STRATTEC SECURITY CORP

Strattec is a global automotive access company that designs and delivers safe, secure, and highly engineered access solutions for the automotive and mobility markets. The company's product portfolio spans the access journey from Permission, enabling secure vehicle entry through advanced mechanical and electronic systems; to Motion, delivering effortless, reliable powered access; and through to Hold, providing precision-engineered latching solutions. The automotive industry is inherently cyclical and may experience seasonal fluctuations in vehicle production levels due to model changeovers, plant shutdowns, customer production schedules, holidays, and broader economic conditions. 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 primary customers are expected to decline 5% to 6% over the next year. The global trade environment remains dynamic, with the United States implementing and modifying tariffs on certain imported goods, and the ongoing review of the United States-Mexico-Canada Agreement (USMCA) contributing to uncertainty across the North American automotive supply chain.

The automotive component supply industry is highly competitive, with competition based on product design, engineering support, delivery, price, innovation, and aftermarket support. Competitors include Aisin, Aumovio, Alpha-Tech, Brose, Edscha, Huf Group, Inteva, JNS Auto Parts, Magna, Marquardt, MinebeaMitsumi, Mitsuba, Novares, Ohi, PHA Automotive, Shin Chang, Stabilus, Tokai-Rika, Ushin, Valeo and WITTE Automotive. The company believes its engineering expertise, ability to deliver customized solutions, and quality and delivery performance are key advantages that differentiate it from competitors. The company's relatively smaller scale compared to many automotive suppliers may limit its ability to compete effectively. The global automotive industry is also experiencing increased competition from automotive manufacturers and component suppliers based in China, who have expanded their presence in key global markets through competitive pricing strategies, government-supported investments, technological advancements, vertical integration and increasing manufacturing scale.

Strattec generates revenue primarily through the design, manufacture, and sale of automotive access solutions to original equipment manufacturers (OEMs) and aftermarket channels. Sales to various OEMs (including Tier 1 suppliers) are approximately 90% of total sales, while the remainder of sales are to service channels, the aftermarket, and non-automotive customers. A significant portion of sales are to General Motors Company, Ford Motor Company, and Stellantis. Sales are generally based upon purchase orders issued by the OEMs and updated for volume adjustments through production releases, and the company does not have a firm and definitive backlog of orders. Once awarded to supply products for a particular platform, the company typically supports those products for the life of the vehicle, which is normally five to seven years, though this term is not guaranteed. The company's product mix varies by customer, with most customers sourcing multiple product categories from the company.

The company's product offerings primarily relate to vehicle permission, motion and hold functionality. Products that securely authorize vehicle entry and use (Permission) include mechanical, electronically enhanced locks and keys, fobs, passive entry passive start systems, digital key, steering column and instrument panel ignition lock housings, and related solutions. The company also provides vehicle door handles through its joint venture. The Motion product portfolio, which provides powered access and movement, includes power sliding doors, power tailgates, and lift gate systems, as well as power deck lid systems, including drivetrain mechanisms and electronic control units. The patented high-function latches (Hold product portfolio) range from power clinching latches to release latches, combining advanced mechanical design and integrated electronics to deliver secure, reliable, and precisely engineered closure performance. All products are safety critical and powertrain agnostic and, therefore, are applicable for internal combustion, plug-in/hybrid or electric vehicles. The company's product solutions can be found on over 90 different customer vehicles, including electric (EV), plug-in/hybrid, and internal combustion engine platforms.

The company's product engineering activities, including research and development, are an essential part of its efforts to develop new or improved innovative products. Product engineering is accomplished in both the United States and Mexico. The company specializes in integrated system, mechanical, electrical, and software engineering supported by advanced modeling and testing capabilities. The company protects and maintains proprietary technologies, products, processes, software, and manufacturing know-how, relying on a combination of patents, trademarks, trade names, copyrights, trade secrets, confidential information, proprietary manufacturing processes, non-disclosure agreements, and other intellectual property protections. The company operates an integrated manufacturing and engineering platform that supports the full product lifecycle, including product development, engineering, tooling, testing, manufacturing, assembly, and customer support. Manufacturing and distribution operations are conducted through six facilities located in the United States and Mexico, with key manufacturing capabilities including precision metal stamping, zinc die casting, machining, plastic injection molding, plating and painting, electronics and printed circuit board assembly, automated and manual product assembly and tooling development.

During fiscal 2026, the company continued executing on its multi-year business transformation, making significant progress on organizational restructuring actions, operational improvements and investments in business processes and technology. The company reduced total headcount by approximately 7% during the year while maintaining support for customer programs and key growth initiatives. Operationally, the company continued implementing initiatives designed to improve efficiency and cost competitiveness, including manufacturing automation, freight optimization and supply chain resiliency projects. The company also advanced several foundational process and technology initiatives intended to strengthen decision-making, improve data visibility, and increase organizational effectiveness. Commercially, the company continued efforts to strengthen customer engagement, improve quoting and program management processes, refine its product portfolio and pursue opportunities to win new business from both existing and prospective customers. On May 28, 2026, the Board of Directors authorized a new share repurchase program under which the company may repurchase up to $40.0 million of its outstanding common stock, and in connection with the authorization, terminated the previous share repurchase program. During the three months ended June 28, 2026, the company repurchased 110,269 shares at an average price of $67.10 per share.

In fiscal 2026, the company grew net sales 3% to $579.4 million driven by pricing and volume increases, expanded gross margin 150 basis points to 16.5%, delivered a 10% increase in net income to $20.6 million, or $5.00 per diluted share, generated $46.3 million of cash flow from operations driven by cash earnings and working capital management, and returned $7.4 million of capital to shareholders through the repurchase of over 2% of outstanding common stock. Over the past two years the company has driven significant cash flow from operations which has resulted in the repayment of all existing debt and continued strengthening of the balance sheet.

The company's strategic priority is to execute on a business transformation to strengthen profitability and deliver sustainable sales growth. The company expects to improve its business with upgraded systems and processes, modernization of support functions and focus on productivity and efficiencies in manufacturing operations, resulting in an optimized cost structure and consistent cash generation through improved working capital velocity and efficient asset utilization. To drive organic growth, the company will leverage its 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 company is actively working to be included on vehicle platforms scheduled for production in model years 2030 and beyond, and is also working to expand its reach to a broader customer set than it has addressed historically.

The company intends to develop new vehicle access and security products, including advanced mechanical, electronic, and smart access systems, to expand into emerging mobility and connected vehicle markets. The company has elevated its key fob business with its digital key product, which leverages its system and software capability to meet increasing security, software and packaging architecture needs. The power access solutions products are designed from a core platform approach that allows the company to leverage carry-over components within a system to move faster through the design phase and provide optimal package flexibility while meeting increasing vehicle safety and security needs. As access becomes increasingly intelligent, connected, and central to vehicle performance, the company's strategy is to expand its market share, further diversify its customers and geographic reach, organically and inorganically, and to create the ultimate access experience for consumers while working toward its vision to be the most trusted, global leader in safe and secure access solutions for the automotive and mobility industries.

The company's transformational initiatives, combined with ongoing investments in organizational capabilities, are aimed at building a more predictable business that can generate consistent cash flow across industry cycles. The company believes the actions taken during fiscal 2026 have improved profitability and enhanced cash generation. The company expects to improve its business with upgraded systems and processes, modernization of support functions and focus on productivity and efficiencies in manufacturing operations, which it believes will result in an optimized cost structure and consistent cash generation through improved working capital velocity and efficient asset utilization.

The company's manufacturing operations are supported by advanced quality management systems, automation technologies, and operational excellence initiatives intended to improve productivity, enhance product quality, reduce costs, and strengthen customer satisfaction. The company's footprint provides operational flexibility and proximity to customer assembly operations. The company continues to utilize forward currency contracts to reduce a portion of its exposure to Mexican peso fluctuations. The company has been rationalizing and consolidating its supply base, resulting in greater dependence on fewer sources of supply for certain components and materials used in its products. The company sources a wide range of materials, components, and subassemblies from a network of global suppliers, with primary raw materials being high-grade zinc, brass, nickel silver, steel, aluminum, plastic resins, semiconductor chips and other electronics.

The company is committed to a disciplined capital allocation approach, designed to maximize long-term shareholder value while maintaining financial flexibility through industry cycles. The first priority is to maintain a strong balance sheet and sufficient liquidity to support working capital requirements and capital expenditures. The second priority is investing in the business to support long-term growth and operational improvement, including customer program launches, product development, manufacturing automation, cost reduction initiatives, information technology investments, and other strategic initiatives. Third, the company evaluates opportunities to return excess capital to shareholders, and subject to market conditions and investment opportunities, may repurchase shares on an opportunistic basis and to offset dilution associated with equity compensation programs. The company also allocates capital to pursue strategic acquisition opportunities that enhance capabilities, expand customer relationships, increase scale, improve margins, or otherwise support long-term strategic objectives. The company has not paid a cash dividend on its Common Stock in the last three years and does not currently expect to pay cash dividends in the foreseeable future.

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 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 the company's 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.

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. 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 the company 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 operating results, as a significant portion of the company's manufacturing operations are located in Mexico, and 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 generates a significant portion of net sales from a limited number of North American automotive OEM customers, with the three largest customers, General Motors Company, Ford Motor Company and Stellantis, accounting for 27% ¹, 21% ² and 16% ³, respectively, of annual sales in fiscal 2026. The loss of a significant customer, the non-renewal or early cancellation of key vehicle programs, or a substantial reduction in purchases by a major customer could result in reduced sales, lower operating margins, underutilization of manufacturing capacity, and increased operating costs. The company's operations are impacted by international or cross-border trade dynamics, particularly the import and export of products and goods into and out of the United States, and recent shifts in trade policy have resulted in new or higher tariffs on goods imported from numerous countries, which may result in significantly increased production costs, pricing volatility and administrative complexity. The company manufactures a vast majority of its products in Mexico and relies on a global supply chain, and fluctuations in the U.S. dollar/Mexican peso exchange rate may have a material effect on profitability, cash flows and financial position. The automotive component supply industry is highly competitive, and the company's relatively smaller scale compared to many automotive suppliers may limit its ability to compete effectively, with increased competition from Chinese automotive suppliers and rapidly evolving technological developments within its sphere of product offerings. The company is exposed to warranty claims in the event that its products fail to perform as expected, and may be required to participate in the repair costs incurred by customers, with the results of ongoing discussions potentially resulting in additional warranty costs in future periods.

Management's message emphasizes the execution of a business transformation to strengthen profitability and deliver sustainable sales growth, with a focus on upgraded systems and processes, modernization of support functions, and productivity and efficiencies in manufacturing operations. The company expects this to result in an optimized cost structure and consistent cash generation through improved working capital velocity and efficient asset utilization. Management highlights the strength of the balance sheet supporting continued investments in process modernization, automation and new product innovation, as well as the flexibility needed to navigate through industry cycles. The company is committed to a disciplined capital allocation approach, with the first priority being to maintain a strong balance sheet and sufficient liquidity, the second priority being investing in the business to support long-term growth and operational improvement, and the third priority being evaluating opportunities to return excess capital to shareholders. Management believes the actions taken during fiscal 2026 have improved profitability and enhanced cash generation, and as the company enters fiscal 2027, it remains focused on continuing to advance strategic priorities, executing the business transformation, strengthening operational performance, and delivering long-term value for shareholders.