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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Discussion and Analysis should be read in conjunction with STRATTEC SECURITY CORPORATION’s accompanying Financial Statements and Notes thereto included in this Form 10-K. Unless otherwise indicated, all references to years or quarters refer to fiscal years or fiscal quarters of STRATTEC.

Executive Overview

Historically, a significant portion of our total net sales have been to domestic automotive OEMs (General Motors, Ford and Stellantis). During the past two decades these customers lost North American market share to the New Domestic automotive manufacturers (primarily the Japanese and Korean automotive manufacturers). In addition to our dependence on our customers’ maintaining their market share, our financial performance depends in large part on conditions in the overall automotive industry, which in turn, are dependent upon the U.S. and global economies. During fiscal years 2023 and 2022, the above domestic automotive OEMs together represented each year 66 percent and 65 percent, respectively, of our total net sales.

During fiscal years 2023 and 2022, we experienced strong sales demand for our components from our major North American customers noted above as it relates to light trucks and both sport utility and car-based utility vehicles in comparison to passenger cars, influenced by customer preferences. If gas prices were to rise substantially over the next several years, this consumer buying trend may not continue, which is approximately 90 percent light trucks and sport utility vehicles in comparison to 10 percent passenger car vehicle purchases today. During the last 3-5 years our major customers General Motors, Ford and Stellantis eliminated passenger car production on several models in North America as a strategy to improve their overall profitability going forward. Additionally, several of our significant customers have announced plans to increase production volumes for their models of Electric Vehicles. As these customers start migrating over to Electric Vehicles we believe a significant amount of our current and future product content will continue to be purchased by our major customers and will be adopted in this changeover (refer to vehicle list included at page 7 in this Form 10-K).

Fiscal 2023 net sales were $492 million compared to $452 million in fiscal 2022. The net sales improvement in fiscal 2023 reflected an improvement in the global semiconductor chip shortage which had caused our OEM customers to temporarily shut down their assembly plants reducing our net sales during fiscal 2022. Despite higher sales in fiscal 2023, net income attributable to STRATTEC for fiscal 2023 was negative $6.7 million compared with the net income attributable to STRATTEC of $7.0 million in fiscal 2022. The deterioration in profitability was primarily driven by escalating manufacturing input costs for raw materials and purchased materials, higher shipping and Mexican labor wages, which increased on January 1 of both 2022 and 2023 as part of a Government mandated minimum wage increase of 22% and 20% respectively. In addition to the inflationary cost increases, the Mexican Peso strengthened against the U.S. Dollar throughout fiscal year 2023 negatively affecting the cost of our operations in Mexico. Seeking pricing recovery from our customers for the aforementioned inflationary costs was a prime focus of ours throughout fiscal year 2023. However, given the long-term nature of our supply agreements, such pricing concessions are not customary and, therefore, resulted in protracted rounds of negotiations with limited effect on our fiscal 2023 profitability. Despite the limited price concession results in fiscal 2023, we are committed to aggressively seeking a favorable resolution to these negotiations early in fiscal year 2024.

As we look to the future, the June 2023 projections from our third-party forecasting service, S&P Global, indicate that North American light vehicle production will show an increase in demand over the coming years. Model year 2023 preliminary North American vehicle build was 15.1 million. By model year, based on these projections we are expecting a 2024 vehicle build of 15.2 million vehicles, 16.1 million vehicles for 2025, and 16.6 million vehicles for 2026 and 2027. The North American vehicle build for Ford, General Motors and Stellantis reflects relative stability ranging between 6.7 million and 7.1 million vehicles each model year from 2024 through 2027 without much fluctuation between each customer. Of course, all of these forecasts are subject to variability based on what happens in the overall North American and global economies, the current levels of employment, availability of consumer credit, home equity values, fluctuating fuel prices, changes in customer vehicle and option preferences, product quality issues, including related to recall and product warranty coverage issues, and other key factors that we believe could determine whether consumers can or will purchase new vehicles or particular brands.

Fiscal 2024 Outlook

As stated above, we anticipate the 2024 North American light vehicle production, which closely aligns with our fiscal 2024 timing, to be relatively stable with a potential for modest growth. Similarly, we anticipate modest growth in our net sales on the basis of a stable industry and the launch of several new programs in the model year. From a cost of sales perspective, we anticipate some key challenges from fiscal 2023 will continue into fiscal 2024, notably a strong Mexican Peso relative to the U.S. Dollar, risk of another round of Mexican government mandated minimum wage increases in January 2024 affecting the cost of our Mexican operations, and increased purchased material costs from our suppliers. As for positive cost trends, we anticipate a continued recovery in the cost of some key raw materials, a trend which began in the second half of fiscal 2023.

With a focus to offset the anticipated aforementioned cost challenges and to improve present profitability, management is targeting the following actions in fiscal 2024:

(1)

Successfully conclude price-concession negotiations with our key customers by the end of Q2 to achieve between $10 million and $15 million in present program pricing improvement for the fiscal year as well as receive one-time retroactive price adjustment payments totaling between $4 million and $6 million

(2)

Salaried staff reduction commencing in Q1 reducing annualized spending by approximately $2 million

(3)

Drive operational actions that reduce overhead in operations and purchase of materials by $3 million per year

(4)

Reduce fiscal year-end inventory levels by $10 million compared with that for fiscal 2023

We believe the successful execution of these actions together with that of our overall fiscal plan will considerably improve STRATTEC’s profitability in fiscal 2024, reestablishing a solid foundation from which to grow profitability thereafter.

Results of Operations

2023 Compared to 2022

Years Ended

Net Sales (millions of dollars) $ 492.9 $ 452.3

Net Sales to each of our customers or customer groups in the current year and prior year were as follows (millions of dollars):

Years Ended

Commercial and Other OEM Customers 56.3 65.0

The year-over-year sales increase of $40.6 million was due to improved global semiconductor chip availability in the current year period relative to the prior year period. Additionally, our 2023 fiscal year was 52 weeks while our 2022 fiscal year was 53 weeks. The impact of the additional week of sales during the prior year partially offset the lower net sales in the prior year from the semiconductor chip shortage and which extra week increased prior year sales by approximately $7.4 million. The following items further impacted sales to the noted customer groups between periods:

Sales to General Motors Company, Ford Motor Company, and Hyundai/Kia were positively impacted in the current year due to higher vehicle production volumes resulting from improved global semiconductor chip availability relative to the prior year. Sales growth to General Motors Company in the current year was attributed to higher production volumes of their GMC and Chevrolet pickup trucks and certain SUVs for which we supply a wide range of components. Increased sales to Ford Motor Company in the current year were due to higher production volumes of their F-Series Pickups including the Super Duty Pickup, for which we supply a wide range of components, and an increased percentage of the F-Series Super Duty Pickup including our power end gate product option. Sales to Hyundai / Kia increased year-over-year due to higher levels of production of the Kia Carnival minivan in the current year period as compared to the prior year period.

The decrease in net sales to Stellantis was driven primarily by its lower production volumes related to the Chrysler Pacifica minivan, the Jeep Wrangler, Jeep Gladiator, and Dodge Ram Truck for which we supply components.

Sales to Tier 1 Customers improved in the current year compared to the prior year due to higher vehicle production volumes relating to the improvement in semiconductor chip availability referenced above.

Sales to Commercial and Other OEM Customers, which are comprised of aftermarket products and vehicle access control products, such as latches, fobs, driver controls and door handles, declined in the current year as compared to the prior year due to the allocation of available semiconductor chips toward the production of components for production vehicles rather than aftermarket products.

Years Ended

Total cost of goods sold increased $54.6 million between years primarily driven by higher sales volumes in the current year as compared to the prior year as discussed above, however, both direct material costs and labor and overhead costs increased as a percent of net sales, with direct material costs growing at a higher rate, explaining the increase in its percent of cost of goods sold shown above. The increase in direct material costs between years beyond the portion that was attributed to higher net sales was driven by escalating costs of raw material and purchased components as well as a shift toward products with a higher proportion of material costs as a percent of their total cost of goods related to the aforementioned prioritization of production vehicles over aftermarket products. It is worth noting that there was an improvement in the cost of raw materials in the latter half of the current fiscal year compared with the prior year, primarily driven by reduced supplier pricing on zinc and steel.

Labor and overhead costs increased $16.9 million between years. The variable portion of labor and overhead costs increased in the current year commensurate with the production volume increase required to support the increased sales volumes compared to the prior year. Apart from the improved fixed cost absorption associated with the higher sales compared with the prior year, labor and overhead costs were further impacted by the following:

Cost Increases:

Mexico wages and benefits increased $6.9 million in the current year as compared to the prior year as a result of January 1, 2022 and January 1, 2023 government mandated minimum wage increases.

The U.S. dollar value of our Mexican operations was negatively impacted by approximately $5.5 million in the year as compared to the prior year due to an unfavorable Mexican peso to U.S. dollar exchange rate between years. The average U.S. dollar / Mexican peso exchange rate decreased to approximately 18.98 pesos to the dollar for the year from approximately 20.33 pesos to the dollar in the prior year.

Freight costs increased $2.3 million between years due to an increase in fuel costs and supply chain disruptions.

Warranty costs increased by $2.1 million in the year as compared with the prior year due to specific warranty claims involving our product.

Cost Decreases:

Production efficiencies that controlled headcount at our Mexico facilities combined with having one less operational week in the current fiscal year resulted in reduced labor and benefit costs of approximately $2.1 million in the current year as compared to the prior year.

Royalty costs paid on sales of certain aftermarket products decreased $0.9 million in the year as compared to the prior year due to lower volumes in these aftermarket products stemming from the current semiconductor chip shortage.

Years Ended

Gross Profit (millions of dollars) $ 42.2 $ 56.0

Gross Profit as a percentage of net sales 8.6 % 12.4 %

Gross profit dollars in the current year decreased $13.8 million as compared to the prior year driven by the aforementioned inflationary pressures on direct material and labor and overhead costs as well as by the strengthening of the Mexican peso against the U.S. dollar. The resulting decrease in gross profit as a percentage of net sales was 3.8 percentage points from the prior year to the current year.

Engineering, Selling and Administrative Expenses in the current year and prior year were as follows:

Years Ended

Expenses (millions of dollars) $ 48.2 $ 47.1

Expenses as a percentage of net sales 9.8 % 10.4 %

Engineering, selling and administrative expenses were impacted by the following:

Cost Increases:

The current year includes higher outside expenditures on new product development costs associated with utilizing third party vendors for a portion of our development work.

The current year includes an increase in engineering costs related to our ADAC-STRATTEC LLC door handle and exterior trim products. Such expenses are based on a percentage of ADAC-STRATTEC LLC net sales.

The current year includes increased salary costs and increased recruiting costs for new and replacement positions.

Cost Decrease:

The prior year included an additional week of expense as our fiscal 2022 was a 53 week year and our fiscal 2023 was a 52 week year.

Loss from operations in the current year was $6.1 million compared to income from operations of $8.9 million in the prior year. This change between years was the result of an increase in cost of goods sold and increased engineering, selling and administrative expenses, which were partially offset by an increase in sales in the current year as compared to the prior year, all as discussed above.

Equity earnings of joint ventures during the fiscal years ending July 2, 2023 and July 3, 2022 were $1.6 million and $177,000 respectively. Current year equity earnings of joint ventures includes STRATTEC's one-third of a loss on disposal of VAST LLC's investment in Brazil of $531,000 and a gain on sale of STRATTEC's one-third share of VAST LLC of $110,000. Effective June 30, 2023, STRATTEC entered into and completed transactions contemplated by an Equity Restructuring Agreement between STRATTEC and WITTE. Accordingly, effective as of June 30, 2023, STRATTEC sold its one-third interest in VAST LLC to WITTE. Refer to the discussion of "VAST, LLC, SPA, LLC and SPA de Mexico Equity Restructuring Agreement" above and the Equity Restructuring Agreement in Joint Ventures and Majority Owned Subsidiaries included in the Notes to Financial Statements included within this Form 10-K for additional information regarding the sale of STRATTEC's VAST LLC interest to WITTE Automotive.

Improved profitability from our VAST LLC joint venture resulted from increased net sales and increased profitability in VAST China’s operations between fiscal years. VAST China’s sales and profitability improved in the current year due to an improved semiconductor chip availability environment compared with that of the prior year. Additionally, during the prior year, VAST China experienced a fire at their Taicang plant. As a result, certain door handle and painting operations were temporarily transferred to their Jingzhou facility and another supplier. The transfer of production negatively impacted VAST China's profitability in the prior year. Due to a limited amount of business in both India and Brazil during fiscal 2023 the VAST LLC joint venture in India continued to have break-even operating results and the VAST LLC joint venture in Brazil continued to report losses.

Included in other (expense) income, net in the current year and prior year were the following items (thousands of dollars):

Years Ended

Foreign currency transaction (loss) gain $ (2,935 ) $ 237

Rabbi Trust Assets gain (loss) 202 (304 )

Unrealized gain on Mexican peso forward contracts — 384

Realized gain on Mexican peso forward contracts, net 1,022 361

Pension and postretirement plans cost (722 ) (505 )

Foreign currency transaction gains and losses resulted from activity associated with foreign denominated assets and liabilities held by our Mexican subsidiaries.

The Rabbi Trust assets fund our amended and restated supplemental executive retirement plan. The investments held in the Trust are considered trading securities.

We entered into the Mexican peso currency forward contracts during fiscal 2023 and 2022 to reduce earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. No peso forward currency contracts are outstanding as of July 2, 2023.

Pension and postretirement plan costs include net periodic benefit cost other than the service cost component.

Our effective income tax rate for 2023 was (16.7) percent compared to 4.5 percent in 2022. Our 2023 effective tax rate was impacted by $2.2 million in China non-resident capital gain tax resulting from the sale of our interest in VAST LLC, a valuation allowance of $1.4 million related to our assessment of the future realization of capital loss carryforwards generated from the sale of our interest in VAST LLC, and the impact of available R&D and foreign tax credits on pre-tax book losses. Our 2022 effective tax rate was impacted by adjustments made to the amount of our 2021 estimated foreign tax credits and estimated tax impacts associated with our investment in VAST LLC. These true-up adjustments resulted from the filing of our 2021 U.S. income tax returns during 2022 and were attributable to actual results included in non-U.S. income tax returns, which are filed on a calendar year basis, and which differ from estimates included in our 2021 tax provision. The adjustment amounts recorded during 2022 totaled $1.0 million. Our effective tax rate for 2022 excluding these adjustments was 15.6 percent. These adjustments were not material to our previously issued financial statements. Our income tax provision for each year 2023 and 2022 was affected by the non-controlling interest portion

of our pre-tax income, Global Intangible Low Taxed Income (GILTI) provisions and R&D tax credit. The non-controlling interest impacts the effective tax rate as our ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entities are taxed as partnerships for U.S. tax purposes.

Liquidity and Capital Resources

Working Capital (millions of dollars)

Outstanding Receivable Balances from Major Customers

Our primary source of cash flow is from our major customers, which include Stellantis, General Motors Company and Ford Motor Company. As of the date of filing this Annual Report with the Securities and Exchange Commission, all of our customers are making payments on their outstanding accounts receivable in accordance with the payment terms included on their purchase orders. A summary of our outstanding receivable balances from our major customers as of July 2, 2023 and July 3, 2022 was as follows (millions of dollars):

General Motors Company $ 27.5 $ 24.6

Cash Balances in Mexico

We earn a portion of our operating income in Mexico. As of July 2, 2023, $2.2 million of our $20.6 million cash and cash equivalents balance was held in Mexico. These funds are available for repatriation as deemed necessary.

Cash Flow Analysis

Years Ended

Cash Flows from (millions of dollars):

Operating Activities $ 10.1 $ 10.4

Investing Activities 8.9 (14.3 )

Financing Activities (7.4 ) (1.9 )

Cash flow from operating activities was consistent between years as the impact of the reduction in profitability between years, as previously discussed, was offset by a net decrease in working capital requirements. The net decrease in our working capital requirements included the following working capital changes (millions of dollars):

Increase (Decrease) in Working Capital Requirements

Accounts Receivable $ 13.7 $ 5.9 $ 7.8

Accounts Payable and Other Liabilities (24.0 ) (1.8 ) (22.2 )

Accounts receivable balances increased in both the current and prior year periods. The increase in the accounts receivable balance during the current year reflect increased sales as of the end of our fiscal 2023. The increase in accounts receivable balances during the prior year was mostly due to payments from a specific customer being made in advance of the payment

term due dates in the prior year while current year payments from that customer were made according to the planned payment term due dates.

The change in inventory levels reflected a decrease during the current year and an increase during the prior year. The current year decrease was due to a reduction in inventory balances to align with historical customer production patterns, mostly offset by a change in inventory management and shipping terms with a significant vendor. The prior year increase was due to an inventory build-up while our OEM customers experienced reduced production schedules due to certain part shortages, including for semiconductor chips.

The change in customer tooling balances, which consisted of costs incurred for the development of tooling that will be directly reimbursed by the customer whose parts are produced from the tool, was the result of the timing of tooling development spending required to meet customer production requirements and related billings for customer reimbursements.

The change in other assets was relatively consistent between years. The increase in value added tax recoverable balances in the current year due to several periods being open to audit in Mexico was mostly offset by a reduction in our Rabbi Trust assets of $863,000 resulting from a current year SERP settlement and a $627,000 reduction in our Mexico peso forward contract asset.

The current year increase in accounts payable and other liabilities is due to the following:

- Accounts payable increased approximately $14.0 million in the current year primarily due to a change in inventory management, shipping terms, and payment terms with a significant vendor and the suspension of ADAC-STRATTEC LLC's payment of engineering, research and design fees as well as a sales fees to ADAC in order to comply with ADAC-STRATTEC debt covenants.

- Accrued salaries and benefits increased approximately $4.7 million in the current year resulting from increased salaries and benefits for our Mexican associates.

- Income taxes payable increased $2.4 million in the current year primarily due to the accrual of a China non-resident capital gain tax as a result of the sale of our interest in VAST LLC.

- Value added tax payable balances increased $3.0 million in the current year due to several periods being open to audit in Mexico.

Net cash provided by investing activities of $8.9 million during 2023 included proceeds from the sale of our interest in VAST LLC of $26.2 million and a net increase in cash of $354,000 resulting from STRATTEC's purchase of the net assets of VAST Korea. The cash inflows were partially offset by capital expenditures of $17.4 million in support of requirements for new product programs and the upgrade and replacement of existing equipment and a $278,000 investment in VAST LLC for the purpose of funding general operating expenses for Sistema de Acesso Veicular Ltda, VAST LLC's Brazilian joint venture. Net cash used by investing activities of $14.3 million during 2022 included capital expenditures of $14.2 million, which were made in support of requirements for new product programs and the upgrade and replacement of existing equipment. Net cash used by investing activities during 2022 also included an investment in VAST LLC of $150,000 for the purpose of funding general operating expenses for Sistema de Acesso Veicular Ltda.

Net cash used in financing activities of $7.4 million during 2023 included a payment of $9.0 million related to STRATTEC's purchase of the remaining non-controlling interest of STRATTEC POWER ACCESS LLC from WITTE Automotive, the repayment of borrowings under credit facilities of $15.0 million, and $600,000 of dividend payments to non-controlling interests in our subsidiaries. These cash outflows were partially offset by additional borrowings under our credit facilities of $17.0 million and $183,000 received for the exercise of stock options under our stock incentive plan and purchases under our employee stock purchase plan. Net cash used in financing activities of $1.9 million during 2022 included repayments of borrowings under credit facilities of $14.0 million and $1.8 million of dividend payments to non-controlling interests in our subsidiaries, partially offset by borrowings under credit facilities of $13 million and $908,000 received for the exercise of stock options under our stock incentive plan and purchases under our employee stock purchase plan.

Cash Requirements

Dividends

On May 13, 2020, our Board of Directors took action to temporarily suspend payment of our quarterly dividend for the foreseeable future in order to conserve cash as a result of the economic downturn that began with COVID-19. No dividends were paid to shareholders during fiscal 2023 and fiscal 2022.

Future Capital Expenditures

We anticipate capital expenditures will be approximately $14.0 million in fiscal 2024 in support of requirements for new product programs and the upgrade and replacement of existing equipment.

Stock Repurchase Program

Our Board of Directors has authorized a stock repurchase program to buy back outstanding shares of our common stock. Shares authorized for buy back under the program totaled 3,839,395 at July 2, 2023. A total of 3,655,322 shares have been repurchased over the life of the program through July 2, 2023, at a cost of approximately $136.4 million. No shares were repurchased during fiscal 2023 or 2022. Additional repurchases may occur from time to time and are expected to continue to be funded by cash flow from operations and current cash balances. At this time, we anticipate minimal or no stock repurchase activity in fiscal year 2024.

Other Cash Requirements

In connection with the June 30, 2023 sale of our interest in VAST LLC to WITTE Automotive, we will be required to pay nonresident capital gain tax in China. The payment, which will be made during our fiscal 2024, is expected to total approximately $2.2 million.

We also have an operating lease for our El Paso, Texas finished goods and service parts distribution warehouse, which has a term in excess of one year. We also have purchase commitments related to zinc and other purchased parts. Refer to required future payments under the lease and purchase commitments in the discussion of Leases under Organization and Summary of Significant Accounting Policies and in the discussion of Commitments and Contingencies included in the Notes to Financial Statements included as part of Item 8 within this Form 10-K.

Credit Facilities

STRATTEC has a $40 million secured revolving credit facility (the “STRATTEC Credit Facility”) with BMO Harris Bank N.A. ADAC-STRATTEC LLC has a $25 million secured revolving credit facility (the “ADAC-STRATTEC Credit Facility”) with BMO Harris Bank N.A., which is guaranteed by STRATTEC. The credit facilities expire on August 1, 2024. Borrowings under either credit facility are secured by our U.S. cash balances, accounts receivable, inventory, and fixed assets located in the U.S. Interest on borrowings under the STRATTEC Credit Facility were at varying rates based, at our option, on LIBOR plus 1.25 percent or the bank’s prime rate through February 22, 2023. Interest on borrowings under the ADAC-STRATTEC Credit Facility were at varying rates based, at our option, on LIBOR plus 1.25 percent or the bank’s prime rate through February 6, 2023. Subsequent to these dates, interest on borrowings under both credit facilities were at varying rates based, at our option, on SOFR plus 1.35 percent or the bank's prime rate. Both credit facilities contain a restrictive financial covenant that requires the applicable borrower to maintain a minimum net worth level. The ADAC-STRATTEC Credit Facility includes an additional restrictive financial covenant that requires the maintenance of a minimum fixed charge coverage ratio. As of July 2, 2023, we were in compliance with all financial covenants required by these credit facilities. There were no outstanding borrowings under the STRATTEC Credit Facility as of July 2, 2023 or July 3, 2022. The average outstanding borrowings and weighted average interest rate on the STRATTEC Credit Facility loans were approximately $15.4 million and 5.7 percent, respectively, during 2023. The average outstanding borrowings and weighted average interest rate on the STRATTEC Credit Facility loans were approximately $332,000 and 2.0 percent, respectively, during 2022. Outstanding borrowings under the ADAC-STRATTEC Credit Facility totaled $13 million at July 2, 2023 and $11 million at July 3, 2022. The average outstanding borrowings and weighted average interest rate on the ADAC-STRATTEC Credit Facility loans were approximately $12.4 million and 5.3 percent, respectively, during 2023. The average outstanding borrowings and weighted average interest rate on the ADAC-STRATTEC Credit Facility loans were approximately $14.2 million and 1.5 percent, respectively, during 2022. We believe that the credit facilities are adequate, along with existing cash flows from operations, to meet our anticipated capital expenditure, working capital, dividend, and operating expenditure requirements.

On August 22, 2023, STRATTEC entered into an agreement, which is effective September 6, 2023, with BMO Harris Bank N.A. to renew the term of its current $40 million secured credit facility until August 1, 2026. The two parties are working on a renewal of the $25 million secured credit facility for ADAC-STRATTEC LLC, which is guaranteed by STRATTEC, for completion in fiscal year 2024.

Joint Ventures and Majority Owned Subsidiaries

Refer to the discussion of Investment in Joint Ventures and Majority Owned Subsidiaries and discussion of Equity Earnings of Joint Ventures included in the Notes to Financial Statements included within this Form 10-K.

Critical Accounting Policies

We believe the following represents our critical accounting policies:

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. The amount of unrecognized benefits, that if recognized, would affect the effective tax rate was $1.1 million at July 2, 2023 and $1.0 million at July 3, 2022. An increase or decrease in our assessment of the recorded amount of unrecognized benefits by 10 percent would result in an increase or decrease in the reported tax provision, before the impact of interest and penalties, of $110,000 at July 2, 2023 and $100,000 at July 3, 2022. Refer to the discussion of Income Taxes included in the Notes to Financial Statements included as part of Item 8 within this Form 10-K.

Warranty Reserve – 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 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 or product recall claims is dependent on the respective customer platform, volumes, production years and product content. We have product recall insurance once a recall claim exceeds $2.5 million with a limit of $30 million. Refer to the discussion of Warranty Reserve under Organization and Summary of Significant Accounting Policies included in the Notes to Financial Statements included as part of Item 8 within this Form 10-K.

We believe the reserve discussed above is estimated using consistent and appropriate methods. However, changes to the assumptions could materially affect the recorded reserve amount.

New Accounting Standards

Refer to the discussion of New Accounting Standards under Organization and Summary of Significant Accounting Policies included in the Notes to Financial Statements included as part of Item 8 within this Form 10-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Page

CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME 32

CONSOLIDATED BALANCE SHEETS 33

Consolidated Statements of shareholders' Equity 34

Consolidated Statements of Cash Flows 35

Notes to Financial Statements 36

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of STRATTEC SECURITY CORPORATION

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of STRATTEC SECURITY CORPORATION and subsidiaries (the "Company") as of July 2, 2023, the related consolidated statements of (loss) income and comprehensive (loss) income, shareholders’ equity, and cash flows, for the fiscal year ended July 2, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of July 2, 2023, and the results of its operations and its cash flows for the fiscal year ended July 2, 2023, 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) (PCAOB), the Company's internal control over financial reporting as of July 2, 2023, based on criteria established in Internal Control — Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 7, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Warranty Reserve – Refer to the Notes to the Financial Statements

Critical Audit Matter Description

The Company records a reserve for known and potential exposure to warranty claims in the event its products fail to perform as expected and in the event it may be required to participate in the repair costs incurred by its customers for such products. At July 2, 2023, the Company’s warranty reserve was $9.7 million.

The warranty reserve is estimated based on management’s analysis of historical warranty data, current trends and information, known and projected claims for products sold, and the terms of specific agreements. The warranty reserve requires management to apply significant judgment to develop its estimate. Actual warranty costs may differ from management’s estimated costs as a result of, but not limited to, negotiation with customers, changes to the assumptions of repair and/or replacement costs, and changes in trends in product performance. Such matters may require future adjustments to the reserve which could be material.

We identified the warranty reserve as a critical audit matter because estimating future warranty costs requires significant judgment by management. Auditing management’s assumptions about management’s estimated future warranty costs involves a high degree of auditor judgment and an increased extent of effort to evaluate the reasonableness of management’s estimates.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the determination of the warranty reserve included the following, among others:

We tested the effectiveness of internal controls relating to management’s process for developing the assumptions and inputs used to estimate the warranty reserve.

We evaluated the methods and significant assumptions, including the frequency and average cost of warranty claims, used by management to estimate the warranty reserve by:

Evaluating the methodology used to determine the reserve in order to understand how key assumptions were developed.

Testing the accuracy of the underlying data that served as the basis for the analysis, including the historical claims and settlements paid on those claims.

Testing the completeness of the warranty reserve by conducting interviews of operational and executive management regarding knowledge of known product warranty claims or product issues and evaluating whether they were appropriately considered in the determination of the warranty reserve.

Evaluating management’s ability to accurately estimate the warranty reserve by comparing the product warranty reserve in prior years to the actual product warranty claims paid in the subsequent years.

Comparing the warranty reserve to industry data to assess the reasonableness of management’s estimate in comparison to recent trends in actual warranty claims.

Developing an independent expectation of the Company’s warranty reserve and comparing it to management’s estimate to evaluate the reasonableness of the estimate.

/s/ Deloitte & Touche LLP

Milwaukee, Wisconsin

September 7, 2023

We have served as the Company's auditor since 2023.

REPORT OF INDEPENDENT PUBLIC ACCOUNTING FIRM

Shareholders and the Board of Directors of STRATTEC SECURITY CORPORATION

Milwaukee, Wisconsin

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of STRATTEC SECURITY CORPORATION (the "Company") as of July 3, 2022, the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for the year ended July 3, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of July 3, 2022, and the results of its operations and its cash flows for the year ended July 3, 2022, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

/s/ Crowe LLP

We served as the Company's auditor from fiscal year 2021 to 2022.

Oak Brook, Illinois

September 8, 2022

CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Years Ended

Engineering, selling, and administrative expenses 48,241 47,119

(LOSS) INCOME FROM OPERATIONS (6,089 ) 8,897

Equity earnings of joint ventures 1,559 177

Other (expense) income, net (2,178 ) 406

Provision for income taxes 1,281 415

Net (loss) income attributable to non-controlling interest (2,279 ) 1,828

COMPREHENSIVE (LOSS) INCOME:

Currency translation adjustments, net of tax 6,164 (2,318 )

Pension and postretirement plans, net of tax 689 376

TOTAL OTHER COMPREHENSIVE INCOME (LOSS) 6,853 (1,942 )

COMPREHENSIVE (LOSS) INCOME (2,096 ) 6,902

Comprehensive income attributable to non-controlling interest 180 1,560

(LOSS) INCOME PER SHARE ATTRIBUTABLE TO STRATTEC SECURITY CORPORATION:

AVERAGE SHARES OUTSTANDING:

The accompanying Notes to Financial Statements are an integral part of these Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AMOUNTS AND PER SHARE AMOUNTS)

ASSETS

CURRENT ASSETS:

INVESTMENT IN JOINT VENTURES — 26,654

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:

Accrued liabilities:

Commitments and Contingencies – see note beginning on page 51

ACCRUED POSTRETIREMENT OBLIGATIONS 1,157 1,329

SHAREHOLDERS’ EQUITY:

Accumulated other comprehensive loss (14,194 ) (18,588 )

Total STRATTEC SECURITY CORPORATION shareholders’ equity 184,963 188,400

The accompanying Notes to Financial Statements are an integral part of these Consolidated Balance Sheets.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Currency translation adjustments (2,318 ) — — — (2,050 ) — (268 )

Stock-based compensation 1,140 — 1,140 — — — —

Stock option exercises 827 1 826 — — — —

Employee stock purchases 81 — 46 — — 35 —

Purchase of SPA Non- controlling interest (7,877 ) — (2,811 ) — — (5,066 )

Stock-based compensation 1,466 — 1,466 — — — —

Stock option exercises 109 — 109 — — — —

Employee stock purchases 75 — 21 — — 54 —

The accompanying Notes to Financial Statements are an integral part of these Consolidated Statements of Shareholders’ Equity.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

Years Ended

CASH FLOWS FROM OPERATING ACTIVITIES

Equity earnings of joint ventures (1,559 ) (177 )

Foreign currency transaction loss (gain) 2,935 (237 )

Unrealized gain on peso forward contracts — (384 )

Loss on settlement of pension obligation 217 —

Stock-based compensation expense 1,466 1,140

Change in operating assets and liabilities:

Accounts payable and accrued liabilities 23,964 1,811

Net cash provided by operating activities 10,095 10,436

CASH FLOWS FROM INVESTING ACTIVITIES

Investment in joint ventures (278 ) (150 )

Proceeds from Sale of interest in VAST LLC 26,170 —

Purchase of VAST Korea net assets 354 —

Additions to property, plant and equipment (17,370 ) (14,188 )

Proceeds received on sale of property, plant and equipment 25 5

Net cash provided by (used in) investing activities 8,901 (14,333 )

CASH FLOWS FROM FINANCING ACTIVITIES

Repayments under credit facilities (15,000 ) (14,000 )

Purchase of SPA non-controlling interest (9,019 ) —

Exercise of stock options and employee stock purchases 183 908

Dividends paid to non-controlling interests of subsidiaries (600 ) (1,800 )

Net cash used in financing activities (7,436 ) (1,892 )

FOREIGN CURRENCY IMPACT ON CASH 237 98

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,797 (5,691 )

CASH AND CASH EQUIVALENTS

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash (Recovered) Paid During the Period For:

Non-Cash Investing Activities:

Purchase price receivable from sale of interest in VAST LLC $ (2,000 ) $ —

Change in capital expenditures in accounts payable $ (1,437 ) $ 1,297

The accompanying Notes to Financial Statements are an integral part of these Consolidated Statements of Cash Flows.

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, fobs, passive entry passive start systems (PEPS), steering column and instrument panel ignition lock housings, latches, power sliding side door systems, power tailgate 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 strategic relationship with WITTE Automotive (“WITTE”) of Velbert, Germany and ADAC Automotive (“ADAC”) of Grand Rapids, Michigan. Under this relationship, STRATTEC, WITTE and ADAC market the products of each company to global customers under the “VAST Automotive Group” brand name (as more fully described herein). STRATTEC products are shipped to customer locations in the United States, Canada, Mexico, Europe, South America, Korea, China and India, and we, along with our VAST LLC partners, provide full service and aftermarket support for each VAST Automotive Group partner’s products. As noted below, effective as of June 30, 2023 we sold our one-third ownership interest in VAST LLC to WITTE and entered into a cooperation framework agreement with WITTE related to VAST LLC which provides a framework for the parties to collaborate on global programs related to product development and manufacturing.

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. Effective June 30, 2023, STRATTEC POWER ACCESS LLC became a wholly owned subsidiary of STRATTEC SECURITY CORPORAITON as a result of the purchase of the remaining non-controlling interest. 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 in Juarez and Leon, Mexico. Effective June 30, 2023, we sold our equity investment in Vehicle Access Systems Technology to WITTE. Prior to the sale, equity investments in Vehicle Access Systems Technology LLC (“VAST LLC”) for which we exercised significant influence but did not control and were not variable interest entities of STRATTEC, were accounted for using the equity method. VAST LLC consisted primarily of four wholly owned subsidiaries in China, one wholly owned subsidiary in Brazil and one joint venture entity in India. The results of the VAST LLC foreign subsidiaries and joint venture were reported on a one-month lag basis. We have only one reporting segment.

During December 2022, management determined that a previously unrecorded liability for postretirement death benefits was required to be recognized in accordance with ASC 715. Eligible participants for this death benefit include all salaried retirees who retired prior to October 1, 2001 and all hourly retirees who were hired prior to June 27, 2005 and retired prior to January 1, 2010. As such, this actuarially calculated liability and the unrecognized actuarial losses impacting Accumulated Other Comprehensive Loss are reported in the Consolidated Balance Sheets. Additionally, interest cost and amortization of actuarial losses are reported in the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income.

Additionally, management identified a correction to previously reported Equity Earnings of Joint Ventures in the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income, which correction also impacts the previously reported Investment in Joint Ventures amount reported in the Consolidated Balance Sheets. While prior period amounts have been corrected for comparability, the corrections for both of these items, both individually and in total, were not material to the previously reported consolidated financial statements.

The impact of the prior period corrections on the Consolidated Balance Sheets, the related components of Stockholders’ Equity, and the related components of Accumulate Other Comprehensive Loss is as follows (thousands of dollars):

Previously Reported Adjustment As Reported

ASSETS

LIABILITIES AND SHAREHOLDERS' EQUITY

Accrued Liabilities: Payroll and benefits $ 17,905 $ 54 $ 17,959

Total STRATTEC SECURITY CORPORATION shareholders' equity 188,866 (466 ) 188,400

Accumulated Other Comprehensive Loss:

Foreign currency translation adjustments $ (16,723 ) $ (10 ) $ (16,733 )

Retirement and Postretirement Benefit Plans (1,934 ) 79 (1,855 )

Accumulated other comprehensive loss $ (18,657 ) $ 69 $ (18,588 )

Previously Reported Adjustment As Reported

Total STRATTEC SECURITY CORPORATION shareholders' equity 181,646 (636 ) 181,010

Accumulated Other Comprehensive Loss:

Foreign currency translation adjustments $ (14,685 ) $ 2 $ (14,683 )

Retirement and Postretirement Benefit Plans (2,112 ) (119 ) (2,231 )

Accumulated other comprehensive loss $ (16,797 ) $ (117 ) $ (16,914 )

The impact of the prior period corrections on the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income is as follows (thousands of dollars):

Previously Reported Adjustment As Reported

Equity earnings of joint ventures $ 181 $ (4 ) $ 177

Other income (expense), net 423 (17 ) 406

Provision for income taxes 420 (5 ) 415

Net income attributed to STRATTEC SECURITY CORPORATION $ 7,032 $ (16 ) $ 7,016

Comprehensive Income:

Currency translation adjustments, net of tax (2,306 ) (12 ) (2,318 )

Pension and postretirement plans, net of tax 178 198 376

Other comprehensive income (loss), net of tax (2,128 ) 186 (1,942 )

The correction of prior period amounts had no impact on total operating, investing, and financing activities on the Consolidated Statements of Cash Flows for the year ended July 3, 2022. In conjunction with the correction of the prior period amounts, the following footnotes, which were impacted by the above adjustments, were also corrected: Shareholders’ Equity, Other (Expense) Income, net, Earnings Per Share, Pension and Postretirement Benefits, and Accumulated Other Comprehensive Loss.

Reclassifications: For consistency with current year presentation, reclassifications have been made to the Consolidated Balance Sheet for the fiscal year ended July 3, 2022 in order to separately state Value Added Tax Recoverable and Value Added Tax Payable. These reclassifications had no effect on the reported results of operations and cash flows.

Risks and Uncertainties: Due to the evolving global economic conditions since 2020, initially as a result of the COVID-19 pandemic, the automotive industry experienced a decline in global customer sales and production volumes. Although industry production has recovered modestly, production remains well below recent historic levels. Moreover, since 2020, industry and economic conditions have been influenced directly and indirectly by macroeconomic events such as the COVID-19 pandemic and, beginning in February 2022, the Russia-Ukraine conflict, resulting in unfavorable conditions. These conditions have severely restricted the level of economic activity in many countries, and continue to adversely impact global economic activity, including with respect to customer purchasing actions and supply chain continuity and disruption, and in particular the supply of semiconductor chips, transponders and related components to the automotive industry.

STRATTEC’s operating performance is subject to global economic conditions, inflationary pressures and levels of consumer spending specifically within the automotive industry. Our 2022 net sales were negatively impacted by a global semiconductor chip shortage (especially as it relates to the automotive industry). Additionally, inflationary pressures resulted in increased raw material and purchased part costs as well as increased wage rates in Mexico beginning in calendar 2021. Such increases negatively impacted our 2023 and 2022 operating results.

Inflationary pressures in the U.S. and global economy continue to adversely impact our operating results and may continue to impact the supply chain and our operations, including impacting our customers, workforce and suppliers, any of which may continue to disrupt and limit sourcing of semiconductor chips, transponders and other critical supply chain components needed by us and our customers to meet expected production schedules. Moreover, these events may continue to create added inflationary pressures on our operations, including related to wages and the prices of raw materials and purchased parts. All of these foregoing matters, including their scope and duration are uncertain and cannot be predicted as to timing and cost impacts. These changing conditions may also affect the estimates and assumptions made by our management in our financial statements. Such estimates and assumptions affect, among other things, our long-lived asset valuations, assessment of our annual effective tax rate, valuation of deferred income taxes, assessment of excess and obsolete inventory reserves, and assessment of collectability of trade receivables.

Significant Accounting Policies: The significant accounting policies followed in the preparation of these financial statements, as summarized in the following paragraphs, are in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP).

Principles of Consolidation and Presentation: The accompanying consolidated financial statements include the accounts of STRATTEC SECURITY CORPORATION, its wholly owned Mexican subsidiary and its majority owned subsidiaries. Equity investments for which STRATTEC exercises significant influence but does not control and are not variable interest entities of STRATTEC are accounted for using the equity method. All significant inter-company transactions and balances have been eliminated.

New Accounting Standards: In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. The update revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. Originally, the update was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. In November 2019, FASB issued ASU 2019-10, Financial Instruments – Credit Losses, Derivatives and Hedging, and Leases. This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are planning to adopt this standard in the first quarter of our fiscal 2024. The adoption of this pronouncement will not have a material impact on our consolidated financial statements.

Subsequent Event:On August 22, 2023, STRATTEC entered into an agreement, which is effective September 6, 2023, with BMO Harris Bank N.A. to renew the term of its current $40 million secured credit facility until August 1, 2026. Under the terms of the new agreement, interest on borrowings under the credit facility will be at varying rates based, at our option, on Term SOFR plus 1.85 percent or the bank’s prime rate. Refer to the discussion of Credit Facilities herein.

Fiscal Year: Our fiscal year ends on the Sunday nearest June 30. The year ended July 2, 2023 is comprised of 52 weeks. The year ended July 3, 2022 is comprised of 53 weeks.

Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses for the periods presented. These estimates and assumptions could also affect the disclosure of contingencies. Actual results and outcomes may differ from management’s estimates and assumptions.

Cash and Cash Equivalents: Cash and cash equivalents include all short-term investments with an original maturity of three months or less due to the short-term nature of the instruments. Excess cash balances are placed in short-term commercial paper and short-term certificates of deposit.

Derivative Instruments: We own and operate manufacturing operations in Mexico. As a result, a portion of our manufacturing costs are incurred in Mexican pesos, which causes our earnings and cash flows to fluctuate due to changes in the U.S. dollar/Mexican peso exchange rate. During 2022 and 2023, we had contracts with Bank of Montreal that provide for monthly Mexican peso currency forward contracts for a portion of our estimated peso denominated operating costs. Our objective in entering into currency forward contracts is to minimize our earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. The Mexican peso forward contracts are not used for speculative purposes and are not designated as hedges. As a result, all currency forward contracts are recognized in our accompanying consolidated financial statements at fair value and changes in the fair value are reported in current earnings as part of Other (Expense) Income, net. No Mexican peso forward contracts were outstanding as of July 2, 2023.

The fair market value of all outstanding Mexican peso forward contracts in the accompanying Consolidated Balance Sheets was as follows (thousands of dollars):

Not designated as hedging instruments:

Other current assets:

Mexican peso forward contracts $ — $ 627

The pre-tax effects of the Mexican peso forward contracts on the accompanying Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income consisted of the following (thousands of dollars):

Other (Expense) Income, net

Years Ended

Not Designated as Hedging Instruments:

Realized (loss) $ — $ (73 )

Unrealized gain $ — $ 384

Fair Value of Financial Instruments: The fair value of our cash and cash equivalents, accounts receivable, accounts payable and borrowings under our credit facilities approximated their book value as of July 2, 2023 and July 3, 2022. Fair value is defined as the exchange price that would be received for an asset or paid for a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. There is an established fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable. Level 1 – Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 – Inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly. These are typically obtained from readily-available pricing sources for comparable instruments. Level 3 – Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own assumptions of the data that market participants would use in pricing the asset or liability, based on the best information available in the circumstances. The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of July 2, 2023 and July 3, 2022 (thousands of dollars):

Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

Assets:

Rabbi Trust assets:

Stock index funds:

Mexican peso forward contracts — — — — — 627 — 627

The Rabbi Trust assets fund our supplemental executive retirement plan and are included in Other Long-Term Assets in the accompanying Consolidated Balance Sheets as of July 2, 2023. Of the July 3, 2022 $3.3 million Rabbi Trust asset balance, $863,000 was included in Other Current Assets and $2.4 million was included in Other Long-Term Assets in the accompanying Consolidated Balance Sheets. Refer to discussion of Mexican peso forward contracts under Derivative Instruments above. The fair value of the Mexican peso forward contracts considers the remaining term, current exchange rate and interest rate differentials between the two currencies.

Receivables: Receivables consist primarily of trade receivables due from Original Equipment Manufacturers in the automotive industry and locksmith/dealership distributors relating to our service and aftermarket sales. We evaluate the collectability of receivables based on a number of factors. An allowance for doubtful accounts is recorded for significant past due receivable balances based on a review of the past due items, general economic conditions (including with respect to the impact of the Ukraine conflict and the supply chain disruptions on our customers) and the industry as a whole. The allowance for doubtful accounts totaled $500,000 at July 2, 2023 and July 3, 2022.

Inventories: Inventories are comprised of material, direct labor and manufacturing overhead, and are stated at net realizable value using the first-in, first-out (“FIFO”) cost method of accounting. Inventories consisted of the following (thousands of dollars):

Excess and obsolete reserve (7,115 ) (5,489 )

We record a reserve for excess and obsolete inventory based on historical and estimated future demand and market conditions. The reserve level is determined by comparing inventory levels of individual materials and parts to historical usage and estimated future sales by analyzing the age of the inventory in order to identify specific materials and parts that are unlikely to be sold. Technical obsolescence and other known factors are also considered in evaluating the reserve level. The activity related to the excess and obsolete inventory reserve was as follows (thousands of dollars):

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. We capitalize and amortize these other tooling costs over the life of the related product based on the fact that the related tool will be used over the life of the supply arrangement. To the extent that estimated costs exceed expected reimbursement from the customer we recognize a loss.

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 15 to 35 years

Machinery and equipment 3 to 15 years

Property, plant and equipment consisted of the following (thousands of dollars):

Depreciation expense was as follows for the periods indicated (thousands of dollars):

Fiscal Year Depreciation Expense

The gross and net book value of property, plant and equipment located outside of the United States, primarily in Mexico, were as follows (thousands of dollars):

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. If such indicators are present, the recoverability of assets to be held and used is assessed 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 determined to not be recoverable, the impairment recognized is calculated as the excess of the carrying amount of the asset over the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less estimated costs to sell. There were no impairments recorded in the years ended July 2, 2023 or July 3, 2022.

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.

Leases: Our right-of-use operating lease assets are recorded at the present value of future minimum lease payments, net of amortization. We have an operating lease for our El Paso, Texas finished goods and service parts distribution warehouse. During fiscal 2023, the El Paso warehouse lease was amended, which resulted in a lease modification that changed future payments for the existing premises. The amended lease has a current lease term through December 2028. The lease does not contain an option to extend the lease term, material residual value guarantees or restrictive covenants. Operating lease expense is recognized on a straight-line basis over the lease term.

As the lease does not provide an implicit rate, we used our incremental borrowing rate at lease commencement to determine the present value of our lease payments. The incremental borrowing rate is an entity-specific rate which represents the rate of interest we would pay to borrow over a similar term with similar payments.

The operating lease asset and obligation related to our El Paso warehouse lease included in the accompanying Consolidated Balance Sheets are presented below (thousands of dollars):

Right-of-Use Asset Under Operating Lease:

Lease Obligation Under Operating Lease:

Current Liabilities: Accrued Liabilities: Other $ 465 $ 403

Future minimum lease payments, by our fiscal year, including options to extend that are reasonably certain to be exercised, under the non-cancelable lease are as follows as of July 2, 2023 (thousands of dollars):

Total Future Minimum Lease Payments 5,343

Less: Imputed Interest (878 )

Total Lease Obligations $ 4,465

Cash flow information related to the operating lease is shown below (thousands of dollars):

Years Ended

Operating Cash Flows:

Cash Paid Related to Operating Lease Obligation $ 497 $ 484

The weighted average remaining lease term and discount rate for the El Paso, Texas operating lease are shown below:

Weighted Average Remaining Lease Term, (in years) 5.5 6.3

Weighted Average Discount Rate 6.2 % 3.3 %

Operating lease expense for the years ended July 2, 2023 and July 3, 2022 totaled $497,000 and $484,000, respectively.

Supplier Concentrations: The following inventory purchases were made from major suppliers during each fiscal year noted:

Fiscal Year Percentage of Inventory Purchases Number of Suppliers

We have long-term contracts or arrangements with most of our suppliers to assist in guaranteeing the availability of raw materials and component parts.

Labor Concentrations: We had approximately 3,361 full-time associates as of July 2, 2023. Approximately178 or 5.3percent of our full time associates were represented by a labor union at July 2, 2023 at our Milwaukee facility, which associates account for all production associates at our Milwaukee, WI facility. The current contract with our Milwaukee unionized associates is effective through November 1, 2025. Additionally, approximately 102 or 3.0 percent of our full time associates were represented by a labor union at our Leon, Mexico facility. The current contract with our Leon unionized associates is effective through April 8, 2024.

Revenue Recognition: We generate revenue from the production of parts sold to automotive and light-truck Original Equipment Manufacturers (“OEMs”), or Tier 1 suppliers at the direction of the OEM, under long-term supply agreements supporting new vehicle production. Such agreements also require related production of service parts subsequent to the initial vehicle production periods. Additionally, we generate revenue from the production of parts sold in aftermarket service channels and to non-automotive commercial customers.

Revenue Recognition:

Our contracts with customers under long-term supply agreements do not commit the customer to a specified quantity of parts. However, we are generally required to fulfill our customers’ purchasing requirements for the production life of the vehicle. Contracts do not become a performance obligation until we receive either a purchase order and/or customer release for a specific number of parts at a specified price. While long-term supply agreements may range from four to six years for new vehicle production and ten to fifteen subsequent years for service parts production, contracts may be terminated by customers at any time. Historically, terminations have been minimal. Contracts may also provide for annual price reductions over the production life of the vehicle, and prices are adjusted on an ongoing basis to reflect changes in product content/cost and other commercial factors.

Revenue is recognized at a point in time when control of the parts produced are transferred to the customer according to the terms of the contract, which is usually when the parts are shipped or delivered to the customer’s premises. Customers are generally invoiced upon shipment or delivery and payment generally occurs within 45 to 90 days after the shipment date. The amount of revenue recognized reflects the consideration that we expect to be entitled to receive in exchange for those products based on purchase orders, annual price reductions and ongoing price adjustments, some of which are accounted for as variable consideration. We use the most likely amount method, the single most likely outcome of the contract, to estimate the amount to which we expect to be entitled. There were no significant changes to our estimates of variable consideration during the reporting periods referenced in our accompanying financial statements and significant changes to our estimates of variable consideration are not expected in future periods.

We do not have an enforceable right to payment at any time prior to when the parts are shipped or delivered to the customer. Therefore, we recognize revenue at the point in time we satisfy a performance obligation by transferring control of a part to a customer. Amounts billed to customers related to shipping and handling costs are included in Net Sales in the accompanying Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income. Shipping and handling costs are accounted for as fulfillment costs and are included in Cost of Goods Sold in the accompanying Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income.

Tooling and Pre-Production Engineering Costs Related to Long-Term Supply Arrangements:

We incur pre-production engineering and tooling costs related to the products produced for our customers under long-term supply agreements. Customer reimbursements for tooling and pre-production engineering activities that are part of a long-term supply arrangement are accounted for as a reduction of cost in accordance with ASC 340, Other Assets and Deferred Costs. Pre-production costs related to long-term supply agreements with a contractual guarantee for reimbursement are included in Other Current Assets in the accompanying Consolidated Balance Sheets. We expense all pre-production engineering costs for which reimbursement is not contractually guaranteed by the customer. All pre-production tooling costs related to customer-owned tools for which reimbursement is not contractually guaranteed by the customer or for which we do not have a non-cancelable right to use the tooling is also expensed when incurred.

Receivables, net:

Receivables, net include amounts billed and currently due from customers. We maintain an allowance for doubtful accounts to provide for estimated amounts of receivables not expected to be collected. We continually assess our receivables for collectability and any allowance is recorded based upon age of the outstanding receivables, historical payment experience, customer creditworthiness and general economic conditions.

Contract Balances:

We had no material contract assets or contract liabilities as of July 2, 2023 or July 3, 2022.

Product Sales and Sales and Receivable Concentration:

Refer to Product Sales and Sales and Receivable Concentration included herein for revenue by product group and revenue by customer.

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 $15.9 million in 2023 and $12.2 million in 2022.

Other (Expense) Income, Net: Net other (expense) income included in the accompanying Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income primarily included foreign currency transaction gains and losses, realized and unrealized gains and losses on our Mexican peso currency forward contracts, the components of net periodic benefit cost other than the service cost component related to our pension and postretirement plans and Rabbi Trust gains and losses. Foreign currency transaction gains and losses resulted from activity associated with foreign denominated assets and liabilities held by our Mexican subsidiaries. The Rabbi Trust assets fund our amended and restated supplemental executive retirement plan. The investments held in the Trust are considered trading securities. We entered into the Mexican peso currency forward contracts during fiscal 2023 and 2022 to reduce earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. Pension and postretirement plan costs include the components of net periodic benefit cost other than the service cost component. The impact of these items for the periods presented was as follows (thousands of dollars):

Years Ended

Foreign currency transaction (loss) gain $ (2,935 ) $ 237

Rabbi Trust Assets gain (loss) 202 (304 )

Unrealized gain on Mexican peso forward contracts — 384

Realized gain on Mexican peso forward contracts, net 1,022 361

Pension and postretirement plans cost (722 ) (505 )

Warranty Reserve: We have a warranty reserve recorded related to our known and potential exposure to warranty claims in the event our products fail to perform as expected, and in the event we may be required to participate in the repair costs incurred by our customers for such products. The recorded warranty 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. During 2023, we recorded warranty provisions associated with customer-specific warranty claims involving our product. As additional information becomes available, actual results may differ from recorded estimates, which may require us to adjust the amount of our warranty provision.

Changes in the warranty reserve were as follows (thousands of dollars):

Foreign Currency Translation: The financial statements of our foreign subsidiaries and equity investees are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and the average exchange rate for each applicable period for sales, costs and expenses. Foreign currency translation adjustments are included as a component of accumulated other comprehensive loss. Foreign currency transaction gains and losses are included in other (expense) income, net in the accompanying Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income.

Accumulated Other Comprehensive Loss (“AOCL”): The following tables summarize the changes in AOCL for the years ended July 2, 2023 and July 3, 2022 (thousands of dollars):

Foreign CurrencyTranslationAdjustments Retirement andPostretirementPlans Total

Other comprehensive loss before reclassifications (4,698 ) (559 ) (5,257 )

Net other comprehensive loss before reclassifications (5,334 ) (427 ) (5,761 )

Reclassifications:

Sale of interest in VAST LLC (830 ) — (830 )

Actuarial losses (A) — (342 ) (342 )

Total reclassifications before tax (830 ) (342 ) (1,172 )

Other comprehensive loss attributable

to non-controlling interest (2,459 ) — (2,459 )

Foreign CurrencyTranslationAdjustments Retirement andPostretirementPlans Total

Other comprehensive loss before reclassifications 1,712 (82 ) 1,630

Net other comprehensive loss before reclassifications 2,318 (63 ) 2,255

Reclassifications:

Actuarial losses (A) — (409 ) (409 )

Total reclassifications before tax — (409 ) (409 )

Net reclassifications — (313 ) (313 )

Other comprehensive loss attributable

to non-controlling interest 268 — 268

(A)

Amounts reclassified are included in the computation of net periodic benefit cost, which is included in Other (Expense) Income, net in the accompanying Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income. See Retirement Plans and Postretirement Costs note to these Notes to Financial Statements below.

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 2 million shares of common stock available for the grant of awards under the plan. Remaining shares available to be granted under the plan as of July 2, 2023 were 134,769. Awards that expire or are cancelled without delivery of shares become available for re-issuance under the plan. We issue new shares of common stock to satisfy stock option exercises.

Nonqualified and incentive stock options and shares of restricted stock have been granted to our officers, outside directors and specified associates under the stock incentive plan. Stock options granted under the plan may not be issued with an exercise price less than the fair market value of the common stock on the date the option is granted. Stock options become exercisable as determined at the date of grant by the Compensation Committee of our Board of Directors. The options expire 10 years after the grant date unless an earlier expiration date is set at the time of grant. The options vest 1 to 4 years after the date of grant. Shares of restricted stock granted under the plan are subject to vesting criteria determined by the Compensation Committee of our Board of Directors at the time the shares are granted and have a minimum vesting period of one year from the date of grant. Restricted shares granted have voting rights, regardless of whether the shares are vested or unvested, but only have the right to receive cash dividends after such shares become vested. Restricted stock grants issued vest 1 to 3 years after the date of grant.

No stock options were granted during 2023 or 2022, and all compensation cost related to previously granted options was recognized prior to 2022. Accordingly, no compensation cost related to stock options was recorded during 2023 or 2022. The fair value of each restricted stock grant was based on the market price of the underlying common stock as of the date of grant. The resulting compensation cost is amortized on a straight-line basis over the vesting period. We record stock based compensation only for those awards that are expected to vest.

Unrecognized compensation cost as of July 2, 2023 related to restricted stock granted under the plan was as follows (thousands of dollars):

Restricted stock granted $ 1,370 0.9

Unrecognized compensation cost will be adjusted for any future changes in estimated and actual forfeitures.

Cash received from stock option exercises and the related income tax benefit were as follows (thousands of dollars):

Fiscal Year Cash Received fromStock OptionExercises Income TaxBenefit

The intrinsic value of stock options exercised and the fair value of options vested were as follows (thousands of dollars):

Years Ended

Intrinsic value of options exercised $ 31 $ 451

Fair value of stock options vested $ — $ —

The range of options outstanding as of July 3, 2022 was as follows:

Income Taxes: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases and operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered, settled or utilized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. We recognize the benefit of an income tax position only if it is more likely than not (greater than 50 percent) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit is recognized. The tax benefits recognized are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. Additionally, we accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. Interest and penalties on uncertain tax positions are classified in the (Benefit) Provision for Income Taxes in the accompanying Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income.

INVESTMENT IN JOINT VENTURES AND MAJORITY OWNED SUBSIDIARIES

Prior to June 30, 2023, we participated in certain Alliance Agreements with WITTE Automotive (“WITTE”) and ADAC Automotive (“ADAC”). WITTE, of Velbert, Germany, is a privately held automotive supplier. WITTE designs, manufactures and markets automotive components, including locks and keys, hood latches, rear compartment latches, seat back latches, door handles and specialty fasteners. WITTE’s primary market for these products has been Europe. ADAC, of Grand Rapids, Michigan, is a privately held automotive supplier and manufactures engineered products, including door handles and other automotive trim parts, utilizing plastic injection molding, automated painting and various assembly processes.

The Alliance Agreements included 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 held a one-third equity interest, existed to seek opportunities to manufacture and sell each company’s products in areas of the world outside of North America and Europe. As a result of these relationships, the entities involved purchased component products from each other for use in end products assembled and sold in their respective home markets. STRATTEC purchased such component parts from WITTE. These purchases totaled $839,000 in 2023 and $918,000 in 2022. STRATTEC also paid WITTE a royalty related to certain latch product sales. Such royalties incurred totaled $528,000 in 2023 and

$889,000 in 2022. The outstanding payable balance to WITTE was $459,000 as of July 3, 2022. WITTE was no longer a related party as of July 2, 2023 as a result of the Equity Restructuring Agreement discussed below.

VAST LLC had investments in Sistema de Acesso Veicular Ltda, VAST China (Taicang), VAST Jingzhou Co. Ltd., VAST Shanghai Co., VAST Fuzhou and Minda-VAST Access Systems. The operations under VAST Fuzhou closed during our fiscal 2021 and the related land and building were held for sale. Sistema de Acesso Veicular Ltda was located in Brazil and serviced customers in South America. VAST LLC disposed of Sistema de Acesso Veicular Ltda in June 2023. VAST China (Taicang), VAST Jingzhou Co. Ltd, and VAST Shanghai Co. (collectively known as VAST China), provided a base of operations to service each VAST partner’s automotive customers in the Asian market. Minda-VAST Access Systems is based in Pune, India and is a 50:50 joint venture between VAST LLC and Minda Management Services Limited, an affiliate of both Minda Corporation Limited and Spark Minda, Ashok Minda Group of New Delhi, India (collectively “Minda”). Minda and its affiliates cater to the needs of all major car, motorcycle, commercial vehicle, tractor and off-road vehicle manufacturers in India. VAST LLC also maintained branch offices in South Korea and Japan in support of customer sales and engineering requirements.

Effective June 30, 2023, we entered into and completed transactions contemplated by an Equity Restructuring Agreement ("Restructuring Agreement") between STRATTEC and WITTE. Pursuant to the terms of the Restructuring Agreement, STRATTEC sold its one-third interest in VAST LLC to WITTE and STRATTEC purchased WITTE's 20 percent non-controlling interest in STRATTEC POWER ACCESS LLC ("SPA") along with the net assets of VAST LLC's Korea branch office. The total net purchase price payable from WITTE to STRATTEC was $18.5 million, of which $16.5 million was paid on June 30, 2023 and $2 million was paid in July 2023. The $2 million paid in July 2023 was included in other current assets in the accompanying Consolidated Balance Sheet as of July 2, 2023. The allocation of the $18.5 million net purchase price was as follows (millions of dollars):

Cash Received (Paid)

Sale of STRATTEC's one-third ownership interest in VAST LLC $ 28.2

Purchase of 20 percent non-controlling interest in SPA (9.0 )

Purchase of net assets of VAST LLC's Korean branch office (0.7 )

Net purchase price received by STRATTEC $ 18.5

As of June 30, 2023, the Korean branch office is wholly owned by STRATTEC and its subsequent financial results are consolidated with the financial results of STRATTEC. The Restructuring Agreement will position STRATTEC to redeploy assets, both financial and technical, to create greater focus on STRATTEC-specific strategic growth opportunities in North America and around the world. This transaction will allow STRATTEC to be well-positioned to take advantage of new opportunities, including more of our product applications on Electric Vehicles, growing consumer demand for Power Access products, expansion of electronics capabilities and other new automotive products. It will also give us greater resources to further explore diversification of markets, complimentary technology and regions outside of North America. As part of the Restructuring Agreement, STRATTEC also entered into a cooperation framework agreement with WITTE related to VAST LLC which provides a framework for the parties to collaborate on global programs related to product development and manufacturing.

Prior to the restructuring agreement, VAST LLC investments were accounted for using the equity method of accounting. Results of the VAST LLC foreign subsidiaries and joint venture were reported on a one-month lag basis. The activities of the VAST LLC foreign subsidiaries and joint ventures resulted in equity earnings of joint ventures to STRATTEC of approximately $1.6 million during 2023 and $177,000 during 2022. STRATTEC's 2023 equity earnings includes STRATTEC's one-third of a loss on disposal of Brazil of $531,000 and a gain on sale of STRATTEC's one-third share of VAST LLC of $110,000. During 2023, capital contributions totaling $834,000 were made to VAST LLC for purposes of funding operations in Brazil with STRATTEC's portion of such capital contributions totaling $278,000. During 2022, capital contributions totaling $450,000 were made to VAST LLC for purposes of funding operations in Brazil with STRATTEC’s portion of such capital contribution totaling $150,000. As of June 30, 2023, STRATTEC has no continuing involvement in VAST LLC other than under the cooperation framework agreement described above.

STRATTEC POWER ACCESS LLC (“SPA”) was formed in fiscal year 2009 to supply the North American portion of the power sliding door, lift gate, tail gate and deck lid system access control products which were acquired from Delphi Corporation. Prior to the Restructuring Agreement, SPA was 80 percent owned by STRATTEC and 20 percent owned by WITTE. As a result of the Restructuring Agreement, STRATTEC purchased the remaining 20 percent interest in SPA, and SPA became a wholly owned subsidiary of STRATTEC. An additional Mexican entity, STRATTEC POWER ACCESS de Mexico, is wholly owned by SPA. STRATTEC's purchase of WITTE's 20 percent noncontrolling interest in SPA was accounted for as an equity transaction. No gain or loss was recognized in the Consolidated Statement of (Loss) Income and Comprehensive (Loss) Income. The difference between the fair value of the consideration paid and the amount by which the non-controlling interest was adjusted was recognized in equity attributable to STRATTEC. The financial results of SPA are consolidated with the financial results of STRATTEC. SPA net sales and net income to STRATTEC totaled approximately $114.1 million and $2.5 million, respectively, in 2023 and $95.7 million and $5.3 million, respectively, in 2022.

ADAC-STRATTEC LLC, a Delaware limited liability company, was formed in fiscal year 2007 to support injection molding and door handle assembly operations in Mexico. ADAC-STRATTEC LLC was 51 percent owned by STRATTEC and 49 percent owned by ADAC for all periods presented in this report. An additional Mexican entity, ADAC-STRATTEC de Mexico, is wholly owned by ADAC-STRATTEC LLC. ADAC-STRATTEC LLC’s financial results are consolidated with the financial results of STRATTEC. ADAC-STRATTEC LLC net sales and net loss to STRATTEC totaled approximately $121.9 million and $2.1 million, respectively, in 2023 and approximately $111.8 million and $100,000, respectively, in 2022. ADAC charges ADAC-STRATTEC LLC an engineering, research and design fee as well as a sales fee. Such fees are calculated as a percentage of ADAC-STRATTEC LLC net sales, are included in the consolidated results of STRATTEC, and totaled $8.5 million in 2023 and $7.8 million in 2022. The related outstanding payable balance to ADAC was $4.9 million as of July 2, 2023 and $1.9 million as of July 3, 2022. Effective January 1, 2023, ADAC and STRATTEC agreed to suspend the payment of these fees as needed to comply with debt covenant provisions included in the ADAC-STRATTEC LLC credit facility described in greater detail under Credit Facilities below. Additionally, ADAC-STRATTEC LLC sells production parts to ADAC. Sales to ADAC are included in the consolidated results of STRATTEC and totaled $12.2 million in 2023 and $9.1 million in 2022. The related outstanding receivable balance from ADAC was $3.9 million and $1.6 million as of July 2, 2023 and July 3, 2022, respectively.

See further discussion under Equity Earnings of Joint Ventures included in Notes to Financial Statements herein.

EQUITY EARNINGS OF JOINT VENTURES

As discussed above within Investment in Joint Ventures and Majority Owned Subsidiaries, effective June 30, 2023, we sold our one-third ownership interest in VAST LLC, for which we exercised significant influence but did not control. VAST LLC was not a variable interest entity of STRATTEC. Until the effective date of the sale, our investment in VAST LLC was accounted for using the equity method. The results of the VAST LLC foreign subsidiaries and joint venture were reported on a one-month lag basis.

During the quarter ended March 27, 2022, VAST China experienced a fire at their Taicang facility. As a result, certain door handle and painting operations were subsequently transferred to their new Jingzhou facility and to another supplier. The transfer of production negatively impacted VAST China’s fiscal 2022 profitability.

As a result of the Restructuring Agreement, STRATTEC no longer holds an ownership interest in VAST LLC as of July 2, 2023. The following are summarized statements of operations and summarized balance sheet data for VAST LLC (thousands of dollars):

Years Ended

Engineering, selling and administrative expense 31,302 31,887

Income (Loss) from operations 4,209 (1,131 )

Loss on disposal of investment in Brazil (1,592 ) —

Income (Loss) before provision for income taxes 4,921 (229 )

Provision (benefit) for income taxes 672 (754 )

STRATTEC’s share of VAST LLC net

Intercompany profit eliminations 33 2

STRATTEC’s equity earnings of VAST LLC prior to loss on sale 1,449 177

Gain on sale of VAST LLC 110 —

STRATTEC's equity earnings of VAST LLC $ 1,559 $ 177

Cash and cash equivalents $ — $ 21,694

Other current assets — 14,574

Property, plant and equipment, net — 70,096

Other long-term assets — 16,686

Current debt $ — $ 388

Other current liabilities — 86,364

Other long-term liabilities — 2,258

Total liabilities $ — $ 109,089

STRATTEC’s share of VAST LLC net assets $ — $ 26,770

We had sales of component parts to VAST LLC, purchases of component parts from VAST LLC, expenses charged to VAST LLC for engineering and accounting services and expenses charged from VAST LLC to STRATTEC for general headquarter expenses. As a result of the Restructuring Agreement, STRATTEC no longer holds an ownership interest in VAST LLC as of July, 2, 2023. The following tables summarize the related party transactions with VAST LLC for the periods indicated (thousands of dollars):

Years Ended

Purchases from VAST LLC $ 49 $ 169

Expenses charged to VAST LLC $ 382 $ 593

Expenses charged from VAST LLC $ 761 $ 784

Accounts receivable from VAST LLC $ — $ 63

Accounts payable to VAST LLC $ — $ 23

CREDIT FACILITIES

Outstanding borrowings under the credit facilities referenced in the above paragraph as of the end of 2023 and 2022 were as follows (thousands of dollars):

STRATTEC Credit Facility $ — $ —

Average outstanding borrowings and the weighted average interest rate under each such credit facility during 2023 and 2022 were as follows (thousands of dollars):

Average OutstandingBorrowings Weighted AverageInterest Rate

Years Ended Years Ended

We believe that the credit facilities referenced above are adequate, along with existing cash balances and cash flow from operations, to meet our anticipated capital expenditure, working capital, dividend and operating expenditure requirements.

COMMITMENTS AND CONTINGENCIES

We are from time to time subject to various legal actions and claims incidental to our business, including those arising out of alleged defects, alleged breaches of contracts, product warranties, intellectual property matters and employment related matters. It is our opinion that the outcome of such matters will not have a material adverse impact on the consolidated financial position, results of operations or cash flows of STRATTEC. With respect to warranty matters, although we cannot ensure that the future costs of warranty claims by customers will not be material, we believe our established reserves are adequate to cover potential warranty settlements.

In 1995, we recorded a provision for estimated costs to remediate an environmental contamination site at our Milwaukee facility. The facility 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, in fiscal years 2010, 2016, and 2021, we obtained updated third party estimates of projected costs to adequately cover the cost for active remediation of this contamination and adjusted the reserve as needed. We monitor and evaluate the site with the use of these groundwater monitoring wells. 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 at the site, 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 our 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 $1.4 million at July 2, 2023 is adequate.

At July 2, 2023, we had purchase commitments related to zinc. We also had minimum rental commitments under non-cancelable operating leases with a term in excess of one year. The purchase and minimum rental commitments are payable as follows (thousands of dollars):

Purchase Minimum Rental

Fiscal Year Commitments Commitments

Thereafter $ — $ 1,647

INCOME TAXES

The provision for income taxes consisted of the following (thousands of dollars):

Years Ended

Currently payable (recoverable):

The current Federal provision for income taxes excludes a deduction for $22.0 million in research and development costs that are deductible in future periods and $6.0 million of capital losses on the sale of our interest in VAST LLC, which losses are not currently deductible. The current foreign provision for income taxes includes $2.2 million of China non-resident capital gain tax related to the sale of our interest in VAST LLC. The deferred tax provision includes the $22.0 million in research and development costs that are deductible in future periods.

The items accounting for the difference between income taxes computed at the Federal statutory tax rate and the provision for income taxes were as follows:

Years Ended

U.S. statutory rate 21.0 % 21.0 %

State taxes, net of Federal tax benefit 4.7 0.4

Foreign subsidiaries — 8.4

China non-resident capital gain tax (28.7 ) —

U.S. tax impact on sale of VAST LLC (9.7 ) —

Valuation allowance (18.8 ) —

Return to provision adjustment 2.1 (11.1 )

Global intangible low-taxed income (8.0 ) 0.5

Research and development tax credit 19.4 (9.7 )

Solar investment tax credit — (0.8 )

Non-controlling interest 4.0 (1.8 )

Uncertain tax positions (1.7 ) (1.4 )

Stock based compensation 0.3 (1.3 )

Impacts of the sale of our one-third interest in VAST LLC on our 2023 effective rate include the China non-resident capital gain tax, the U.S. tax impact on the sale of VAST LLC, and the valuation allowance. As discussed above, the current foreign provision for income taxes includes $2.2 million of China non-resident capital gain tax related to the sale of our interest in VAST LLC. The U.S. tax impact of the sale of VAST LLC is the result of the tax gain recognized. The valuation allowance, as discussed further below, is generated by our current assessment of the future realization of the capital losses realized on the VAST LLC sale. The change in the research and development tax credit on the effective rate between periods is due to an estimated increase in the available credit in 2023 as compared to 2022 on a book pre-tax loss in the current year as compared to book pre-tax income in the prior year.

The return to provision adjustment related to adjustments we made to our fiscal 2021 estimated foreign tax credits and estimated tax impacts associated with our investment in VAST LLC. These true-up adjustments resulted from the filing of our US income tax returns during fiscal 2022 and were attributable to actual results included in the non-US income tax returns, which are filed on a calendar year basis, and which differ from estimates included in our fiscal 2021 tax provision. This adjustment was not material to our previously issued financial statements.

The components of deferred tax (liabilities) assets were as follows (thousands of dollars):

Unrecognized pension and postretirement benefit plan liabilities $ 368 $ 579

Research and development costs 5,541 —

Capital loss carryforward related to sale of interest in VAST LLC 1,403 —

Stock-based compensation 414 360

Repair and maintenance supply parts reserve 222 222

Allowance for doubtful accounts 118 118

Postretirement obligations 64 8

Accumulated depreciation (4,387 ) (3,886 )

Accrued pension obligations 415 504

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered.

Federal credit carry-forwards at July 2, 2023 resulted in future benefits of approximately $1.4 million and expire between 2031 and 2041. We currently anticipate having sufficient Federal taxable income to utilize these credit carry-forwards. State credit carry-forwards at July 2, 2023 resulted in future benefits of approximately $196,000 and expire at varying times between 2025 and 2031. A valuation allowance of $1.4 million has been recorded as of July 2, 2023, due to our assessment of the future realization of the capital loss carryforward. We do not currently anticipate having capital gains in future taxable years to offset the capital loss carryforward. A valuation allowance of $172,000 has been recorded as of July 2, 2023, due to our assessment of the future realization of certain state credit carry-forward benefits. We do not currently anticipate having sufficient state taxable income to offset these credit carry-forwards. Foreign income before the provision for income taxes was $3.1 million in 2023 and $8.6 million in 2022.

The total liability for unrecognized tax benefits was $1.6 million as of July 2, 2023 and $1.5 million as of July 3, 2022 and was included in Other Long-term Liabilities in the accompanying Consolidated Balance Sheets. This liability includes approximately $1.4 million and $1.3 million of unrecognized tax benefits at July 2, 2023 and July 3, 2022, respectively, and approximately $162,000 of accrued interest at July 2, 2023 and $137,000 at July 3, 2022. 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 2, 2023 and $1.0 million at July 3, 2022. We recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows for the years ended July 2, 2023 and July 3, 2022 (thousands of dollars):

Years Ended

Unrecognized tax benefits, beginning of year $ 1,314 $ 1,458

Gross increases – tax positions in prior years 50 13

Gross decreases – tax positions in prior years — (19 )

Gross increases – current period tax positions 385 241

Unrecognized tax benefits, end of year $ 1,395 $ 1,314

We or one of our subsidiaries files income tax returns in the United States (Federal), Wisconsin (state), Michigan (state) and various other states, Mexico and other foreign jurisdictions. Tax years open to examination by tax authorities under the statute of limitations include fiscal 2020 through 2023 for Federal, fiscal 2019 through 2023 for most states and calendar 2018 through 2022 for foreign jurisdictions.

RETIREMENT PLANS AND POSTRETIREMENT COSTS

We have a noncontributory Supplemental Executive Retirement Plan (“SERP”), which is a nonqualified defined benefit plan. The SERP is funded through a Rabbi Trust with TMI Trust Company. Under the SERP, as amended December 31, 2013, participants received an accrued lump-sum benefit as of December 31, 2013 which was credited to each participant’s account. Subsequent to December 31, 2013, each eligible participant receives a supplemental retirement benefit equal to the foregoing lump-sum benefit, plus an annual benefit accrual equal to 8 percent of the participant’s base salary and cash bonus, plus annual credited interest on the participant’s account balance. All then current participants as of December 31, 2013 are fully vested in their account balances with any new individuals participating in the SERP effective on or after January 1, 2014 being subject to a five year vesting period. The SERP, which is considered a nonqualified defined benefit plan under applicable rules and regulations of the Internal Revenue Code, will continue to be funded through use of a Rabbi Trust to hold investment assets to be used in part to fund any future required lump sum benefit payments to participants. During 2023, SERP benefits of $863,000 were cash settled using Rabbi trust assets. We incurred a related settlement charge to operations of $217,000 pre-tax in 2023 as a result of the requirement to expense a portion of the unrealized actuarial losses due to the settlement of the SERP obligation. The Rabbi Trust assets had a value of $2.6 million at July 2, 2023 and $3.3 million at July 3, 2022, respectively. At July 2, 2023, the Rabbi Trust asset balance was included in Other Long-Term Assets in the accompanying Consolidated Balance Sheets. At July 3, 2022, $863,000 of the Rabbi Trust asset balance was included in Other Current Assets and the remaining balance was included in Other Long-Term Assets in the accompany Consolidated Balance Sheets. Refer to Fair Value of Financial Instruments discussion included in Notes to Financial Statements herein for further discussion of Rabbi Trust assets. The Rabbi Trust assets are excluded from the SERP tables below as they do not qualify as plan assets. The projected benefit obligation under the SERP, which is included in the SERP tables below, was $2.3 million at July 2, 2023 and $3.2 million at July 3, 2022. The SERP has 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 accumulated benefit obligation under the SERP was $2.2million at July 2, 2023 and $2.8 million at July 3, 2022.

We also sponsor a postretirement health care plan for all current and future eligible U.S. retirees hired prior to June 1, 2001. The expected cost of retiree health care benefits is recognized during the years the associates who are covered under the plan render service. Effective January 1, 2010, an amendment to the postretirement health care plan limited the benefit for future eligible retirees to $4,000 per plan year and the benefit is further subject to a maximum five-year coverage period based on the associate’s retirement date and age. The postretirement health care plan is unfunded. Additionally, we sponsor a postretirement life plan for all U.S. salaried retirees who retired prior to October 1, 2001 and all U.S. hourly retirees who were hired prior to June 27, 2005 and retired prior to January 1, 2010. The benefit provides for a death benefit of $8,000, which is increased to $70,000 for disability retirees until reaching the age of 65, in which case the death benefit decreased to $8,000. The postretirement life plan is unfunded. See "Organization and Summary of Significant Accounting Policies" above for additional information regarding certain matters related to recording a liability adjustment for the death benefit owed to eligible participants under the postretirement life plan.

Amounts included in accumulated other comprehensive loss, net of tax, at July 2, 2023, which have not yet been recognized in net periodic benefit cost were as follows (thousands of dollars):

SERP Postretirement

Unrecognized net actuarial losses included in accumulated other comprehensive loss at July 2, 2023 which are expected to be recognized in net periodic benefit cost (credit) in fiscal 2024, net of tax, for the SERP and postretirement plans are as follows (thousands of dollars):

SERP Postretirement

Net actuarial loss $ 35 $ 150

The following tables summarize the 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 SERP and postretirement plans.

SERP Benefits Postretirement Benefits

Years Ended Years Ended

COMPONENTS OF NET PERIODIC BENEFIT COST (CREDIT):

Plan settlements 217 — — —

Amortization of unrecognized net loss 99 86 243 323

WEIGHTED-AVERAGE ASSUMPTIONS:

Benefit Obligations:

Discount rate (SERP / postretirement life) 5.07 % 4.26 % 5.2 % 4.57 %

Discount rate (postretirement health) 5.06 % 4.23 %

Rate of compensation increases 4.61 % 4.0 % n/a n/a

STRT US Equity

STRT · 10-K · period ended 2023-07-02

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

STRT US Equity☆

STRT · 10-K · period ended 2023-07-02

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

STRT US Equity