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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, traditional domestic automotive OEMs (General Motors, Ford and Stellantis) have comprised a majority of our total net sales. During the past two decades, these customers have lost North American market share to New Domestic automotive manufacturers (primarily Japanese and Korean automotive manufacturers). In addition, our financial performance depends in large part on conditions in the North American automotive industry, which in turn, are largely dependent upon the U.S. economy. During fiscal years 2024 and 2023, the traditional domestic automotive OEMs represented 66 percent of our total net sales.

Fiscal 2024 net sales were $537.8 million compared to $492.9 million in fiscal 2023. $32.7 million of the $44.9 million net sales increase was driven by net price increases to our major OEM customers. When excluding this pricing effect, underlying sales increased by $12.2 million, up 2.5% over the prior year, largely reflecting the launch of new customer programs in the latter half of the fiscal year. The $32.7 million of aforementioned net price increase was composed of $9.7 million one-time retroactive pricing that is not expected to recur, and $23.0 million in ongoing increases in current part prices to our customers. In addition, we settled negotiations with certain key suppliers and paid $5.7 million in higher prices during the year, of which $1.7 million relates to one-time retroactive pricing with the remaining $4.0 million attributable to higher supplier prices on an ongoing basis. The net margin result of both customer and supplier changes in price represented a $27.0 million net margin improvement in fiscal 2024, comprised of $8.0 million of nonrecurring one-time pricing and $19.0 million of ongoing pricing. These net margin improvements surpassed the higher end of our target ranges of $6.0 million and $15.0 million for one-time and ongoing net pricing respectively, which were provided in the fiscal 2024 Outlook in our 2023 Form 10-K.

During fiscal 2024, our cost of sales performance proved challenging. Despite favorability in our raw materials costs, which recovered from elevated levels in fiscal 2023, and improved efficiency of our Mexican operations through a salaried staff reduction in the first quarter and production efficiencies implemented throughout the year, our overall cost of sales performance deteriorated. Factors driving higher costs in our manufacturing operations were primarily:

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a weakened U.S. dollar against the Mexican peso, raising the cost of our Mexican operations

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higher Mexican labor wages due to government-mandated minimum wage increases

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higher shipping costs primarily due to expedited shipments related to the launch of new product programs

Sales, engineering and administrative expenses decreased in fiscal 2024, primarily due to historically high engineering cost reimbursements from our customers, offset by expenses related to the company bonus plan and the transition of our Chief Executive Officer position. Our improved operating performance enabled us to achieve net income attributable to STRATTEC of $16.3 million in fiscal 2024 compared with a net loss attributable to STRATTEC of $6.7 million in fiscal 2023.

Based on July 2024 projections from our third-party forecasting service, S&P Global, North American light vehicle production is forecasted to grow modestly between 2024 and 2028. Model year 2024 preliminary North American vehicle build was 15.8 million. S&P Global currently expects 2025 model year vehicle build to remain at 15.8 million vehicles, growing to 16.2 million vehicles in 2026 and then to 16.4 million vehicles for 2027 and 2028. The North American vehicle build forecasts for our primary customers (Ford, General Motors and Stellantis) project a modest decline from 6.7 million vehicles in 2024 to 6.5 million vehicles in 2025 and then an increase to 6.9 million vehicles in model year 2026, stabilizing at that level for model years 2027 and 2028. In an effort to increase our sales, we will continue pursuing opportunities to expand our offerings with existing and new customers. These forecasts are subject to variability based upon a number of factors, including the overall North American economy, current employment levels, availability and cost of consumer credit, home equity values, fuel prices, changes in customer vehicle and option preferences, product quality issues, including those 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.

Results of Operations

2024 Compared to 2023

Years Ended

Net Sales (millions of dollars) $ 537.8 $ 492.9

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 58.9 56.3

The year-over-year sales increase of $44.9 million reflects net price increases from our major OEM customers of $32.7 million of which $23.0 million is attributable to ongoing increases in current part prices and $9.7 million relates to one-time retroactive price increases for parts shipped in the prior year for which the net price increase was agreed to during the current year. In addition to the net price increases, the following items specifically impacted sales to the noted customer groups between years:

Sales to General Motors Company were favorably impacted by new door handle business supplied on the Chevrolet Equinox EV.

Sales to Ford Motor Company were positively impacted by added power end gate content we supply on the F-Series Super Duty Pickup and by new tailgate latch content supplied on the F-Series Pickups.

Sales to Stellantis were negatively impacted by reduced customer vehicle production volumes as well as reduced content we supply for the Dodge Ram Pickup and several passenger car programs ending.

Sales to Tier 1 Customers improved in the current year compared to the prior year due to new door hardware content on the F-Series Super Duty Pickup, which is sold to a Tier 1 customer.

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, were positively impacted by sales for new business awarded from Aston Martin.

Sales to Hyundai / Kia were positively impacted by an overall increase in customer vehicle production volumes between years.

Cost of goods sold in the current year and prior year were as follows (millions of dollars):

Years Ended

Prior year reclassifications have been made for consistency with current year presentation.

Total cost of goods sold increased $21.5 million between years. The year-over-year increase in direct material costs of $6.1 million was the result of increases in sales volumes and content we supply, as discussed above, and $5.7 million of negotiated material price increases paid to key suppliers. Price increases paid to suppliers attributed to ongoing operations totaled $4.0 million while the remaining $1.7 million related to one-time retroactive price increases. The impact of content and material price increases was partially offset by reduced zinc costs of approximately $3.1 million in the current year as compared to the prior year. The year-over-year increase in labor and overhead costs of $15.4 million was impacted by the following:

Cost Increases:

The U.S. dollar value of our Mexican operations was negatively impacted by approximately $8.5 million in the current 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 17.13 pesos to the dollar for the year from approximately 18.98 pesos to the dollar in the prior year.

Mexico wages and benefits increased $6.6 million in the current year as compared to the prior year as a result of annual wage increases, including January 1, 2024 and January 1, 2023 government mandated minimum wage increases.

Freight costs increased $4.1 million between years due to an increase in shipments from foreign vendors, a change in shipping terms with a major supplier that occurred in June 2023, and an increase in expedited shipments.

The current year includes expense provisions of $2.7 million under our incentive bonus plan. The prior year includes no bonus expense.

The current year includes severance costs of $220,000 related to a realignment of our Mexican workforce.

Cost Decreases:

Mexico wages and benefits decreased by $1.5 million due to a September 1, 2023 salaried staff reduction in Mexico and current year production efficiencies that controlled headcount and hours worked.

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.

The net unfavorable impact of specific labor and overhead costs noted above was partially offset by more favorable absorption of our fixed overhead costs in the current year as compared to the prior year due to higher production volumes driven by an increase in finished goods inventory during the year and increased sales volumes.

Years Ended

Gross Profit (millions of dollars) $ 65.5 $ 42.2

Gross Profit as a percentage of net sales 12.2 % 8.6 %

Gross profit margin improvement between years was driven by pricing relief achieved during the current year as discussed above. The impact of one-time retroactive pricing in the current year increased the gross profit margin percentage by 1.3 percentage points. Additionally, favorable impacts of ongoing customer price increases, reduced zinc costs, favorable absorption, production efficiencies in Mexico and reduced royalty costs were partially offset by an unfavorable U.S. dollar to Mexican peso exchange rate, wage increases in Mexico, and increased freight, bonus, and severance costs, all as discussed above.

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

Years Ended

Expenses (millions of dollars) $ 47.7 $ 48.2

Expenses as a percentage of net sales 8.9 % 9.8 %

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

Cost Decrease:

Current year costs decreased $3.2 million in comparison to the prior year due to an increase in customer billings for the reimbursement of engineering development costs.

Cost Increase:

The current year includes one-time charges of $1.0 million associated with the transition of our Chief Executive Officer position.

The current year includes expense provisions of $1.9 million under our incentive bonus plan. The prior year includes no bonus expense.

Income from operations in the current year was $17.8 million compared to loss from operations of $6.1 million in the prior year. This change between years was the result of an increase in sales in the current year as compared to the prior year along with a reduction in engineering, selling and administrative expenses partially offset by an increase in cost of goods sold, all as discussed above.

Effective June 30, 2023, STRATTEC sold its one-third interest in VAST LLC to WITTE. Refer to the discussion of the Equity Restructuring Agreement within Joint Ventures and Majority Owned Subsidiaries included in the Notes to Financial Statements within this Form 10-K for additional information regarding the sale. The equity loss of joint ventures was $331,000 in the current year compared to equity earnings of joint ventures of $1.6 million in the prior year. The current year loss was the result of additional professional fees incurred related to the sale of STRATTEC's investment in VAST LLC. The $331,000 loss is an adjustment to the gain on sale of VAST LLC, which was recorded in the prior year. Our adjusted loss to date on the sale of VAST LLC totals $221,000. Prior year equity earnings 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.

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

Years Ended

Foreign currency transaction gain (loss) $ 2,153 $ (2,935 )

Rabbi Trust Assets gain 211 202

Realized and unrealized gain on Mexican peso forward contracts, net 885 1,022

Pension and postretirement plans cost (395 ) (722 )

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 2024 and 2023 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 June 30, 2024.

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

Our effective income tax rate for 2024 was 18.7 percent compared to (16.7) percent in 2023. Our 2024 effective tax rate was reduced by $1.2 million due to changes in the estimate of our 2023 foreign tax credits associated with the sale of our interest in VAST LLC. 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, a net Global Intangible Low Tax Income (GILTI) cost of $613,000 and the impact of available R&D and foreign tax credits on pre-tax book losses. Our income tax provision for each year 2024 and 2023 was affected by the non-controlling interest portion of our pre-tax income and R&D tax credit. The non-controlling interest impacts the effective tax rate as our ADAC-STRATTEC LLC entity was taxed as a partnership for U.S. tax purposes in 2024 and our ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entities were taxed as partnerships for U.S. tax purposes in 2023.

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 June 30, 2024 and July 2, 2023 was as follows (millions of dollars):

General Motors Company $ 28.6 $ 27.5

Cash Balances in Mexico

We earn a portion of our operating income in Mexico. As of June 30, 2024, $1.4 million of our $25.4 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 $ 12.3 $ 10.1

Investing Activities (7.8 ) 8.9

Financing Activities — (7.4 )

Cash flow from operating activities increased $2.2 million between years as the impact of increased profitability between years, as previously discussed, was offset by a net increase in working capital. The net increase in our working capital included the following working capital changes (millions of dollars):

Increase (Decrease) in Working Capital Requirements

Accounts Receivable $ 9.4 $ 13.7 $ (4.3 )

Accounts Payable and Other Liabilities (10.7 ) (24.0 ) 13.3

Accounts receivable balances increased in both the current and prior year periods. The increase in the accounts receivable balance during 2024 reflects increased sales as of the end of our fiscal 2024 as compared to the end of our fiscal 2023 as well as an increase of $6.4 million in open customer billings for the reimbursement of customer tooling costs and engineering development costs. The increase in accounts receivable balances during 2023 reflects increased sales as of the end of our fiscal 2023 as compared to the end of our fiscal 2022.

The change in inventory levels reflected an increase during the current year and a decrease during the prior year. The current year increase was driven by an increase in finished product inventory balances resulting from our long-term inventory reduction plan that looks to shift the composition of our inventory from purchased materials to finished production, improving responsiveness while reducing overall inventories. The prior 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 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 current year increase in other assets is due to an $11.8 million increase in value added tax ("VAT") recoverable balances related to our Mexican operations. VAT recoverable balances increased due to a temporary issue with our Mexican tax certification. Although the certification issue was resolved during our December 2023 quarter, we were required to pay VAT on all parts temporarily imported into Mexico before seeking reimbursement for periods in which the certification issue was outstanding, which periods are now open to audit with the Mexican tax authority along with all periods subsequent to resolution of the certification issue. We believe temporary increases in the VAT recoverable balance will remain elevated until the periods under audit are closed.

Accounts payable balances increased in both the current and prior year periods. The current year increase was due to the following:

- Accrued salaries and benefits increased $6.3 million due to the accrual of $4.5 million under our incentive bonus plan as well as increased benefit accruals for our Mexican associates, which resulted from annual wage increases, including January 1, 2024 government mandated increases. There was no bonus accrual as of June 2023.

- VAT payable balances increased $3.5 million due to periods from 2024 being open to audit. Refer to the discussion of VAT recoverable balances and the VAT certification issue above.

- Income tax payable balances increased $2.5 million in 2024 based on the required income tax provision, the timing and amounts of federal, state and foreign tax payments made, and the timing of utilization of tax credits.

The prior year increase was due to the following:

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

- Accrued salaries and benefits increased $4.7 million due to increased salaries and benefits for our Mexican associates.

- Income taxes payable increased $2.4 million 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 due to several periods being open to audit in Mexico.

Net cash used in investing activities of $7.8 million during 2024 included capital expenditures of $9.8 million in support of requirements for new product programs and the upgrade and replacement of existing equipment partially offset by additional proceeds from the sale of our interest in VAST LLC of $2.0. 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 provided by financing activities of $72,000 during 2024 included additional borrowings under our credit facilities of $2.0 million and $72,000 received for purchases under our employee stock purchase plan. These cash inflows were partially offset by the repayment of borrowings under credit facilities of $2.0 million. 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.

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 2024 or fiscal 2023.

Future Capital Expenditures

We anticipate capital expenditures will be approximately $15.0 million in fiscal 2025 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 June 30, 2024. A total of 3,655,322 shares have been repurchased over the life of the program through June 30, 2024, at a cost of approximately $136.4 million. No shares were repurchased during fiscal 2024 or 2023. 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.

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 is expected to be made during our fiscal 2025, is expected to total approximately $1.9 million.

We anticipate payments of approximately $4.5 million to associates in connection with our incentive bonus plan during the first quarter of our fiscal 2025 related to bonuses earned in our fiscal 2024.

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 $20 million secured revolving credit facility (the “ADAC-STRATTEC Credit Facility”) with BMO Harris Bank N.A., which is guaranteed by STRATTEC. The ADAC-STRATTEC Credit Facility borrowing limit decreases to $18 million on August 1, 2025. The credit facilities both expire August 1, 2026. 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, SOFR plus 1.35 percent for the period February 23, 2023 through September 5, 2023, and SOFR plus 1.85 percent subsequent to September 5, 2023. Interest on borrowings under the ADAC-STRATTEC Credit Facility were at varying rates based, at our option, on the bank's prime rate with no interest rate margin through May 30, 2024 and a 2 percent interest rate margin subsequent to May 30, 2024 or LIBOR plus 1.25 percent through February 6, 2023, SOFR plus 1.35 percent for the period February 7, 2023 through May 30, 2024, and SOFR plus 3.10 percent subsequent to May 30, 2024. 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 June 30, 2024, 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 June 30, 2024 or July 2, 2023. The average outstanding borrowings and weighted average interest rate on the STRATTEC Credit Facility loans were approximately $33,000 and 8.5 percent, respectively, during 2024. 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. Outstanding borrowings under the ADAC-STRATTEC Credit Facility totaled $13 million at both June 30, 2024 and July 2, 2023. The average outstanding borrowings and weighted average interest rate on the ADAC-STRATTEC Credit Facility loans were approximately $13.0 million and 6.8 percent, respectively, during 2024. 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. 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.

Joint Ventures and Majority Owned Subsidiaries

Refer to the discussion of Investment in Joint Ventures and Majority Owned Subsidiaries and discussion of Equity (Loss) 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 $1.2 million at June 30, 2024 and $1.1 million at July 2, 2023. 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 $120,000 at June 30, 2024 and $110,000 at July 2, 2023. 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 INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) 30

CONSOLIDATED BALANCE SHEETS 31

Consolidated Statements of shareholders' Equity 32

Consolidated Statements of Cash Flows 33

Notes to Financial Statements 34

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 sheets of STRATTEC SECURITY CORPORATION and subsidiaries (the "Company") as of June 30, 2024 and July 2, 2023, the related consolidated statements of income (loss) and comprehensive income (loss), shareholders’ equity, and cash flows, for the fiscal years ended June 30, 2024 and 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 June 30, 2024 and July 2, 2023, and the results of its operations and its cash flows for the fiscal years ended June 30, 2024 and 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 June 30, 2024, 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 5, 2024, 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 audits. 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 audits 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 audits 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 audits 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 audits provide 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.

Specific Warranty Reserve – Refer to the Warranty Reserve Footnote to the Financial Statements

Critical Audit Metter Description

The Company records a specific warranty reserve for known warranty claims when its products fail to perform as expected and when it is probable that they will participate in the repair costs incurred by its customers for such products.

The specific 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 specific 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 repair rate. Such matters may require future adjustments to the reserve which could be material.

We identified a certain specific 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 certain specific 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 certain specific warranty reserve.

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

Evaluating the methodology used to determine the certain specific warranty 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 certain specific 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 certain specific warranty reserve.

Comparing certain inputs used in the certain specific warranty reserve to industry data to assess the reasonableness of management’s assumptions used in the estimate.

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

/s/ Deloitte & Touche LLP

Milwaukee, Wisconsin

September 5, 2024

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

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

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Years Ended

Engineering, selling, and administrative expenses 47,654 48,241

Equity (loss) earnings of joint ventures (331 ) 1,559

Investment Income 572 —

Other income (expense), net 3,048 (2,178 )

Net income (loss) attributable to non-controlling interest 115 (2,279 )

COMPREHENSIVE INCOME (LOSS):

Currency translation adjustments, net of tax (2,794 ) 6,164

Pension and postretirement plans, net of tax 193 689

TOTAL OTHER COMPREHENSIVE (LOSS) INCOME (2,601 ) 6,853

Comprehensive (loss) income attributable to non-controlling interest (991 ) 180

INCOME (LOSS) 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 Income (Loss) and Comprehensive Income (Loss).

CONSOLIDATED BALANCE SHEETS

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

ASSETS

CURRENT ASSETS:

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:

Accrued liabilities:

Commitments and Contingencies – see note beginning on page 46

ACCRUED POSTRETIREMENT OBLIGATIONS 1,050 1,157

SHAREHOLDERS’ EQUITY:

Accumulated other comprehensive loss (15,689 ) (14,194 )

Total STRATTEC SECURITY CORPORATION shareholders’ equity 200,545 184,963

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)

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 —

Currency translation adjustments (2,794 ) — — — (1,688 ) — (1,106 )

Purchase of SPA Non- controlling interest (775 ) — (775 ) — — —

Stock-based compensation 1,467 — 1,467 — — — —

Employee stock purchases 72 1 23 — — 48 —

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 loss (earnings) of joint ventures 331 (1,559 )

Foreign currency transaction (gain) loss (2,153 ) 2,935

Loss on settlement of pension obligation — 217

Stock-based compensation expense 1,467 1,466

Change in operating assets and liabilities:

Accounts payable and accrued liabilities 10,738 23,964

Net cash provided by operating activities 12,265 10,095

CASH FLOWS FROM INVESTING ACTIVITIES

Investment in joint ventures — (278 )

Proceeds from Sale of interest in VAST LLC 2,000 26,170

Purchase of VAST Korea net assets — 354

Additions to property, plant and equipment (9,788 ) (17,370 )

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

Net cash (used in) provided by investing activities (7,788 ) 8,901

CASH FLOWS FROM FINANCING ACTIVITIES

Borrowings under credit facilities 2,000 17,000

Repayments under credit facilities (2,000 ) (15,000 )

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

Exercise of stock options and employee stock purchases 72 183

Dividends paid to non-controlling interests of subsidiaries — (600 )

Net cash provided by (used in) financing activities 72 (7,436 )

FOREIGN CURRENCY IMPACT ON CASH 290 237

NET INCREASE IN CASH AND CASH EQUIVALENTS 4,839 11,797

CASH AND CASH EQUIVALENTS

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash 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 $ 171 $ (1,437 )

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 security, access control, and user interface controls products and solutions. This includes mechanical locks and keys, electronically enhanced locks and keys, passive entry passive start systems (PEPS), phone as a key systems (PaaK), 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 steering wheel switches and controller, E-shifters, paddle switches and related products for primarily North American automotive customers. We also previously supplied global automotive manufacturers through a strategic relationship with WITTE Automotive (“WITTE”) of Velbert, Germany and ADAC Plastics Inc. (doing business as ADAC Automotive (“ADAC”), of Grand Rapids, Michigan) called Vehicle Access Systems Technology LLC ("VAST LLC"), doing business as the VAST Automotive Group (“VAST”). Under this unique strategic relationship, STRATTEC, WITTE and ADAC marketed the products of each company to global customers under the “VAST Automotive Group” brand name. Effective as of June 30, 2023, STRATTEC sold its one-third interest in VAST LLC to WITTE. As of the closing of the sale of its VAST LLC interest, STRATTEC entered into a strategic preferred partner relationship with WITTE covering VAST LLC pursuant to the terms of a cooperation framework agreement that enables STRATTEC to continue to market and rely on the global capabilities of VAST LLC. STRATTEC products are shipped to customer locations in the United States, Canada, Mexico, Europe, South America, Korea, and China, and we, along with our partners, provide full service and aftermarket support for each VAST Automotive Group partners’ products.

The accompanying consolidated financial statements reflect the consolidated results of STRATTEC SECURITY CORPORATION, its wholly owned subsidiaries, STRATTEC de Mexico and STRATTEC POWER ACCESS LLC (“SPA”), and its majority owned subsidiary, ADAC-STRATTEC, LLC. Effective June 30, 2023, SPA became a wholly owned subsidiary of STRATTEC SECURITY CORPORAITON as a result of the purchase of the remaining non-controlling interest. Prior to June 30, 2023, STRATEC owned 80 percent of SPA. STRATTEC is headquartered in Milwaukee, Wisconsin. STRATTEC de Mexico is located in Juarez, Mexico. ADAC-STRATTEC, LLC and SPA have operations in El Paso, Texas and in Juarez and Leon, Mexico. For periods prior to June 30, 2023, the accompanying financial statements also reflect the results of our one-third equity investment in VAST LLC for which we exercised significant influence but did not control and were not variable interest entities of STRATTEC. VAST LLC was accounted for using the equity method and consisted primarily of four wholly owned subsidiaries in China, one wholly owned subsidiary in Brazil and one joint venture entity in India. We have only one reporting segment.

Risks and Uncertainties: STRATTEC’s operating performance is subject to global economic conditions, inflationary pressures and levels of consumer spending specifically within the automotive industry. In our fiscal year 2023, the inflationary pressures negatively affected the areas of raw materials, purchased materials and wage rates in Mexico, resulting in increased raw material and purchased part costs in the year. While our fiscal 2024 results reflect reduced raw material costs as compared to our fiscal 2023, inflationary pressures on purchased material and wage rates in Mexico persist and may continue to negatively impact our fiscal 2025 operating results.

Additionally, unforeseen global economic conditions may adversely impact our supply chain and our operations, including impacting our customers, workforce and suppliers, any of which may continue to disrupt and limit sourcing of critical supply chain components needed by us and our customers to meet expected production schedules. Moreover, these events may create added inflationary pressures on our operations, including further increases in 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 upon our operations. 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 subsidiaries and its majority owned subsidiary. 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 adopted this standard in the first quarter of our fiscal 2024. The adoption of this pronouncement did not have a material impact on our consolidated financial statements.

In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements - Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative. The update incorporates into the Codification several disclosures and presentation requirements currently residing in SEC Regulations S-X and S-K. The effective date of ASU 2023-06 will be the date that the SEC eliminates the corresponding disclosure requirement from Regulation S-X and Regulation S-K. All amendments must be applied prospectively. The adoption of this pronouncement is not expected to have a material impact on our consolidated financial statements.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures. The update enhances annual and interim reportable segment disclosures primarily by requiring disclosures about significant reportable segment expenses and provides new segment disclosure requirements for entities with a single reportable segment. ASU 2023-07 is effective for public business entities for fiscal years beginning after December 15, 2023 and for interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. This update is to be applied retrospectively to all periods presented in the financial statements. As a result of this update, we will be required to provide single reportable segment disclosure. Annual reporting under this update becomes effective for us in our fiscal 2025. Interim reporting under this update becomes effective for us in our fiscal 2026. We are currently assessing the required disclosure impacts of this update.

In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures. The update requires greater disaggregation of income tax disclosures related to the income tax rate reconciliation and income taxes paid. ASU 2023-09 is effective for public business entities for annual periods beginning after December 15, 2024, with early adoption permitted. This update is to be applied on a prospective basis. Retrospective application is permitted. Annual reporting under this update becomes effective for us in our fiscal 2026. We are currently assessing the required disclosure impacts of this update.

Subsequent Event: In August 2024, we entered into a peso forward contract providing for monthly settlements during the period September 2024 through August 2025. The notional amount over the contract period totals $33.5 million with a weighted average forward exchange rate of $19.73. Refer to the Derivative Instruments discussion below.

Fiscal Year: Our fiscal year ends on the Sunday nearest June 30. The years ended June 30, 2024 and July 2, 2023 are each comprised of 52 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 money market funds comprised of government agency securities, bank money market deposits 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 2023 and 2024, 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 Income (Expense), net. No Mexican peso forward contracts were outstanding as of June 30, 2024 or July 2, 2023.

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

Other Income (Expense), net

Years Ended

Not Designated as Hedging Instruments:

Realized and unrealized gain, net $ 885 $ 1,022

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 June 30, 2024 and July 2, 2023. 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 June 30, 2024 and July 2, 2023 (thousands of dollars):

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

Assets:

Rabbi Trust assets:

Stock index funds:

The Rabbi Trust assets fund our supplemental executive retirement plan and are included in Other Long-Term Assets in the accompanying Consolidated Balance Sheets. The reduction in Rabbi trust assets between periods resulted from $1.2 million in assets being moved from the trust in June 2024 related to a July 2024 settlement payment. Refer to discussion of Mexican peso forward contracts under Derivative Instruments above.

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 credit losses 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 credit losses totaled $500,000 at June 30, 2024 and July 2, 2023.

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):

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.

Value-Added Tax: Our Mexican entities are subject to value-added tax ("VAT"). VAT is paid on goods and services and collected on sales. A VAT certification generally allows for relief from VAT tax for temporarily imported goods. Our VAT recoverable and payable balances were increased as of July 2, 2023 due to several monthly VAT tax periods being open to audit by the Mexican tax authority. As of June 30, 2024, the audits for periods prior to July 2023 have been closed. VAT recoverable balances increased $11.8 million during 2024 mostly due to a temporary issue with our VAT certification. Although the certification issue was resolved during our December 2023 quarter, we were required to pay VAT on all parts temporarily imported into Mexico before seeking reimbursement for periods in which the certification issue was outstanding, which periods are now open to audit with the Mexican tax authority along with all periods subsequent to resolution of the certification issue. VAT payable balances increased $3.5 million during 2024 mostly due to all periods subsequent to resolution of the VAT certificate issue being open to audit. We believe temporary increases in the VAT recoverable and payable balances will remain elevated until the periods under audit are closed.

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 June 30, 2024 or July 2, 2023.

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. This lease has a current lease term through December 2028 and does not include any options to extend the lease term beyond such timeframe. We have two operating leases for office space at our Korean branch office. Both of these leases have a lease term through July 1, 2024 with automatic renewal. For purposes of calculating operating lease obligations, we included an extension of four years after July 1, 2024 as it is reasonably certain that we will exercise such automatic renewals. Our leases do not contain 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 operating leases 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 $ 744 $ 465

Future minimum lease payments, by our fiscal year, including options to extend that are reasonably certain to be exercised, under the non-cancelable leases are as follows as of June 30, 2024 (thousands of dollars):

Total Future Minimum Lease Payments 4,765

Less: Imputed Interest (631 )

Total Lease Obligations $ 4,134

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

Years Ended

Operating Cash Flows:

Cash Paid Related to Operating Lease Obligation $ 769 $ 497

The weighted average remaining lease term and discount rate for our operating leases are shown below:

Weighted Average Remaining Lease Term, (in years) 4.5 5.5

Weighted Average Discount Rate 6.2 % 6.2 %

Operating lease expense for the years ended June 30, 2024 and July 2, 2023 totaled $989,000 and $497,000, respectively.

Supplier Concentrations: The following inventory purchases were made from major suppliers with purchases in excess of 2.5 percent of total purchases 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 3,365 full-time associates as of June 30, 2024. Approximately170 or 5.1percent of our full time associates were represented by a labor union at June 30, 2024 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 152 or 4.5 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, 2025.

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 Income (Loss) and Comprehensive Income (Loss). Shipping and handling costs are accounted for as fulfillment costs and are included in Cost of Goods Sold in the accompanying Consolidated Statements of Income (Loss) and Comprehensive Income (Loss).

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 credit losses 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 June 30, 2024 or July 2, 2023.

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 $14.8 million in 2024 and $15.9 million in 2023.

Other Income (Expense), Net: Net other income (expense) included in the accompanying Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) 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 2024 and 2023 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 gain (loss) $ 2,153 $ (2,935 )

Rabbi Trust Assets gain 211 202

Realized and unrealized gain on Mexican peso forward contracts, net 885 1,022

Pension and postretirement plans cost (395 ) (722 )

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 received from our customers. During 2024 and 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 are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and the average exchange rate for each applicable period for sales, costs and expenses. Foreign currency translation adjustments are included as a component of accumulated other comprehensive loss. Foreign currency transaction gains and losses are included in other income (expense), net in the accompanying Consolidated Statements of Income (Loss) and Comprehensive Income (Loss).

Accumulated Other Comprehensive Loss (“AOCL”): The following tables summarize the changes in AOCL for the years ended June 30, 2024 and July 2, 2023 (thousands of dollars):

Foreign CurrencyTranslationAdjustments Retirement andPostretirementPlans Total

Other comprehensive loss before reclassifications 2,794 (10 ) 2,784

Income Tax — 2 2

Net other comprehensive loss before reclassifications 2,794 (8 ) 2,786

Reclassifications:

Actuarial losses (A) — (242 ) (242 )

Total reclassifications before tax — (242 ) (242 )

Net reclassifications - (185 ) (185 )

Other comprehensive loss attributable

to non-controlling interest 1,106 — 1,106

Foreign CurrencyTranslationAdjustments Retirement andPostretirementPlans Total

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

Net other comprehensive income 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 income attributable

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

(A)

Amounts reclassified are included in the computation of net periodic benefit cost, which is included in Other Income (Expense), net in the accompanying Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). 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 2,250,000 shares of common stock available for the grant of awards under the plan. Remaining shares available to be granted under the plan as of June 30, 2024 were 361,085. 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 2024 or 2023, and all compensation cost related to previously granted options was recognized prior to 2023. Accordingly, no compensation cost related to stock options was recorded during 2024 or 2023. 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 June 30, 2024 related to restricted stock granted under the plan was as follows (thousands of dollars):

Restricted stock granted $ 930 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

Fair value of stock options vested $ — $ —

Options outstanding as of June 30, 2024 were 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 Income (Loss) and Comprehensive Income (Loss).

INVESTMENT IN JOINT VENTURES AND MAJORITY OWNED SUBSIDIARIES

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. For all periods presented in this report, ADAC-STRATTEC LLC was 51 percent owned by STRATTEC and 49 percent owned by ADAC Automotive (“ADAC”). 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. 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 income to STRATTEC totaled approximately $135.9 million and $147,000, respectively, in 2024. ADAC-STRATTEC LLC net sales and net loss to STRATTEC totaled approximately $121.9 million and $2.1 million, respectively, in 2023.

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 net sales and are included in the consolidated results of STRATTEC. Additionally, ADAC-STRATTEC LLC sells production parts to ADAC. Sales to ADAC are included in the consolidated results of STRATTEC. The following table summarizes these related party transactions for the periods indicated below (in thousands):

Years Ended

Accounts receivable due from ADAC $ 833 $ 3,903

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 June 30, 2023, SPA was 80 percent owned by STRATTEC and 20 percent owned by WITTE. WITTE, of Velbert, Germany, is a privately held automotive supplier that designs, manufactures and markets automotive components, including locks and keys, hood latches, rear compartment latches, seat back latches, door handles and specialty fasteners. Effective June 30, 2023, we entered into and completed transactions contemplated by an Equity Restructuring Agreement ("Restructuring Agreement") between STRATTEC and WITTE. As a result, STRATTEC purchased the remaining 20 percent interest in SPA, and SPA became a wholly owned subsidiary of STRATTEC. The restructuring agreement is discussed further below. An additional Mexican entity, STRATTEC POWER ACCESS de Mexico, is wholly owned by SPA. The financial results of SPA are consolidated with the financial results of STRATTEC.

Prior to June 30, 2023, we participated in certain Alliance Agreements with WITTE and ADAC. 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. VAST LLC had investments in China, Brazil, and India with sales and engineering branch offices in South Korea and Japan. Due to these relationships, STRATTEC purchased $839,000 of component parts from WITTE in 2023. STRATTEC also paid WITTE a royalty of $528,000 in 2023 related to certain latch product sales. WITTE was no longer a related party as of June 30, 2023.

As a result 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 SPA along with the net assets of VAST LLC's Korea branch office. The 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

The Restructuring Agreement positions 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 allows 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 also gives 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. The activities of VAST LLC resulted in equity loss of joint ventures to STRATTEC of $331,000 during 2024, which loss was the result of additional professional fees incurred related to the Restructuring Agreement. The current year loss is an adjustment to our 2023 gain on sale of VAST LLC of $110,000. Our accumulated loss on sale of VAST LLC totals $221,000 as of June 30, 2024. The activities of VAST LLC resulted in equity earnings of joint ventures to STRATTEC of approximately $1.6 million during 2023. STRATTEC's 2023 equity earnings also includes STRATTEC's one-third share of a loss on disposal of Brazil, which totaled $531,000. 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. As of June 30, 2023, STRATTEC had no continuing involvement in VAST LLC. See further discussion under Equity (Loss) Earnings of Joint Ventures included in Notes to Financial Statements herein.

EQUITY (LOSS) 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.

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

Years Ended

Engineering, selling and administrative expense — 31,302

Income from operations — 4,209

Other income, net — 2,304

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

Income before provision for income taxes — 4,921

Provision for income taxes — 672

Net income $ — $ 4,249

STRATTEC’s share of VAST LLC net income $ — $ 1,416

Intercompany profit eliminations — 33

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

(Loss) gain on sale of VAST LLC (331 ) 110

STRATTEC's equity (loss) earnings of VAST LLC $ (331 ) $ 1,559

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 held 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

Sales to VAST LLC $ — $ 64

Purchases from VAST LLC $ — $ 49

Expenses charged to VAST LLC $ — $ 382

Expenses charged from VAST LLC $ — $ 761

CREDIT FACILITIES

Outstanding borrowings under the credit facilities referenced in the above paragraph as of the end of 2024 and 2023 were as follows (thousands of dollars):

STRATTEC Credit Facility $ — $ —

Average outstanding borrowings and the weighted average interest rate under each such credit facility during 2024 and 2023 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 June 30, 2024 is adequate.

At June 30, 2024, 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 $ — $ 558

INCOME TAXES

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

Years Ended

Currently payable (recoverable):

The 2024 and 2023 federal provisions for income taxes excluded deductions of $16.7 million and $22.0 million, respectively, in research and development costs that are deductible in future periods as the costs were included in the deferred tax provisions of the respective periods. The 2023 federal provision also included $6.0 million of capital losses on the sale of our interest in VAST LLC. The 2023 foreign provision for income taxes included $2.2 million of China non-resident capital gain tax related to the sale of our interest in VAST LLC. Foreign income before the provision for income taxes was $8.4 million in 2024 and $3.1 million in 2023.

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 2.7 4.7

Foreign subsidiaries 5.4 —

China non-resident capital gain tax (1.6 ) (28.7 )

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

Valuation allowance 2.6 (18.8 )

Return to provision adjustment (6.1 ) 2.1

Global intangible low-taxed income — (8.0 )

Research and development tax credit (8.1 ) 19.4

Non-controlling interest 2.3 4.0

Uncertain tax positions — (1.7 )

Stock-based compensation 0.7 0.3

Impacts of the sale of our one-third interest in VAST LLC on our 2023 effective rate included the China non-resident capital gain tax, the U.S. tax impact on the sale of VAST LLC, and the capital loss carryforward valuation allowance. As discussed above, the 2023 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 was the result of the tax gain recognized. The valuation allowance, as discussed further below, was generated by our 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 book pre-tax income in the current year as compared to book pre-tax loss in the prior year.

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

Unrecognized pension and postretirement benefit plan liabilities $ 296 $ 368

Research and development costs 8,598 5,541

Capital loss carryforward related to sale of interest in VAST LLC 1,677 1,403

Stock-based compensation 281 414

Repair and maintenance supply parts reserve 215 222

Allowance for credit losses 113 118

Postretirement obligations 104 64

Accumulated depreciation (3,455 ) (4,387 )

Accrued pension obligations 444 415

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.

Foreign tax credit carry-forwards at June 30, 2024 resulted in future benefits of approximately $1.4 million and expire between 2031 and 2041. A valuation allowance related to the federal credit carry-forwards of $692,000 has been recorded as of June 30, 2024 as we currently do not anticipate having sufficient foreign sourced income to utilize these credit carry-forwards. State credit carry-forwards at June 30, 2024 resulted in future benefits of approximately $541,000 and expire at varying times between 2025 and 2032. A valuation allowance of $155,000 has been recorded as of June 30, 2024, 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. A valuation allowance of $1.7 million has been recorded as of June 30, 2024 due to our assessment of the future realization of the capital loss carryforward related to the sale of VAST LLC. We do not currently anticipate having capital gains in future taxable years to offset the capital loss carryforward.

The total liability for unrecognized tax benefits was $1.6 million as of both June 30, 2024 and July 2, 2023 and was included in Other Long-term Liabilities in the accompanying Consolidated Balance Sheets. This liability includes $1.4 million of unrecognized tax benefits at both June 30, 2024 and July 2, 2023. The liability includes $150,000 of accrued interest at June 30, 2024 and $162,000 at July 2, 2023. 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 $1.2 million at June 30, 2024 and $1.1 million at July 2, 2023. 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 June 30, 2024 and July 2, 2023 (thousands of dollars):

Years Ended

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

Gross increases – tax positions in prior years 41 50

Gross decreases – tax positions in prior years (59 ) —

Gross increases – current period tax positions 427 385

Unrecognized tax benefits, end of year $ 1,417 $ 1,395

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 2021 through 2024 for federal, fiscal 2020 through 2024 for most states and calendar 2019 through 2023 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 $1.6 million and $2.6 million at June 30, 2024 and July 2, 2023, respectively, and were 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 reduction in Rabbi trust assets between periods resulted from $1.2 million in assets being moved from the trust in June 2024 related to a July 2024 settlement payment. The projected benefit obligation under the SERP, which is included in the SERP tables below, was $2.6 million at June 30, 2024 and $2.3 million at July 2, 2023. 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 $2.4 million at June 30, 2024 and $2.2 million at July 2, 2023.

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 June 30, 2024, 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 June 30, 2024 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 $ 20 $ 127

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 46 99 196 243

WEIGHTED-AVERAGE ASSUMPTIONS:

Benefit Obligations:

Discount rate (SERP / postretirement life) 5.21 % 5.07 % 5.45 % 5.20 %

Discount rate (postretirement health) 5.23 % 5.06 %

Rate of compensation increases 5.46 % 4.61 % n/a n/a

Net Periodic Benefit Cost:

Discount rate (SERP / postretirement life) 5.07 % 4.26 % 5.20 % 4.57 %

Discount rate (postretirement health) 5.06 % 4.23 %

Rate of compensation increases 4.00 % 4.00 % n/a n/a

CHANGE IN PROJECTED BENEFIT OBLIGATION:

Plan settlements — (863 ) — —

CHANGE IN PLAN ASSETS:

Fair value of plan assets at beginning of year $ — $ — $ — $ —

Fair value of plan assets at end of year $ — $ — $ — $ —

AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE SHEETS:

SERP Benefits Postretirement Benefits

Years Ended Years Ended

Plan settlements — (217 ) — —

Amortization of unrecognized net loss (46 ) (99 ) (196 ) (243 )

An annual rate increase in the per capita cost of covered health care benefits is not applicable as all eligible retirees will be limited to $4,000 per plan year subject to a maximum five-year coverage period as of June 2024.

We expect to contribute $1.2 million to our SERP and $108,000 to our postretirement health care and life plans in fiscal 2025. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid during the fiscal years noted below (thousands of dollars):

SERPBenefits PostretirementBenefits

All U.S. associates may participate in our 401(k) Plan. We contribute 100 percent up to the first 5 percent of eligible compensation that a participant contributes to the plan. Our contributions to the 401(k) Plan were as follows (thousands of dollars):

Years Ended

SHAREHOLDERS’ EQUITY

We had 18,000,000 shares of authorized common stock, par value $.01 per share, with 3,988,794 and 3,929,046 shares outstanding at June 30, 2024 and July 2, 2023, respectively. Holders of our common stock are entitled to one vote for each share on all matters voted on by shareholders.

Our Board of Directors previously authorized a stock repurchase program to buy back up to 3,839,395 outstanding shares of our common stock as of June 30, 2024. As of June 30, 2024, 3,655,322 shares have been repurchased under this program at a cost of approximately $136.4 million. No shares were repurchased under this program during 2024 or 2023.

EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed on the basis of the weighted average number of shares of common stock outstanding during the applicable period. Diluted earnings (loss) per share is computed on the basis of the weighted average number of shares of common stock plus the potential dilutive common shares outstanding during the applicable period using the treasury stock method. Potential dilutive common shares include outstanding stock options and unvested restricted stock awards. A reconciliation of the components of the basic and diluted per share computations follows (in thousands, except per share amounts):

Years Ended

Net income (loss) attributable to STRATTEC $ 16,313 $ (6,670 )

Weighted average shares of common stock outstanding 3,975 3,921

Incremental shares – stock based compensation 29 —

Diluted weighted average shares of common stock outstanding 4,004 3,921

Basic earnings (loss) per share $ 4.10 $ (1.70 )

Diluted earnings (loss) per share $ 4.07 $ (1.70 )

Potentially dilutive common shares that were excluded from the calculation of diluted earnings per share because their inclusion would have been antidilutive were as follows:

Years Ended Number of SharesExcluded

STOCK OPTION AND PURCHASE PLANS

A summary of stock option activity under our stock incentive plan was as follows:

Weighted Average Weighted AverageRemainingContractual AggregateIntrinsicValue

Shares Exercise Price Term (in years) (in thousands)

Exercisable as of:

No options were granted during fiscal 2024 or 2023.

A summary of restricted stock activity under our stock incentive plan was as follows:

Weighted Average

Grant Date

Shares Fair Value

We have an Employee Stock Purchase Plan to provide substantially all U.S. full-time associates an opportunity to purchase shares of STRATTEC common stock through payroll deductions. A participant may contribute a maximum of $5,200 per calendar year to the plan. On the last day of each month or if such date is not a trading day on the most recent previous trading day, participant account balances are used to purchase shares of our common stock at the average of the highest and lowest reported sales prices of a share of STRATTEC common stock on the NASDAQ Global Market on such date. A total of 100,000 shares may be issued under the plan. Shares issued from treasury stock under the plan totaled 2,998 at an average price of $24.08 during 2024 and 3,342 at an average price of $22.24 during 2023. A total of 42,804 shares remain available for purchase under the plan as of June 30, 2024.

EXPORT SALES

Total export sales, sales from the United States to locations outside of the United States, are summarized as follows (thousands of dollars and percent of total net sales):

Years Ended

Net Sales % Net Sales %

During the years ended June 30, 2024 and July 2, 2023, sales to Canada totaled $57.1 million or 11 percent of total net sales and $51.3 million or 10 percent of total net sales, respectively.

PRODUCT SALES

Sales by product group were as follows (thousands of dollars and percent of total net sales):

Years Ended

Net Sales % Net Sales %

SALES AND RECEIVABLE CONCENTRATION

Sales to our largest customers were as follows (thousands of dollars and percent of total net sales):

Years Ended

STRT US Equity

STRT · 10-K · period ended 2024-06-30

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 2024-06-30

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