Annual Report for Fiscal Year Ending June 28, 2026 (Form 10-K)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis should be read in conjunction with the accompanying audited consolidated financial statements and notes.

Business Overview

Strattec is a global automotive access company that designs and delivers safe, secure, and highly engineered access solutions for the automotive and mobility industries. Built on generations of access and security engineering expertise, Strattec partners closely with OEMs to create differentiated, system-level access experiences for end consumers. Strattec's portfolio spans the access journey from Permission, enabling secure vehicle entry through advanced mechanical and electronic systems; to Motion, delivering effortless, reliable powered access that enhances everyday usability; and through to Hold, providing precision-engineered latching solutions that give drivers confidence through proven strength, safety, and durability trusted by OEMs worldwide. As access becomes increasingly intelligent, connected, and central to vehicle experience, Strattec's strategy is to expand its market share, further diversify its customers and geographic reach while becoming the most trusted access partner to drive long-term growth across global automotive and mobility markets. While the Company serves major automotive OEMs globally, the majority of sales are to the three largest automobile original equipment manufacturers in North America.

Current Business Update

Our strategic priority is to execute on a business transformation to strengthen the Company's profitability and deliver sustainable sales growth. We expect to improve our business with upgraded systems and processes, modernization of our support functions and focus on productivity and efficiencies in our manufacturing operations. We believe this will result in an optimized cost structure and consistent cash generation through improved working capital velocity and efficient asset utilization. To drive organic growth, we will leverage our technical engineering expertise, market leading positions and strong customer relationships to generate innovative solutions and capture more content on current platforms, win new platforms with current customers, gain new customers both domestically and abroad and build opportunities in the broader transportation industry. The strength of our balance sheet also supports continued investments in process modernization, automation and new product innovation, as well as the flexibility needed to navigate through industry cycles.

Fiscal 2026 Financial Highlights

Business Transformation

During fiscal 2026, we continued executing on our multi-year business transformation. We made significant progress on organizational restructuring actions, operational improvements and investments in business processes and technology. We reduced total headcount by approximately 7% during the year while maintaining support for customer programs and key growth initiatives. Operationally, we continued implementing initiatives designed to improve efficiency and cost competitiveness, including manufacturing automation, freight optimization and supply chain resiliency projects. These efforts contributed to improved gross profit margin despite foreign exchange headwinds and fluctuating customer production schedules. We also advanced several foundational process and technology initiatives intended to strengthen decision-making, improve data visibility, and increase organizational effectiveness.

Commercially, we continued efforts to strengthen customer engagement, improve quoting and program management processes, refine our product portfolio and pursue opportunities to win new business from both existing and prospective customers. The automotive industry is characterized by long product development and customer sourcing cycles. New vehicle programs are typically awarded several years before the start of production, requiring suppliers to invest significant engineering, validation, tooling and program management resources well in advance of realizing sales. Customer relationships are often developed over an extended period, and it may take five to seven years or longer to establish new OEM relationships, demonstrate technical capabilities, earn customer trust and secure meaningful production awards. As a result, we are actively working to be included on vehicle platforms scheduled for production in model years 2030 and beyond. We are also working to expand our reach to a broader customer set than we have addressed historically. Our strategic initiatives are aimed at building a more predictable business that can generate consistent cash flow across industry cycles.

We believe these transformational initiatives, combined with ongoing investments in organizational capabilities, will better position the Company to respond in a changing automotive market.

Capital Allocation

Over the past two years we have driven significant cash flow from operations which has resulted in the repayment of all existing debt and continued strengthening of our balance sheet. We are committed to a disciplined capital allocation approach, designed to maximize long-term shareholder value while maintaining financial flexibility through industry cycles. Our first priority is to maintain a strong balance sheet and sufficient liquidity to support working capital requirements and capital expenditures, and allow us to navigate potential market volatility. Given the cyclical nature of the automotive industry and ongoing macroeconomic uncertainty, we believe maintaining a strong balance sheet enhances our ability to invest through economic cycles and respond to changing customer and market conditions. Our second priority is investing in the business to support long-term growth and operational improvement. These investments include customer program launches, product development, manufacturing automation, cost reduction initiatives, information technology investments, and other strategic initiatives intended to improve our competitiveness and margins. Third, we evaluate opportunities to return excess capital to shareholders. Subject to market conditions and investment opportunities we may repurchase shares on an opportunistic basis and to offset dilution associated with equity compensation programs. We also allocate capital to pursue strategic acquisition opportunities that enhance our capabilities, expand customer relationships, increase scale, improve margins, or otherwise support our long-term strategic objectives.

Market & Macro Environment

The North American automotive market continues to experience uncertainty driven by evolving trade policies, foreign exchange fluctuations, changing vehicle affordability dynamics, shifting OEM production schedules and emerging Chinese OEMs. Industry production levels remained below historical peak levels during fiscal 2026, and third-party forecasts indicate a modest (2% to 3%) decline in North American light vehicle production in fiscal 2027, while our primary customers are expected to decline 5% to 6% over the next year. Recent production forecasts have been impacted by tariff-related uncertainty, consumer demand trends, and a reduced number of scheduled vehicle launches by certain OEMs. Several of our largest customers, including Ford, General Motors, and Stellantis, continue to operate in a highly competitive environment characterized by declining market share positions, ongoing electrification strategy adjustments, and efforts to optimize vehicle inventories and production schedules. Industry participants remain focused on balancing production with retail demand following the inventory rebuilding experienced after the COVID-19 supply disruptions.

The global trade environment also remains dynamic. During fiscal 2026, the United States implemented and modified tariffs on certain imported goods, while other countries introduced reciprocal measures and trade restrictions. In addition, the ongoing review of the United States-Mexico-Canada Agreement ("USMCA") and potential future changes to regional content requirements, rules of origin, and tariff treatment have contributed to uncertainty across the North American automotive supply chain. These developments have required us to evaluate sourcing strategies, localization opportunities, and supply chain resiliency initiatives.

Foreign currency movements, particularly fluctuations in the Mexican peso relative to the U.S. dollar, remain an important factor affecting our operating results. Because a significant portion of the Company's manufacturing operations are located in Mexico, peso appreciation increases labor and manufacturing costs when translated into U.S. dollars. During fiscal 2026, changes in foreign exchange rates affected both operating costs and the mark-to-market valuation of the Company's foreign currency hedging program. The Company continues to utilize forward currency contracts to reduce a portion of its exposure to Mexican peso fluctuations.

While macroeconomic uncertainty, fluctuating OEM production volumes, tariffs, and foreign exchange volatility remain challenges, we believe the actions taken during fiscal 2026 have improved profitability and enhanced cash generation. As we enter fiscal 2027, we remain focused on continuing to advance our strategic priorities, executing the business transformation, strengthening operational performance, and delivering long-term value for shareholders.

Analysis of Results of Operations

The following discussion is a comparison between fiscal 2026 and fiscal 2025 results. For a discussion of our results of operations comparing fiscal 2025 to fiscal 2024, refer to Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended June 29, 2025, which was filed with the SEC on August 25, 2025 and is available on our website.

Year ended June 28, 2026 (fiscal 2026) compared with the year ended June 29, 2025 (fiscal 2025)

The Company's consolidated results of operations for the years ended June 28, 2026 and June 29, 2025 were as follows (in thousands):

Net sales in fiscal 2026 totaled $579.4 million, an increase of $14.3 million, or 3%, compared with fiscal 2025 net sales of $565.1 million. The year-over-year increase was driven by $11.0 million of pricing, including $2.6 million of U.S. tariff surcharges and price increases, and $3.3 million of additional volume. Sales volumes reflected a $9.5 million increase on existing platforms and $3.3 million of net new program launches, which were partially offset by $9.5 million in reduced sales associated with customer cancelled electric vehicle ("EV") programs compared to the prior-year.

Material costs increased $3.3 million primarily due to higher sales volumes, while labor and overhead costs increased $0.2 million. Increased conversion costs were due to higher sales volumes and a $6.5 million headwind from changes in foreign currency exchange rates. These increases were partially offset by $5.4 million in savings from previously completed restructuring actions and $1.7 million lower provisions for annual bonuses.

Gross profit was $95.4 million in fiscal 2026, compared with $84.5 million in the comparable prior-year period. Despite unfavorable changes in foreign currency exchange rates, gross margin improved year-over-year from 15.0% to 16.5%, a 150 basis point improvement, reflecting our focused efforts to manage our cost structure, incremental production volumes and pricing actions.

Selling, administrative, and engineering expenses were 11.9% of sales in fiscal 2026, compared with 10.9% in the prior-year period. Total Selling, administrative, and engineering expenses were $68.8 million in fiscal 2026, an increase of $7.0 million year-over-year. The increase in costs reflects $3.3 million associated with investments in additional talent, $3.3 million of incremental business transformation costs and $1.3 million of incremental restructuring and voluntary retirement costs related to efforts to improve our cost structure. These increases were partially offset by reduced executive transition costs of $1.4 million and $1.2 million of lower provisions for annual bonuses.

Interest income increased $1.5 million due to increased levels of cash and cash equivalents, which are invested in overnight money market funds, while interest expense decreased $0.6 million, the result of debt repayments.

Other income, net increased from $0.8 million in fiscal 2025 to $3.3 million in fiscal 2026. The increase in Other income, net was primarily due to $4.9 million realized gains on peso forward contracts, partially offset by $1.6 million foreign currency transaction losses and $0.8 million non-service pension and postemployment costs.

The effective income tax rate was 34.4% and 23.2% for fiscal 2026 and 2025, respectively. The effective rate for both periods differs from the statutory rate because of the foreign rate differential, state income taxes, research and development tax credits, limitations on the utilization of tax credits and non-deductible items. Additionally, the fiscal 2026 effective tax rate was impacted by a $1.0 million increase to valuation allowances and a $2.9 million increase to reserves for uncertain tax positions. See Note 6, "Income Taxes," for additional information.

Fiscal 2026 net income attributable to Strattec was $20.6 million, a 10% increase compared with $18.7 million in fiscal 2025. Incremental production volumes, coupled with pricing and restructuring actions drove improved profitability, despite headwinds from changes in foreign currency exchange rates and continued investments in the business. Earnings per diluted share were $5.00 in fiscal 2026, compared with $4.58 in the prior year.

Liquidity and Capital Resources

At June 28, 2026, we had $108.2 million of cash and cash equivalents, of which $3.8 million was held by our foreign subsidiaries. The following table summarizes our cash flows provided by (used in) operating, investing and financing activities (in millions):

Fiscal 2026 cash flow from operations increased our balance sheet cash position, allowed us to repay all outstanding bank debt, repurchase common stock and continue to invest in the business. Cash flow from operations was $46.3 million compared with $71.7 million in the prior year. Current year cash from operations reflects improved cash earnings, while the prior year benefited from a significant reduction in primary working capital and the recovery of pre-production costs. Net cash used in investing activities was $5.4 million during fiscal 2026 compared with $7.2 million in the prior-year period. Capital expenditures to support new product programs and the upgrade and replacement of existing equipment were $7.3 million which was partially offset by $1.9 million of proceeds from the sale of property, plant and equipment. Current year cash used in financing activities resulted from the repayment of $8.0 million under our joint venture revolving credit agreement, $7.4 million repurchases of our common stock and the payment of $1.4 million for taxes withheld for the vesting of share-based awards.

Primary Working Capital Management

We use primary working capital as a percentage of sales (PWC %) as a key metric of working capital management. We define this metric as the sum of net accounts receivable and net inventory less accounts payable, divided by the past three months sales annualized. The following table shows a comparison of primary working capital (dollars in millions):

Cash Requirements and Contractual Obligations

Future Capital Expenditures

We anticipate capital expenditures will be approximately $12.0 million in fiscal 2027 in support of requirements for new product programs and the upgrade and replacement of existing equipment.

Stock Repurchase Program

On May 28, 2026, the Board of Directors authorized a new share repurchase program under which we may repurchase up to $40.0

million of its outstanding common stock. The authorization has no fixed expiration date and does not obligate us to acquire any specific amount of common stock. During the fourth quarter of fiscal 2026 and prior to termination of our previous repurchase authorization, we repurchased 110,269 shares of common stock for $7.4 million. As of June 28, 2026, no shares had been repurchased under the new authorization and the full $40.0 million remained available for repurchase. Repurchases under the program, if any, are expected to be funded through cash generated from operations and existing cash balances.

Credit Facilities

We have a revolving credit facility with BMO Harris Bank N.A., which provides for a $40 million revolving line of credit maturing October 2028. The Company's joint venture also has a revolving credit agreement with BMO Harris Bank N.A., which provides for a $10 million asset-based revolving line of credit, subject to a borrowing base, maturing October 2028.

There were no outstanding borrowings and no interest due on either facility as of June 28, 2026. The repayment of any balance drawn on these facilities and the related interest payment obligations are expected to be funded by cash flow from operations and current cash balances. For further information related to our credit facilities, see Note 3, "Credit Facilities," for additional information.

Income Taxes

We may be required to make cash outlays related to our unrecognized tax benefits, including interest and penalties. As of June 28, 2026, we had unrecognized tax benefits, including interest and penalties, of $4.7 million. However, due to the uncertainty of the timing of future cash flows associated with our unrecognized tax benefits, we are unable to make reasonably reliable estimates of the period of cash settlement, if any, with the respective taxing authorities. For further information related to our unrecognized tax benefits, see Note 6, "Income Taxes," for additional information.

Critical Accounting Estimates

We prepare our consolidated financial statements in conformity with U.S. GAAP. This requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. The following estimates are considered by management to be the most critical in understanding judgments involved in the preparation of our consolidated financial statements and uncertainties that could impact our results of operations, financial position and cash flow.

Revenue Recognition

We enter into contracts with our customers generally at the beginning of a vehicle's lifecycle. Typically, these contracts do not provide for a specified quantity of products, but once entered into, we are often expected to fulfill our customers' purchasing requirements for the life of the vehicle. These contracts may be terminated by our customers at any time. Historically, terminations of these contracts have been infrequent.

Throughout a vehicle's lifecycle, we receive purchase orders from our customers, which provide the commercial terms for a sale transaction. Revenue is typically recognized at a point in time based on the transaction price and the quantity of parts shipped to the customer. Discrete price adjustments may occur during the vehicle production period in order for us to remain competitive with market prices or based on changes in product specifications or based on changes in significant input costs for the products. In the event the Company concludes that a portion of the revenue for a given product may vary from the purchase order, we record consideration at the most likely amount to which we expect to be entitled based on historical experience and input from customer negotiations.

Warranty

We have a warranty reserve 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 reserve balance involves judgment and estimates. Our reserve estimate is based on an analysis of historical warranty data as well as current trends and information. Actual warranty costs might differ from estimates due to the level of actual claims varying from our historical claims experience and estimates and final negotiations and settlements reached with our customers. Therefore, future actual claims experience could result in changes in our estimates of the required reserve. Sensitivity of potential warranty claims is dependent on the respective customer platform, volumes, production years and product content.

Income Tax

Judgment is required to determine the annual effective income tax rate, deferred tax assets and liabilities, reserves for unrecognized tax benefits and any valuation allowances recorded against net deferred tax assets. Our effective income tax rate is based on annual income, statutory tax rates, tax planning opportunities available in the various jurisdictions in which we operate and other adjustments. Tax regulations require items to be included in our tax returns at different times than these same items are reflected in our consolidated financial statements.

As a result, these differences and the interplay in tax laws between jurisdictions may cause our estimates of income tax liabilities to differ from actual payments or assessments. Some of these differences are permanent, such as expenses that are not tax deductible, while others are temporary differences, such as amortization and depreciation expenses. Temporary differences create deferred tax assets and liabilities, which are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We establish valuation allowances for our deferred tax assets when the amount of expected future taxable income is not large enough to utilize the entire deduction or credit. Relevant factors in determining the realizability of deferred tax assets include future taxable income, the expected timing of the reversal of temporary differences, tax planning strategies and the expiration dates of the various tax attributes.

While we have support for the positions taken on tax returns, taxing authorities may assert different interpretations of laws and facts and may challenge cross-jurisdictional transactions. We assess our income tax positions and record tax liabilities for all years subject to examination based upon management's evaluation of the facts and circumstances and information available at the reporting dates. For those tax positions which do not meet the more-likely-than-not threshold regarding the ultimate realization of the related tax benefit, no tax benefit has been recorded in the financial statements.

Post-employment Benefits

We have post-employment liabilities, including a supplemental executive retirement plan, termination indemnity plans and seniority premium obligations that are developed from actuarial valuations. These valuations include key assumptions regarding discount rates, expected return on plan assets and rate of compensation increases. We consider current market conditions in selecting these assumptions. While the Company believes that these assumptions are appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the Company's liability or future expense.