Executive Summary / Key Takeaways

• STRATTEC is undergoing a strategic transformation focused on operational efficiency, cost optimization, and product portfolio enhancement, showing tangible results in margin expansion and cash flow generation despite a challenging automotive market.
• The company's gross margin significantly improved in Q3 FY2025 to 16.0% (from 10.4% prior year), driven by favorable FX, pricing actions, mix, and fixed cost leverage, demonstrating the impact of internal initiatives.
• Strong cash flow from operations, totaling $41.5 million year-to-date through Q3 FY2025, reflects enhanced profitability and disciplined working capital management, including a notable reduction in pre-production tooling balances and improved inventory/payables.
• STRATTEC is proactively addressing potential tariff impacts ($9M-$12M estimated annual cost before mitigation) through logistics adjustments, commercial recovery discussions with customers, and supply chain shifts, leveraging its strong balance sheet for flexibility.
• While facing industry volume pressures (NA light vehicle production forecasted down 6-8% in FY2026) and intense competition, STRT is focused on securing new platform wins and leveraging its technical expertise in electro-mechanical and power access solutions to drive future profitable growth.

The Turnaround Story Begins: STRATTEC's Strategic Pivot in a Dynamic Auto Landscape

STRATTEC SECURITY CORPORATION, with a history spanning over 110 years, has long been a key player in providing automotive access, security, and user interface solutions. From its roots in mechanical locks and keys, the company has evolved, transitioning towards integrated electro-mechanical systems, power access solutions, and advanced security products like key fobs and passive entry systems. Serving primarily the three largest North American automotive OEMs, alongside other global customers and the aftermarket, STRT has built its reputation on engineering expertise, reliable service, and deep customer relationships.

The automotive industry, however, is a notoriously cyclical and volatile environment, currently grappling with supply chain disruptions, inflationary pressures, labor availability challenges, rising commodity costs, and geopolitical uncertainties. OEM production volumes fluctuate in response to consumer demand and external factors, directly impacting suppliers like STRT. Recent third-party projections anticipate North American light vehicle production to be flat near-term, with a potential dip of 6-8% in fiscal 2026 before recovering in fiscal 2027 and 2028.

Against this backdrop, and following a change in leadership in 2024, STRATTEC has embarked on a strategic transformation. The core objective is clear: strengthen profitability and deliver sustainable sales growth by optimizing the cost structure, enhancing operational efficiencies, reviewing the product portfolio, improving working capital management, and modernizing support functions. This isn't just a tactical adjustment; management describes it as a broader cultural shift prioritizing cost optimization and margin expansion.

In the competitive arena, STRT operates alongside larger, more diversified automotive suppliers like Magna International (MGA), Aptiv (APTV), and Johnson Controls International (JCI), as well as facing indirect competition from tech firms developing in-house solutions. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, STRT holds an estimated 2-5% aggregate market share in North American automotive access control, trailing significantly behind players like Magna (estimated 20-25%) and Aptiv (estimated 10-15%). STRT's growth trajectory (5% year-to-date through Q3 FY25) also trails the industry average and key competitors (Magna 8%, Aptiv 12%, JCI 6% in their respective last reported fiscal years), indicating challenges in scaling relative to market leaders.

STRATTEC's competitive advantages lie in its specialized technical expertise and proprietary technology, particularly in electro-mechanical locks and cost-efficient manufacturing processes. Its proprietary die-casting technology, for instance, is stated to enable higher efficiency and lower manufacturing costs, contributing to stronger gross margins. This allows STRT to compete effectively in niche, high-security segments where its products offer enhanced anti-theft performance or specific reliability benefits. The company is also investing in new technology, such as a digital key fob integrating with smartphones, signaling an intent to adapt to evolving vehicle access trends, though this R&D investment (around 3% of revenue historically) is smaller in absolute terms compared to larger rivals like Aptiv (estimated 5% of revenue), which could pose a technological gap risk.

Despite its smaller scale and certain technological gaps compared to larger, more diversified competitors, STRT's focus on specific product areas and its established relationships with major OEMs provide a foundation. The current strategic transformation aims to leverage these foundational strengths while addressing operational inefficiencies and cost structures to improve its competitive standing and financial performance.

Financial Performance Reflecting Early Transformation Gains

The initial results of STRATTEC's transformation are becoming evident in its financial performance, particularly in margin expansion and cash flow generation.

For the third quarter of fiscal year 2025 (ended March 30, 2025), net sales were $144.1 million, a modest increase of 2.3% compared to $140.8 million in the prior-year quarter. This growth was driven by $2.5 million of price increases, a favorable mix contributing $2.2 million, and net new program launches adding $1.6 million, which collectively more than offset a $3.0 million decline in sales volumes on existing platforms. Year-to-date net sales for the nine months ended March 30, 2025, reached $413.1 million, up 4.7% from $394.7 million in the prior year, fueled by $17.0 million of net new program launches, favorable mix, higher volumes on certain platforms, and $6.1 million of accretive pricing, partially offset by the absence of $9.9 million in one-time retroactive pricing recoveries recognized in the prior year.

Looking at performance by product category for the nine months ended March 30, 2025:

• Power Access Solutions: $101.9 million (+12.3%)
• Door Handles Exterior Trim: $103.6 million (+5.2%)
• Keys Locksets: $70.9 million (-12.3%) - impacted by program endings, though new content on Dodge Ram Heavy Duty provided some offset.
• Latches: $55.8 million (+13.2%) - benefited from new content on Ford (F) F-Series trucks.
• User Interface Controls: $40.6 million (+17.9%)
• Aftermarket OE Service: $32.6 million (+0.0%)
• Other: $7.6 million (-7.7%)

The most significant financial highlight is the improvement in gross profitability. Third quarter fiscal 2025 gross profit was $23.1 million, resulting in a gross margin of 16.0%, a substantial increase from $14.7 million (10.4% margin) in the comparable prior-year period. For the nine-month period, gross profit rose to $59.2 million (14.3% margin) from $46.9 million (11.9% margin) in the prior year. This margin expansion was primarily driven by the strengthening of the US dollar against the Mexican peso ($4.4 million benefit in Q3, $10.6 million benefit year-to-date), strategic pricing actions, favorable product mix (higher value content in Power Access and Latches), and improved leverage of the fixed cost structure on higher sales volumes. These gains more than offset increases in tariff costs ($0.8 million in Q3, $1.2 million year-to-date) and higher Mexico labor costs from mandated wage increases.

Operating expenses (Engineering, Selling, and Administrative) increased, reflecting investments in the transformation. Q3 FY2025 ES&A was $16.0 million (11.1% of sales), up from $12.7 million in the prior year. Year-to-date ES&A was $44.9 million, up from $38.8 million. This increase included business transformation and restructuring costs ($1.1 million in Q3 and year-to-date), incremental equity compensation and annual bonus expense ($1.2 million in Q3, $2.8 million year-to-date), and executive transition costs ($2.1 million year-to-date). While these investments impacted the operating expense ratio in the short term, they are part of the strategy to drive long-term efficiency.

Net income attributable to STRATTEC saw a significant increase, reaching $5.4 million ($1.32 per diluted share) in Q3 FY2025, up from $1.5 million ($0.37 per diluted share) in the prior year. Year-to-date net income was $10.4 million ($2.56 per diluted share), compared to $6.7 million ($1.67 per diluted share) in the prior year. Adjusted EBITDA margin expanded notably to 8.9% in Q3 FY2025, up from 4.4% in the prior year period, underscoring the impact of improved gross margins.

Strengthening the Balance Sheet and Navigating Headwinds

STRATTEC's focus on operational and financial discipline has translated into robust cash flow generation and a strengthened balance sheet, providing crucial flexibility in the current uncertain environment.

Cash flow from operations was particularly strong, generating $20.7 million in Q3 FY2025 alone, bringing the year-to-date total to $41.5 million. This is a substantial improvement compared to a use of cash in the prior year period and reflects both enhanced profitability and disciplined working capital management. The company achieved a $17.5 million reduction in working capital year-to-date, driven by a $6.1 million reduction in inventory levels, a $16.7 million increase in accounts payable (aligning with customer terms), and successful recovery of pre-production costs. The pre-production tooling balance has been reduced by $10.5 million, or nearly 50%, since the start of fiscal year 2025, highlighting the impact of management's focus on accountability and process improvement.

At March 30, 2025, STRATTEC held $62.1 million in cash and cash equivalents. The company has access to a $40 million revolving credit facility (with no outstanding borrowings) and its joint venture has a $20 million facility (with $13 million outstanding). Management believes this liquidity, combined with anticipated operating cash flows, is adequate to meet foreseeable operating, debt service, and capital expenditure needs. The primary working capital metric (net receivables + net inventory - accounts payable, as a % of annualized sales) improved to 19% at the end of Q3 FY2025, down from 22% at June 30, 2024, indicating better working capital efficiency.

Capital expenditures for the nine months ended March 30, 2025, totaled $4.2 million, consistent with the focus on supporting new customer programs, IT infrastructure upgrades, and manufacturing equipment replacement/automation. The full-year fiscal 2025 CapEx is expected to be roughly $7.5 million, reflecting a conservative approach to investment during uncertain times, prioritizing internal efficiencies and organic growth initiatives.

A significant near-term challenge is the evolving tariff situation. While over 90% of STRT's U.S. sales volume is USMCA compliant, the company estimates the potential annualized impact of recently announced U.S. tariffs to be $9 million to $12 million in added costs before mitigation. STRATTEC has moved quickly, forming a dedicated task force and implementing mitigation actions including adjusting logistics routes, engaging in pricing discussions with customers for commercial recovery of the balance, and exploring supply chain shifts. Management expressed confidence in their ability to recover the remainder of the tariff impact, although the process and timing with customers are still being worked out. The strong balance sheet provides a buffer to manage this potential headwind.

Other risks include ongoing labor inflation in Mexico due to mandated wage increases, foreign currency exchange rate volatility, and the inherent cyclicality and volume pressures of the automotive market. The restructuring actions initiated in fiscal 2025, expected to generate approximately $5 million in annualized cost reductions and reach full run rate in Q1 FY2026, are a key part of mitigating these cost pressures.

Outlook and the Path Forward

STRATTEC's outlook for the remainder of fiscal 2025 and beyond is centered on executing its strategic transformation amidst a dynamic market. The focus for the balance of fiscal 2025 is explicitly on mitigating the impact of additional tariffs, executing new initiatives to improve the cost structure (leveraging the $5 million in restructuring savings), driving cash flow through improved asset and working capital utilization, and securing new platforms to solidify future sales growth.

The company's efforts to place higher-value content on existing programs and win new business, particularly in areas like power access and latches, are critical for offsetting declines in mature product lines like keys and locksets and driving future revenue growth. The investment in a new Chief Commercial Officer and a market-driven approach to product portfolio review signal a commitment to identifying and capitalizing on profitable growth opportunities within the transportation sector, leveraging STRT's technical expertise and customer relationships.

While management has not provided specific consolidated revenue or net income guidance figures, the focus on margin expansion through cost optimization, pricing actions, and operational efficiencies, coupled with disciplined working capital management, points towards a continued effort to improve underlying profitability and cash generation. The expected $5 million in annualized restructuring savings, reaching full run rate in Q1 FY2026, provides a concrete tailwind for future profitability.

The potential sale of the Milwaukee facility, which is significantly larger than needed for current manufacturing operations, is another strategic initiative that could unlock value and further optimize the operational footprint, though this process is still in its early stages.

The investment thesis for STRT hinges on the successful execution of this strategic transformation. Can the company continue to drive operational efficiencies and cost reductions to expand margins? Can it effectively mitigate the impact of tariffs and other inflationary pressures? Can it leverage its technical expertise and customer relationships to secure profitable new business, particularly in higher-value product categories, to offset declines in legacy segments and navigate potential industry volume softness? The strong cash position and improved working capital provide a solid financial foundation from which to pursue these objectives.

Conclusion

STRATTEC is demonstrating tangible progress in its strategic transformation, delivering meaningful margin expansion and robust cash flow generation in fiscal year 2025 despite the inherent volatility of the automotive industry. The company's focus on optimizing its cost structure, enhancing operational efficiencies, and proactively managing external headwinds like tariffs is yielding positive results, as seen in the improved gross margins and strong cash build.

While challenges remain, including potential near-term industry volume declines and intense competition, STRT's strengthened financial position, ongoing cost reduction initiatives, and strategic focus on higher-value product areas like power access and new technologies position it to navigate these dynamics. The success of the transformation will depend on continued execution, particularly in securing new platform wins and effectively leveraging its technical differentiators to drive sustainable, profitable growth in the evolving automotive landscape. Investors should monitor the company's progress on its strategic initiatives, the impact of tariff mitigation efforts, and overall trends in North American vehicle production.