate)	

2

 
 	(c)	 	The weighted average of the Cost of Equity and the Debt Cost of Capital is determined by reference to the expected debt-to-capital ratio	
where the Risk Free Rate is the average daily closing yield rate on 10 year U.S. Treasury Notes for an appropriate period (determined by the Compensation Committee from time to time) preceding the relevant Plan Year, the Business Risk Index is determined by reference to an auto supply industry factor selected by the Compensation Committee, the Average Equity Risk Premium is 6%, the Debt Yield is the weighted average yield of all borrowing included in the Company’s permanent capital, and the tax rate is the combination of the relevant corporate Federal and state income tax rates.
 	I.	 	“Disabilities or Disabled” means that the Participant: (1) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months; or (2) is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period not less than three months under an accident and health plan covering employees of the Company.	
 	 	 	 	
 	J.	 	“Economic Value Added” or “EVA” means the NOPAT that remains after subtracting the Capital Charge, expressed as follows:	
EVA = NOPAT - Capital Charge
EVA may be positive or negative.
 	K.	 	“Effective Date” means February 27, 1995, the date as of which the Plan first applies to the Company.	

 	L.	 	“EVA Leverage Factor” means the adjustment factor reflecting deviation in the use of capital employed as a percentage of capital employed. For purposes of this Plan, the Company’s EVA Leverage Factor is determined to be 3% of the monthly average net operating capital employed during the prior Plan year.	

3

 
 	 	 	For fiscal year 2008 (beginning July 2, 2007) the EVA Leverage Factor is set at $3,316,000.	
 	 	 	 	
 	M.	 	“Leave of Absence” means that the Participant is on a sick leave, military leave or other bona fide leave of absence (such as temporary employment by the government) if the period of the leave does not exceed six months. If the leave is longer, the Participant’s right to reemployment with the Company must be provided by statute or contract. A Participant who is on a Leave of Absence has not terminated employment.	
 	 	 	 	
 	N.	 	“NOPAT” means cash adjusted net operating profits after taxes for the Plan Year, calculated as follows:	

 	 	 	Net Sales	
 	 	 	 	
 	-	 	Cost of Goods Sold	
 	 	 	 	
 	(+ -)	 	Change in LIFO Reserve	
 	 	 	 	
 	-	 	Engineering/Selling & Admin.	
 	 	 	 	
 	(+ -)	 	Change in Bad Debt Reserve	
 	 	 	 	
 	(+ -)	 	Other Income & Expense excluding Interest Expense	
 	 	 	 	
 	(+ -)	 	Other Unusual Income or Expense Items (See Section VI.B.)	
 	 	 	 	
 	(+ -)	 	Amortization of Unusual Income or Expense Items	

 	-	 	Cash Adjusted Taxes on the Above (+/- change in deferred tax liability)	

 	O.	 	“Participant” means individual who has satisfied the eligibility requirements of the Plan as provided in Section IV.	
 	 	 	 	
 	P.	 	“Plan Year” means the one-year period coincident with the Company’s fiscal year.	
 	 	 	 	
 	Q.	 	“Executive Officers” means those Participants designated as Executive Officers by the Compensation Committee with respect to any Plan Year.	
 	 	 	 	
 	R.	 	“Senior Managers” means those Participants designated as Senior Managers by the Compensation Committee with respect to any Plan Year.	
 	 	 	 	
 	S.	 	“Separation from Service” means the events which allow the Available Balance (minus income and employment taxes) to be paid to an Executive Officer, as specified in Article VIII(C)(8)(b).	

4

 
 	T.	 	“Target EVA” means the target level of EVA for the Plan Year, determined as follows:	

 	 	Current Plan	 	 	 	Prior Year	 	 	 	 	 	Prior Year	 	 	 	Expected	
 	 	Year Target EVA	 	=	 	Target EVA	 	 	+	 	 	Actual EVA	 	+ 	 	Improvement	
 	 	 	 	 	 	 	 	 	2	 	 	 	 	 	 	 	
Expected Improvement will be approved by the Board of Directors annually, based on increasing economic value in the context of the then current relevant economic conditions.
For fiscal year 2008 (beginning July 2, 2007) the Target EVA is set at $1,154,000.
IV.	 	ELIGIBILITY	

 	A.	 	Eligible Positions. In general, only Executive Officers and Senior Managers selected by the Compensation Committee may be eligible for participation in the Plan. However, actual participation will depend upon the contribution and impact each eligible employee may have on the Company’s value to its shareholders, as determined by the Compensation Committee.	
 	 	 	 	
 	B.	 	Nomination and Approval. Each Plan Year, the Chairman and President will nominate eligible employees to participate in the Plan for the next Plan Year. The Compensation Committee will have the final authority to select Plan participants (the “Participants”) among the eligible employees nominated by the Chairman and President. Continued participation in the Plan is contingent on approval of the Compensation Committee.	
 	 	 	 	
 	C.	 	Employee Performance Requirement. Employees whose performance is rated “Needs Improvement” on their annual performance review will not be eligible for an EVA bonus applicable to the year covered by such performance review. However, if the employee so rated is subject to a performance improvement plan, and successfully meets the requirement of the plan in the time frame prescribed, the employee’s EVA eligibility will be reinstated, and the EVA bonus will be paid with the next regular payroll check following reinstatement.	

5

 
V.	 	INDIVIDUAL PARTICIPATION LEVELS	

 	A.	 	Calculation of Accrued Bonus. Each Participant’s Accrued Bonus will be determined as a function of the Participant’s Base Salary, the Participant’s Target Incentive Award (provided in paragraph V.B., below), Company Performance Factor (provided in Section VI.A.) and the Individual Performance Factor (provided in Section VI.C.) for the Plan Year. Each Participant’s Accrued Bonus will be calculated as follows:	

 	B.	 	Target Incentive Awards. The Target Incentive Awards will be determined according to the following schedule:	

 	 	Target Incentive Award	 	
Position	 	(% of Base Salary)	 	
 	 	 	 	 	
Chairman (if also CEO of Company)	 	 	75	%	
President	 	 	65	%	
Executive Vice President	 	 	50	%	
Senior Vice President	 	 	45	%	
Vice President	 	 	35	%	
Senior Managers as approved each year pursuant to section IV.B	 	 	12%-20	%	

VI.	 	PERFORMANCE FACTORS	

 	A.	 	Company Performance Factor Calculation. For any Plan Year, the Company Performance Factor will be calculated as follows:	

 	 	Company Performance Factor = 1.00 +	 	Actual EVA - Target EVA	 	 	
 	 	 	 	 	 	 	
 	 	 	 	EVA Leverage Factor	 	 	

 	B.	 	Adjustments to Company Performance. When Company performance is based on Economic Value Added or other quantifiable financial or accounting measure, it may be necessary to exclude significant, unusual, unbudgeted or noncontrollable gains or losses from actual financial results in order to measure performance properly. The Compensation Committee will decide those items that	

6

 
 	 	 	shall be considered in adjusting actual results. For example, some types of items that may be considered for exclusion are:	

 	(1)	 	Any gains or losses which will be treated as extraordinary in the Company’s financial statements.	
 	 	 	 	
 	(2)	 	Profits or losses of any entities acquired by the Company during the Plan Year, assuming they were not included in the budget and/or the goal.	
 	 	 	 	
 	(3)	 	Material gains or losses not in the budget and/or the goal which are of a nonrecurring nature and are not considered to be in the ordinary course of business. Some of these would be as follows:	

 	(a)	 	Gains or losses from the sale or disposal of real estate or property.	
 	 	 	 	
 	(b)	 	Gains resulting from insurance recoveries when such gains relate to claims filed in prior years.	
 	 	 	 	
 	(c)	 	Losses resulting from natural catastrophes, when the cause of the catastrophe is beyond the control of the Company and did not result from any failure or negligence on the Company’s part.	

 	C.	 	Individual Performance Factor Calculation. Determination of the Individual Performance Factor will be the responsibility of the individual to whom the participant reports. This determination will be subject to approval by the Chairman and President (or the Compensation Committee with respect to the Chairman and President) and shall conform with the process set forth below:	

 	(1)	 	Quantifiable Supporting Performance Factors. The Individual Performance Factor of the Accrued Bonus calculation will be based on the accomplishment of individual, financial and/or other goals (“Supporting Performance Factors”). Whenever possible, individual performance will be evaluated according to quantifiable benchmarks of success. These Supporting Performance Factors will be enumerated from 0 to 2.0 based on the levels of achievement for each goal per the schedule in VI C.(2). Provided, however, that if the quantifiable Supporting Performance Factor is based on the Company Performance	

7

 
 	 	 	Factor as set forth in Section VI.A., then the Supporting Performance Factor may be unlimited.	

 	(2)	 	Non-Quantifiable Supporting Performance Factors. When performance cannot be measured according to a quantifiable monitoring system, an assessment of the Participant’s overall performance may be made based on a non-quantifiable Supporting Performance Factor (or Factors). The individual to whom the Participant reports (or the Compensation Committee with respect to the Chairman) will evaluate the Participant’s performance based on behavioral attributes and overall performance and this evaluation will determine the Participant’s Supporting Performance Factor (or Factors) according to the following schedule:	

Non Quantifiable	 	 	 	 	 	Quantifiable	
Supporting	 	Supporting	 	Supporting	
Performance Rating	 	Performance Factor	 	Performance Rating	
Significantly Exceeds Requirements	 	 	1.8-2.0	 	 	Significantly Exceeds Goal	
Exceeds Requirements	 	 	1.4-1.7	 	 	Exceeds Goal	
Meets Requirements	 	 	.7-1.3	 	 	Meets Goal	
Marginally meets Requirements	 	 	.3-.6	 	 	Goal Not Met, but Significant Progress Made	
Needs Improvements	 	 	0-.2	 	 	Goal Not Met	

 	(3)	 	Aggregate Individual Performance Factor. The Individual Performance Factor to be used in the calculation of the Accrued Bonus shall be equal to the sum of the quantifiable and/or non-quantifiable Supporting Performance Factor(s), divided by two as follows:	

 	 	 	 	Quantifiable	 	 	 	 	 	Non-Quantifiable	 	 	
 	 	 	 	Supporting	 	 	+	 	 	Supporting	 	 	
 	 	Individual	 	Performance	 	 	 	 	 	Performance	 	 	
 	 	Performance =	 	Factor	 	 	 	 	 	Factor	 	 	
 	 	 	 	 	 	 	
 	 	Factor	 	 	 	 	2	 	 	 	 	 	
Notwithstanding the foregoing, the individual to whom the Participant reports (with the approval of the Chairman and President or the Compensation Committee with respect to the Chairman and President), shall have the authority to weight the Supporting Performance Factors, according to relative importance. The weighting of each Supporting Performance

8

 
Factor shall be expressed as a percentage, and the sum of the percentages applied to all of the Supporting Performance Factors shall be 100%. The Individual Performance Factor, if weighted factors are used, will then be equal to the weighted average of such Supporting Performance Factors.
VII.	 	CHANGE IN STATUS DURING THE PLAN YEAR	

 	A.	 	New Hires and Promotions. A newly hired employee or an employee promoted during the Plan Year to a position qualifying for participation (or leaving the participating class) may accrue (subject to discretion of the Compensation Committee) a pro rata Accrued Bonus based on Base Salary received.	
 	 	 	 	
 	B.	 	Discharge. An employee discharged during the Plan Year shall not be eligible for an Accrued Bonus, even though his or her service arrangement or contract extends past year-end, unless the Compensation Committee determines that the conditions of the termination indicate that a prorated Accrued Bonus is appropriate. The Compensation Committee shall have full and final authority in making such a determination.	
 	 	 	 	
 	C.	 	Resignation. An employee who resigns during the Plan Year to accept employment elsewhere (including self-employment) will not be eligible for an Accrued Bonus, unless the Compensation Committee determines that the conditions of the termination indicate that a prorated Bonus is appropriate. The Compensation Committee shall have full and final authority in making such a determination.	
 	 	 	 	
 	D.	 	Death, Disability and Retirement. If a Participant’s employment is terminated during a Plan Year by reason of death, Disability, or normal or early retirement under the Company’s retirement plan, a tentative Accrued Bonus will be calculated as if the Participant had remained employed as of the end of the Plan Year. The final Accrued Bonus will be calculated based upon the Base Salary received.	
 	 	 	 	
 	 	 	Each employee may name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under this Plan is to be paid in case of the employee’s death.

Each such designation shall revoke all prior designations by the employee, shall be in the form prescribed by the Compensation Committee, and shall be effective only when filed by the employee	

9

 
 	 	 	in writing with the Compensation Committee during his or her lifetime.	
 	 	 	 	
 	 	 	In the absence of any such designation, benefits remaining unpaid at the employee’s death shall be paid to the employee’s estate.	
 	 	 	 	
 	E.	 	Leave of Absence. An employee whose status as an active employee is changed during a Plan Year as a result of a Leave of Absence may, at the discretion of the Compensation Committee, be eligible for a pro rata Accrued Bonus determined in the same way as in paragraph D of this Section.	
 	 	 	 	
 	F.	 	Needs Improvement Status. Associates whose performance has been rated Needs Improvement on their annual performance review will not be eligible for an EVA bonus until such time as their performance is at an acceptable level. If the associate’s performance returns to an acceptable level, the EVA bonus that was withheld will be paid with the next available pay period.	

VIII.	 	BONUS PAID AND BONUS BANK	
The Accrued Bonus will be either paid to the Participant, or a portion credited to or charged against a Bonus Bank as provided in this Article.
 	A.	 	Participants Who Are Not Executives Officers. All positive Accrued Bonuses of Participants who are not Executive Officers for the Plan Year shall be paid in full, less amounts required by law to be withheld for income and employment tax purposes, not later than December 31 following the end of the Plan Year in which the Accrued Bonus was earned. Participants who are not Executive Officers shall not have any portion of their Accrued Bonuses banked.	
 	 	 	 	
 	B.	 	Participants Who Are Executive Officers. The Total Bonus Payout to Participants who are Executive Officers for the Plan Year shall be as follows:	
Total Bonus Payout = [Accrued Bonus - Extraordinary Bonus Accrual] + Bank Payout
The Total Bonus Payout for each Plan Year, less amounts required by law to be withheld for income tax and employment tax purposes, shall be paid not later than December 31 following the end of the Plan Year in which the Accrued Bonus was earned.

10

 
 	C.	 	Establishment of a Bonus Bank. To encourage a long term commitment to the enhancement of shareholder value by Executive Officers, “Extraordinary Bonus Accruals” shall be credited to an “at risk” deferred account (“Bonus Bank”) for each such Participant, and all negative Accrued Bonuses shall be charged against the Bonus Bank, as determined in accordance with the following:	

 	1.	 	“Bonus Bank” means, with respect to each Executive Officer, a bookkeeping record of an account to which Extraordinary Bonus Accruals or positive Accrued Bonuses are credited, and negative Accrued Bonuses debited as the case may be, for each Plan Year, and from which bonus payments to such Executive Officers are debited.	
 	 	 	 	
 	2.	 	“Bank Balance” means, with respect to each Executive Officer, a bookkeeping record of the net balance of the amounts credited to and debited against such Executive Officer’s Bonus Bank. The Bank Balance shall initially be equal to zero and can never be less than zero.	
 	 	 	 	
 	3.	 	“Extraordinary Bonus Accrual” shall mean the amount of the Accrued Bonus for any year that exceeds 1.25 times the portion of the Executive Officer’s Base Salary which is represented by the Target Incentive Award.	
 	 	 	 	
 	4.	 	Annual Allocation. Each Executive Officer’s Extraordinary Bonus Accrual, positive Accrued Bonus or negative Accrued Bonus is credited or debited to the Bonus Bank maintained for that Executive Officer. Such Annual Allocation will occur as soon as administratively feasible after the end of each Plan Year.	
 	 	 	 	
 	5.	 	“Available Balance” means the Bank Balance at the point in time immediately after the Annual Allocation has been made.	
 	 	 	 	
 	6.	 	“Payout Percentage” means the percentage of the Available Balance that may be paid out in cash to the Participant. The Payout Percentage will equal 33%.	

 	7.	 	“Bank Payout” means the amount of the Available Balance that may be paid out in cash to the Executive Officer for each Plan Year. The Bank Payout is calculated as follows:	

11

 
Bank Payout = Available Balance x Payout Percentage
The Bank Payout is subtracted from the Bank Balance.
 	8.	 	Treatment of Available Balance Upon Termination.	

 	(a)	 	Resignation or Termination With Cause. Executive Officers leaving voluntarily to accept employment elsewhere (including self-employment) or who are terminated with cause will forfeit their Available Balance.	
 	 	 	 	
 	(b)	 	Retirement, Death, Disability or Termination Without Cause. In the event of an Executive Officer’s normal or early retirement under the STRATTEC SECURITY CORPORATION Retirement Plan, death, Disability, or termination without cause (“Separation from Service”), the Available Balance, less amounts required by law to be withheld for income tax and employment tax purposes shall be paid to the Executive Officer. The Plan will pay the amount as a lump sum. If the Executive Officer’s Separation from Service occurs before March 15 of the Plan Year, the lump sum shall be paid the following September 15. If the Executive Officer’s Separation from Service occurs on or after March 15 of the Plan Year, the lump sum shall be paid on the date which is six months after the date of the Participant’s Separation from Service.	
 	 	 	 	
 	(c)	 	For purposes of this Plan “cause” shall mean:	

 	(i)	 	The willful and continued failure of a Participant to perform substantially the Participant’s duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Participant by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Participant has not substantially performed the Participant’s duties, or	

12

 
 	(ii)	 	The willful engaging by the Participant in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company.	
 	 	 	 	
 	 	 	For purposes of this provision, no act or failure to act, on the part of the Participant, shall be considered “willful” unless it is done, or omitted to be done, by the Participant in bad faith or without reasonable belief that the Participant’s action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Participant in good faith and in the best interests of the Company. The cessation of employment of the Participant shall not be deemed to be for cause unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Participant and the Participant is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Participant is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail.	

IX.	 	ADMINISTRATIVE PROVISIONS	

 	A.	 	Amendments. Subject to Code section 409A which applies to payments which are deferred compensation under this Plan, the Compensation Committee or full Board of Directors of the Company shall have the right to amend or restate the Plan at any time from	

13

 
 	 	 	time to time. The Company reserves the right to suspend or terminate the Plan at any time. No such modification, amendment, suspension, or termination may, without the consent of any affected participants (or beneficiaries of such participants in the event of death), reduce the rights of any such participants (or beneficiaries, as applicable) to a payment or distribution already earned under Plan terms in effect prior to such change. The provisions of the Plan as in effect at the time of a Participant’s termination of employment shall control as to that Participant, unless otherwise specified in the Plan.	

 	B.	 	Authority to Act. The Compensation Committee or full Board of Directors may act on behalf of the Company for purposes of the Plan.	
 	 	 	 	
 	C.	 	Interpretation of Plan. Any decision of the Compensation Committee with respect to any issues concerning individuals selected for awards, the amounts, terms, form and time of payment of awards, and interpretation of any Plan guideline, definition, or requirement shall be final and binding.	
 	 	 	 	
 	 	 	The Compensation Committee may determine that a Participant is Disabled if the Participant is determined to be totally disabled by the Social Security Administration. The Compensation Committee may also determine that the Participant is Disabled in accordance with a disability insurance program, provided that the definition of disability applied under that program complies with the definition of Disability provided under this Plan.	
 	 	 	 	
 	D.	 	Effect of Award on Other Employee Benefits. By acceptance of a bonus award, each recipient agrees that such award is special additional compensation and that it will not affect any employee benefit,  e.g. , life insurance, etc., in which the recipient participates, except as provided in paragraph D. below.	
 	 	 	 	
 	E.	 	Retirement Programs. Awards made under this Plan shall be included in the employee’s compensation for purposes of the STRATTEC SECURITY CORPORATION Retirement Plan and STRATTEC SECURITY CORPORATION Employee Savings Investment Plan.	

 	F.	 	Right to Continued Employment; Additional Awards. The receipt of a bonus award shall not give the recipient any right to continued employment, and the right and power to dismiss any employee is	

14

 
 	 	 	specifically reserved to the Company. In addition, the receipt of a bonus award with respect to any Plan Year shall not entitle the recipient to an award with respect to any subsequent Plan Year.	

X.	 	MISCELLANEOUS	

 	A.	 	Indemnification. The Compensation Committee shall not be liable for, and shall be indemnified and held harmless by the Company from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred in connection with any claim, action, suit, or proceeding to which the Compensation Committee may be a party by reason of any action taken or failure to act under this Plan. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such person(s) may be entitled under the Company’s Certificate of Incorporation of By-Laws, as a matter of law, or otherwise, or any power that the Company may have to indemnify such person(s) or hold such person(s) harmless.	
 	 	 	 	
 	B.	 	Expenses of the Plan. The expenses of administering this Plan shall be borne by the Company.	
 	 	 	 	
 	C.	 	Withholding Taxes. The Company shall have the right to deduct from all payments under this Plan any Federal or state taxes required by law to be withheld with respect to such payments.	
 	 	 	 	
 	D.	 	Governing Law. This Plan is subject to federal law, including the requirements of Code section 409A, the proposed regulations for Code section 409A and other guidance provided by the Internal Revenue Service. For purposes of state law, the Plan shall be construed under the laws of the State of Wisconsin.	
 	 	 	 	
 	E.	 	Severability. This Plan has been amended in pursuant to proposed regulations issued by the Internal Revenue Service and is intended to be in good faith compliance with the requirements under Code section 409A. To the extent that the Compensation Committee determines that additional information or interpretation of the rules, final regulations or other guidance provided by the Internal Revenue Service require amendments to the Plan to comply with Code section 409A, the Compensation Committee shall amend the Plan accordingly. Any provision of this Plan prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions. The illegal or invalid provisions shall be	

15

 
 	 	 	fully severable and this Plan shall be construed and enforced as if the illegal or invalid provisions had never been included in this Plan.	

16

Exhibit 10.4
STRATTEC SECURITY CORPORATION
ECONOMIC VALUE ADDED
BONUS PLAN
FOR
NON-EMPLOYEE MEMBERS OF THE
BOARD OF DIRECTORS
Effective June 30, 1997
as Amended August 21, 2001, October 23, 2001,
August 24, 2007 and July 4, 2011

 

 
STRATTEC SECURITY CORPORATION
ECONOMIC VALUE ADDED
BONUS PLAN
FOR
NON-EMPLOYEE MEMBERS OF THE
BOARD OF DIRECTORS
TABLE OF CONTENTS
 	 	 	 	 	
 	 	Page	 	
 	 	 	 	 	
I. Plan Objectives	 	 	1	 	
 	 	 	 	 	
II. Plan Administration	 	 	1	 	
 	 	 	 	 	
III. Definitions	 	 	1	 	
 	 	 	 	 	
IV. Eligibility	 	 	4	 	
 	 	 	 	 	
V. Individual Participation Levels	 	 	4	 	
 	 	 	 	 	
VI. Performance Factors	 	 	4	 	
 	 	 	 	 	
VII. Change in Status During Plan Year	 	 	5	 	
 	 	 	 	 	
VIII. Bonus Payment	 	 	6	 	
 	 	 	 	 	
IX. Administrative Provisions	 	 	6	 	
 	 	 	 	 	
X. Miscellaneous	 	 	7	 	

 

 
I.	 	PLAN OBJECTIVES	

 	A.	 	To promote the maximization of shareholder value over the long term by providing incentive compensation to non-employee members of the Board of Directors of STRATTEC SECURITY CORPORATION (the “Company”) in a form which is designed to financially reward participants for an increase in the value of the Company.	
 	 	 	 	
 	B.	 	To provide competitive levels of compensation that enable the Company to attract and retain people who can have a positive impact on the economic value of the Company to its shareholders.	
 	 	 	 	
 	C.	 	To encourage teamwork and cooperation in the achievement of Company goals.	

II.	 	PLAN ADMINISTRATION	
The Chairman & C.E.O. of the Company shall be responsible for the design, administration, and interpretation of the Plan.
III.	 	DEFINITIONS	

 	A.	 	“Actual EVA” means the EVA as calculated for the relevant Plan Year.	
 	 	 	 	
 	B.	 	“Bonus” means the bonus which is calculated in the manner set forth in Section V.A.	
 	 	 	 	
 	C.	 	“Capital” means the Company’s average monthly net operating capital employed for the Plan Year, calculated as follows:	

 	 	 	Current Assets	
 	 	 	 	
 	+	 	Bad Debt Reserve	
 	 	 	 	
 	+	 	LIFO Reserve	
 	 	 	 	
 	-	 	Future Income Tax Benefits	
 	 	 	 	
 	-	 	Current Noninterest-Bearing Liabilities	
 	 	 	 	
 	+	 	Property, Plant, Equipment, (Net)	
 	 	 	 	
 	-	 	Construction in Progress	
 	 	 	 	
 	(+/-)	 	Unusual Capital Items	

 	D.	 	“Capital Charge” means the deemed opportunity cost of employing Capital in the Company’s business, determined as follows:	

1

 
Capital Charge = Capital x Cost of Capital
 	E.	 	“Company” means STRATTEC SECURITY CORPORATION. The Company’s Chairman & C.E.O., or his/her designee may act on behalf of the Company with respect to this Plan.	
 	 	 	 	
 	F.	 	“Compensation Committee” means the Compensation Committee of the Board of Directors, which among other duties, is responsible for administering the EVA Plan for the Company’s Officers and Senior Managers.	
 	 	 	 	
 	G.	 	“Cost of Capital” means the weighted average of the cost of equity and the after tax cost of debt for the relevant Plan Year. For Plan administration purposes, it is assumed the Company’s capital structure will be 80% Equity and 20% Debt. The Cost of Capital will be initially set at 10% for fiscal year 2008 and reviewed by the Compensation Committee prior to each Plan Year thereafter, consistent with the following methodology:	

 	(a)	 	Cost of Equity = Risk Free Rate + (Business Risk Index x Average Equity Risk Premium)	
 	 	 	 	
 	(b)	 	Debt Cost of Capital = Debt Yield x (1 - Tax Rate)	
 	 	 	 	
 	(c)	 	The weighted average of the Cost of Equity and the Debt Cost of Capital is determined by reference to the expected debt-to-capital ratio	
where the Risk Free Rate is the average daily closing yield rate on 30 year U.S. Treasury Bonds for an appropriate period (determined by the Compensation Committee from time to time) preceding the relevant Plan Year, the Business Risk Index is determined by reference to an auto supply industry factor selected by the Compensation Committee, the Average Equity Risk Premium is 6%, the Debt Yield is the weighted average yield of all borrowing included in the Company’s permanent capital, and the tax rate is the combination of the relevant corporate Federal and state income tax rates.
The Compensation Committee will review the Cost of Capital annually and make appropriate adjustments only if the calculated Cost of Capital changes by more than 1% from that used during the prior Plan Year.

2

 
 	H.	 	“Earned Wages” includes all cash compensation paid in the Plan Year.	
 	 	 	 	
 	I.	 	“Economic Value Added” or “EVA” means the NOPAT that remains after subtracting the Capital Charge, expressed as follows:	
EVA = NOPAT - Capital Charge
EVA may be positive or negative.
 	J.	 	Effective Date. June 30, 1997, the date as of which the Plan first applies to the Company.	
 	 	 	 	
 	K.	 	“EVA Leverage Factor” means the adjustment factor reflecting deviation in the use of capital expressed as a percentage of net operating capital employed. For purposes of this Plan, the Company’s EVA Leverage Factor is determined to be 3% of the monthly average net operating capital employed during the prior Plan year.	
 	 	 	 	
 	 	 	For fiscal year 2008 (beginning July 2, 2007) the EVA Leverage Factor is set at $3,316,000.	
 	 	 	 	
 	L.	 	“NOPAT” means cash adjusted net operating profits after taxes for the Plan Year, calculated as follows:	

 	 	 	Net Sales	
 	 	 	 	
 	-	 	Cost of Goods Sold	
 	 	 	 	
 	(+ -)	 	Change in LIFO Reserve	
 	 	 	 	
 	-	 	Engineering/Selling & Admin.	
 	 	 	 	
 	(+ -)	 	Change in Bad Debt Reserve	
 	 	 	 	
 	(+ -)	 	Other Income & Expense excluding Interest Expense	
 	 	 	 	
 	(+ -)	 	Other Unusual Income or Expense Items	
 	 	 	 	
 	(+ -)	 	Amortization of Unusual Income or Expense Items	
 	 	 	 	
 	-	 	Cash Adjusted Taxes on the Above (+/- change in deferred tax liability)	

 	M.	 	Participant. Any individual who has satisfied the eligibility requirements of the Plan as provided in Section IV.	
 	 	 	 	
 	N.	 	“Plan Year” means the one-year period coincident with the Company’s fiscal year.	

3

 
 	O.	 	“Target EVA” means the target level of EVA for the Plan Year, determined as follows:	

 	 	Current Plan	 	 	 	Prior Year	 	 	 	 	 	Prior Year	 	 	 	Expected	
 	 	Year Target EVA	 	=	 	Target EVA	 	 	+	 	 	Actual EVA	 	+	 	Improvement	
 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	2	 	 	 	 	 	 	 	
Expected Improvement will be approved by the Board of Directors annually, based on increasing economic value in the context of the then current relevant economic conditions.
For fiscal year 2008 (beginning July 2, 2007) the Target EVA is set at $1,154,000.
IV.	 	ELIGIBILITY	
Members of the Company’s Board of Directors who are not regular full-time employees of the Company are the only individuals eligible to participate in this Plan.
V.	 	INDIVIDUAL PARTICIPATION LEVELS	

 	A.	 	Bonus Formula. Each Participant’s Bonus will be determined as a function of the Participant’s Earned Wages, the Participant’s Target Incentive Award (provided in paragraph V.B., below), and the Company Performance Factor (provided in Section VI.) for the Plan Year. Each Participant’s Accrued Bonus will be calculated as follows:	

 	 	 	 	 	 	Target	 	 	 	Company	 	 	
 	 	Participant’s	 	x	 	Incentive	 	x	 	Performance	 	 	
 	 	Earned Wages	 	 	 	Award	 	 	 	Factor	 	 	

 	B.	 	Target Incentive Award. The Target Incentive Award for all non-employee Directors will be 40% of Earned Wages.	

VI.	 	PERFORMANCE FACTOR	

 	A.	 	Company Performance Factor Calculation. For any Plan Year, the Company Performance Factor will be calculated as follows:	

4

 
 	 	 	 	 	 	 	
 	 	Company Performance Factor = 1.00 +	 	Actual EVA - Target EVA	 	 	
 	 	 	 	 	 	 	
 	 	 	 	EVA Leverage Factor	 	 	

 	B.	 	Adjustments to Company Performance. When Company performance is based on Economic Value Added, it may be necessary to exclude significant, unusual, unbudgeted or noncontrollable gains or losses from actual financial results in order to properly measure performance. The Chairman & C.E.O. will decide those items that shall be considered in adjusting actual results. For example, some types of items that may be considered for exclusion are:	

 	(1)	 	Any gains or losses which will be treated as extraordinary in the Company’s financial statements.	
 	 	 	 	
 	(2)	 	Profits or losses of any entities acquired by the Company during the Plan Year, assuming they were not included in the budget and/or the goal.	
 	 	 	 	
 	(3)	 	Material gains or losses not in the budget and/or the goal which are of a nonrecurring nature and are not considered to be in the ordinary course of business. Some of these would be as follows:	

 	(a)	 	Gains or losses from the sale or disposal of real estate or property.	
 	 	 	 	
 	(b)	 	Gains resulting from insurance recoveries when such gains relate to claims filed in prior years.	
 	 	 	 	
 	(c)	 	Losses resulting from natural catastrophes, when the cause of the catastrophe is beyond the control of the Company and did not result from any failure or negligence on the Company’s part.	

VII.	 	CHANGE IN STATUS DURING THE PLAN YEAR	

 	A.	 	New Board Members. A newly appointed or elected non-employee Director will accrue a pro rata Bonus based on Earned Wages received during the first Plan Year in which that Director joins the Board of Directors.	

5

 
 	B.	 	Removal. A non-employee Director removed from the Board of Directors by due process during the Plan Year shall not be eligible for a Bonus.	
 	 	 	 	
 	C.	 	Resignation. A non-employee Director who resigns during the Plan Year will be eligible for a pro rata Bonus based on Earned Wages received.	
 	 	 	 	
 	D.	 	Death, Disability and Retirement. If a non-employee Director ceases to function as a member of the Board of Directors during a Plan Year by reason of death or disability, a tentative Bonus will be calculated as if the Participant had remained an active member of the Board as of the end of the Plan Year. The final Bonus will be calculated based upon the Earned Wages received.	
 	 	 	 	
 	 	 	Each non-employee Director may name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under this Plan is to be paid in case of the non-employee Director’s death.	
 	 	 	 	
 	 	 	Each such designation shall revoke all prior designations by the non-employee Director, shall be in the form prescribed by the Compensation Committee, and shall be effective only when filed by the non-employee Director in writing during his or her lifetime with the Chairman & C.E.O.	
 	 	 	 	
 	 	 	In the absence of any such designation, benefits remaining unpaid at the non-employee Director’s death shall be paid to that Director’s estate.	
 	 	 	 	
 	E.	 	Leave of Absence. A non-employee Director whose status as an active Board Member is changed during a Plan Year as a result of a leave of absence may, at the discretion of the Chairman & C.E.O., be eligible for a pro rata Bonus determined in the same way as in paragraph D of this Section.	

VIII.	 	BONUS PAYMENT	
All positive Bonuses of Participants for the Plan Year shall be paid in full as soon as administratively feasible following the end of the Plan Year in which the Bonus was earned.

6

 
IX.	 	ADMINISTRATIVE PROVISIONS	

 	A.	 	Amendments. The Chairman & C.E.O. of the Company shall have the right to amend or restate the Plan at any time from time to time. The Company reserves the right to suspend or terminate the Plan at any time. No such modification, amendment, suspension, or termination may, without the consent of any affected participants (or beneficiaries of such participants in the event of death), reduce the rights of any such participants (or beneficiaries, as applicable) to a payment or distribution already earned under Plan terms in effect prior to such change.	
 	 	 	 	
 	B.	 	Authority to Act. The Chairman & C.E.O. (or in his or her absence, the President & C.O.O.) may act on behalf of the Company for purposes of the Plan.	
 	 	 	 	
 	C.	 	Interpretation of Plan. Any decision of the Chairman & C.E.O. with respect to any issues concerning, the amounts, terms, form and time of payment of awards, and interpretation of any Plan guideline, definition, or requirement shall be final and binding.	
 	 	 	 	
 	D.	 	Reporting Compliance. Awards made under this Plan shall be included in the employee’s compensation for purposes of Securities & Exchange Commission required reporting.	
 	 	 	 	
 	E.	 	Right to Continued Employment; Additional Awards. The receipt of a bonus award shall not give the recipient any right to continued membership on the Company’s Board of Directors. In addition, the receipt of a bonus award with respect to any Plan Year shall not entitle the recipient to an award with respect to any subsequent Plan Year.	

X.	 	MISCELLANEOUS	

 	A.	 	Indemnification. The Chairman & C.E.O. (or any Company officer designated to act in the Chairman’s behalf) shall not be liable for, and shall be indemnified and held harmless by the Company from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred in connection with any claim, action, suit, or proceeding to which the Chairman & C.E.O., President & C.O.O. and/or the Compensation Committee may be a party by reason of any action taken or failure to act under this Plan. The foregoing right of indemnification shall not be exclusive of any other rights of	

7

 
 	 	 	indemnification to which such person(s) may be entitled under the Company’s Certificate of Incorporation of By-Laws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.	
 	 	 	 	
 	B.	 	Expenses of the Plan. The expenses of administering this Plan shall be borne by the Company.	
 	 	 	 	
 	C.	 	Governing Law. This Plan shall be construed in accordance with and governed by the laws of the State of Wisconsin.	

8

Exhibit 13

 

 

Everyday, it becomes increasingly apparent that we are living in a truly global community in which the people of the world are linked more closely together. This development presents challenges and opportunities for us all.
STRATTEC is focusing on the opportunities globalization presents for our business. With our strategic partners, WITTE Automotive of Velbert, Germany and ADAC Automotive of Grand Rapids, Michigan, we are expanding our cooperation to service our collective global customers. We are pursuing this global business under the VAST brand. VAST is an acronym for Vehicle Access Systems Technology, and represents the combined vehicle access control product lines of all three companies.
VAST is the engine powering our globalization strategy. It is a unique relationship between STRATTEC, our partners and customers which will allow us to utilize our vehicle access systems technology on a global basis. It is the “start button” we have pushed to capture the significant global opportunities before us.

 

 

2011 ANNUAL REPORT 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 relationship with WITTE Automotive of Velbert, Germany and ADAC Automotive of Grand Rapids, Michigan. Under this relationship STRATTEC, WITTE and ADAC market our products to global customers under the “VAST” brand name. Our products are shipped to customer locations in the United States, Canada, Mexico, Europe, South America, Korea and China, and we provide full service and aftermarket support. CONTENTS LETTER TO THE SHAREHOLDERS 2 FINANCIAL HIGHLIGHTS 4 COMPANY DESCRIPTION 5 STRATTEC EQUIPPED VEHICLE LIST 12 MANAGEMENT’S DISCUSSION AND ANALYSIS 13 FINANCIAL STATEMENTS 27 REPORT OF MANAGEMENT 47 REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 48 FINANCIAL SUMMARY 50 FINANCIAL SUMMARY / PERFORMANCE GRAPH 51 DIRECTORS / OFFICERS / SHAREHOLDERS’ INFORMATION 52  PROSPECTIVE INFORMATION  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 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, 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.	

 

 
LETTER TO THE SHAREHOLDERS
SEPTEMBER, 2011
Fellow Shareholders:
Fiscal 2011 marked a year in which we demonstrated that the strategies we put in place five years ago to expand our product portfolio, expand our customer base and establish a global presence through VAST have been successful. The year was a record breaker from a sales standpoint, beating the company’s previous record by 16%. We benefited from increased customer demand as the auto industry recovery continued, but also from a wider portfolio of products to sell.
Our profitability exceeded the prior year’s level, but was far from a record. Profits were significantly reduced by our first major warranty claim from a customer, related to past model year production. Despite this unusual event, our business is in far better condition than it was in fiscal 2009, when three out of our four largest customers were in bankruptcy and the future of the auto industry was very uncertain.
The significant sales increases we experienced in fiscal 2011 and 2010 in excess of the general auto industry volume increases are due to our expanded product portfolio. Our traditional Lock and Key products now make up less than 50% of our sales. This is a dramatic change from where we were just five years ago when we were highly dependent on that product line. The two major contributors to this expansion are our STRATTEC POWER ACCESS and ADAC-STRATTEC ventures. However, we also benefited from new products developed by our Driver Controls team, higher value content on certain Lock and Key products, and new Latch applications.
With our increased production, we experienced some significant headwinds which hampered our profitability. The significant year-over-year growth in production volume caused us to be less efficient as we assimilated the increase. For the most part, these inefficiencies were addressed during the year, and contributed to our more favorable results in the fourth quarter. Ironically, we were also impacted by post-recession difficulties with certain suppliers who made it through the Great Recession, but could not raise sufficient working capital to finance the increases in production demanded by their customers as the economy improved. As a result, we were forced to re-source the components purchased from these suppliers, resulting in temporary extra costs. We also experienced shortages with several electronic components which caused us to incur expedited freight charges for both inbound and outbound goods, as well as production overtime.
We were negatively impacted throughout the year by increases in the costs of zinc and brass used in our products and higher costs at our Mexican operations resulting from the declining value of the U.S. dollar compared to the peso. To mitigate the effects of the

2011 STRATTEC Annual Report	 	2	

 

 
LETTER TO THE SHAREHOLDERS
exchange rate fluctuations on earnings, we entered into an agreement with Bank of Montreal that provides for Mexican peso currency option contracts. This is the first time we have taken this step since we began operations in Mexico during our 1989 fiscal year. Details of these contracts are included in the financial section of this report.
During the fiscal year, we and our business partners, WITTE Automotive and ADAC Automotive, took steps to enhance VAST as a global supplier. VAST is the brand we are building to represent the combined vehicle access control product lines of all three companies. In the very near future, components for virtually all new vehicle programs developed by our major customers will be sourced globally, and we would be excluded from participation if we could not effectively demonstrate our global capability. Fortunately, we have already had some success with customer global programs through VAST. But to assure that our identified global customers have greater confidence and satisfaction with VAST and the role STRATTEC and its partners play as part of the brand, we have implemented a new VAST management structure to oversee our collective global activities.
The organization structure is led by a President dedicated to VAST and includes three Vice Presidents, one from each of the business partners. Its purpose is to manage business relationships with identified global customers to assure a single point of contact for each of those customers and provide coordinated support for their needs. This structure provides hard evidence to our customers that the three entities can act as one, and in so doing, harness our respective regional and technical abilities to serve them on a global basis.
In addition to the development of this specific management group, VAST continued to expand its global footprint. VAST China opened a new facility near Shanghai which increases capacity and gives VAST the capability of producing the complete product portfolio of the partners. We are excited about these developments and what they will mean for our future.
Overall, fiscal 2011 was a good year in which we demonstrated real progress in building a stronger business. We have more to do, and we are pursuing new strategies that we anticipate will further grow our business in both size and profitability over the next several years.
Thank you for your continued support of STRATTEC and our endeavors.
Sincerely,

Harold M. Stratton II	 	Frank J. Krejci	
Chairman and Chief Executive Officer	 	President and Chief Operating Officer	

 	 	 	
2011 STRATTEC Annual Report	 	3	

 

 
FINANCIAL HIGHLIGHTS
(IN MILLIONS)
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	 	2009	 	
Net Sales	 	$	260.9	 	 	$	208.0	 	 	$	126.1	 	
Gross Profit	 	 	42.2	 	 	 	33.0	 	 	 	13.2	 	
Income (Loss) from Operations	 	 	8.7	 	 	 	4.4	 	 	 	(12.7	)	
Net Income (Loss)	 	 	5.4	 	 	 	3.4	 	 	 	(6.1	)	
Total Assets	 	 	148.1	 	 	 	145.0	 	 	 	128.2	 	
Total Debt	 	 	—	 	 	 	—	 	 	 	—	 	
Shareholders’ Equity	 	 	86.2	 	 	 	74.1	 	 	 	71.4	 	
ECONOMIC VALUE ADDED (EVA®)
We believe that EVA® represents an accurate measure of STRATTEC’s overall performance and shareholder value. All U.S. associates and many of our Mexico-based salaried associates participate in incentive plans that are based upon our ability to add economic value to the enterprise. During 2008, our EVA ®  Plan was modified to include cash and cash equivalents as part of the Company’s net capital employed in the business. Because cash and cash equivalents were a significant component of the capital employed in the business again in 2011 this increased the capital charge, thereby contributing to our negative EVA ® . The EVA ®  performance for 2011 was a negative $3.7 million which represents a $1.2 million improvement from 2010. (For further explanation of our EVA ®  Plan and the effect negative EVA ®  has on awards granted under our incentive plans, see our 2011 definitive Proxy Statement.)
 	 	 	 	 	 	 	 	 	
Net Operating Profit After Cash-Basis Taxes	 	 	 	 	 	$	4.2	 	
Average Monthly Net Capital Employed	 	$	79.1	 	 	 	 	 	
Cost of Capital	 	 	10	%	 	 	 	 	
 	 	 	 	 	 	 	 	
Capital Charge	 	 	 	 	 	 	7.9	 	
 	 	 	 	 	 	 	 	
Economic Value Added	 	 	 	 	 	$	(3.7	)	
 	 	 	 	 	 	 	 	
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:
 	 	 	 	 	
2011 Net Income as Reported	 	$	5.4	 	
Deferred Tax Provision	 	 	(.2	)	
Other	 	 	(1.0	)	
 	 	 	 	
Net Operating Profit After Cash-Basis Taxes	 	$	4.2	 	
 	 	 	 	
Average Monthly Net Capital Employed:
 	 	 	 	 	
Total Shareholders’ Equity as Reported at July 3, 2011	 	$	86.2	 	
Long-Term Liabilities	 	 	7.0	 	
Deferred Tax Asset	 	 	(7.7	)	
Other	 	 	(5.8	)	
 	 	 	 	
Net Capital Employed at July 3, 2011	 	$	79.7	 	
Impact of 12 Month Average	 	 	(.6	)	
 	 	 	 	
Average Monthly Net Capital Employed	 	$	79.1	 	
 	 	 	 	
EVA® is a registered trademark of Stern, Stewart & Co.

2011 STRATTEC Annual Report	 	4	

 

 
COMPANY DESCRIPTION
BASIC BUSINESS
STRATTEC SECURITY CORPORATION designs, develops, manufactures and markets automotive access control products including mechanical locks and keys, electronically enhanced locks and keys, steering column and instrument panel ignition lock housings, latches, power sliding side door systems, power lift gate systems, power deck lid systems, door handles and related products for North American automotive customers. We also supply global automotive manufacturers through a unique strategic relationship with WITTE Automotive of Velbert, Germany and ADAC Automotive of Grand Rapids, Michigan. Under this relationship STRATTEC, WITTE and ADAC market our products to global customers under the “VAST” brand name. Our products are shipped to customer locations in the United States, Canada, Mexico, Europe, South America, Korea and China, and we provide full service and aftermarket support.

HISTORY
STRATTEC formerly was a division of Briggs & Stratton Corporation. In 1995, STRATTEC was spun off from Briggs & Stratton through a tax-free distribution to the then-existing Briggs & Stratton shareholders and has been an independent public company for sixteen years.
Our history in the automotive security business spans over 100 years. STRATTEC has been the world’s largest producer of automotive locks and keys since the late 1920s, and we currently maintain a dominant share of the North American markets for these products.
PRODUCTS
Our traditional products are locks and keys for cars and light trucks. A typical new car uses a set of two to three locks. A typical 3-way lockset contains a steering column/ignition lock, a driver’s door lock and a rear compartment (trunk, hatch or liftgate) lock. Pickup trucks also use two to three locks, while sport utility vehicles and vans use three to five locks. Some vehicles have additional locks for consoles, storage compartments or folding rear seats. Pickup truck tailgate locks and spare tire locks are offered as options. Usually, two keys are provided with each vehicle lockset. Many of the vehicles we currently supply are using keys with sophisticated radio frequency identification technology for theft prevention. However, keys with remote entry devices integrated into a single unit have been added to our product line and are gaining in popularity.

A growing product line for us is ignition lock housings. 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 zinc or magnesium die castings, or plastic injection molded and can include electronic components for theft deterrent systems.
We are also developing business for additional access control products, including trunk latches,

2011 STRATTEC Annual Report	 	5	

 

 
COMPANY DESCRIPTION

liftgate latches, tailgate latches, hood latches, side door latches and related hardware for this product category. With our acquisition of Delphi Corporation’s Power Products Group in fiscal 2009, we are now supplying power access devices for sliding side doors, liftgates and trunk lids. Through a joint venture formed with ADAC Automotive during fiscal 2007, we also supply door handle components and related vehicle access hardware.
STRATTEC’s products are supported by an extensive staff of experienced product engineers. This staff, which includes product design, quality and manufacturing engineers, is capable of providing complete design, development and testing of new products for our customers. This staff also is available for customer problem solving, warranty analysis, and other activities that arise during a product’s life cycle. Our customers receive after-sales support in the form of special field service kits, service manuals, and specific in-plant production repair programs.
MARKETS
We are a direct supplier to OEM auto and light truck manufacturers as well as other transportation-related manufacturers. Our largest customers are General Motors Company, Chrysler Group LLC and Ford Motor Company. Our product mix varies by customer, but generally our overall sales tend to be highest in lock and key products, followed by power access products, ignition lock housings, the door handle and trim products produced by ADAC-STRATTEC de Mexico and latch products.

Direct sales to various OEMs represented approximately 81% of our total sales for fiscal 2011. The remainder of our revenue is received primarily through sales to the OEM service channels, the aftermarket and Tier 1 automotive supplier 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 customer Program Managers and Application Engineers located in Detroit, and other product engineering personnel. Sales to other OEM customers are accomplished through a combination of our Detroit-area sales personnel located in Detroit and personnel in our Milwaukee headquarters office.
The majority of our OEM products are sold in North America. While a modest amount of exporting is done to Tier 1 and automotive assembly plants in Europe, Asia and South America, we are in the process of expanding our presence in these markets and elsewhere through the Vehicle Access Systems Technology (VAST) brand we share with WITTE Automotive and ADAC Automotive. VAST is described in more detail on page 8.
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

2011 STRATTEC Annual Report	 	6	

 

 
COMPANY DESCRIPTION
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 that we currently do not supply on an OE basis, including keys for Toyota, Honda and other popular domestic and import vehicles. This extended line of keys enable automotive repair specialists to satisfy consumer needs for repair or replacement parts. Our aftermarket activities are serviced through a warehousing operation integral to our Milwaukee headquarters and manufacturing facility.

CUSTOMER FOCUS
To bring the proper focus to the relationships with our major customers, we have seven customer-focused teams, each with a Director of Sales, one or two Engineering Program Managers and Customer Application Engineers. In addition to customer teams for General Motors, Ford and Chrysler, we currently have teams for New Domestic Vehicle Manufacturers, Driver Control/Ignition Lock Housing customers, Tiered Products, and Service and Aftermarket customers. Sales and engineering for ADAC-STRATTEC LLC are supported by our JV partner, ADAC Automotive.
Each Sales Director is responsible for the overall relationship between STRATTEC and a specific customer group. Program Managers report to their respective customer teams and are responsible for coordinating cross functional activities while managing new product programs for their customers.
To serve our customers’ product needs, STRATTEC’s engineering resources are organized by product type. We currently have four product groups: Locks and Keys, Latches and Power Access Devices, Driver Control/Ignition Lock Housings and Electrical. Each group has a Product Business Manager, Engineering Manager and a complement of skilled engineers who design and develop products for specific applications. In doing this, each engineering group works closely with the Customer teams, Engineering Program Managers, and application engineers.
Underlying this organization is a formalized product development process to identify and meet customer needs in the shortest possible time. By following this

 	 	 	
2011 STRATTEC Annual Report	 	7	

 

 
COMPANY DESCRIPTION
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.
OPERATIONS
A significant number of the components that go into our products are manufactured at our main facility and headquarters in Milwaukee, Wisconsin. This facility produces zinc die cast components, stampings and milled key blades. We have two owned production facilities in Juarez, Mexico operating as STRATTEC de Mexico. Plant No. 1 houses assembly operations for locksets and ignition lock housings. Plant No. 2 is a new facility we built during fiscal 2009 to replace a leased facility. Plant No. 2 houses our key finishing operations as well as dedicated space for the assembly operations of STRATTEC POWER ACCESS de Mexico and ADAC-STRATTEC de Mexico.

ADVANCED DEVELOPMENT
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 and processes that will keep us in the forefront of the markets we serve. Projects we are pursuing focus on electronic and mechanical access control products, modularization of related access/security control components and new manufacturing processes to reduce costs for ourselves and our customers. Once our Advanced Development Group establishes a proof-of-concept product utilizing new technology, further product development shifts to our engineering groups for commercialization and product applications.
VAST (VEHICLE ACCESS SYSTEMS TECHNOLOGY)
In fiscal 2001, we entered into a formal alliance with WITTE-Velbert GmbH, an automotive supplier based in Germany which designs, develops, manufactures and markets automotive access control products for European-based customers. This alliance consisted of two initiatives. The first was a set of legal agreements which allowed STRATTEC to manufacture and market WITTE’s core products in North America, and WITTE to manufacture and market STRATTEC’s core products in Europe. The second initiative was a 50-50 joint venture, WITTE-

2011 STRATTEC Annual Report	 	8	

 

 
COMPANY DESCRIPTION
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 JV simply as “VAST”. WITTE is now called WITTE Automotive, and ADAC is now doing business as ADAC Automotive. We have adopted a common graphic image in which we share a logo mark and colors, and a specific VAST logo used on the partners’ printed and electronic presentation materials. What is now VAST LLC made investments with a local partner in Brazil in September, 2001, and local partners in China in March, 2002. VAST do Brasil remains a joint venture with our local partners there. However, during fiscal 2010, VAST LLC purchased the remaining 40 percent interest of its local partners in the China venture, and VAST China is now wholly owned by VAST LLC. This was an important step which gives STRATTEC a one-third interest in VAST China’s activities in the important growing Chinese/Asia market.
VAST is the embodiment of STRATTEC’s, WITTE’s and ADAC’s globalization strategy. 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, 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 also 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

 	 	 	
 	 	 	
2011 STRATTEC Annual Report	 	9	

 

 
COMPANY DESCRIPTION
point of contact for customers, with the added advantage of providing regional support from the partners’ operating entities which, combined with VAST LLC’s ventures in China and Brazil, and sales/engineering offices in Japan and Korea, provide our global footprint.
ADAC-STRATTEC de MEXICO
During fiscal 2007, we formed a joint venture 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 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 2011 and 2010, ASdM represented $25.2 and $13.3 million, respectively of our consolidated net sales.

STRATTEC has just introduced BOLT, the world’s first codeable padlock. In a simple one-step process, users can code the padlock to their vehicle key. This provides significant convenience by reducing the number of keys users need to secure their lockers, storage sheds and vehicle accessories such as tool boxes, trailer hitches, etc. You can buy this product direct at www.boltlock.com
STRATTEC POWER ACCESS LLC
During fiscal year 2009, we formed a new subsidiary with WITTE Automotive called STRATTEC Power Access LLC (SPA) to acquire the North American business of the Delphi Power 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, liftgates and trunk lids. SPA de Mexico currently operates out of defined space in STRATTEC de Mexico Plant No. 2 manufacturing facilities located in Juarez, Mexico. Financial results for SPA are consolidated in STRATTEC’s financial statements. As a new operation effective November 30, 2008, SPA had a negative impact on STRATTEC’s fiscal 2009 operating results due to the overall economic slowdown that was experienced throughout the global economy. For fiscal years ending 2011 and 2010, SPA was profitable and represented $62.8 and $58.5 million, respectively of our consolidated net sales.

SEASONAL NATURE OF THE BUSINESS
The manufacturing of components used in automobiles is driven by the normal peaks and valleys associated with the automotive industry. Typically, the months of July and August are relatively slow as summer vacation shutdowns and model year changeovers occur at the automotive assembly plants. September volumes increase rapidly as each new model year

2011 STRATTEC Annual Report	 	10	

 

 
COMPANY DESCRIPTION
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. The recession of 2008-2009 abnormally altered this pattern resulting in dramatically reduced production levels throughout the period. We believe the more normal peaks and valleys are returning as the auto industry emerges from recession.
GLOBAL PRESENCE

1. STRATTEC — Milwaukee, Wisconsin1	
2. STRATTEC de Mexico — Juarez, Mexico1	
3. STRATTEC de Mexico — Key Finishing — Juarez, Mexico1	
4. ADAC-STRATTEC de Mexico — Juarez, Mexico	
5. STRATTEC Power Access de Mexico — Juarez, Mexico	
6. ADAC Automotive — Grand Rapids and Muskegan, Michigan1	
7. ADAC Automotive, STRATTEC and STRATTEC POWER ACCESS	
(Sales/Engineering Offices — Detroit, Michigan)1	
8. WITTE Automotive — Velbert, Germany1	
9. WITTE Automotive — Nejdek, Czech Republic1	
10. VAST do Brasil — Sao Paulo, Brazil2	
11. VAST Fuzhou — Fuzhou, China2	
12. VAST Great Shanghai Co. — Shanghai, China2	
13. VAST Shanghai Co. Ltd. — Taicang, China2
14. VAST Japan — Tokyo, Japan (Branch Office) 2	
15. VAST Korea — Anyang, Korea (Branch Office)2	
 	 	 	
1	 	Members of VAST.	
 	 	 	
2	 	Units of VAST LLC joint venture.	
ECONOMIC VALUE COMMITMENT
The underlying philosophy of our business, and the means by which we measure our performance, is Economic Value Added (EVA ® ). Simply stated, economic value is created when our business enterprise yields a return greater than the cost of capital we and our shareholders have invested in STRATTEC. The amount by which our return exceeds the cost of our capital is EVA ® . In line with this philosophy, EVA ®  bonus plans are in effect for all our U.S. associates, outside directors and many of our Mexico-based salaried associates as an incentive to help positively drive the 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.

2011 STRATTEC Annual Report	 	11	

 

 

 	 	 	
2011 STRATTEC Annual Report	 	12	

 

 
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following Discussion and Analysis should be read in conjunction with STRATTEC SECURITY CORPORATION’S accompanying Financial Statements and Notes thereto. Unless otherwise indicated, all references to years or quarters refer to fiscal years or fiscal quarters.
Purchase of Delphi Power Products Business
Effective November 30, 2008, STRATTEC SECURITY CORPORATION, in combination with WITTE Automotive of Velbert, Germany, completed the acquisition of certain assets, primarily equipment and inventory, and assumption of certain employee liabilities of Delphi Corporation’s Power Products business for approximately $7.3 million. For the purposes of owning and operating the North American portion of this acquired business, STRATTEC established a new subsidiary, STRATTEC POWER ACCESS LLC (“SPA”), which is 80 percent owned by STRATTEC and 20 percent owned by WITTE. The purchase price of the North American portion of the acquired business totaled approximately $4.4 million, of which STRATTEC paid approximately $3.5 million. WITTE acquired the European portion of the business for approximately $2.4 million. Effective February 12, 2009, SPA acquired the Asian portion of the business for approximately $500,000.
The acquisition of the North American and Asian portions of this business by SPA was not material to STRATTEC’s consolidated financial statements. Amortizable intangible assets acquired totaled $890,000 and are subject to amortization over a period of nine years. In addition, goodwill of approximately $223,000 was recorded as part of the transaction. The amortizable intangibles are included in Other Long-Term Assets in the Consolidated Balance Sheets. Refer to discussion of goodwill impairment under Analysis of Results of Operations below.
The financial results of SPA are consolidated with the financial results of STRATTEC and resulted in increased net income to STRATTEC of approximately $2.5 million and $545,000 during fiscal 2011 and fiscal 2010, respectively, and decreased net income to STRATTEC of approximately $2.1 million during fiscal 2009.
SPA designs, develops, tests, manufactures, markets and sells power systems to operate vehicle sliding side doors and rear compartment access points such as liftgates and trunk lids. In addition, the product line includes power cinching latches, cinching strikers and electronic control modules used in these systems. Current customers for these products supplied from North America are Chrysler Group LLC, Hyundai Kia Automotive Group (Korea), General Motors Company, Ford Motor Company and Yulon Group (Taiwan).
EXECUTIVE OVERVIEW
Historically, a significant portion of our total net sales are to domestic automotive OEM’s (General Motors, Ford and Chrysler). During the past decade these customers continued to lose North American vehicle production share to the New Domestic automotive manufacturers (primarily the Japanese and Korean automotive manufacturers). In addition to our customers’ 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 2011, 2010 and 2009, the domestic automotive OEMs together represented 66 percent, 67 percent and 66 percent, respectively, of our total sales.
Our financial results for fiscal year 2011, reflected a significant improvement compared to fiscal years 2010 and 2009, with 2009 being the worst year of operating results in our history. Fiscal 2011 net sales were $261 million compared to $208 million in 2010 and $126 million in 2009. Net income for fiscal 2011 was $5.4 million compared to $3.4 million in 2010 and a net loss of $6.1 million in 2009. The financial health of our three largest customers also improved during fiscal 2011. General Motors, Ford and Chrysler are now reporting 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.
Prior to 2009, the normal yearly vehicle production build in North America ranged from 15 to 16 million vehicles. As we look out into the future, the July 2011 projections from our third-party forecasting service indicate that North American light vehicle production will show steady improvement for the next five years. By model year, we are expecting a 2011 build of 12.4 million vehicles, 13.9 million vehicles for 2012, 14.5 million vehicles for 2013, 15.5 million vehicles for 2014 and 16.1 million vehicles for 2015. As part of this forecast, General Motors Company and Ford Motor Company are expected to experience modest increases in their production levels during this time period. Chrysler Group LLC is expected to increase production in model years 2012 and 2013, but decline starting in model year 2014, primarily due to the forecasting uncertainty and risk in Fiat’s future vehicle product plans for the Chrysler Group. Of course all of these forecasts are subject to variability based on what happens in the overall economy, especially as it relates to the current level of high unemployment, continued tight credit markets, relatively low home equity values, fluctuating fuel prices and other key factors that we believe could determine whether consumers can or will purchase new vehicles.

2011 STRATTEC Annual Report	 	13	

 

 
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 are pursuing the following objectives as summarized below:
 	•	 	Streamline and standardize processes to increase productivity	
 	 	 	 	
 	•	 	Maintain a disciplined and flexible cost structure to leverage scale and optimize asset utilization and procurement	
 	 	 	 	
 	•	 	Maintain our strong financial position by deploying capital spending targeted for growth and productivity improvement	
 	 	 	 	
 	•	 	Leverage the “VAST Brand” with customer relationships to generate organic growth from global programs	
 	 	 	 	
 	•	 	Offer our customers innovative products and cost savings solutions to meet their changing demands	
 	 	 	 	
 	•	 	Explore and execute targeted mergers and acquisitions with a disciplined due diligence approach and critical financial analysis to drive shareholder value	
We use several key performance indicators to gauge progress toward achieving these objectives. These indicators include net sales growth, operating margin improvement, return on capital employed and cash flow from operations, etc.
RESULTS OF OPERATIONS
The following is a discussion and analysis of our financial position and results of operations for the periods ended July 3, 2011 and June 27, 2010.
2011 Compared to 2010
Net sales were $260.9 million in 2011 compared to $208.0 million in 2010. Our 2011 fiscal year was 53 weeks while our 2010 fiscal year was the typical 52 weeks. The impact of the additional week of customer shipments during the current year increased sales by approximately $4.5 million. Sales to our largest customers overall increased in the current year compared to the prior year levels due to higher customer vehicle production volumes and the additional week of customer shipments. Higher value content on certain new products also contributed to the net sales improvement. Sales to Chrysler Group LLC were $80.9 million in the current year compared to $68.2 million in the prior year. Sales to General Motors Company were $63.6 million in the current year compared to $51.7 million in the prior year. Included in the prior year sales to General Motors were $5.0 million of sales to Nexteer Automotive, formerly a unit of Delphi Corporation, which was owned by General Motors from October 2009 through November 2010. Current year sales to General Motors included $3.0 million of Sales to Nexteer Automotive through November 2010. Sales to Ford Motor Company increased to $26.9 million in the current year compared to $18.4 million in the prior year. Sales to Hyundai/Kia were $15.7 million in the current year compared to $13.2 million in the prior year. In the current year, net sales were reduced by $650,000 for a customer price concession granted in the third quarter. In the prior year period certain historical customer pricing issues were resolved which increased our net sales during that period by approximately $1.2 million. This $1.2 million pricing issue was related to a specific vehicle program and was fully resolved as of the end of the prior year.
Gross profit as a percentage of net sales was 16.2 percent in the current year compared to 15.9 percent in the prior year. The current year gross margin was favorably impacted by increased customer vehicle production volumes which resulted in more favorable absorption of our fixed manufacturing costs, by reduced expedited freight and overtime costs of approximately $2.8 million as compared to the prior year and by lower expense provisions of approximately $270,000 for the accrual of bonuses under our Economic Value Added (EVA ® ) Incentive Bonus Plans. Increased expedited freight and overtime costs during the prior year were incurred during the months of September, October and November 2009 to meet significantly increased production requirements from our largest customers as they continued to rebuild retail inventories following the U.S. Government’s “Cash for Clunkers” program that ended in August 2009. These favorable impacts were partially offset by a combination of the $650,000 adjustment for a customer price concession noted above, increased warranty costs of approximately $200,000, higher purchased raw material costs for brass and an unfavorable Mexican Peso to U.S. dollar exchange rate which increased the U.S. dollar cost of our Mexican operations. Warranty provisions totaled $2.8 million in the current year compared to $2.6 million in the prior year. Historically, we had experienced relatively low warranty charges from our customers due to our contractual arrangements and improvements in the quality, reliability and durability of our

2011 STRATTEC Annual Report	 	14	

 

 
MANAGEMENT’S DISCUSSION AND ANALYSIS
products. More recently, our largest customers extended the warranty protection for their vehicles and have since demanded higher warranty cost sharing arrangements from their suppliers, including STRATTEC. The current and prior year warranty provisions included additional accruals to address the warranty exposure related to the demand for higher warranty cost sharing. The current year provision also included $1.15 million related to our share of costs associated with a customer’s specific warranty claim involving one of our products. The average brass price paid per pound increased to $3.93 in the current period from $3.29 in the prior year period. During the current year, we used approximately 1.0 million pounds of brass. This resulted in increased brass costs of approximately $650,000 in the current year compared to the prior year. The average U.S. dollar/Mexican peso exchange rate decreased to approximately 12.25 pesos to the dollar in the current year from approximately 12.96 pesos to the dollar in the prior year. This resulted in increased U.S. dollar costs related to our Mexican operations of approximately $1.9 million in the current year compared to the prior year. Also impacting the prior year gross profit margin was a curtailment loss related to our qualified defined benefit pension plan. An amendment to this plan, which became effective January 1, 2010, discontinued the benefit accruals for salary increases and credited service rendered after December 31, 2009. A curtailment loss related to unrecognized prior service cost of $505,000 was recorded in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Income for fiscal 2010, of which approximately $375,000 increased cost of goods sold and approximately $130,000 increased engineering, selling and administrative expenses.
Engineering, selling and administrative expenses were $33.4 million in the current year compared to $29.9 million in the prior year. The increase in operating expenses during the current period was primarily attributed to higher spending for new product development and an additional week of expense as a result of the 53 week fiscal year, partially offset by lower incentive bonus expense provisions of approximately $450,000. Also, expenses in the prior year were lower due to temporary actions implemented with respect to the U.S. salaried work force to help conserve cash during the recent recession. These actions included reductions in wages and the Company 401(k) match, as well as cost savings related to several unpaid work furlough days. As discussed above, a curtailment loss of $130,000 was included in the prior year period costs.
An annual goodwill impairment analysis was completed during 2010 related to the goodwill recorded as part of the acquisition of SPA in November 2008. A $223,000 impairment charge to write off the goodwill balance was recorded in the prior year as a result of this analysis.
In 1995, we recorded a provision of $3 million 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 originally established based on estimates to adequately cover the cost for active remediation of the contamination. Due to changing technology and related costs associated with active remediation of the contamination, an updated analysis and estimate was obtained during 2010. The reserve was reduced during the prior year by approximately $1.1 million to reflect the revised monitoring and remediation cost estimate. From 1995 through July 3, 2011, costs of approximately $400,000 have been incurred related to the installation of monitoring wells on the property and other ongoing monitoring costs.
In 2009, we recorded a $500,000 provision for doubtful accounts in connection with Chrysler LLC’s filing for Chapter 11 bankruptcy protection for certain of their U.S. legal entities on April 30, 2009. All uncollectible receivables related to the bankruptcy were written off against the $500,000 reserve during 2010. However, as a result of subsequent payments received from Chrysler, $421,000 of the $500,000 provision was recorded as a recovery of allowance for doubtful accounts in 2010.
Income from operations in the current year was $8.7 million compared to $4.4 million in the prior year. This improvement was the result of the increase in sales and gross profit margin as discussed above.
Our effective income tax rate for 2011 was 25.1 percent compared to 29.7 percent in 2010. The reduction in the calculated effective rate is primarily due to an increase in the non-controlling interest portion of our pre-tax net income. Both the 2011 and 2010 tax rates were impacted by a lower effective tax rate for income subject to tax in Mexico as compared to the effective tax rate for income subject to tax in the U.S. As of July 3, 2011, we have a valuation allowance of $209,000 related to our assessment of the future realization of certain state operating loss carry-forwards and capital loss carry-forward benefits.
2010 Compared to 2009
Net sales were $208.0 million in 2010 compared to $126.1 million in 2009. Sales to our largest customers overall increased in 2010 compared to 2009 primarily due to higher vehicle production volumes. Sales to General Motors Company in 2010 were $51.7 million compared to $39.2 million in 2009. Included in the 2010 sales to General Motors were $5.0 million of sales to

2011 STRATTEC Annual Report	 	15	

 

 
MANAGEMENT’S DISCUSSION AND ANALYSIS
Nexteer Automotive, formerly a unit of Delphi Corporation, which was owned by General Motors from October 2009 through November 2010. Sales to Chrysler Group LLC were $68.2 million in 2010 compared to $31.9 million in 2009 and sales to Ford Motor Company were $18.4 million in 2010 compared to $12.6 million in 2009. In 2010, sales generated by SPA to Hyundai/Kia were $13.2 million. Also, in 2010 historical customer pricing issues were resolved which increased our sales by approximately $1.2 million. The pricing issues related to a specific vehicle program and were fully resolved during fiscal 2010.
Gross profit as a percentage of net sales was 15.9 percent in 2010 compared to 10.5 percent in 2009. The improvement in the gross profit margin was primarily the result of higher customer vehicle production volumes compared to 2009, which increased overhead absorption of our manufacturing costs, partially offset by expense provisions for the accrual of bonuses earned under our Economic Value Added (EVA ® ) Incentive Bonus Plans, increased warranty costs and expedited freight and overtime costs incurred to meet significantly increased production requirements from our largest customers. Also impacting 2010 were lower purchased raw material costs for zinc. During 2010, we significantly exceeded our planned financial targets on which payouts under our incentive bonus plans are based. Our operating results therefore reflected incentive bonus expense provisions of $5.2 million in 2010 of which $2.6 million impacted our gross profit. No bonuses were provided for or paid in 2009. Warranty provisions totaled $2.6 million in 2010 compared to $362,000 in 2009. Historically, we had experienced relatively low warranty charges from our customers due to our contractual arrangements and improvements in the quality, reliability and durability of our products. More recently, our largest customers extended the warranty protection for their vehicles and have since demanded higher warranty cost sharing arrangements from their suppliers, including STRATTEC. The 2010 warranty provisions included additional accruals to address the warranty exposure related to the demand for higher warranty cost sharing. Expedited freight and overtime costs incurred to meet significantly increased production requirements from our largest customers totaled $5.0 million in 2010 compared to $1.1 million in 2009. The average zinc price paid per pound decreased to $1.03 in 2010 from $1.21 in 2009. During 2010, we used approximately 8.6 million pounds of zinc. This resulted in decreased zinc costs of approximately $1.5 million in 2010 compared to 2009. Also impacting the 2010 gross margin was a curtailment loss related to our qualified defined benefit pension plan. An amendment to this plan, which became effective January 1, 2010, discontinued the benefit accruals for salary increases and credited service rendered after December 31, 2009. As a result of the amendment, a curtailment loss related to unrecognized prior service cost of $505,000 was recorded, of which approximately $375,000 increased cost of goods sold and approximately $130,000 increased engineering, selling and administrative expenses. Additionally, the 2009 year was negatively impacted by approximately $205,000 of relocation costs related to the move from our leased facility in Juarez, Mexico to our new owned manufacturing facility in Juarez, a non-recurring inventory adjustment of $152,000 and severance costs of $154,000 relating to a work force reduction in Mexico in January 2009. Construction of our new Mexican facility was completed in November 2008, and the move from our leased facility in Juarez to our new facility was completed in February 2009. The non-recurring inventory adjustment resulted from finished goods inventory that was acquired in the Delphi Power Products business acquisition. The value of the finished goods inventory acquired was adjusted to its selling price less costs to sell, and gross profit was negatively impacted by the inventory that was sold during the year.
Engineering, selling and administrative expenses were $29.9 million in 2010, compared to $25.5 million in 2009. The increase was primarily attributable to 2010 including twelve months of expenses for SPA engineering and administrative personnel compared to only seven months in 2009 as a result of the timing of the acquisition of this business and to the EVA ®  incentive bonus expense provisions described above. EVA ®  incentive bonus expense provisions impacting engineering, selling and administrative expenses totaled $2.6 million during 2010 compared to no provision in 2009. Also, as previously discussed, included in the 2010 expense was a curtailment loss of $130,000.
An annual goodwill impairment analysis was completed during 2010 related to the goodwill recorded as part of the acquisition of SPA in November 2008. A $223,000 impairment charge to write off the goodwill balance was recorded as a result of this analysis.
In 1995, we recorded a provision of $3 million 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 originally established based on estimates to adequately cover the cost for active remediation of the contamination. Due to changing technology and related costs associated with active remediation of the contamination, an updated analysis and estimate was obtained during 2010. The reserve was reduced by approximately $1.1 million to reflect the revised monitoring and remediation cost estimate. From 1995 through June 27, 2010, costs of approximately $400,000 had been incurred related to the installation of monitoring wells on the property and other ongoing monitoring costs.

2011 STRATTEC Annual Report	 	16	

 

 
MANAGEMENT’S DISCUSSION AND ANALYSIS
In 2009, we recorded a $500,000 provision for doubtful accounts in connection with Chrysler LLC’s filing for Chapter 11 bankruptcy protection for certain of their U.S. legal entities on April 30, 2009. All uncollectible receivables related to the bankruptcy were written off against the $500,000 reserve during 2010. However, as a result of subsequent payments received from Chrysler, $421,000 of the $500,000 provision was recorded as a recovery of allowance for doubtful accounts during 2010.
Income from operations in 2010 was $4.4 million compared to a loss from operations of $12.7 million in 2009. This improvement was the result of the increase in sales and gross profit margin as discussed above.
Interest income was $86,000 in 2010 compared to $731,000 in 2009. The decrease was due to both lower invested cash and cash equivalent balances and lower investment returns on these assets in 2010 compared to 2009.
Equity earnings of joint ventures increased to $1.0 million in 2010 from $245,000 in 2009. The improvement in equity earnings of joint ventures was primarily due to the favorable economic conditions in China and an increase in our ownership percentage resulting from the November 20, 2009 purchase by VAST LLC of the non-controlling interest of its two Chinese joint ventures, VAST Fuzhou and VAST Great Shanghai.
Net other income was $312,000 in 2010 compared to $804,000 in 2009. The decrease was primarily due to transaction losses resulting from foreign currency transactions entered into by our Mexican subsidiaries of $283,000 in 2010 compared to transaction gains of $918,000 in 2009. The foreign currency transaction impact was partially offset by gains on the Rabbi Trust which funds our supplemental executive retirement plan totaling $431,000 in 2010 compared to losses of $393,000 in 2009. The investments held in the Rabbi Trust are considered trading securities.
Our effective income tax rate for 2010 was 29.7 percent compared to 38.0 percent in 2009. The 2010 tax rate was impacted by a lower effective tax rate for income subject to tax in Mexico as compared to the effective tax rate for income subject to tax in the U.S. The 2009 tax rate was impacted by a higher U.S. effective tax rate applied to pre-tax U.S. losses and a lower Mexican tax rate being applied to pre-tax income in Mexico. The overall U.S. effective tax rate differed from the Federal statutory tax rate primarily due to the lower Mexican tax rate. As of June 27, 2010, a valuation allowance of $152,000 was recorded due to our assessment of the future realization of certain capital loss carryforward benefits.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of cash flow is from our major customers, which include General Motors Company, Ford Motor Company and Chrysler Group LLC. 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 3, 2011 is as follows (in thousands of dollars):
 	 	 	 	 	
General Motors	 	$	9,208	 	
Ford	 	$	4,372	 	
Chrysler	 	$	12,103	 	
On April 30, 2009, Chrysler LLC and on June 1, 2009 General Motors Corporation filed for Chapter 11 bankruptcy protection for certain of their U.S. legal entities. During 2009, we increased our provision for bad debts by $500,000 to cover the portion of the pre-bankruptcy receivable balances which we believed could be uncollectible. During 2010, $421,000 of amounts previously written-off were paid and recorded as a recovery of doubtful accounts, and all remaining uncollectible amounts related to the bankruptcy filings were written off against the reserve.
Cash flow provided by operating activities was $8.4 million in 2011 compared to $10.1 million in 2010. The impact of the improvement in our overall operating results during 2011 was offset by the August 2010 payment of approximately $5 million in bonuses, which were earned during fiscal 2010 under our incentive bonus plans. There were no bonus payments made in the prior year. Pension contributions to our qualified plan totaled $2.0 million during the current year compared to $4.0 million during the prior year.
On February 26, 2009, our Board of Directors took action to suspend payment of our $0.15 per common share quarterly dividend to conserve cash. On August 4, 2010, our Board of Directors declared a special one-time cash dividend of $1.20 per common share payable on October 29, 2010 to shareholders of record on October 8, 2010. The special dividend totaled approximately $4.0 million and was funded with current cash balances. Although we believe the outlook for our business is generally positive, the uncertain strength of economic recovery in North America, and the effect that this and the recent restructuring of our two largest customers may have on

2011 STRATTEC Annual Report	 	17	

 

 
MANAGEMENT’S DISCUSSION AND ANALYSIS
STRATTEC have resulted in both management and our Board being cautious about fully reinstating our regular dividend. However, our Board of Directors, on August 23, 2011, decided to partially reinstate our regular quarterly dividend declaring a quarterly cash dividend of $0.10 per common share, payable September 30, 2011, to shareholders of record as of September 15, 2011. The quarterly dividend will total approximately $350,000, or $1.4 million annually, and will be funded by current cash balances.
Our accounts receivable balance increased approximately $3.5 million to $39.6 million at July 3, 2011 from $36.1 million at June 27, 2010. The increase was primarily the result of the increased sales experienced in 2011 as discussed under Results of Operations herein. Our inventory balances increased approximately $5.0 million to $22.1 million at July 3, 2011 from $17.1 million at June 27, 2010. The increase was primarily the result of increased production volumes as discussed under Results of Operations herein.
The accrued pension obligations balance includes our qualified plan and our supplemental executive retirement plan (SERP). The change in the accrued pension obligations balance during 2011 is the result of the net impact of pension contributions, the actuarially calculated pension expense and the impact of the change in the funded status of the plans due to better than projected returns on plan assets. The 2011 pre-tax funded status adjustment decreased our accrued pension obligation balance by $13.9 million at July 3, 2011 compared to June 27, 2010. The resulting tax impact decreased our long-term deferred income tax asset balance by $5.3 million.
Capital expenditures were $9.5 million in 2011 compared to $6.9 million in 2010. Expenditures were primarily in support of requirements for new product programs and the upgrade and replacement of existing equipment. We anticipate capital expenditures will be approximately $7 million to $8 million in fiscal 2012 in support of requirements for new product programs and the upgrade and replacement of existing equipment.
As a result of VAST LLC’s purchase of the remaining non-controlling interest of its two Chinese joint ventures in November 2009, a loan of $2.5 million was made from STRATTEC to VAST LLC during 2010 related to STRATTEC’s share of the purchase price due under this transaction. A repayment of $1 million of the loan balance was received during 2010. In addition, a $2.1 million stand-by letter of credit was issued by VAST LLC, and guaranteed by STRATTEC, related to the remaining amount due on this transaction. This resulted in $2.1 million of cash being restricted as of June 27, 2010. The final payment related to this transaction was made by VAST LLC on October 28, 2010 resulting in the cancellation of the stand-by letter of credit, and the associated guarantee by STRATTEC. The $2.1 million of previously restricted cash became available for operations during the current year.
Our Board of Directors has authorized a stock repurchase program to buy back outstanding shares of our common stock. Shares authorized for repurchase under the program totaled 3,839,395 at July 3, 2011. Over the life of the repurchase program through July 3, 2011, a total of 3,655,322 shares have been repurchased at a cost of approximately $136.4 million. During fiscal year 2011, no shares were repurchased. 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. Based on the current economic environment we anticipate minimal or no stock repurchase activity in fiscal year 2012.
As of July 3, 2011, we had a $20 million unsecured line of credit (“Line of Credit”) with M&I Marshall & Ilsley Bank, which was scheduled to expire October 30, 2011. Interest on borrowings under our line of credit was at varying rates based on the London Interbank Offering Rate with a minimum annual rate of 4 percent. The Line of Credit was not subject to any covenants. Effective August 1, 2011, the $20 million unsecured Line of Credit was replaced with a $25 million secured revolving credit facility (“Credit Facility”) with BMO Harris Bank N.A. BMO Harris Bank is a unit of Bank of Montreal which acquired M&I Marshall & Ilsley Bank effective July 5, 2011. M&I Marshall & Ilsley Bank is being assimilated into BMO Harris Bank. The credit facility expires August 1, 2014. Interest on borrowings under the Credit Facility is at varying rates based, at our option, on the London Interbank Offering Rate plus one percent or the bank’s prime rate. The Credit Facility contains a restrictive financial covenant that requires us to maintain a minimum net worth level. There were no outstanding borrowings at July 3, 2011 or June 27, 2010. There were no borrowings under any third party debt facilities during 2011, 2010 or 2009. We believe that the Credit Facility is adequate, along with existing cash balances and cash flow from operations, to meet our anticipated capital expenditure, working capital, dividend and operating expenditure requirements.
Over the past several years, we have been impacted by rising health care costs, which have increased our cost of employee medical coverage. A portion of these increases have been offset by plan design changes and employee wellness initiatives. We have also been impacted by increases in the market price of zinc and brass and inflation in Mexico, which impacts the U. S. dollar costs of our Mexican operations. We have negotiated raw material price adjustments clauses with certain, but not all, of our customers to offset some of the market price fluctuations in the cost of zinc. As of July 3, 2011, we have outstanding agreements with Bank of Montreal, which were effective January 2011 that provide for two weekly Mexican peso currency option contracts for a portion of our weekly estimated peso denominated operating costs through July 6, 2012. The weekly option contracts are for equivalent notional amounts. One provides for the purchase of Mexican pesos at a U.S. dollar/Mexican peso exchange rate of 11.85 if the spot rate at the weekly expiry date is below 11.85. The second provides for the purchase of Mexican pesos at a U.S. dollar/Mexican peso

2011 STRATTEC Annual Report	 	18	

 

 
MANAGEMENT’S DISCUSSION AND ANALYSIS
exchange rate of 12.85 if the spot rate at the weekly expiry date is above 12.85. Our objective in entering into these currency option 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 option contracts are not used for speculative purposes and are not designated as hedges, and as a result, all currency option contracts are recognized in our accompanying consolidated financial statements at fair value and changes in the fair value of the currency option contracts are reported in current earnings as part of Other Income, net in our accompanying Consolidated Statements of Operations and Comprehensive Income (Loss). The premiums to be paid and received under the two Mexican peso currency option contracts net to zero, and as a result, premiums related to the contracts did not impact our earnings. The following table quantifies the outstanding Mexican peso currency option contracts and the corresponding impact on the value of these instruments assuming a 10 percent appreciation/depreciation of the U.S. dollar relative to the Mexican peso on July 3, 2011 (thousands of dollars):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	Foreign Exchange	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	Gain/Loss) From:	 	
 	 	Notional	 	 	Option Contractual	 	 	 	 	 	 	10% Appreciation	 	 	10% Depreciation	 	
 	 	Amount	 	 	Exchange Rate	 	 	Fair Value	 	 	of U.S. Dollar	 	 	of U.S. Dollar	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Buy MXP/Sell USD	 	$	14,061	 	 	 	11.85	 	 	$	414	 	 	$	(389	)	 	$	1,586	 	
Buy MXP/Sell USD	 	$	14,061	 	 	 	12.85	 	 	$	(169	)	 	$	(281	)	 	$	169	 	
The fair market value of all outstanding peso option contracts in the accompanying Consolidated Balance Sheets was as follows (thousands of dollars):
 	 	 	 	 	 	 	 	 	
 	 	Other Current Assets	 	
 	 	July 3, 2011	 	 	June 27, 2010	 	
Not Designated as Hedging Instruments:	 	 	 	 	 	 	 	 	
Mexican Peso Option Contracts	 	$	245	 	 	$	—	 	
The pre-tax effects of the peso option contracts on the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss) consisted of the following (thousands of dollars):
 	 	 	 	 	 	 	 	 	
 	 	Other Income, net	 	
 	 	July 3, 2011	 	 	June 27, 2010	 	
Not Designated as Hedging Instruments:	 	 	 	 	 	 	 	 	
Mexican Peso Option Contracts — Unrealized Gain	 	$	414	 	 	$	—	 	
Mexican Peso Option Contracts — Realized Gain	 	$	33	 	 	$	—	 	
Mexican Peso Option Contracts — Unrealized Loss	 	$	(169	)	 	$	—	 	
Mexican Peso Option Contracts — Realized Loss	 	$	—	 	 	$	—	 	
In August 2011, we entered into additional agreements with Bank of Montreal that provide for two weekly Mexican peso currency option contracts covering a portion of our estimated peso denominated operating costs for the period July 6, 2012 through June 28, 2013. The notional amounts of each of the two weekly contracts total approximately $10.2 million over this period. One set of contracts provides for the purchase of Mexican pesos at an average U.S. dollar/Mexican peso exchange rate of 12.40 if the spot rate at the weekly expiry date is below 12.40. The second set of contracts provides for the purchase of Mexican pesos at an average U.S. dollar/Mexican peso exchange rate of 13.40 if the spot rate at the weekly expiry date is above 13.40. Our objective in entering into these currency option 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 option contracts are not used for speculative purposes and are not designated as hedges.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Contractual obligations are as follows as of July 3, 2011 (thousands of dollars):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Payments Due By Period	 	
 	 	 	 	 	 	Less Than	 	 	 	 	 	 	 	 	 	 	More Than	 	
Contractual Obligation	 	Total	 	 	1 Year	 	 	1-3 Years	 	 	3-5 Years	 	 	5 Years	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating Leases	 	$	1,953	 	 	$	625	 	 	$	1,048	 	 	$	280	 	 	$	—	 	
Other Purchase Obligations	 	 	29,091	 	 	 	10,484	 	 	 	15,604	 	 	 	3,003	 	 	 	—	 	
Pension and Postretirement Obligations (a)	 	 	6,134	 	 	 	6,134	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	37,178	 	 	$	17,243	 	 	$	16,652	 	 	$	3,283	 	 	$	—	 	

(a)	 	As disclosed in our Notes to Financial Statements, estimated cash funding related to our pension and postretirement benefit plans is expected to total $6.1 million in 2012. Because the timing of funding related to these plans beyond 2012 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 2012 have not been included in the table above.	

 	 	 	
2011 STRATTEC Annual Report	 	19	

 

 
MANAGEMENT’S DISCUSSION AND ANALYSIS
Liabilities recognized for uncertain tax benefits of $1.7 million are not presented in the table above due to uncertainty as to amounts and timing regarding future payments.
JOINT VENTURES
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 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 provides a set of cross-licensing agreements for the manufacture, distribution and sale of WITTE products by STRATTEC and ADAC in North America, and the manufacture, distribution and sale of STRATTEC and ADAC products by WITTE in Europe. Additionally, a joint venture company, Vehicle Access Systems Technology LLC (“VAST LLC”), in which WITTE, STRATTEC and ADAC each hold a one-third interest, exists to seek opportunities to manufacture and sell the companies’ products in areas of the world outside of North America and Europe.
VAST do Brasil, a joint venture between VAST LLC and Ifer do Brasil Ltda., was formed to service customers in South America. VAST Fuzhou and VAST Great Shanghai (collectively known as VAST China), began as joint ventures between VAST LLC and Taiwanese partners to provide a base of operations to service our automotive customers in the Asian market. Effective November 20, 2009, VAST LLC purchased the remaining 40 percent interest of these two Chinese joint ventures, which was held by our former Taiwanese partners, for $9.6 million. VAST LLC now owns 100 percent of the two Chinese joint ventures. VAST LLC also maintains branch offices in South Korea and Japan in support of customer sales and engineering requirements.
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 in earnings of joint ventures to STRATTEC of approximately $1.2 million during 2011, $1 million during 2010 and $245,000 during 2009. During the current year, the VAST partners made capital contributions to VAST totaling $1,350,000 in support of general operating expenses. STRATTEC’s portion of the capital contributions totaled $450,000.
In fiscal year 2007, we entered into a joint venture with ADAC forming ADAC-STRATTEC LLC, a Delaware limited liability company. The joint venture was created to establish injection molding and door handle assembly operations in Mexico. STRATTEC originally held a 50.1 percent interest in ADAC-STRATTEC LLC. Effective June 28, 2010, STRATTEC purchased an additional .9 percent interest from ADAC and now owns 51 percent. A Mexican entity, ADAC-STRATTEC de Mexico, exists and is wholly owned by ADAC-STRATTEC LLC. ADAC-STRATTEC LLC’s financial results are consolidated with the financial results of STRATTEC and resulted in increased net income to STRATTEC of approximately $910,000 in 2011, approximately $114,000 in 2010, and no change in net income to STRATTEC in 2009.
Effective November 30, 2008, STRATTEC established a new entity, STRATTEC POWER ACCESS LLC (“SPA”), which is 80 percent owned by STRATTEC and 20 percent owned by WITTE. SPA operates the North American portion of the Power Products business which was acquired from Delphi Corporation. The financial results of SPA are consolidated with the financial results of STRATTEC and resulted in increased net income to STRATTEC of approximately $2.5 million in 2011, approximately $545,000 in 2010 and decreased net income to STRATTEC by approximately $2.1 million in 2009.
OTHER MATTERS
Health care reform legislation was recently enacted by the Federal government. We are currently evaluating the legislation to determine its effects on our plan structure, future operating results and financial position.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2010, the Financial Accounting Standard Board (“FASB”) issued guidance that requires reporting entities to make new disclosures about recurring or nonrecurring fair value measurements, including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. The guidance is currently effective and the required disclosures are included in our Notes to Financial Statements under Organization and Summary of Significant Accounting Policies — Fair Value of Financial Instruments.

2011 STRATTEC Annual Report	 	20	

 

 
MANAGEMENT’S DISCUSSION AND ANALYSIS
CRITICAL ACCOUNTING POLICIES
We believe the following represents our critical accounting policies:
Pension and Postretirement Health Benefits — Pension and postretirement health obligations and costs are developed from actuarial valuations. The determination of the obligation and expense for pension and postretirement health benefits is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in the 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 and health care costs. We evaluate and update all of the assumptions annually on June 30, the measurement date. Refer to Notes to Financial Statements for the impact of the pension and postretirement plans on the 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 5.57 percent to be appropriate as of June 30, 2011, which is an increase of .16 percentage points from the rate of 5.41 percent used at June 30, 2010. The impact of this change decreased our year-end 2011 projected pension benefit obligations by approximately $1.7 million, the year-end 2011 accumulated pension benefit obligations by approximately $1.7 million and the year-end 2011 accumulated postretirement obligation by approximately $23,000. This change is also expected to decrease our 2012 pension expense by $142,000 and increase our postretirement expense by $3,000. Pension expense increases as the discount rate decreases. Lowering our 2011 discount rate assumption by 50 basis points would have increased our 2011 pension expense by approximately $420,000.
As of June 30, 2010, we updated the termination rates for the qualified pension plan and the postretirement plan. The impact of this change decreased our year-end 2010 projected pension benefit obligations by approximately $513,000 and our year end accumulated postretirement obligation by approximately $38,000. This change also increased our 2011 pension expense by approximately $130,000 and postretirement expense by approximately $6,000.
As of January 1, 2010, the qualified defined benefit pension plan was amended discontinuing the benefit accrual for salary increases and credited service rendered after December 31, 2009. As a result, a curtailment loss related to the unrecognized prior service cost of $505,000 was recorded during fiscal 2010.
As of June 30, 2009, we decreased the salary scale from 3.5% to 3%. The impact of this change decreased our year-end 2009 projected pension benefit obligations by approximately $652,000 and increased our year-end 2009 accumulated pension benefit obligations by approximately $253,000. This change decreased our 2010 pension expense by $179,000.
A significant element in determining the 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 8.25 percent for 2009, 8.0 percent for 2010 and 2011 and 7.8 percent for 2012. The changes to this assumption reduced the expected return on plan assets by approximately $200,000 in both 2009 and 2010, had no impact in 2011 and reduced the expected return on plan assets by approximately $165,000 in 2012. Refer to 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 2011 expected rate of return assumption for our plan assets by 50 basis points would have increased our 2011 pension expense by approximately $400,000.
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, 2011, we had $30.3 million of net unrecognized pension actuarial losses, which included deferred asset losses of $726,000. As of June 30, 2011, we had unrecognized postretirement actuarial losses of $7.4 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 9 years for the pension plans and 10 years for the postretirement plan.
During fiscal years 2011, 2010 and 2009, we voluntarily contributed $2 million, $4 million and $3 million, respectively, to our qualified pension plan. Future pension contributions are expected to be approximately $2 million annually depending on market conditions. We have evaluated the potential impact of the Pension Protection Act (the “Act”), which was passed into law on August 17, 2006, on future pension plan funding requirements based on current market conditions. The Act has not had and is not anticipated to have in future periods a material effect on our level of future funding requirements or on our liquidity and capital resources.
A significant element in determining the postretirement health expense is the health care cost trend rates. We develop these rates based on historical cost data, the near-term outlook and an

2011 STRATTEC Annual Report	 	21	

 

 
MANAGEMENT’S DISCUSSION AND ANALYSIS
assessment of likely long-term trends. Changes in the health care cost trend rate assumption will have a significant effect on the postretirement benefit amounts reported. As of January 1, 2011, we updated the health care cost trend assumption. The impact of this change increased our year-end 2011 accumulated postretirement obligation by approximately $139,000. This change is also expected to increase our 2012 postretirement expense by approximately $20,000. Refer to Notes to Financial Statements for an analysis of the impact of a one percent change in the trend rate.
As of January 1, 2010, the postretirement health care benefit plan was amended to limit future eligible retirees’ benefits under the plan to $4,000 per year for a maximum of five years. This change decreased the year-end 2010 postretirement benefit obligation by approximately $3.4 million and decreased 2011 postretirement expense by approximately $645,000.
While we believe that the assumptions used are appropriate, significant differences in the actual experience or significant changes in the assumptions may materially affect our pension and postretirement health obligations and future expense.
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 on page 40 of this 2011 Annual Report.
Other Reserves — We have reserves such as an environmental reserve, a warranty reserve, an incurred but not reported claim reserve for self-insured health plans, a workers’ compensation reserve, an allowance for doubtful accounts related to trade accounts receivable, an excess and obsolete inventory reserve and a repair and maintenance supply parts 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 on page 40 of this 2011 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 of their warranty programs. Actual warranty costs might vary from estimates due to the level of actual claims varying from our claims experience and estimates. 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 on page 37 of this 2011 Annual Report.
Incurred But Not Reported Claim Reserve for Self-Insured Health plans and Workers’ Compensation Reserve — We have self-insured medical and dental plans covering all eligible U.S. associates. We also maintain an insured workers’ compensation program covering all U.S. associates. The insurance is renewed annually and may be covered under a loss sensitive plan. Under a loss sensitive plan, the ultimate cost is dependent upon losses incurred during the policy period. The incurred loss amount for loss sensitive policies will continue to change as claims develop and are settled in future periods. The expected ultimate cost of claims incurred under these plans is subject to judgment and estimation. We estimate the ultimate expected cost of claims incurred under these plans based upon the aggregate liability for reported claims and an estimated additional liability for claims incurred but not reported. Our estimate of claims incurred but not reported is based on an analysis of historical data, current trends related to claims and health care costs and information available from the insurance carrier. Actual ultimate costs may vary from estimates due to variations in actual claims experience from past trends and large unexpected claims being filed. Therefore, changes in claims experience and large unexpected claims could result in changes to our estimate of the claims incurred but not reported liabilities. Refer to the discussion of Self Insurance and Loss Sensitive Plans under Organization and Summary of Significant Accounting Policies included in Notes to Financial Statements on page 36 of this 2011 Annual Report.
Allowance for Doubtful Accounts Related to Trade Accounts Receivable — Our trade accounts

2011 STRATTEC Annual Report	 	22	

 

 
MANAGEMENT’S DISCUSSION AND ANALYSIS
receivable consist primarily of receivables due from Original Equipment Manufacturers in the automotive industry and locksmith distributors relating to our service and aftermarket business. Our evaluation of the collectability of our trade accounts receivable involves judgment and estimates and includes a review of past due items, general economic conditions and the economic climate of the industry as a whole. The estimate of the required reserve involves uncertainty as to future collectability of receivable balances. This uncertainty is magnified by the financial difficulty recently experienced by our customers as discussed under Risk Factors-Loss of Significant Customers, Vehicle Content, Vehicle Models and Market Share on page 23 of this 2011 Annual Report. Refer to the discussion of Receivables under Organization and Summary of Significant Accounting Policies included in Notes to Financial Statements on page 33 of this 2011 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 on page 33 of this 2011 Annual Report.
Repair and Maintenance Supply Parts Reserve — We maintain an inventory of repair and maintenance 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 lack of spare parts when equipment break-downs occur. Depending on maintenance requirements during the life of the equipment, excess quantities of repair parts arise. A repair and maintenance supply parts reserve is maintained to recognize the normal adjustment of inventory for obsolete and slow-moving repair and maintenance supply parts. Our evaluation of the reserve level involves judgment and estimates, which are based on a review of historical obsolescence and current inventory levels. Actual obsolescence may differ from estimates due to actual maintenance requirements differing from historical levels. This could result in changes to our estimated required reserve. Refer to the discussion of Repair and Maintenance Supply Parts under Organization and Summary of Significant Accounting Policies included in the Notes to Financial Statements on page 34 of this 2011 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.
Stock-Based Compensation — Stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating future volatility of our stock, the amount of stock-based awards that are expected to be forfeited and the expected term of awards granted. We estimate the fair value of stock options granted using the Black-Scholes option valuation model. We amortize the fair value of all awards on a straight-line basis over the vesting periods. The expected term of awards granted represents the period of time they are expected to be outstanding. We determine the expected term based on historical experience with similar awards, giving consideration to the contractual terms and vesting schedules. We estimate the expected volatility of our common stock at the date of grant based on the historical volatility of our common stock. The volatility factor used in the Black-Scholes option valuation model is based on our historical stock prices over the most recent period commensurate with the estimated expected term of the award. We base the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term commensurate with the expected term of the award. We use historical data to estimate pre-vesting option forfeitures. We record stock-based compensation only for those awards that are expected to vest. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.
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 Chrysler Group LLC represented approximately 66 percent of our annual net sales (based on fiscal 2011 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, reduction in vehicle content, early cancellation of a specific vehicle model,

2011 STRATTEC Annual Report	 	23	

 

 
MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
On April 27, 2009, General Motors announced certain aspects of its Revised Viability Plan including assembly plant closures and reduced production volumes for calendar year 2009 and the subsequent five years. The announcement indicated that certain vehicle brands, including Pontiac, Saturn, Hummer and Saab, will be discontinued or sold. In addition, subsequent to Chrysler LLC’s filing for Chapter 11 bankruptcy protection on April, 30 2009, they announced certain vehicle models planned for discontinuation (Jeep Commander, Jeep Compass, Jeep Patriot, Dodge Nitro, Dodge Avenger, Dodge Caliber, Dodge Durango, Dodge Dakota, Dodge Viper, Chrysler Sebring, Chrysler Aspen, etc.). Subsequently, certain of the models have been reaffirmed for continued production over the next two years. We continue to evaluate the impact these evolving plans have on our business as more details become available.
Our major customers also have significant under-funded legacy liabilities related to pension and postretirement health care obligations. The future impact of these items along with a continuing loss in our majority customers’ North American automotive market share to the “New Domestic” automotive manufacturers (primarily the Japanese 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 additional restructuring actions. For example, on October 8, 2005, Delphi Corporation filed for Chapter 11 bankruptcy protection. As a result, we wrote-off $1.6 million of uncollectible accounts receivable due from Delphi Corporation. This directly reduced our pre-tax net income during fiscal 2006. On April 30, 2009 and on June 1, 2009, each of Chrysler LLC and General Motors Corporation, respectively, filed for Chapter 11 bankruptcy protection for certain of their U.S. legal entities. During fiscal 2009, we recorded a provision for bad debts of $500,000 related to these filings, of which we subsequently recovered $421,000 of the $500,000 provision during fiscal 2010. This directly reduced our pre-tax net income during 2009 by $500,000 and increased our pre-tax income during 2010 by $421,000.
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 fiscal 2009 and fiscal 2010. Moreover, certain of our major customers announced plans to continue these production cuts into future fiscal years. For example, during April 2009, General Motors Corporation announced assembly plant downtime for the months of May through July in order to reduce excess inventories at their dealer locations. Consequently, this downtime reduced our production schedules and affected both our sales and profitability for our fiscal fourth quarter ending June 28, 2009 and our fiscal 2010 first quarter ending September 27, 2009. Additionally, on April 27, 2009, General Motors announced some aspects of its Revised Viability Plan including assembly plant closures and reduced production volumes for the remainder of calendar 2009 and the subsequent five calendar years. The continuation of these production cuts 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, the 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 of financial distress within the supply base and suppliers’ inability to obtain credit from lending institutions may lead to commercial disputes and possible supply chain interruptions. In addition, the potential for future adverse industry environment may require us to take measures to ensure uninterrupted production. The continuation or worsening 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 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. In addition, due to the recent turbulence in the automotive industry, several suppliers have filed for bankruptcy proceedings or ceased operations. As a result, there is greater dependence on fewer sources of supply for certain components and materials, 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 or other problems will

2011 STRATTEC Annual Report	 	24	

 

 
MANAGEMENT’S DISCUSSION AND ANALYSIS
not result in any shortages or delays in the supply of components to us.
Cost Reduction — There is continuing pressure from our major customers to reduce the 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.
Foreign Operations — As discussed under “Joint Ventures”, we have joint venture investments in Mexico, Brazil and China. 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.
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 and 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. As described in Derivative Instruments under Organization and Summary of Significant Accounting Policies included in the Notes to Financial Statements, we have entered into weekly peso currency option contracts to minimize the volatility resulting from changes in the exchange rates. There can be no assurances that the peso currency option contracts will eliminate our exchange rate risk associated with our Mexican operations.
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 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 affect 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, we began quoting quarterly material price adjustments for changes in our raw material 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.
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 the unionized associates is effective through June 29, 2014. We may encounter further labor disruption after the expiration date of this contract and 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. Current labor contracts between General Motors Company, Ford Motor Company and Chrysler Group LLC and their unionized associates under the United Auto Workers expire on September 14, 2011. Labor disruptions encountered after the expiration date of these contracts could have an adverse effect on our business and our financial results.
Environmental and Safety 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

2011 STRATTEC Annual Report	 	25	

 

 
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 by 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 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 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 acquisitions, alliances or establishing joint ventures that would enable us to expand globally. 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 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.
Financial Industry / Credit Market Risk — The U.S. capital and credit markets experienced significant volatility and disruption during the 2008/2009 recession. In many cases this resulted in pressures on borrowers and reduced credit availability from certain issuers without regard to the underlying financial strength of the borrower or issuer. If financial market disruption and volatility occur again in the future, there can be no assurance that such conditions will not have an effect on our ability to access debt and, in turn, result in a material adverse effect on our business, financial condition and results of operations.
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 their warranty protection for their vehicles. Other OEMs have similarly extended their warranty programs. We are engaged with ongoing discussions with our customers regarding certain warranty claims. This trend will put additional pressure on the supply base to improve quality systems. This trend may also result in higher cost recovery claims by OEMs from suppliers whose products incur a higher rate of warranty claims. Historically, we have experienced relatively low warranty charges from our customers due to our commercial arrangements and improvements in the quality, reliability and durability of our products. During 2010 and 2011, due to our largest customers’ extensions of their warranty protection programs and demands for higher warranty cost sharing arrangements from their suppliers, including STRATTEC, we increased our provision to cover warranty exposures. Moreover, in 2011, our increased warranty provision was the result of our share of the cost associated with a customer’s specific warranty claim involving our product. 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.

2011 STRATTEC Annual Report	 	26	

 

 
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Years Ended	 	
 	 	July 3, 2011	 	 	June 27, 2010	 	 	June 28, 2009	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
NET SALES	 	$	260,933	 	 	$	207,964	 	 	$	126,097	 	
Cost of goods sold	 	 	218,770	 	 	 	174,922	 	 	 	112,857	 	

GROSS PROFIT	 	 	42,163	 	 	 	33,042	 	 	 	13,240	 	
Engineering, selling, and administrative expenses	 	 	33,443	 	 	 	29,939	 	 	 	25,480	 	
Impairment charge	 	 	—	 	 	 	223	 	 	 	—	 	
Environmental Reserve Adjustment	 	 	—	 	 	 	(1,125	)	 	 	—	 	
(Recovery of) Provision for doubtful accounts	 	 	—	 	 	 	(421	)	 	 	500	 	

INCOME (LOSS) FROM OPERATIONS	 	 	8,720	 	 	 	4,426	 	 	 	(12,740	)	
Interest income	 	 	119	 	 	 	86	 	 	 	731	 	
Equity earnings of joint ventures	 	 	1,246	 	 	 	1,008	 	 	 	245	 	
Interest expense-related parties	 	 	(175	)	 	 	(225	)	 	 	(164	)	
Other income, net	 	 	220	 	 	 	312	 	 	 	804	 	

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND NON-CONTROLLING INTEREST	 	 	10,130	 	 	 	5,607	 	 	 	(11,124	)	
Provision (benefit) for income taxes	 	 	2,540	 	 	 	1,666	 	 	 	(4,222	)	

NET INCOME (LOSS)	 	 	7,590	 	 	 	3,941	 	 	 	(6,902	)	
Net (income) loss attributable to non-controlling interest	 	 	(2,172	)	 	 	(520	)	 	 	780	 	

NET INCOME (LOSS) ATTRIBUTABLE TO STRATTEC SECURITY CORPORATION	 	$	5,418	 	 	$	3,421	 	 	$	(6,122	)	

COMPREHENSIVE INCOME (LOSS):	 	 	 	 	 	 	 	 	 	 	 	 	
NET INCOME (LOSS)	 	$	7,590	 	 	$	3,941	 	 	$	(6,902	)	
Change in cumulative translation adjustments	 	 	1,777	 	 	 	503	 	 	 	(2,505	)	
Pension funded status adjustment, net of tax	 	 	8,450	 	 	 	(1,346	)	 	 	(11,114	)	
 	 	 	 	 	 	 	 	 	 	
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)	 	 	10,227	 	 	 	(843	)	 	 	(13,619	)	
 	 	 	 	 	 	 	 	 	 	
COMPREHENSIVE INCOME (LOSS)	 	 	17,817	 	 	 	3,098	 	 	 	(20,521	)	
Comprehensive (income) loss attributed to non controlling interest	 	 	(2,208	)	 	 	(525	)	 	 	800	 	
 	 	 	 	 	 	 	 	 	 	
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO STRATTEC SECURITY CORPORATION	 	$	15,609	 	 	$	2,573	 	 	$	(19,721	)	

EARNINGS (LOSS) PER SHARE:	 	 	 	 	 	 	 	 	 	 	 	 	
BASIC	 	$	1.65	 	 	$	1.05	 	 	$	(1.87	)	
 	 	 	 	 	 	 	 	 	 	
DILUTED	 	$	1.63	 	 	$	1.04	 	 	$	(1.86	)	

AVERAGE SHARES OUTSTANDING:	 	 	 	 	 	 	 	 	 	 	 	 	
BASIC	 	 	3,285	 	 	 	3,271	 	 	 	3,280	 	
DILUTED	 	 	3,323	 	 	 	3,280	 	 	 	3,284	 	
The accompanying Notes to Financial Statements are an integral part of these Consolidated Statements of Operations and Comprehensive Income (Loss).

2011 STRATTEC Annual Report	 	27	

 
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS AND PER SHARE AMOUNTS)
 	 	 	 	 	 	 	 	 	
 	 	July 3, 2011	 	 	June 27, 2010	 	
ASSETS	 	 	 	 	 	 	 	 	
CURRENT ASSETS:	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	17,250	 	 	$	21,867	 	
Receivables, less allowance for doubtful accounts of $400 at July 3, 2011 and June 27, 2010	 	 	39,649	 	 	 	36,084	 	
Restricted cash	 	 	—	 	 	 	2,100	 	
Inventories, net	 	 	22,135	 	 	 	17,086	 	
Customer tooling in progress, net	 	 	2,788	 	 	 	3,439	 	
Deferred income taxes	 	 	4,026	 	 	 	2,133	 	
Other current assets	 	 	8,554	 	 	 	7,299	 	
 	 	 	 	 	 	 	
Total current assets	 	 	94,402	 	 	 	90,008	 	
 	 	 	 	 	 	 	 	 	
DEFERRED INCOME TAXES	 	 	3,639	 	 	 	10,534	 	
INVESTMENT IN JOINT VENTURES	 	 	7,276	 	 	 	5,176	 	
LOAN TO JOINT VENTURE	 	 	1,500	 	 	 	1,500	 	
OTHER LONG-TERM ASSETS	 	 	635	 	 	 	733	 	
PROPERTY, PLANT AND EQUIPMENT, NET	 	 	40,636	 	 	 	37,051	 	
 	 	 	 	 	 	 	
 	 	$	148,088	 	 	$	145,002	 	

LIABILITIES AND SHAREHOLDERS’ EQUITY	 	 	 	 	 	 	 	 	
CURRENT LIABILITIES:	 	 	 	 	 	 	 	 	
Accounts payable	 	$	22,851	 	 	$	21,192	 	
Loans from related parties	 	 	1,850	 	 	 	3,000	 	
Accrued liabilities:	 	 	 	 	 	 	 	 	
Payroll and benefits	 	 	15,546	 	 	 	15,496	 	
Environmental	 	 	1,478	 	 	 	1,497	 	
Warranty	 	 	3,856	 	 	 	1,718	 	
Income taxes	 	 	1,734	 	 	 	63	 	
Other	 	 	3,673	 	 	 	3,265	 	
 	 	 	 	 	 	 	
Total current liabilities	 	 	50,988	 	 	 	46,231	 	
 	 	 	 	 	 	 	 	 	
COMMITMENTS AND CONTINGENCIES — see note on page 40	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
BORROWINGS UNDER LINE OF CREDIT	 	 	—	 	 	 	—	 	
ACCRUED PENSION OBLIGATIONS	 	 	3,447	 	 	 	18,492	 	
ACCRUED POSTRETIREMENT OBLIGATIONS	 	 	3,589	 	 	 	4,490	 	
SHAREHOLDERS’ EQUITY:	 	 	 	 	 	 	 	 	
Common stock, authorized 12,000,000 shares, $.01 par value, issued 6,920,557 shares at July 3, 2011 and 6,909,357 shares at June 27, 2010	 	 	69	 	 	 	69	 	
Capital in excess of par value	 	 	79,767	 	 	 	79,339	 	
Retained earnings	 	 	164,138	 	 	 	162,706	 	
Accumulated other comprehensive loss	 	 	(21,750	)	 	 	(31,941	)	
Less: Treasury stock at cost (3,631,079 shares at July 3, 2011 and 3,633,402 shares at June 27, 2010)	 	 	(136,009	)	 	 	(136,047	)	
 	 	 	 	 	 	 	
Total STRATTEC SECURITY CORPORATION shareholders’ equity	 	 	86,215	 	 	 	74,126	 	
Non-controlling interest	 	 	3,849	 	 	 	1,663	 	
 	 	 	 	 	 	 	
Total shareholders’ equity	 	 	90,064	 	 	 	75,789	 	
 	 	 	 	 	 	 	
 	 	$	148,088	 	 	$	145,002	 	
 	 	 	 	 	 	 	
The accompanying Notes to Financial Statements are an integral part of these Consolidated Balance Sheets.

2011 STRATTEC Annual Report	 	28	

 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Accumulated	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	Capital in	 	 	 	 	 	 	Other	 	 	 	 	 	 	 	
 	 	 	 	 	 	Common	 	 	Excess of	 	 	Retained	 	 	Comprehensive	 	 	Treasury	 	 	Non-controlling	 	
 	 	Total	 	 	Stock	 	 	Par Value	 	 	Earnings	 	 	Loss	 	 	Stock	 	 	Interest	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
BALANCE JUNE 29, 2008	 	$	98,893	 	 	$	69	 	 	$	78,885	 	 	$	166,397	 	 	$	(17,495	)	 	$	(129,916	)	 	$	953	 	

Net loss	 	 	(6,902	)	 	 	—	 	 	 	—	 	 	 	(6,122	)	 	 	—	 	 	 	—	 	 	 	(780	)	
Translation adjustments	 	 	(2,505	)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(2,485	)	 	 	—	 	 	 	(20	)	
Contribution from non-controlling interest	 	 	986	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	986	 	
Pension and postretirement funded status adjustment, net of tax of $6,812	 	 	(11,114	)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(11,114	)	 	 	—	 	 	 	—	 	
Purchase of common stock	 	 	(6,214	)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(6,214	)	 	 	—	 	
Cash dividends declared ($0.30 per share)	 	 	(990	)	 	 	—	 	 	 	—	 	 	 	(990	)	 	 	—	 	 	 	—	 	 	 	—	 	
Stock-based compensation and shortfall tax benefit, including tax benefit on restricted stock dividends of $5	 	 	363	 	 	 	—	 	 	 	363	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Employee stock purchases	 	 	40	 	 	 	—	 	 	 	(1	)	 	 	—	 	 	 	—	 	 	 	41	 	 	 	—	 	

BALANCE June 28, 2009	 	$	72,557	 	 	$	69	 	 	$	79,247	 	 	$	159,285	 	 	$	(31,094	)	 	$	(136,089	)	 	$	1,139	 	

Net income	 	 	3,941	 	 	 	—	 	 	 	—	 	 	 	3,421	 	 	 	—	 	 	 	—	 	 	 	520	 	
Translation adjustments	 	 	503	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	499	 	 	 	—	 	 	 	4	 	
Pension and postretirement funded status adjustment, net of tax of $825	 	 	(1,346	)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(1,346	)	 	 	—	 	 	 	—	 	
Share of premium on equity method ownership	 	 	(409	)	 	 	—	 	 	 	(409	)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Stock-based compensation and shortfall tax benefit	 	 	464	 	 	 	—	 	 	 	464	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Stock Option Exercises	 	 	35	 	 	 	—	 	 	 	35	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Employee stock purchases	 	 	44	 	 	 	—	 	 	 	2	 	 	 	—	 	 	 	—	 	 	 	42	 	 	 	—	 	

BALANCE JUNE 27, 2010	 	$	75,789	 	 	$	69	 	 	$	79,339	 	 	$	162,706	 	 	$	(31,941	)	 	$	(136,047	)	 	$	1,663	 	

Net income	 	 	7,590	 	 	 	—	 	 	 	—	 	 	 	5,418	 	 	 	—	 	 	 	—	 	 	 	2,172	 	
Translation adjustments	 	 	1,777	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	1,741	 	 	 	—	 	 	 	36	 	
Pension and postretirement funded status adjustment, net of tax of $5,179	 	 	8,450	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	8,450	 	 	 	—	 	 	 	—	 	
Cash dividends declared ($1.20 per share)	 	 	(3,986	)	 	 	—	 	 	 	—	 	 	 	(3,986	)	 	 	—	 	 	 	—	 	 	 	—	 	
Purchase of Additional Interest in Majority Owned Subsidiary	 	 	(22	)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(22	)	
Stock-Based Compensation and shortfall tax benefit, including tax benefit on restricted stock dividends of $15	 	 	364	 	 	 	—	 	 	 	364	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Stock Option Exercises	 	 	40	 	 	 	—	 	 	 	40	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Employee stock purchases	 	 	62	 	 	 	—	 	 	 	24	 	 	 	—	 	 	 	—	 	 	 	38	 	 	 	—	 	

BALANCE July 3, 2011	 	$	90,064	 	 	$	69	 	 	$	79,767	 	 	$	164,138	 	 	$	(21,750	)	 	$	(136,009	)	 	$	3,849	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
The accompanying Notes to Financial Statements are an integral part of these Consolidated Statements of Shareholders’ Equity.

2011 STRATTEC Annual Report	 	29	

 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Years Ended	 	
 	 	July 3, 2011	 	 	June 27, 2010	 	 	June 28, 2009	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
CASH FLOWS FROM OPERATING ACTIVITIES	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Income (Loss)	 	$	7,590	 	 	$	3,941	 	 	$	(6,902	)	 	 	 	
Adjustments to reconcile net income (loss) to net cash provided by operating activities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Equity earnings in joint ventures	 	 	(1,246	)	 	 	(1,008	)	 	 	(245	)	 	 	 	
Depreciation and amortization	 	 	6,619	 	 	 	7,143	 	 	 	6,264	 	 	 	 	
Foreign currency transaction loss (gain)	 	 	836	 	 	 	283	 	 	 	(918	)	 	 	 	
Unrealized gain on peso option contracts	 	 	(245	)	 	 	—	 	 	 	—	 	 	 	 	
(Gain) loss on disposition of property, plant and equipment	 	 	(6	)	 	 	50	 	 	 	39	 	 	 	 	
Deferred income taxes	 	 	(177	)	 	 	3,428	 	 	 	(2,986	)	 	 	 	
Stock based compensation expense	 	 	621	 	 	 	468	 	 	 	419	 	 	 	 	
(Recovery) provision for doubtful accounts	 	 	—	 	 	 	(421	)	 	 	500	 	 	 	 	
Impairment charge	 	 	—	 	 	 	223	 	 	 	—	 	 	 	 	
Environmental reserve adjustment	 	 	—	 	 	 	(1,125	)	 	 	—	 	 	 	 	
Loss on curtailment of employee benefits	 	 	—	 	 	 	505	 	 	 	—	 	 	 	 	
Change in operating assets and liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Receivables	 	 	(3,309	)	 	 	(18,301	)	 	 	5,235	 	 	 	 	
Inventories	 	 	(5,049	)	 	 	(497	)	 	 	1,033	 	 	 	 	
Other assets	 	 	(183	)	 	 	3,181	 	 	 	(1,966	)	 	 	 	
Accounts payable and accrued liabilities	 	 	2,902	 	 	 	12,192	 	 	 	(7,326	)	 	 	 	
Other, net	 	 	18	 	 	 	3	 	 	 	17	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash provided (used) by operating activities	 	 	8,371	 	 	 	10,065	 	 	 	(6,836	)	 	 	 	

CASH FLOWS FROM INVESTING ACTIVITIES	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Investment in joint ventures	 	 	(450	)	 	 	(100	)	 	 	(551	)	 	 	 	
Restricted cash	 	 	2,100	 	 	 	(2,100	)	 	 	—	 	 	 	 	
Loan to joint venture	 	 	—	 	 	 	(2,500	)	 	 	—	 	 	 	 	
Proceeds from repayment of loan to joint venture	 	 	—	 	 	 	1,000	 	 	 	—	 	 	 	 	
Additions to property, plant and equipment	 	 	(9,531	)	 	 	(6,903	)	 	 	(12,492	)	 	 	 	
Purchase of Delphi Power Products	 	 	—	 	 	 	—	 	 	 	(4,931	)	 	 	 	
Purchase of additional interest in majority owned subsidiary	 	 	(22	)	 	 	—	 	 	 	—	 	 	 	 	
Proceeds received on sale of property, plant and equipment	 	 	111	 	 	 	21	 	 	 	8	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash used in investing activities	 	 	(7,792	)	 	 	(10,582	)	 	 	(17,966	)	 	 	 	

CASH FLOWS FROM FINANCING ACTIVITIES	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Purchase of common stock	 	 	—	 	 	 	—	 	 	 	(6,214	)	 	 	 	
Exercise of stock options and employee stock purchases	 	 	90	 	 	 	72	 	 	 	40	 	 	 	 	
Excess tax benefits from stock-based compensation	 	 	12	 	 	 	9	 	 	 	—	 	 	 	 	
Dividends paid	 	 	(3,989	)	 	 	—	 	 	 	(1,511	)	 	 	 	
Loan from related parties	 	 	—	 	 	 	—	 	 	 	2,175	 	 	 	 	
Repayment of loan from related parties	 	 	(1,150	)	 	 	(225	)	 	 	—	 	 	 	 	
Contribution from non-controlling interest	 	 	—	 	 	 	—	 	 	 	986	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash used in financing activities	 	 	(5,037	)	 	 	(144	)	 	 	(4,524	)	 	 	 	

FOREIGN CURRENCY IMPACT ON CASH	 	 	(159	)	 	 	(236	)	 	 	589	 	 	 	 	

NET DECREASE IN CASH AND CASH EQUIVALENTS	 	 	(4,617	)	 	 	(897	)	 	 	(28,737	)	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
CASH AND CASH EQUIVALENTS	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Beginning of year	 	 	21,867	 	 	 	22,764	 	 	 	51,501	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
End of year	 	$	17,250	 	 	$	21,867	 	 	$	22,764	 	 	 	 	

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income taxes paid (recovered)	 	$	1,394	 	 	$	(2,963	)	 	$	(1,869	)	 	 	 	
Interest paid — related parties	 	 	188	 	 	 	250	 	 	 	107	 	 	 	 	
The accompanying Notes to Financial Statements are an integral part of these Consolidated Statements of Cash Flows.

2011 STRATTEC Annual Report	 	30	

 
NOTES TO FINANCIAL STATEMENTS
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 of Velbert, Germany and ADAC Automotive of Grand Rapids, Michigan. Under this relationship STRATTEC, WITTE and ADAC market our products to global customers under the “VAST” brand name. Our products are shipped to customer locations in the United States, Canada, Mexico, Europe, South America, Korea and China, and we provide full service and aftermarket support.
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, Mexico. Equity investments in Vehicle Access Systems Technology LLC (“VAST 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 two wholly owned subsidiaries in China and one joint venture in Brazil. 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).
Purchase of Delphi Power Products Business: Effective November 30, 2008, STRATTEC SECURITY CORPORATION, in combination with WITTE Automotive of Velbert, Germany, completed the acquisition of certain assets, primarily equipment and inventory, and assumption of certain employee liabilities of Delphi Corporation’s Power Products business for approximately $7.3 million. For purposes of owning and operating the North American portion of this acquired business, STRATTEC established a new subsidiary, STRATTEC POWER ACCESS LLC (“SPA”), which is 80 percent owned by STRATTEC and 20 percent owned by WITTE. The purchase price of the North American portion of the acquired business totaled approximately $4.4 million, of which STRATTEC paid approximately $3.5 million. WITTE acquired the European portion of the business for approximately $2.4 million. Effective February 12, 2009, SPA acquired the Asian portion of the business for approximately $500,000.
The acquisition of the North American and Asian portions of this business by SPA was not material to STRATTEC’s consolidated financial statements. Amortizable intangible assets acquired totaled $890,000 and are subject to amortization over a period of nine years. In addition, goodwill of approximately $223,000 was recorded as part of the transaction. The amortizable intangibles are included in Other Long-Term Assets in the Consolidated Balance Sheets. Refer to discussion of goodwill impairment under Goodwill and Other Intangibles on page 34 of this 2011 Annual Report.
The financial results of SPA are consolidated with the financial results of STRATTEC and resulted in increased net income to STRATTEC of approximately $2.5 million in 2011, increased net income to STRATTEC of approximately $545,000 during fiscal 2010 and decreased net income to STRATTEC of approximately $2.1 million during fiscal 2009.
SPA designs, develops, tests, manufactures, markets and sells power systems to operate vehicle sliding side doors and rear compartment access points such as liftgates and trunk lids. In addition, the product line includes power cinching latches and cinching strikers used in these systems. Current customers for these products supplied from North America are Chrysler Group LLC, Hyundai/Kia Automotive Group, General Motors Company, Ford Motor Company and Yulon Group.
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.
Reclassifications and Other Adjustments: Certain reclassifications have been made to the 2009 financial statements to conform to the 2010 and 2011 presentation to reflect the adoption of a new accounting standard issued by the Financial Accounting Standards Board (“FASB”) related to non-controlling interests in consolidated financial statements, which required retrospective adjustment to the presentation of prior year financial information and disclosures, and separate presentation of components of other income (expense), net. These reclassifications include the presentation of non-controlling interest as a separate component of equity in the Consolidated Balance Sheet and the presentation of net income/(loss) due to non-controlling interest net of the related tax impact in the Consolidated Statement of Operations. These reclassifications did not impact previously reported net income (loss) or retained earnings amounts. In fiscal 2011, we also corrected the fiscal 2009 and 2010 presentation of net income (loss) in the Consolidated Statements of Cash Flows to properly include net income (loss) attributable to non-controlling interest. The correction did not change previously reported net cash provided (used) by operating activities.
Fiscal Year: Our fiscal year ends on the Sunday nearest June 30. The years ended July 3, 2011, June 27, 2010 and June 28, 2009 are comprised of 53, 52 and 52 weeks, respectively.

2011 STRATTEC Annual Report	 	31	

 
NOTES TO FINANCIAL STATEMENTS
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 a money market account at a high quality financial institution and in short-term commercial paper.
Restricted Cash: Restricted cash at June 27, 2010 consisted of STRATTEC’s commercial guarantee of a $2.1 million stand-by letter of credit that was issued by VAST LLC related to future installment payments for the November 2009 purchase of the remaining 40 percent interest of VAST China. The final payment related to this transaction was made by VAST LLC on October 28, 2010 resulting in the cancellation of the stand-by letter of credit, and the associated guarantee by STRATTEC. This resulted in the $2.1 million of previously restricted cash becoming available for operations during the current period.
Derivative Instruments: We have 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 as a result of changes in the U.S. dollar/Mexican peso exchange rate. As of July 3. 2011, we have outstanding agreements with Bank of Montreal, which were effective January 2011, that provide for two weekly Mexican peso currency option contracts for a portion of our weekly estimated peso denominated operating costs through July 6, 2012. The weekly option contracts are for equivalent notional amounts. One provides for the purchase of Mexican pesos at a U.S. dollar/Mexican peso exchange rate of 11.85 if the spot rate at the weekly expiry date is below 11.85. The second provides for the purchase of Mexican pesos at a U.S. dollar/Mexican peso exchange rate of 12.85 if the spot rate at the weekly expiry date is above 12.85. Our objective in entering into these currency option 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 option contracts are not used for speculative purposes and are not designated as hedges, and as a result, all currency option contracts are recognized in our accompanying consolidated financial statements at fair value and changes in the fair value of the currency option contracts are reported in current earnings as part of Other Income, net. The premiums to be paid and received under the two Mexican peso currency option contracts net to zero, and as a result, premiums related to the contracts did not impact our earnings. The following table quantifies the outstanding Mexican peso currency option contracts and the corresponding impact on the value of these instruments assuming a 10 percent appreciation/depreciation of the U.S. dollar relative to the Mexican peso on July 3, 2011 (thousands of dollars):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	Foreign Exchange	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	Gain/(Loss) From:	 	
 	 	Notional	 	 	Option Contractual	 	 	 	 	 	 	10% Appreciation	 	 	10% Depreciation	 	
 	 	Amount	 	 	Exchange Rate	 	 	Fair Value	 	 	of U.S. Dollar	 	 	of U.S. Dollar	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Buy MXP/Sell USD	 	$	14,061	 	 	 	11.85	 	 	$	414	 	 	$	(389	)	 	$	1,586	 	
Buy MXP/Sell USD	 	$	14,061	 	 	 	12.85	 	 	$	(169	)	 	$	(281	)	 	$	169	 	
The fair market value of all outstanding peso option contracts in the accompanying Consolidated Balance Sheets was as follows (thousands of dollars):
 	 	 	 	 	 	 	 	 	
 	 	Other Current Assets	 	
 	 	July 3, 2011	 	 	June 27, 2010	 	
Not Designated as Hedging Instruments:	 	 	 	 	 	 	 	 	
Mexican Peso Option Contracts	 	$	245	 	 	$	—	 	
The pre-tax effects of the peso option contracts on the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss) consisted of the following (thousands of dollars):
 	 	 	 	 	 	 	 	 	
 	 	Other Income, net	 	
 	 	July 3, 2011	 	 	June 27, 2010	 	
Not Designated as Hedging Instruments:	 	 	 	 	 	 	 	 	
Mexican Peso Option Contracts — Unrealized Gain	 	$	414	 	 	$	—	 	
Mexican Peso Option Contracts — Realized Gain	 	$	33	 	 	$	—	 	
Mexican Peso Option Contracts — Unrealized Loss	 	$	(169	)	 	$	—	 	
Mexican Peso Option Contracts — Realized Loss	 	$	—	 	 	$	—	 	
In August 2011, we entered into additional agreements with Bank of Montreal that provide for two weekly Mexican peso currency option contracts covering a portion of our estimated peso denominated operating costs for the period July 6, 2012 through June 28, 2013. The notional amounts of each of the two weekly contracts total approximately $10.2 million over this period. One set of contracts provides for the purchase of Mexican pesos at an average U.S. dollar/Mexican peso exchange rate of 12.40 if the spot rate at the weekly expiry date is below 12.40. The second provides for the purchase of Mexican pesos at a

2011 STRATTEC Annual Report	 	32	

 
NOTES TO FINANCIAL STATEMENTS
U.S. dollar/Mexican peso exchange rate of 13.40 if the spot rate at the weekly expiry date is above 13.40. Our objective in entering into these currency option 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 option contracts are not used for speculative purposes and are not designated as hedges.
Fair Value of Financial Instruments: The fair value of our cash and cash equivalents, accounts receivable, accounts payable and loans from and to related parties approximated book value as of July 3, 2011 and June 27, 2010. 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 3, 2011 and June 27, 2010 (thousands of dollars):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	July 3, 2011	 	 	June 27, 2010	 	
 	 	Level 1	 	 	Level 2	 	 	Level 3	 	 	Total	 	 	Level 1	 	 	Level 2	 	 	Level 3	 	 	Total	 	
Assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Rabbi Trust assets	 	$	4,349	 	 	$	—	 	 	$	—	 	 	$	4,349	 	 	$	3,965	 	 	$	—	 	 	$	—	 	 	$	3,965	 	
Mexican peso option contracts	 	 	—	 	 	 	414	 	 	 	—	 	 	 	414	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets at fair value	 	$	4,349	 	 	$	414	 	 	$	—	 	 	$	4,763	 	 	$	3,965	 	 	$	—	 	 	$	—	 	 	$	3,965	 	

Liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mexican peso option contracts	 	$	—	 	 	$	169	 	 	$	—	 	 	$	169	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
The Rabbi Trust assets fund our supplemental executive retirement plan and are included in Other Current Assets in the accompanying Consolidated Balance Sheets. Assets held in the Trust include U.S. Treasury Securities and large, medium and small-cap index funds. Refer to discussion of Mexican peso option contracts under Derivative Instruments above. The fair value of the Mexican peso option contracts are based on an option pricing model that considers the remaining term, current exchange rate and volatility of the underlying foreign currency base. There were no transfers between Level 1 and Level 2 assets during 2011.
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 business. 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. In 2009, we recorded a $500,000 provision for doubtful accounts in connection with Chrysler LLC’s and General Motors Corporation’s filing for Chapter 11 bankruptcy protection for certain of their U.S. legal entities on April 30, 2009 and June 1, 2009, respectively. All uncollectible receivables related to the bankruptcy filings were written off against the $500,000 reserve during 2010. However, as a result of subsequent payments received, $421,000 of the $500,000 provision was recorded as a recovery of allowance for doubtful accounts during 2010. Changes in the allowance for doubtful accounts are as follows (thousands of dollars):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Balance,	 	 	(Recovery) Provision	 	 	 	 	 	 	Balance,	 	
 	 	Beginning	 	 	for Doubtful	 	 	Net	 	 	End of	 	
 	 	of Year	 	 	Accounts	 	 	Recoveries	 	 	Year	 	
Year ended July 3, 2011	 	$	400	 	 	$	—	 	 	$	—	 	 	$	400	 	
Year ended June 27, 2010	 	$	750	 	 	$	(421	)	 	$	71	 	 	$	400	 	
Year ended June 28, 2009	 	$	250	 	 	$	500	 	 	$	—	 	 	$	750	 	
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 consist of the following (thousands of dollars):

2011 STRATTEC Annual Report	 	33	

 
NOTES TO FINANCIAL STATEMENTS
 	 	 	 	 	 	 	 	 	
 	 	July 3, 2011	 	 	June 27, 2010	 	
Finished products	 	$	5,899	 	 	$	3,880	 	
Work in process	 	 	5,557	 	 	 	4,637	 	
Purchased materials	 	 	11,879	 	 	 	9,987	 	
 	 	 	 	 	 	 	
 	 	 	23,335	 	 	 	18,504	 	
Excess and obsolete reserve	 	 	(1,200	)	 	 	(1,418	)	
 	 	 	 	 	 	 	
Inventories, net	 	$	22,135	 	 	$	17,086	 	
 	 	 	 	 	 	 	
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. The activity related to the excess and obsolete inventory reserve is as follows (thousands of dollars):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Balance,	 	 	Provision	 	 	 	 	 	 	Balance,	 	
 	 	Beginning	 	 	Charged to	 	 	Amounts	 	 	End of	 	
 	 	of Year	 	 	Expense	 	 	Written Off	 	 	Year	 	
Year ended July 3, 2011	 	$	1,418	 	 	$	334	 	 	$	(552	)	 	$	1,200	 	
Year ended June 27, 2010	 	$	975	 	 	$	643	 	 	$	(200	)	 	$	1,418	 	
Year ended June 28, 2009	 	$	850	 	 	$	501	 	 	$	(376	)	 	$	975	 	
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 will 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 $2.1 million at July 3, 2011 and $2.0 million at June 27, 2010. 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 is as follows (thousands of dollars):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Balance,	 	 	Provision	 	 	 	 	 	 	Balance,	 	
 	 	Beginning	 	 	Charged to	 	 	Amounts	 	 	End of	 	
 	 	of Year	 	 	Expense	 	 	Written Off	 	 	Year	 	
Year ended July 3, 2011	 	$	680	 	 	$	78	 	 	$	63	 	 	$	695	 	
Year ended June 27, 2010	 	$	630	 	 	$	78	 	 	$	28	 	 	$	680	 	
Year ended June 28, 2009	 	$	650	 	 	$	80	 	 	$	100	 	 	$	630	 	
Goodwill and Other Intangibles: Based upon the annual goodwill impairment review completed during 2010, we determined that goodwill related to SPA, which resulted from the purchase of the Delphi Power Products business in 2009, was impaired. Accordingly, a non-cash impairment charge of $223,000 was recognized in 2010 to write-off the related goodwill amount.
Intangible assets that have defined useful lives acquired in the purchase of the Delphi Power Products business in 2009 consist of patents, engineering drawings and software. The carrying value and accumulated amortization are as follows (thousands of dollars):
 	 	 	 	 	 	 	 	 	
 	 	July 3, 2011	 	 	June 27, 2010	 	
Patents, engineering drawings and software	 	$	890	 	 	$	890	 	
Less: accumulated amortization	 	 	(255	)	 	 	(157	)	
 	 	 	 	 	 	 	
 	 	$	635	 	 	$	733	 	

 	 	 	
 	 	 	
2011 STRATTEC Annual Report	 	34	

 
NOTES TO FINANCIAL STATEMENTS
The remaining useful life of the intangible assets in the table above is approximately 6.4 years. Intangible amortization expense was $99,000 for each of the years ended July 3, 2011 and June 27, 2010, respectively, and $58,000 for the year ended June 28, 2009. Estimated intangible amortization expense for each of the next five fiscal years is $99,000.
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	 	Expected Useful Lives	
Land improvements	 	20 years	
Buildings and improvements	 	20 to 35 years	
Machinery and equipment	 	3 to 10 years	
Property, plant and equipment consist of the following (thousands of dollars):
 	 	 	 	 	 	 	 	 	
 	 	July 3, 2011	 	 	June 27, 2010	 	
Land and improvements	 	$	3,078	 	 	$	2,919	 	
Buildings and improvements	 	 	18,983	 	 	 	18,337	 	
Machinery and equipment	 	 	119,303	 	 	 	115,472	 	
 	 	 	 	 	 	 	
 	 	 	141,364	 	 	 	136,728	 	
Less: accumulated depreciation	 	 	(100,728	)	 	 	(99,677	)	
 	 	 	 	 	 	 	
 	 	$	40,636	 	 	$	37,051	 	
 	 	 	 	 	 	 	
Depreciation expense for the years ended July 3, 2011, June 27, 2010 and June 28, 2009 totaled approximately $6.5 million, $7.0 million and $6.2 million, respectively.
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 3, 2011, June 27, 2010 or June 28, 2009.
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.
Supplier Concentrations: The following inventory purchases were made from major suppliers during each fiscal year noted:
 	 	 	 	 	 	 	 	 	
 	 	Percentage of	 	 	Number of	 	
Fiscal Year	 	Inventory Purchases	 	 	Suppliers	 	
2011	 	 	40	%	 	 	11	 	
2010	 	 	34	%	 	 	8	 	
2009	 	 	24	%	 	 	4	 	
We have long-term contracts or arrangements with most of our suppliers to guarantee the availability of merchandise.
Labor Concentrations: We had approximately 2,556 full-time employees of which approximately 216 or 8.5 percent were represented by a labor union at July 3, 2011. The employees represented by a labor union account for all production associates at our Milwaukee facility. The current contract with the unionized associates is effective through June 29, 2014.
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.
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 $1.5 million in 2011, $900,000 in 2010, and $670,000 in 2009.

2011 STRATTEC Annual Report	 	35	

 

 
NOTES TO FINANCIAL STATEMENTS
Other Income, Net: Net other income included in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss) primarily includes foreign currency transaction gains and losses, unrealized gains on Mexican peso option contracts and Rabbi Trust gains and losses. Foreign currency transaction gains and losses are the result of foreign currency transactions entered into by our Mexican subsidiaries and fluctuations in foreign currency cash balances. The Rabbi Trust funds our supplemental executive retirement plan. The investments held in the Trust are considered trading securities. The impact of these items for the periods presented is as follows (thousands of dollars):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Years Ended	 	
 	 	July 3, 2011	 	 	June 27, 2010	 	 	June 28, 2009	 	
Foreign currency transaction (loss) gain	 	$	(836	)	 	$	(283	)	 	$	918	 	
Rabbi Trust gain (loss)	 	 	384	 	 	 	431	 	 	 	(393	)	
Unrealized gain on Mexican peso option contracts	 	 	245	 	 	 	—	 	 	 	—	 	
Other	 	 	427	 	 	 	164	 	 	 	279	 	
 	 	 	 	 	 	 	 	 	 	
 	 	$	220	 	 	$	312	 	 	$	804	 	
 	 	 	 	 	 	 	 	 	 	
Self Insurance and Loss Sensitive 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 2008 through 2011. Prior to January 1, 2011, each covered individual could receive up to $2 million in total benefits during his or her lifetime. Effective January 1, 2011, under Health Care Reform, there is no lifetime maximum for overall benefits.
We maintain an insured workers’ compensation program covering all U.S. associates. The insurance is renewed annually, with a renewal date of February 27. The policy may be a guaranteed cost policy or a loss sensitive policy. Under a guaranteed cost policy, the ultimate cost is known at the beginning of the policy period and is subject to change only as a result of changes in payrolls. Under a loss sensitive policy, the ultimate cost is dependent upon losses incurred during each policy period. The incurred loss amount for loss sensitive policies will continue to change as claims develop and are settled in future reporting periods.
The expected ultimate cost for claims incurred under the self-insured medical and dental plans and loss sensitive workers’ compensation plan as of the balance sheet date is not discounted and is recognized as an expense. 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 analysis of historical data, current trends and information available from the insurance carrier. The expected ultimate cost for claims incurred under the self-insured medical and dental plans that has not been paid as of the balance sheet date is included in the accrued payroll and benefits liabilities amount in our accompanying Consolidated Balance Sheets. The schedule of premium payments due under the workers compensation plan requires a larger percentage of the estimated premium dollars to be paid during the beginning of the policy period. The excess of the premium payments over the expected ultimate cost for claims incurred as of the balance sheet date is included in other current assets in our accompanying Consolidated Balance Sheets.
Changes in the balance sheet amounts for self-insured and loss sensitive plans are as follows (thousands of dollars):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Balance,	 	 	Provision	 	 	 	 	 	 	Balance,	 	
 	 	Beginning	 	 	Charged to	 	 	 	 	 	 	End of	 	
 	 	of Year	 	 	Expense	 	 	Payments	 	 	Year	 	
Year ended July 3, 2011	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Incurred but not reported claims reserve for self insured plans	 	$	320	 	 	$	3,077	 	 	$	3,077	 	 	$	320	 	
Workers’ Compensation	 	$	(185	)	 	$	398	 	 	$	491	 	 	$	(278	)	
Year ended June 27, 2010	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Incurred but not reported claims reserve for self insured plans	 	$	300	 	 	$	3,041	 	 	$	3,021	 	 	$	320	 	
Workers’ Compensation	 	$	(78	)	 	$	259	 	 	$	366	 	 	$	(185	)	
Year ended June 28, 2009	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Incurred but not reported claims reserve for self insured plans	 	$	300	 	 	$	2,468	 	 	$	2,468	 	 	$	300	 	
Workers’ Compensation	 	$	(140	)	 	$	208	 	 	$	146	 	 	$	(78	)	

 	 	 	
2011 STRATTEC Annual Report	 	36	

 

 
NOTES TO FINANCIAL STATEMENTS
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 of their warranty programs. Recently, our largest customers have extended their warranty protection for their vehicles and have since demanded higher warranty cost sharing arrangements from their suppliers, including STRATTEC. As a result of these actions, during 2011 and 2010 we increased our provision to cover these exposures. Moreover, in 2011, the warranty provision was increased by $1.15 million as a result of our share of the cost associated with a customer’s specific warranty claim involving our product. Our share of the cost of this warranty claim was not paid as of July 3, 2011.
Changes in the warranty reserve are as follows (thousands of dollars):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Balance,	 	 	Provision	 	 	 	 	 	 	Balance,	 	
 	 	Beginning	 	 	Charged to	 	 	 	 	 	 	End of	 	
 	 	of Year	 	 	Expense	 	 	Payments	 	 	Year	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Year ended July 3, 2011	 	$	1,718	 	 	$	2,807	 	 	$	669	 	 	$	3,856	 	
Year ended June 27, 2010	 	$	221	 	 	$	2,560	 	 	$	1,063	 	 	$	1,718	 	
Year ended June 28, 2009	 	$	390	 	 	$	362	 	 	$	531	 	 	$	221	 	
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 other accumulated comprehensive loss. Foreign currency transaction gains and losses are included in other income, net in the accompanying Consolidated Statement of Operations and Comprehensive Income (Loss).
Accumulated Other Comprehensive Loss: Accumulated other comprehensive loss is comprised of the following (thousands of dollars):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	July 3, 2011	 	 	June 27, 2010	 	 	June 28, 2009	 	
Unrecognized pension and postretirement benefit liabilities, net of tax	 	$	19,772	 	 	$	28,222	 	 	$	26,876	 	
Foreign currency translation	 	 	1,978	 	 	 	3,719	 	 	 	4,218	 	
 	 	 	 	 	 	 	 	 	 	
 	 	$	21,750	 	 	$	31,941	 	 	$	31,094	 	
 	 	 	 	 	 	 	 	 	 	
Deferred taxes have not been provided for the foreign currency translation adjustments.
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 1,700,000 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 3, 2011 were 228,543. 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 the Board of Directors. The options expire 5 to 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 the Board of Directors at the time the shares are granted and have a minimum vesting period of three years from the date of grant. Restricted shares granted have voting and dividend rights, regardless of whether the shares are vested or unvested. The restricted stock grants issued to date vest 3 years after the date of grant.
The fair value of each stock option grant was estimated as of the date of grant using the Black-Scholes pricing model. The resulting compensation cost for fixed awards with graded 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 expected term 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

2011 STRATTEC Annual Report	 	37	

 

 
NOTES TO FINANCIAL STATEMENTS
straight line basis over the vesting period. We record stock based compensation only for those awards that are expected to vest.
As of July 3, 2011, there was $749,000 of total unrecognized compensation cost related to stock options granted under the plan. This cost is expected to be recognized over a weighted average period of 13 months. As of July 3, 2011, there was $331,000 of total unrecognized compensation cost related to restricted stock grants under the plan. This cost is expected to be recognized over a weighted average period of 1 year. Total unrecognized compensation cost will be adjusted for any future changes in estimated and actual forfeitures.
Cash received from option exercises was $28,000 in 2011 and $26,000 in 2010. The related income tax benefit was $18,000 in 2011 and $13,000 in 2010.
The intrinsic value of stock options exercised and the fair value of stock options vested are as follows (in thousands of dollars):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Years Ended	 	
 	 	July 3, 2011	 	 	June 27, 2010	 	 	June 28, 2009	 	
Intrinsic value of options exercised	 	$	44	 	 	$	35	 	 	$	—	 	
Fair value of stock options vested	 	$	293	 	 	$	114	 	 	$	469	 	
The grant date fair values and assumptions used to determine compensation expense in 2011, 2010 and 2009 are as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	
Options Granted During	 	2011	 	 	2010	 	 	2009	 	
Weighted average grant date fair value:	 	 	 	 	 	 	 	 	 	 	 	 	
Options issued at grant date market value	 	 	n/a	 	 	$	8.95	 	 	$	3.80	 	
Options issued above grant date market value	 	$	7.48	 	 	 	n/a	 	 	 	n/a	 	
Assumptions:	 	 	 	 	 	 	 	 	 	 	 	 	
Risk free interest rates	 	 	1.08	%	 	 	3.14	%	 	 	2.22	%	
Expected volatility	 	 	59.89	%	 	 	49.73	%	 	 	32.96	%	
Expected dividend yield	 	 	1.54	%	 	 	—	 	 	 	1.67	%	
Expected term (in years)	 	 	4.0	 	 	 	6.0	 	 	 	5.5	 	
No dividends were assumed in the grant date fair value calculations in 2010 as we did not intend to pay cash dividends on our common stock as of the grant date.
The range of options outstanding as of July 3, 2011 is as follows:
 	 	 	 	 	 	 	
 	 	 	 	 	 	Weighted Average Remaining	
 	 	Number of Options	 	Weighted Average Exercise	 	Contractual Life Outstanding	
 	 	Outstanding/Exercisable	 	Price Outstanding/Exercisable	 	(In Years)	
$10.92-$22.47	 	207,400/65,800	 	$16.18/$13.85	 	7.3	
$37.58-$44.93	 	4,000/4,000	 	$41.26/$41.26	 	.9	
$53.07-$63.25	 	86,000/86,000	 	$56.99/$56.99	 	2.6	
 	 	 	 	 	 	
 	 	 	 	$28.32/$38.37	 	 	
Recent Accounting Pronouncements: In January 2010, the Financial Accounting Standard Board (“FASB”) issued guidance that requires reporting entities to make new disclosures about recurring or nonrecurring fair value measurements, including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. The guidance is currently effective and the required disclosures are included in our Notes to Financial Statements under Organization and Summary of Significant Accounting Policies — Fair Value of Financial Instruments.
SUBSEQUENT EVENTS
On August 23, 2011, our Board of Directors declared a quarterly cash dividend of $0.10 per common share, payable September 30, 2011, to shareholders of record as of September 15, 2011. This quarterly dividend will total approximately $350,000, or $1.4 million annually, and will be funded by current cash balances.
In August 2011, we entered into additional agreements with Bank of Montreal that provide for two weekly Mexican peso currency option contracts covering the period July 6, 2012 through June 28, 2013. See further discussion under Organization and Summary of Significant Accounting Policies — Derivative Instruments included in these Notes to Financial Statements.
Effective August 1, 2011, our $20 million unsecured Line of Credit was replaced with a $25 million secured revolving credit facility with BMO Harris Bank N.A., which expires August 1, 2014. See further discussion under Credit Facility included in these Notes to Financial Statements.
INVESTMENT IN JOINT VENTURES
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

2011 STRATTEC Annual Report	 	38	

 

 
NOTES TO FINANCIAL STATEMENTS
designs, manufactures and markets 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 provides a set of cross-licensing agreements for the manufacture, distribution and sale of WITTE products by STRATTEC and ADAC in North America, and the manufacture, distribution and sale of STRATTEC and ADAC products by WITTE in Europe. Additionally, a joint venture company, Vehicle Access Systems Technology LLC (“VAST LLC”), in which WITTE, STRATTEC and ADAC each hold a one-third interest, exists to seek opportunities to manufacture and sell the companies’ products in areas of the world outside of North America and Europe.
VAST do Brasil, a joint venture between VAST LLC and Ifer do Brasil Ltda., was formed to service customers in South America. VAST Fuzhou and VAST Great Shanghai (collectively known as VAST China), began as joint ventures between VAST LLC and Taiwanese partners to provide a base of operations to service our automotive customers in the Asian market. Effective November 20, 2009, VAST LLC purchased the remaining 40 percent interest of these two Chinese joint ventures, which was held by our former Taiwanese partners, for $9.6 million. VAST LLC now owns 100 percent of the two Chinese joint ventures. VAST LLC also maintains branch offices in South Korea and Japan in support of customer sales and engineering requirements.
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 in earnings of joint ventures to STRATTEC of approximately $1.2 million during 2011, $1 million during 2010 and $245,000 in 2009. During the current year, the VAST partners made capital contributions to VAST totaling $1,350,000 in support of general operating expenses. STRATTEC’s portion of the capital contributions totaled $450,000.
In fiscal year 2007, we entered into a joint venture with ADAC forming ADAC-STRATTEC LLC, a Delaware limited liability company. The joint venture was created to establish injection molding and door handle assembly operations in Mexico. STRATTEC originally held a 50.1 percent interest in ADAC-STRATTEC LLC. Effective June 28, 2010, STRATTEC purchased an additional .9 percent interest from ADAC and now owns 51 percent. A Mexican entity, ADAC-STRATTEC de Mexico, exists and is wholly owned by ADAC-STRATTEC LLC. ADAC-STRATTEC LLC’s financial results are consolidated with the financial results of STRATTEC and resulted in increased net income to STRATTEC of approximately $910,000 in 2011, approximately $114,000 in 2010 and no change in net income to STRATTEC in 2009.
Effective November 30, 2008, STRATTEC established a new entity, STRATTEC POWER ACCESS LLC (“SPA”), which is 80 percent owned by STRATTEC and 20 percent owned by WITTE. SPA operates the North American portion of the Power Products business which was acquired from Delphi Corporation. The financial results of SPA are consolidated with the financial results of STRATTEC and resulted in increased net income to STRATTEC of approximately $2.5 million in 2011, approximately $545,000 in 2010 and decreased net income to STRATTEC of approximately $2.1 million in 2009.
LOANS FROM RELATED PARTIES
At July 3, 2011 and June 27, 2010, loans from related parties (ADAC Automotive and WITTE Automotive) totaled $1.9 million and $3.0 million, respectively, and consisted of loans to ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC to fund working capital requirements of these entities. Working capital loans to these entities are made by each partner based on each partner’s ownership percentage in the entity. The weighted average interest rate was approximately 7.3 percent in 2011 and 7.2 percent in 2010.
CREDIT FACILITY
As of July 3, 2011, we had a $20 million unsecured line of credit (“Line of Credit”) with M&I Marshall & Ilsley Bank, which was scheduled to expire October 30, 2011. Interest on borrowings under our line of credit was at varying rates based on the London Interbank Offering Rate with a minimum annual rate of 4 percent. The Line of Credit was not subject to any covenants. Effective August 1, 2011, the $20 million unsecured Line of Credit was replaced with a $25 million secured revolving credit facility (“Credit Facility”) with BMO Harris Bank N.A. BMO Harris Bank is a unit of Bank of Montreal, which acquired M&I Marshall & Ilsley Bank effective July 5, 2011. M&I Marshall & Ilsley Bank is being assimilated into BMO Harris Bank. The Credit Facility expires August 1, 2014. Interest on borrowings under the Credit Facility is at varying rates based, at our option, on the London Interbank Offering Rate plus one percent or the

2011 STRATTEC Annual Report	 	39	

 

 
NOTES TO FINANCIAL STATEMENTS
bank’s prime rate. The Credit Facility contains a restrictive financial covenant that requires us to maintain a minimum net worth level. There were no outstanding borrowings at July 3, 2011 or June 27, 2010. There were no borrowings under any third party debt facilities during 2011, 2010 or 2009. We believe that the Credit Facility is 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
In 1995, we recorded a provision of $3 million 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 originally established based on third party estimates to adequately cover the cost for active remediation of the contamination. Due to changing technology and related costs associated with active remediation of the contamination, an updated analysis and estimate was obtained during fiscal 2010. As a result of this analysis, the reserve was reduced by approximately $1.1 million, to $1.5 million in 2010, to reflect the revised monitoring and remediation cost estimate. From 1995 through July 3, 2011, costs of approximately $400,000 have been incurred related to the installation of monitoring wells on the property and ongoing monitoring costs. We continue to 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 $1.5 million at July 3, 2011, is adequate.
At July 3, 2011, we had purchase commitments for zinc, aluminum, other purchased parts and natural gas totaling approximately $10.5 million payable in 2012, $8.2 million payable in 2013, $7.4 million payable in 2014 and $3.0 million payable in 2015. Minimum rental commitments under all non-cancelable operating leases with a term in excess of one year are payable as follows: 2012-$625,000; 2013-$545,000; 2014-$503,000; 2015-$280,000. Rental expense under all non-cancelable operating leases totaled approximately $783,000 in 2011, $553,000 in 2010 and $516,000 in 2009.
INCOME TAXES
The provision for income taxes data presented below for 2009 has been retrospectively adjusted for the adoption of a new accounting standard issued by the FASB related to non-controlling interests in consolidated financial statements.
The provision (benefit) for income taxes consists of the following (thousands of dollars):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	 	2009	 	
Currently payable (refundable):	 	 	 	 	 	 	 	 	 	 	 	 	
Federal	 	$	1,181	 	 	$	(2,745	)	 	$	(1,747	)	
State	 	 	167	 	 	 	230	 	 	 	150	 	
Foreign	 	 	1,369	 	 	 	753	 	 	 	361	 	
 	 	 	 	 	 	 	 	 	 	
 	 	 	2,717	 	 	 	(1,762	)	 	 	(1,236	)	
Deferred tax (benefit) provision	 	 	(177	)	 	 	3,428	 	 	 	(2,986	)	
 	 	 	 	 	 	 	 	 	 	
 	 	$	2,540	 	 	$	1,666	 	 	$	(4,222	)	
 	 	 	 	 	 	 	 	 	 	
The items accounting for the difference between income taxes computed at the Federal statutory tax rate and the provision for income taxes are as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	 	2009	 	
U.S. statutory rate	 	 	34.0	%	 	 	34.0	%	 	 	34.0	%	
State taxes, net of Federal tax benefit	 	 	0.4	 	 	 	4.1	 	 	 	1.2	 	
Foreign subsidiaries	 	 	(1.9	)	 	 	(4.1	)	 	 	4.3	 	
Non-controlling interest	 	 	(7.2	)	 	 	(3.5	)	 	 	(2.3	)	
Valuation allowance	 	 	0.5	 	 	 	2.8	 	 	 	—	 	
Other	 	 	(0.7	)	 	 	(3.6	)	 	 	.8	 	
 	 	 	 	 	 	 	 	 	 	
 	 	 	25.1	%	 	 	29.7	%	 	 	38.0	%	

 	 	 	
 	 	 	
2011 STRATTEC Annual Report	 	40	

 

 
NOTES TO FINANCIAL STATEMENTS
The components of deferred tax assets and (liabilities) are as follows (thousands of dollars):
 	 	 	 	 	 	 	 	 	
 	 	July 3, 2011	 	 	June 27, 2010	 	
Deferred income taxes—current:	 	 	 	 	 	 	 	 	
Repair and maintenance supply parts reserve	 	$	264	 	 	$	258	 	
Payroll-related accruals	 	 	1,504	 	 	 	1,028	 	
Environmental reserve	 	 	562	 	 	 	569	 	
Inventory reserve	 	 	401	 	 	 	475	 	
Allowance for Doubtful Accounts	 	 	152	 	 	 	152	 	
Accrued Warranty	 	 	1,169	 	 	 	436	 	
Method change for inventory valuation	 	 	(460	)	 	 	(919	)	
Other	 	 	588	 	 	 	288	 	
 	 	 	 	 	 	 	
 	 	 	4,180	 	 	 	2,287	 	
Valuation allowance	 	 	(154	)	 	 	(154	)	
 	 	 	 	 	 	 	
 	 	$	4,026	 	 	$	2,133	 	

Deferred income taxes—noncurrent:	 	 	 	 	 	 	 	 	
Accrued pension obligations	 	$	(9,080	)	 	$	(8,634	)	
Unrecognized pension and postretirement benefit plan liabilities	 	 	12,118	 	 	 	17,297	 	
Accumulated depreciation	 	 	(1,968	)	 	 	(2,001	)	
Stock-based compensation	 	 	693	 	 	 	740	 	
Postretirement obligations	 	 	1,153	 	 	 	1,651	 	
NOL/credit carry-forwards	 	 	216	 	 	 	273	 	
Other	 	 	562	 	 	 	1,208	 	
 	 	 	 	 	 	 	
 	 	 	3,694	 	 	 	10,534	 	
Valuation allowance	 	 	(55	)	 	 	—	 	
 	 	 	 	 	 	 	
 	 	$	3,639	 	 	$	10,534	 	
 	 	 	 	 	 	 	
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.
State operating loss and credit carry-forwards at July 3, 2011 result in future benefits of approximately $216,000 and begin to expire in 2024. A valuation allowance of $209,000 has been recorded as of July 3, 2011, due to our assessment of the future realization of certain state operating loss carry-forwards and capital loss carry-forward benefits. Due to the change in certain state tax laws, existing state loss carry-forwards will not be able to be utilized after the date of the tax law change. We do not currently anticipate having sufficient future capital gains to offset the capital losses. We believe that it is more likely than not that the results of future operations will generate sufficient taxable income and foreign source income to realize the remaining deferred tax assets.
Foreign income before the provision for income taxes was $3.6 million in 2011, $2.9 million in 2010 and $2.9 million in 2009. No provision for Federal income taxes was made on earnings of foreign subsidiaries and joint ventures that are considered permanently invested or that would be offset by foreign tax credits upon distribution. Such undistributed earnings at July 3, 2011 were approximately $20.1 million.
The total liability for unrecognized tax benefits was $1.7 million as of July 3, 2011 and $1.2 million as of June 27, 2010. This liability includes approximately $1.5 million of unrecognized tax benefits at July 3, 2011 and $1.1 million at June 27, 2010 and approximately $151,000 of accrued interest at July 3, 2011 and $118,000 at June 27, 2010. 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 $1.1 million at July 3, 2011 and $863,000 at June 27, 2010. 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 3, 2011 and June 27, 2010 (thousands of dollars):
 	 	 	 	 	 	 	 	 	
 	 	Year Ended	 	
 	 	July 3, 2011	 	 	June 27, 2010	 	
Unrecognized tax benefits, beginning of year	 	$	1,125	 	 	$	1,103	 	
Gross increases — tax positions in prior years	 	 	26	 	 	 	—	 	
Gross decreases — tax positions in prior years	 	 	—	 	 	 	(29	)	
Gross increases — current period tax positions	 	 	349	 	 	 	115	 	
Tax Years Closed	 	 	—	 	 	 	(64	)	
 	 	 	 	 	 	 	
Unrecognized tax benefits, end of year	 	$	1,500	 	 	$	1,125	 	

 	 	 	
 	 	 	
2011 STRATTEC Annual Report	 	41	

 

 
NOTES TO FINANCIAL STATEMENTS
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. We are currently subject to a Federal income tax examination related to fiscal 2009. Tax years open to examination by tax authorities under the statute of limitations include fiscal 2006 through 2011 for Federal, fiscal 2007 through 2011 for most states and calendar 2006 through 2010 for foreign jurisdictions.
RETIREMENT PLANS AND POSTRETIREMENT COSTS
We have a qualified, noncontributory defined benefit pension plan covering substantially all U.S. associates. Benefits are based on years of service and final average compensation. Our policy is to fund 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 January 1, 2010, an amendment to the qualified defined benefit pension plan discontinued the benefit accruals for salary increases and credited service rendered after December 31, 2009. As a result of this action, a curtailment loss related to unrecognized prior service cost of $505,000 was recorded during 2010, of which approximately $375,000 increased cost of goods sold and approximately $130,000 increased engineering, selling and administrative expenses.
We have a noncontributory supplemental executive retirement plan (“SERP”), which is a nonqualified defined benefit plan. The SERP will pay supplemental pension benefits to certain key associates upon retirement based upon the associates’ years of service and compensation. The SERP is being funded through a Rabbi Trust with M&I Trust Company. The trust assets had a value of $4.3 million at July 3, 2011 and $4.0 million at June 27, 2010. The Rabbi Trust assets are included in other current assets in the accompanying Consolidated Balance Sheets. The projected benefit obligation was $4.7 million at July 3, 2011 and $3.7 million at June 27, 2010. The SERP liabilities are included in the pension tables below. However, the trust assets are excluded from the table as they do not qualify as plan assets.
We also sponsor a postretirement health care plan for all U.S. associates hired prior to June 1, 2001. The expected cost of retiree health care benefits is recognized during the years the 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 is subject to a maximum 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 3, 2011, which have not yet been recognized in net periodic benefit cost are as follows (thousands of dollars):
 	 	 	 	 	 	 	 	 	
 	 	Pension and SERP Benefits	 	 	Postretirement Benefits	 	
Prior service cost (credit)	 	$	52	 	 	$	(3,610	)	
 	 	 	 	 	 	 	 	 	
Net actuarial loss	 	 	18,759	 	 	 	4,571	 	

 	 	$	18,811	 	 	$	961	 	
 	 	 	 	 	 	 	
Included in accumulated other comprehensive loss at July 3, 2011 are prior service costs of $12,000 ($7,000 net of tax) and unrecognized net actuarial losses of $2.4 million ($1.5 million net of tax) which are expected to be recognized in pension and SERP net periodic benefit cost during 2012.
Included in accumulated other comprehensive loss at July 3, 2011 are prior service credits of $764,000 ($474,000 net of tax) and unrecognized net actuarial losses of $673,000 ($417,000 net of tax) which are expected to be recognized in postretirement net periodic benefit cost during 2012.
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.

2011 STRATTEC Annual Report	 	42	

 

 
NOTES TO FINANCIAL STATEMENTS
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Pension and SERP Benefits	 	 	Postretirement Benefits	 	
 	 	2011	 	 	2010	 	 	2009	 	 	2011	 	 	2010	 	 	2009	 	
COMPONENTS OF NET PERIODIC BENEFIT COST:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Service cost	 	$	70	 	 	$	1,006	 	 	$	1,935	 	 	$	10	 	 	$	124	 	 	$	191	 	
Interest cost	 	 	4,692	 	 	 	5,047	 	 	 	5,083	 	 	 	275	 	 	 	701	 	 	 	737	 	
Expected return on plan assets	 	 	(6,445	)	 	 	(6,351	)	 	 	(6,562	)	 	 	—	 	 	 	—	 	 	 	—	 	
Amortization of prior service cost	 	 	12	 	 	 	45	 	 	 	79	 	 	 	(764	)	 	 	(388	)	 	 	(388	)	
Amortization of unrecognized net loss	 	 	2,504	 	 	 	727	 	 	 	255	 	 	 	645	 	 	 	685	 	 	 	695	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net periodic benefit cost	 	 	833	 	 	 	474	 	 	 	790	 	 	 	166	 	 	 	1,122	 	 	 	1,235	 	
Curtailment loss	 	 	—	 	 	 	505	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net benefit cost	 	$	833	 	 	$	979	 	 	$	790	 	 	$	166	 	 	$	1,122	 	 	$	1,235	 	

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Pension and SERP Benefits	 	 	Postretirement Benefits	 	
 	 	July 3,	 	 	June 27,	 	 	July 3,	 	 	June 27,	 	
 	 	2011	 	 	2010	 	 	2011	 	 	2010	 	
WEIGHTED-AVERAGE ASSUMPTIONS	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Benefit Obligations:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Discount rate	 	 	5.57	%	 	 	5.41	%	 	 	5.57	%	 	 	5.41	%	
Expected return on plan assets	 	 	7.8	%	 	 	8.0	%	 	 	n/a	 	 	 	n/a	 	
Rate of compensation increases — SERP	 	 	3.0	%	 	 	3.0	%	 	 	n/a	 	 	 	n/a	 	
Net Periodic Benefit Cost:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Discount rate	 	 	5.41	%	 	 	6.86	%	 	 	5.41	%	 	 	6.86	%	
Expected return on plan assets	 	 	8.0	%	 	 	8.0	%	 	 	n/a	 	 	 	n/a	 	
Rate of compensation increases — SERP	 	 	3.0	%	 	 	3.0	%	 	 	n/a	 	 	 	n/a	 	

 	 	2011	 	 	2010	 	 	2011	 	 	2010	 	
CHANGE IN PROJECTED BENEFIT OBLIGATION:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Benefit obligation at beginning of year	 	$	90,402	 	 	$	78,058	 	 	$	5,642	 	 	$	10,812	 	
Service cost	 	 	70	 	 	 	1,006	 	 	 	10	 	 	 	124	 	
Interest cost	 	 	4,692	 	 	 	5,047	 	 	 	275	 	 	 	701	 	
Plan amendments	 	 	—	 	 	 	(3,982	)	 	 	—	 	 	 	(3,399	)	
Actuarial (gain) loss	 	 	(1,829	)	 	 	14,101	 	 	 	134	 	 	 	(1,543	)	
Benefits paid	 	 	(3,726	)	 	 	(3,828	)	 	 	(1,475	)	 	 	(1,053	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Benefit obligation at end of year	 	$	89,609	 	 	$	90,402	 	 	$	4,586	 	 	$	5,642	 	

CHANGE IN PLAN ASSETS:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fair value of plan assets at beginning of year	 	$	68,768	 	 	$	60,594	 	 	$	—	 	 	$	—	 	
Actual return on plan assets	 	 	15,981	 	 	 	7,783	 	 	 	—	 	 	 	—	 	
Employer contribution	 	 	2,000	 	 	 	4,219	 	 	 	1,475	 	 	 	1,053	 	
Benefits paid	 	 	(3,726	)	 	 	(3,828	)	 	 	(1,475	)	 	 	(1,053	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Fair value of plan assets at end of year	 	 	83,023	 	 	 	68,768	 	 	 	—	 	 	 	—	 	

Funded status-accrued benefit obligations	 	$	(6,586	)	 	$	(21,634	)	 	$	(4,586	)	 	$	(5,642	)	

AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE SHEETS:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Accrued payroll and benefits (current liabilities)	 	$	(3,139	)	 	$	(3,142	)	 	$	(997	)	 	$	(1,152	)	
Accrued benefit obligations (long-term liabilities)	 	 	(3,447	)	 	 	(18,492	)	 	 	(3,589	)	 	 	(4,490	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net amount recognized	 	$	(6,586	)	 	$	(21,634	)	 	$	(4,586	)	 	$	(5,642	)	

CHANGES IN PLAN ASSETS AND BENEFIT OBLIGATIONS RECOGNIZED IN OTHER COMPREHENSIVE INCOME:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net benefit cost	 	$	833	 	 	$	979	 	 	$	166	 	 	$	1,122	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net actuarial loss (gain)	 	 	(11,365	)	 	 	8,686	 	 	 	135	 	 	 	(1,543	)	
Prior service cost	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(3,399	)	
Amortization of prior service (cost) credits	 	 	(12	)	 	 	(550	)	 	 	764	 	 	 	388	 	
Amortization of unrecognized net loss	 	 	(2,504	)	 	 	(727	)	 	 	(645	)	 	 	(685	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total recognized in other comprehensive income, before tax	 	 	(13,881	)	 	 	7,409	 	 	 	254	 	 	 	(5,239	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total recognized in net periodic benefit cost and other comprehensive income	 	$	(13,048	)	 	$	8,388	 	 	$	420	 	 	$	(4,117	)	

 	 	 	
 	 	 	
2011 STRATTEC Annual Report	 	43	

 

 
NOTES TO FINANCIAL STATEMENTS
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):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Pension	 	 	SERP	 	
 	 	July 3, 2011	 	 	June 27, 2010	 	 	July 3, 2011	 	 	June 27, 2010	 	
Accumulated benefit obligation	 	$	84,902	 	 	$	86,658	 	 	$	4,158	 	 	$	3,682	 	
Projected benefit obligation	 	$	84,902	 	 	$	86,658	 	 	$	4,707	 	 	$	3,744	 	
For measurement purposes, an 8.5 percent annual rate increase in the per capita cost of covered health care benefits was assumed for 2012; the rate was assumed to decrease gradually to 5 percent by the year 2018 and remain at that level thereafter relating to retirees prior to January 1, 2010.
The health care cost trend assumption has a significant effect on the postretirement benefit amounts reported. A 1% change in the health care cost trend rates would have the following effects (thousands of dollars):
 	 	 	 	 	 	 	 	 	
 	 	1% Increase	 	 	1% Decrease	 	
Effect on total of service and interest cost components in fiscal 2011	 	$	5	 	 	$	(5	)	
Effect on postretirement benefit obligation as of July 3, 2011	 	$	92	 	 	$	(89	)	
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, but has a small allocation to hedge funds. 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 are as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Target Allocation	 	 	July 3, 2011	 	 	June 27, 2010	 	
Equity investments	 	 	70	%	 	 	70	%	 	 	56	%	
Fixed-income investments	 	 	30	%	 	 	26	%	 	 	44	%	
Other	 	 	—	%	 	 	4	%	 	 	—	%	
 	 	 	 	 	 	 	 	 	 	
Total	 	 	100	%	 	 	100	%	 	 	100	%	
 	 	 	 	 	 	 	 	 	 	
The following is a summary, by asset category, of the fair value of pension plan assets at the June 30, 2011 and June 30, 2010 measurement date (thousands of dollars):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	June 30, 2011	 	 	June 30, 2010	 	
Asset Category	 	Level 1	 	 	Level 2	 	 	Level 3	 	 	Total	 	 	Level 1	 	 	Level 2	 	 	Level 3	 	 	Total	 	
Cash and cash equivalents	 	$	630	 	 	$	—	 	 	$	—	 	 	$	630	 	 	$	1,508	 	 	$	—	 	 	$	—	 	 	$	1,508	 	
Equity Securities/Funds:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Small Cap	 	 	13,770	 	 	 	—	 	 	 	—	 	 	 	13,770	 	 	 	6,392	 	 	 	—	 	 	 	—	 	 	 	6,392	 	
Mid Cap	 	 	9,139	 	 	 	—	 	 	 	—	 	 	 	9,139	 	 	 	8,973	 	 	 	—	 	 	 	—	 	 	 	8,973	 	
Large Cap	 	 	19,234	 	 	 	—	 	 	 	—	 	 	 	19,234	 	 	 	17,060	 	 	 	—	 	 	 	—	 	 	 	17,060	 	
International	 	 	15,398	 	 	 	—	 	 	 	—	 	 	 	15,398	 	 	 	5,970	 	 	 	—	 	 	 	—	 	 	 	5,970	 	
Taxable/Fixed Income Bond Funds	 	 	21,157	 	 	 	—	 	 	 	—	 	 	 	21,157	 	 	 	28,865	 	 	 	—	 	 	 	—	 	 	 	28,865	 	
Hedge funds	 	 	—	 	 	 	—	 	 	 	3,695	 	 	 	3,695	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	79,328	 	 	$	—	 	 	$	3,695	 	 	$	83,023	 	 	$	68,768	 	 	$	—	 	 	$	—	 	 	$	68,768	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
The following table summarizes the changes in Level 3 investments for the pension plan assets (thousands of dollars):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	Realized	 	 	 	 	
 	 	Fair Value	 	 	Net Purchases	 	 	and Unrealized	 	 	Fair Value	 	
 	 	June 30, 2010	 	 	and Sales	 	 	Gain (loss)	 	 	June 30, 2011	 	
Hedge Funds	 	$	—	 	 	$	3,500	 	 	$	195	 	 	$	3,695	 	
There were no transfers in or out of Level 3 investments during the year ended July 3, 2011.
The expected long-term rate of return on U.S. pension plan assets used to calculate the year-end 2011 projected benefit obligation was 7.8 percent. The target asset allocation is 70 percent public equity and 30 percent fixed income. The 7.8 percent is approximated by applying returns of 10 percent on public equity and 6 percent on fixed income to the target allocation. The actual historical returns are also relevant. Annualized returns for periods ended June 30, 2011 were 4.49 percent for 5 years, 5.65 percent for 10 years, 6.88 percent for 15 years, 8.29 percent for 20 years, 8.60 percent for 25 years and 10.27 percent for 30 years.
We expect to contribute approximately $2 million to our qualified pension plan, $3.1 million to our SERP and $1.0 million to our postretirement health care plan in 2012. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (thousands of dollars):

2011 STRATTEC Annual Report	 	44	

 

 
NOTES TO FINANCIAL STATEMENTS
 	 	 	 	 	 	 	 	 	
 	 	Pension and SERP Benefits	 	 	Postretirement Benefits	 	
2012	 	$	7,544	 	 	$	996	 	
2013	 	 	4,758	 	 	 	905	 	
2014	 	 	5,186	 	 	 	793	 	
2015	 	 	5,529	 	 	 	615	 	
2016	 	 	5,380	 	 	 	437	 	
2017-2021	 	 	31,014	 	 	 	907	 	
All U.S. associates may participate in our 401(k) Plan. As of January 1, 2010, we contribute 100 percent up to the first 5 percent of eligible compensation that a participant contributes to the plan. Prior to January 1, 2010, we contributed a fixed percentage up to the first 6 percent of eligible compensation that a participant contributed to the plan. Prior to January 1, 2010, the fixed percentage contribution for all U.S. bargaining unit associates was 50 percent. The fixed percentage contribution for all U.S. salaried associates was 50 percent prior to January 1, 2009 and 20 percent from January 1, 2009 through December 31, 2009. Our contributions totaled approximately $1.3 million in 2011, $743,000 in 2010 and $464,000 in 2009.
SHAREHOLDERS’ EQUITY
We have 12,000,000 shares of authorized common stock, par value $.01 per share, with 3,289,478 and 3,275,955 shares outstanding at July 3, 2011 and June 27, 2010, 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 as of July 3, 2011. As of July 3, 2011, 3,655,322 shares have been repurchased under this program at a cost of approximately $136.4 million.
EARNINGS (LOSS) PER SHARE (“EPS”) (“LPS”)
Basic earnings (loss) per share is computed on the basis of the weighted average number of shares of common stock outstanding during the 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 period using the treasury stock method. Potential dilutive common shares include outstanding stock options and restricted stock awards. A reconciliation of the components of the basic and diluted per share computations follows (in thousands, except per share amounts):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	 	2009	 	
 	 	Net	 	 	 	 	 	 	Per Share	 	 	Net	 	 	 	 	 	 	Per Share	 	 	Net	 	 	 	 	 	 	Per Share	 	
 	 	Income	 	 	Shares	 	 	Amount	 	 	Income	 	 	Shares	 	 	Amount	 	 	Loss	 	 	Shares	 	 	Amount	 	
Basic EPS (LPS)	 	$	5,418	 	 	 	3,285	 	 	$	1.65	 	 	$	3,421	 	 	 	3,271	 	 	$	1.05	 	 	$	(6,122	)	 	 	3,280	 	 	$	(1.87	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Stock-based compensation	 	 	 	 	 	 	38	 	 	 	 	 	 	 	 	 	 	 	9	 	 	 	 	 	 	 	 	 	 	 	4	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted EPS (LPS)	 	$	5,418	 	 	 	3,323	 	 	$	1.63	 	 	$	3,421	 	 	 	3,280	 	 	$	1.04	 	 	$	(6,122	)	 	 	3,284	 	 	$	(1.86	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
As of July 3, 2011, options to purchase 142,000 shares of common stock at a weighted-average exercise price of $43.57 were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive. As of June 27, 2010, options to purchase 207,650 shares of common stock at a weighted-average exercise price of $42.17 were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive. As of June 28, 2009, options to purchase 227,240 shares of common stock at a weighted-average exercise price of $38.07 were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.
Net earnings available to participating securities were not significant in any of the years presented. We consider restricted stock that provides the holder with a non-forfeitable right to receive dividends to be a participating security.
STOCK OPTION AND PURCHASE PLANS
A summary of stock option activity under our stock incentive plan is as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	Weighted Average	 	 	 	 	 	
 	 	 	 	 	 	Weighted	 	 	Remaining	 	 	Aggregate	 	
 	 	 	 	 	 	Average	 	 	Contractual Term	 	 	Intrinsic Value	 	
 	 	Shares	 	 	Exercise Price	 	 	(in years)	 	 	(in thousands)	 	
Balance at June 29, 2008	 	 	187,780	 	 	$	58.74	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Granted	 	 	96,800	 	 	$	11.80	 	 	 	 	 	 	 	 	 	
Exercised	 	 	—	 	 	$	—	 	 	 	 	 	 	 	 	 	
Expired	 	 	(52,340	)	 	$	61.68	 	 	 	 	 	 	 	 	 	
Terminated	 	 	(5,000	)	 	$	58.55	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at June 28, 2009	 	 	227,240	 	 	$	38.07	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Granted	 	 	80,000	 	 	$	17.73	 	 	 	 	 	 	 	 	 	
Exercised	 	 	(2,400	)	 	$	10.92	 	 	 	 	 	 	 	 	 	
Expired	 	 	(2,790	)	 	$	61.22	 	 	 	 	 	 	 	 	 	
Terminated	 	 	(4,400	)	 	$	10.92	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at June 27, 2010	 	 	297,650	 	 	$	33.01	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Granted	 	 	40,000	 	 	$	22.47	 	 	 	 	 	 	 	 	 	
Exercised	 	 	(2,600	)	 	$	10.92	 	 	 	 	 	 	 	 	 	
Expired	 	 	(37,650	)	 	$	60.36	 	 	 	 	 	 	 	 	 	
Terminated	 	 	—	 	 	$	—	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at July 3, 2011	 	 	297,400	 	 	$	28.32	 	 	 	5.8	 	 	$	1,080	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Exercisable as of:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
July 3, 2011	 	 	155,800	 	 	$	38.37	 	 	 	4.8	 	 	$	479	 	
June 27, 2010	 	 	149,350	 	 	$	50.92	 	 	 	3.4	 	 	$	212	 	
June 28, 2009	 	 	130,440	 	 	$	57.57	 	 	 	3.5	 	 	$	—	 	
Available for grant as of July 3, 2011	 	 	228,543	 	 	 	 	 	 	 	 	 	 	 	 	 	

 	 	 	
2011 STRATTEC Annual Report	 	45	

 

 
NOTES TO FINANCIAL STATEMENTS
Options granted at a price greater than the market value on the date of grant included in the table above totaled 40,000 at an exercise price of $22.47 in 2011. No options included above were granted at a price greater than the market value on the date of grant during 2010 or 2009.
A summary of restricted stock activity under our stock incentive plan is as follows:
 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	Weighted Average	 	
 	 	 	 	 	 	Grant Date	 	
 	 	Shares	 	 	Fair Value	 	
Nonvested Balance at June 29, 2008	 	 	29,400	 	 	$	46.32	 	
 	 	 	 	 	 	 	 	
Granted	 	 	10,000	 	 	$	29.00	 	
Vested	 	 	(10,200	)	 	$	50.58	 	
Forfeited	 	 	(1,000	)	 	$	46.22	 	
 	 	 	 	 	 	 	 	
Nonvested Balance at June 28, 2009	 	 	28,200	 	 	$	38.64	 	
 	 	 	 	 	 	 	 	
Granted	 	 	10,000	 	 	$	14.75	 	
Vested	 	 	(9,000	)	 	$	40.00	 	
Forfeited	 	 	(1,700	)	 	$	32.28	 	
 	 	 	 	 	 	 	 	
Nonvested Balance at June 27, 2010	 	 	27,500	 	 	$	29.90	 	
 	 	 	 	 	 	 	 	
Granted	 	 	20,000	 	 	$	20.66	 	
Vested	 	 	(8,600	)	 	$	47.78	 	
Forfeited	 	 	—	 	 	$	—	 	
 	 	 	 	 	 	 	 	
Nonvested Balance at July 3, 2011	 	 	38,900	 	 	$	21.19	 	
 	 	 	 	 	 	 	 	
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, 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. A total of 100,000 shares may be issued under the plan. Shares issued from treasury stock under the plan totaled 2,323 at an average price of $26.78 during 2011, 2,587 at an average price of $17.01 during 2010 and 2,548 at an average price of $15.63 during 2009. A total of 75,757 shares are available for purchase under the plan as of July 3, 2011.
EXPORT SALES
Export sales are summarized below (thousands of dollars):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	 	2009	 	
Export Sales	 	$	103,232	 	 	$	79,144	 	 	$	28,050	 	
Percent of Net Sales	 	 	40	%	 	 	38	%	 	 	22	%	
These sales were primarily to automotive manufacturing assembly plants in Canada, China, Mexico and Korea.
SALES AND RECEIVABLE CONCENTRATION
Sales to our largest customers were as follows (thousands of dollars and percent of total net sales):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	 	2009	 	
 	 	Sales	 	 	%	 	 	Sales	 	 	%	 	 	Sales	 	 	%	 	
General Motors Company	 	$	63,617	 	 	 	24	%	 	$	51,673	 	 	 	25	%	 	$	39,156	 	 	 	31	%	
Ford Motor Company	 	 	26,930	 	 	 	10	%	 	 	18,435	 	 	 	9	%	 	 	12,575	 	 	 	10	%	
Chrysler Group LLC	 	 	80,889	 	 	 	31	%	 	 	68,216	 	 	 	33	%	 	 	31,864	 	 	 	25	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	171,436	 	 	 	66	%	 	$	138,324	 	 	 	67	%	 	$	83,595	 	 	 	66	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Receivables from our largest customers were as follows (thousands of dollars and percent of gross receivables):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	July 3, 2011	 	 	June 27, 2010	 	
 	 	Receivables	 	 	%	 	 	Receivables	 	 	%	 	
General Motors Company	 	$	9,208	 	 	 	23	%	 	$	8,125	 	 	 	22	%	
Ford Motor Company	 	 	4,372	 	 	 	11	%	 	 	2,718	 	 	 	7	%	
Chrysler Group LLC	 	 	12,103	 	 	 	30	%	 	 	12,231	 	 	 	34	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	25,683	 	 	 	64	%	 	$	23,074	 	 	 	63	%	

 	 	 	
 	 	 	
2011 STRATTEC Annual Report	 	46	

 

 
REPORTS
REPORT ON MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
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 3, 2011, in relation to criteria for effective internal control over financial reporting as described in “Internal Control — Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the assessment, management concludes that, as of July 3, 2011, its system of internal control over financial reporting is effective and meets 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.

Harold M. Stratton II	 	Patrick J. Hansen	
Chairman and	 	Senior Vice President and	
Chief Executive Officer	 	Chief Financial Officer	

 	 	 	
2011 STRATTEC Annual Report	 	47	

 

 
REPORTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 3, 2011, based on criteria established in  Internal Control —  Integrated Framework  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 Management’s Report on 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 3, 2011, based on the criteria established in  Internal Control  —  Integrated Framework 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 3, 2011 of the Company and our report dated September 8, 2011 expressed an unqualified opinion on those financial statements.

Deloitte & Touche LLP
Milwaukee, Wisconsin
September 8, 2011

2011 STRATTEC Annual Report	 	48	

 

 
REPORTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of STRATTEC SECURITY CORPORATION:
We have audited the accompanying consolidated balance sheet of STRATTEC SECURITY CORPORATION and subsidiaries (the “Company”) as of July 3, 2011 and June 27, 2010, and the related consolidated statement of operations and comprehensive income, shareholders’ equity, and cash flows for the two years in the period ended July 3, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of the Company as of June 28, 2009 were audited by other auditors whose report dated August 24, 2009, September 1, 2010 as to the effects of the adoption of new accounting guidance on the presentation of noncontrolling interests as described in the “Organizational and Summary of Significant Accounting Policies” footnote, expressed an unqualified opinion and included explanatory paragraphs on the Company’s changes in accounting method of inventory and accounting for noncontrolling interests, on those statements.
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 the 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of July 3, 2011 and June 27, 2010, and the results of their operations and their cash flows for the two years in the period ended July 3, 2011 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 3, 2011, based on the criteria established in  Internal Control  —  Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 8, 2011 expressed an unqualified opinion on the Company’s internal control over financial reporting.

Deloitte & Touche LLP
Milwaukee, Wisconsin
September 8, 2011

2011 STRATTEC Annual Report	 	49	

 

 
FINANCIAL SUMMARY
FIVE-YEAR FINANCIAL SUMMARY
The financial data for each period presented below reflects the consolidated results of STRATTEC SECURITY CORPORATION and its wholly owned subsidiaries. Fiscal years 2007 through 2009 have been retrospectively adjusted for the adoption of a new accounting standard issued by the Financial Accounting Standards Board (FASB) related to non-controlling interests in consolidated financial statements. Fiscal years 2007 and 2008 have been retrospectively adjusted for our change in 2009 from the last-in, first-out method of inventory accounting to the first-in, first-out method. 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	 	
 	 	2011	 	 	2010	 	 	2009	 	 	2008	 	 	2007	 	
INCOME STATEMENT DATA	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net sales	 	$	260,933	 	 	$	207,964	 	 	$	126,097	 	 	$	159,642	 	 	$	167,707	 	
Gross profit	 	 	42,163	 	 	 	33,042	 	 	 	13,240	 	 	 	24,767	 	 	 	26,520	 	
Engineering, selling, and administrative expenses	 	 	33,443	 	 	 	29,939	 	 	 	25,480	 	 	 	23,962	 	 	 	20,189	 	
Impairment charge	 	 	—	 	 	 	223	 	 	 	—	 	 	 	—	 	 	 	—	 	
Environmental reserve adjustment	 	 	—	 	 	 	(1,125	)	 	 	—	 	 	 	—	 	 	 	—	 	
(Recovery of) provision for doubtful accounts	 	 	—	 	 	 	(421	)	 	 	500	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from operations	 	 	8,720	 	 	 	4,426	 	 	 	(12,740	)	 	 	805	 	 	 	6,331	 	
Interest income	 	 	119	 	 	 	86	 	 	 	731	 	 	 	2,749	 	 	 	3,611	 	
Equity earnings of joint ventures	 	 	1,246	 	 	 	1,008	 	 	 	245	 	 	 	561	 	 	 	394	 	
Interest expense — related parties	 	 	(175	)	 	 	(225	)	 	 	(164	)	 	 	(31	)	 	 	—	 	
Other income (expense), net	 	 	220	 	 	 	312	 	 	 	804	 	 	 	(300	)	 	 	321	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before taxes and non-controlling interest	 	 	10,130	 	 	 	5,607	 	 	 	(11,124	)	 	 	3,784	 	 	 	10,657	 	
Provision (benefit) for income taxes	 	 	2,540	 	 	 	1,666	 	 	 	(4,222	)	 	 	977	 	 	 	2,533	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	 	7,590	 	 	 	3,941	 	 	 	(6,902	)	 	 	2,807	 	 	 	8,124	 	
Net (income) loss attributable to non-controlling interest	 	 	(2,172	)	 	 	(520	)	 	 	780	 	 	 	(26	)	 	 	75	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss) attributable to STRATTEC SECURITY CORPORATION	 	$	5,418	 	 	$	3,421	 	 	$	(6,122	)	 	$	2,781	 	 	$	8,199	 	

Earnings (Loss) per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	$	1.65	 	 	$	1.05	 	 	$	(1.87	)	 	$	0.80	 	 	$	2.31	 	
Diluted	 	 	1.63	 	 	 	1.04	 	 	 	(1.86	)	 	 	0.80	 	 	 	2.31	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash dividends declared per share:	 	$	1.20	 	 	$	—	 	 	$	0.30	 	 	$	1.60	 	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
BALANCE SHEET DATA	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net working capital	 	$	43,414	 	 	$	43,777	 	 	$	41,710	 	 	$	72,835	 	 	$	84,077	 	
Total assets	 	 	148,088	 	 	 	145,002	 	 	 	128,189	 	 	 	144,221	 	 	 	151,440	 	
Long-term liabilities	 	 	7,036	 	 	 	22,982	 	 	 	24,784	 	 	 	12,389	 	 	 	13,431	 	
Total STRATTEC SECURITY CORPORATION Shareholders’ equity	 	 	86,215	 	 	 	74,126	 	 	 	71,418	 	 	 	97,940	 	 	 	105,954	 	

 	 	 	
2011 STRATTEC Annual Report	 	50	

 

 
FINANCIAL SUMMARY/PERFORMANCE GRAPH
QUARTERLY FINANCIAL DATA (UNAUDITED)
The following data are in thousands of dollars except per share amounts.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Cash	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	Net Income	 	 	Earnings	 	 	Dividends	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	Attributable to	 	 	Per Share	 	 	Declared	 	 	Market Price Per Share	 	
 	 	Quarter	 	Net Sales	 	 	Gross Profit	 	 	STRATTEC	 	 	Basic	 	 	Diluted	 	 	Per Share	 	 	High	 	 	Low	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2011	 	First	 	$	59,849	 	 	$	10,153	 	 	$	1,418	 	 	$	0.43	 	 	$	0.43	 	 	$	1.20	 	 	$	24.56	 	 	$	17.94	 	
 	 	Second	 	 	61,212	 	 	 	9,973	 	 	 	1,247	 	 	 	0.38	 	 	 	0.37	 	 	 	—	 	 	 	35.50	 	 	 	24.46	 	
 	 	Third	 	 	65,650	 	 	 	9,119	 	 	 	55	 	 	 	0.02	 	 	 	0.02	 	 	 	—	 	 	 	38.07	 	 	 	27.12	 	
 	 	Fourth	 	 	74,222	 	 	 	12,918	 	 	 	2,698	 	 	 	0.82	 	 	 	0.81	 	 	 	—	 	 	 	33.90	 	 	 	20.01	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	TOTAL	 	$	260,933	 	 	$	42,163	 	 	$	5,418	 	 	$	1.65	 	 	$	1.63	 	 	$	1.20	 	 	 	 	 	 	 	 	 	

2010	 	First	 	$	41,181	 	 	$	6,798	 	 	$	943	 	 	$	0.29	 	 	$	0.29	 	 	$	—	 	 	$	15.40	 	 	$	13.03	 	
 	 	Second	 	 	52,540	 	 	 	7,653	 	 	 	844	 	 	 	0.26	 	 	 	0.26	 	 	 	—	 	 	 	18.50	 	 	 	13.29	 	
 	 	Third	 	 	52,883	 	 	 	8,861	 	 	 	781	 	 	 	0.24	 	 	 	0.24	 	 	 	—	 	 	 	22.15	 	 	 	16.75	 	
 	 	Fourth	 	 	61,360	 	 	 	9,730	 	 	 	853	 	 	 	0.26	 	 	 	0.26	 	 	 	—	 	 	 	27.80	 	 	 	19.52	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	TOTAL	 	$	207,964	 	 	$	33,042	 	 	$	3,421	 	 	$	1.05	 	 	$	1.04	 	 	$	—	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Registered shareholders of record at July 3, 2011, were 2,182.
The chart below shows a comparison of the cumulative return since June 30, 2006 had $100 been invested at the close of business on June 30, 2006 in STRATTEC Common Stock, the NASDAQ Composite Index (all issuers), and the Dow Jones U.S. Auto Parts Index.

 	 	6/30/06	 	 	7/1/07	 	 	6/29/08	 	 	6/28/09	 	 	6/27/10	 	 	7/3/11	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
STRATTEC**	 	 	100	 	 	 	94	 	 	 	73	 	 	 	29	 	 	 	46	 	 	 	46	 	
NASDAQ Composite Index	 	 	100	 	 	 	122	 	 	 	108	 	 	 	87	 	 	 	100	 	 	 	133	 	
Dow Jones U.S. Auto Parts Index	 	 	100	 	 	 	137	 	 	 	102	 	 	 	74	 	 	 	95	 	 	 	160	 	
 	 	 	
*	 	$100 invested on June 30, 2006 in stock or index-including reinvestment of dividends. Indexes calculated on a month-end basis.	
 	 	 	
**	 	The fiscal year end closing price of STRATTEC Common Stock on June 30, 2006, was $49.81, the closing price on June 29, 2007 was $46.97, the closing price on June 27, 2008 was $34.99, the closing price on June 26, 2009 was $13.90, the closing price on June 25, 2010 was $22.01 and the closing price on July 3, 2011 was $21.13.	

 	 	 	
2011 STRATTEC Annual Report	 	51	

 

 

DIRECTORS/OFFICERS/SHAREHOLDERS’ INFORMATION STRATTEC Board of Directors: (Left to Right) Frank J. Krejci, Michael J. Koss, Robert Feitler, Harold M. Stratton II, David R. Zimmer BOARD OF DIRECTORS Harold M. Stratton II, 63 Chairman and Chief Executive Officer Frank J. Krejci, 61 President and Chief Operating Officer Robert Feitler, 80 Former President and Chief Operating Officer of Weyco Group, Inc. Chairman of the Executive Committee and Director of Weyco Group, Inc. Michael J. Koss, 57 President and Chief Executive Officer of Koss Corporation Director of Koss Corporation David R. Zimmer, 65 Managing Partner of Stonebridge Business Partners CORPORATE OFFICERS Harold M. Stratton II, 63 Frank J. Krejci, 61 Patrick J. Hansen, 52 Senior Vice President-Chief Financial Officer, Treasurer and Secretary Dennis A. Kazmierski, 59 Vice President-Marketing and Sales Kathryn E. Scherbarth, 55 Vice President-Milwaukee Operations Rolando J. Guillot, 43 Vice President-Mexican Operations Brian J. Reetz, 53 Vice President-Security Products Richard P. Messina, 45 Vice President-Access Products SHAREHOLDERS’ INFORMATION Annual Meeting The Annual Meeting of Shareholders will convene at 8:00 a.m. (CDT) on October 11, 2011, at the Radisson Hotel, 7065 North Port Washington Road, Milwaukee, Wl 53217 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 W. Good Hope Road, Milwaukee, Wl 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 Web site 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 P.O. Box 64854 St. Paul, MN 55164-0854 1.800.468.9716	

 	 	 	
2011 STRATTEC Annual Report	 	52	

 

 

BOLT learns your vehicle key! Buy direct at www.boltlock.com A single turn is all it takes to enjoy single key convenience. STRATTEC STRATTEC SECURITY CORPORATION 3333 WEST GOOD HOPE ROAD MILWAUKEE, WI 53209 PHONE 414.247.3333 FAX 414.247.3329 www.strattec.com	

 

Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-103219, 333-31002, 333-45221, 333-4300, and 333-140715 on Form S-8 of our reports dated September 8, 2011, relating to the consolidated financial statements of STRATTEC SECURITY CORPORATION, and the effectiveness of STRATTEC SECURITY CORPORATION’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of STRATTEC SECURITY CORPORATION for the year ended July 3, 2011.
/s/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
September 8, 2011

Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
We have issued our report dated August 24, 2009 (except for the footnote titled “Organization and Summary of Significant Accounting Policies”, as to which the date is September 1, 2010), with respect to the consolidated financial statements and schedules included in the Annual Report of STRATTEC SECURITY CORPORATION on Form 10-K for the year ended July 3, 2011. We hereby consent to the incorporation by reference of said report in the Registration Statements of STRATTEC SECURITY CORPORATION on Forms S-8 (File No. 333-140715, effective February 14, 2007; 333-103219, effective February 14, 2003; 333-31002, effective February 24, 2000; 333-45221, effective January 30, 1998; and 333-4300, effective April 29, 1996).
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Milwaukee, Wisconsin
September 8, 2011

Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Harold M. Stratton II, certify that:
1. I have reviewed this annual report on Form 10-K of STRATTEC SECURITY CORPORATION;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: September 8, 2011
 	 	 	 	 	
 	/s/ Harold M. Stratton II  	 	
 	Harold M. Stratton II, 	 	
 	Chief Executive Officer 	 	

Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Patrick J. Hansen, certify that:
1. I have reviewed this annual report on Form 10-K of STRATTEC SECURITY CORPORATION;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: September 8, 2011
 	 	 	 	 	
 	/s/ Patrick J. Hansen  	 	
 	Patrick J. Hansen, 	 	
 	Chief Financial Officer 	 	

Exhibit 32
Certification of Periodic Financial Report
Pursuant to 18 U.S.C. Section 1350
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of STRATTEC SECURITY CORPORATION (the “Company”) certifies that the Annual Report on Form 10-K of the Company for the year ended July 3, 2011 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and information contained in that Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.
 	 	 	 	 	
Dated: September 8, 2011 	/s/ Harold M. Stratton II  	 	
 	Harold M. Stratton II, 	 	
 	Chief Executive Officer 	 	
 	 	 	
Dated: September 8, 2011 	/s/ Patrick J. Hansen  	 	
 	Patrick J. Hansen, 	 	
 	Chief Financial Officer 	 	
This certification is made solely for purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.