Quarterly Report for Quarter Ending March 29, 2026 (Form 10-Q)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

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

Business Overview

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

Our strategic priority is to execute a business transformation to strengthen the Company's profitability and deliver sustainable sales growth. We expect to improve our business with upgraded systems and processes, modernization of our support functions and a focus on productivity and efficiencies in our manufacturing operations. We believe this will result in an optimized cost structure and consistent cash generation through improved working capital velocity and efficient asset utilization. In the short term, cash generated from our operations will be reinvested in our business to fund our transformational efforts and growth initiatives. To drive organic growth, we will leverage our technical engineering expertise, market-leading positions and strong customer relationships to generate innovative solutions and capture more content on current platforms, win new platforms with current customers, gain new customers both domestically and abroad and build opportunities in the broader transportation industry.

Volatility in the North American automotive industry is driven by supply chain disruptions, global inflation, thinning labor availability, rising global commodity costs and a changing global trade and geopolitical climate. These macro conditions, coupled with changes in production volumes by OEMs in response to new vehicle consumer demand, impact our sales and profitability levels. An evolving tariff landscape, combined with heightened geopolitical instability in certain global regions has further disrupted supply chains and has added complexity to production and cost planning across the industry. Lower near term North American light vehicle production estimates, which are subject to change, reflect these dynamics in addition to continued industry-wide supply chain disruptions and availability of raw materials including rare earth minerals. As we look forward and navigate these macroeconomic challenges and fluctuating OEM production volumes, we are focused on executing new initiatives to improve our cost structure, continuing to mitigate the impact of incremental tariff costs, driving cash flow through improved working capital utilization and securing new platforms to solidify future sales growth.

Analysis of Results of Operations

Three months ended March 29, 2026 (third quarter fiscal 2026) compared with the three months ended March 30, 2025 (third quarter fiscal 2025)

The Company's consolidated results of operations were as follows (in thousands):

Third quarter fiscal 2026 sales were $137.6 million, representing a decrease of $6.5 million or 4.5%, compared to the prior year, primarily due to lower OEM production volumes and the cancellation of certain customer programs. Third quarter North American automotive industry production declined 2.7% as OEMs managed supply chain challenges and dealer inventory levels. In addition, certain customer programs were cancelled or significantly reduced as OEMs adjusted electric vehicle ("EV") production plans and product portfolios, which resulted in a $3.5 million reduction in year-over-year third quarter sales. Partially offsetting these volume declines was $1.3 million of pricing, including $0.6 million of US tariff cost recoveries.

Gross profit was $22.7 million in the third quarter of fiscal 2026, compared to $23.1 million in the comparable prior year quarter. Despite lower volumes and the unfavorable impact of changes in foreign currency exchange rates of $2.5m, gross margin improved from 16.0% in the prior year to 16.5% in the current year. The improvement primarily reflects the benefits of cost reduction initiatives (including $1.7 million of savings from restructuring actions), productivity improvements of $1.6 million, net pricing realization of $1.0 million and $0.3 million of lower tariff costs. Third quarter fiscal 2026 gross profit also benefited from a $0.6 million recovery of previously expensed costs associated with OEM cancelled EV programs.

Selling, administrative, and engineering expenses were $17.6 million, a $1.6 million increase year-over-year. Increased costs in the current quarter were the result of incremental employee costs of $1.0 million, as higher benefit costs were partially offset by lower bonus provisions and timing of outside service spend. The current quarter also includes $0.7 million of incremental business transformation costs and a $0.7 million recovery associated with customer program cancellations.

Interest income increased $0.4 million due to increased levels of cash and cash equivalents, which are invested in overnight money market funds. Interest expense decreased $0.2 million, the result of a continued reduction in the average amounts outstanding under revolving credit agreements.

Other income (expense) was $0.7 million of expense in the current period. Changes in other income (expense) reflect foreign currency transaction gains and losses, unrealized mark-to-market gains and losses on foreign currency forward contracts, and non-service post-employment costs.

The effective income tax rate was 25.1% and 22.4% for the third quarter of fiscal 2026 and 2025, respectively. The effective tax rate for each period presented differs from the U.S. federal statutory rate of 21% primarily due to the accrual of foreign income taxes, which are generally higher than the U.S. federal statutory rate, partially offset by the recognition of U.S. research and development tax credits and discrete income tax benefits associated with share-based payments. The effective tax rate for the third quarter of fiscal 2026 increased primarily due to a shift in the geographic mix of earnings toward higher-tax jurisdictions.

Nine months ended March 29, 2026 compared with the nine months ended March 30, 2025

The Company's consolidated results of operations were as follows (in thousands):

Year-to-date net sales totaled $427.6 million, representing an increase of $14.5 million, or 4%, compared to the prior year period. The year-over-year increase in net sales was primarily driven by $9.5 million of pricing (including $2.6 million of customer recoveries for tariffs), and a $5 million increase in shipment volumes. Sales volumes reflected a $4.6 million increase on existing platforms and $3.8 million of net new program launches, which were partially offset as sales associated with cancelled EV programs declined $3.4 million compared to the prior-year period.

Year-to-date gross profit was $71.7 million, compared with $59.2 million in the comparable prior year period. Despite unfavorable changes in foreign currency exchange rates of $4.6 million and incremental tariff costs of $1.9 million, gross profit margin improved year-over-year from 14.3% to 16.8%, a 240 basis point improvement. Material costs increased $4.9 million on higher production levels while labor and overhead costs decreased $2.9 million. Lower year-over-year conversion costs on higher sales reflect our focused efforts to manage our cost structure, which includes a $4.6 million labor cost benefit from completed restructuring actions.

Selling, administrative, and engineering expenses were 12.0% of sales for the nine months ended March 29, 2026, compared with 10.9% in the prior year period. Year-to-date expenses were $51.4 million, a $6.5 million increase year-over-year. The increase in costs reflects $3.0 million associated with headcount additions and higher incentive compensation costs $0.5 million, $2.5 million of business transformation costs ($0.5 million in the prior year period), and efforts to improve our cost structure including restructuring and voluntary retirement costs of $1.7 million ($1.1 million in the prior year period). These increases were partially offset by reduced executive transition costs of $1.4 million.

Interest income increased $1.4 million due to increased levels of cash and cash equivalents, which are invested in overnight money market funds. Interest expense decreased $0.5 million, the result of a continued reduction in the average amounts outstanding under revolving credit agreements.

Other income (expense) was $0.7 million of income in the current period. Changes in other income (expense) reflect foreign currency transaction gains and losses, unrealized mark-to-market gains and losses on foreign currency forward contracts, and non-service post-employment costs.

The effective income tax rate was 22.9% and 24.0% for the year-to-date period of fiscal 2026 and 2025, respectively. The change in the effective rate between period was primarily impacted by earnings mix and the foreign tax rate differential.

Liquidity and Capital Resources

At March 29, 2026, we had $107.0 million of cash and cash equivalents, of which $5.3 million was held by foreign subsidiaries. Excess cash is held in money market funds. The following table summarizes our cash flows provided by (used in) operating, investing and financing activities (in millions):

Cash flow from operations was $36.7 million, a decrease of $4.8 million compared with the prior year. Current year-to-date cash from operations reflects improved cash earnings, while the prior year period benefited from a $17 million reduction in operating assets and liability, including the benefit of extending vendor accounts payable. Cash used in investing activities, which includes capital expenditures to support customer programs and modernization of equipment was $5.7 million year-to-date compared with $4.2 million in the prior year period. Current year cash used in financing activities resulted from the repayment of $7.0 million under the joint venture revolving credit agreement and the payment of $1.4 million for taxes withheld related to the vesting of share-based awards.

At March 29, 2026, no borrowings were outstanding under the $40.0 million Amended & Restated Credit Agreement and $1.0 million was outstanding under the $18.0 million joint venture revolving credit agreement.

On April 30, 2026, ADAC-Strattec LLC entered into an amended and restated revolving credit agreement with BMO Harris N.A. (the "Amended & Restated JV Credit Facility"), which provides for a $10 million asset-based revolving line of credit, subject to a borrowing base, maturing October 2028. The Amended & Restated JV Credit Facility replaces the previous $18.0 million joint venture facility, which was terminated upon the closing of the agreement.

We believe that the revolving credit lines, combined with our existing cash and anticipated operating cash flows will be adequate to meet operating, debt service and capital expenditure funding requirements. In the short-term., cash generated from operations will be reinvested in our business to fund our transformational efforts and growth initiatives.

Primary Working Capital Management

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

Primary working capital levels at March 29, 2026 are higher than the beginning of the fiscal year, as inventory levels were increased $8.7 million to improve customer deliveries.