# Dear STRATTEC Shareholders

_Source: `DeepSeekOCR_Ardian_pruned_1k/consumer-cyclical-auto-parts/NASDAQ_STRT_2017/NASDAQ_STRT_2017.mmd` · pages 3-9_

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Dear STRATTEC Shareholders,

As a company, we were not satisfied with Fiscal 2017's performance, both from an earnings and an EVA \( ^{®} \)  perspective. While making progress in certain areas, it was not reflected in our scorecard. Because our financial operating results did not reach satisfactory hurdle rates this past year, we are committed to doing better next year and there are good reasons why this should happen.

Fiscal 2017's profits were reduced due to sizable investments in product engineering that we were making for upcoming production releases. Other impacts came from situations where we could have done better or initiatives which didn't materialize due to factors beyond our control. For example, our 2015 investment in India was based on aggressive growth plans by our customers. Now General Motors and Ford are either pulling out or cutting back in India.

Our efforts toward diversification of technology and markets have not been successful. We originally invested in STRATTEC Advanced Logic to bring new technology to the automotive market while at the same time leveraging our aftermarket distribution system into new non-automotive markets. Fingerprint recognition technology is still promising, but the path to profitability has proved to be much more costly than planned. The business suffered from higher expenses, delayed product launches and slower than expected market acceptance. Without the impact of STRATTEC Advanced Logic, our Earnings Per Share would have been improved by over 20%.

Capital expenditures were above normal because of the construction of our new joint venture facility in Leon, Mexico plus the need for new equipment throughout our operations to support additional capacity and new product programs. We are excited about the recent completion of the construction phase of the Leon plant. It is designed to manufacture painted door handles for both existing and future customers currently in, or moving to that region. The start-up costs of building a new factory impacted us throughout Fiscal 2017. We expect these costs to continue over the next two fiscal years, but at a declining rate as we ramp up production. There has been a significant migration of automotive assembly to the central part of Mexico. Ultimately, our investment there will result in a significant increase in sales for ADAC-STRATTEC de Mexico.

## ACTIONS

For Fiscal 2018, we are focused on efficiently launching new business already won, fine tuning processes, cutting marginally profitable business, reducing costs and making capital investments to insure quality and improve efficiency. We have already taken a number of actions which will have predictable and positive impacts on our profitability in 2018.

Effective July 1, we are no longer funding the losses of STRATTEC Advanced Logic. The burden of funding has been shifted to our joint venture partners who are actively trying to move the business forward.

A program is now in place to help us better understand the soft costs related to managing and producing some older products. As a result, an initiative is currently underway to phase out and/or institute substantial price increases for products which require inordinate amounts of support.

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We have recently reduced salaried headcount to better align our organization with current strategies. While it is always difficult to separate loyal and talented Associates from the company, it is an action that needed to be taken.

By realigning priorities, we have freed up talented people to work on more critical projects. A new corporate team has been created to focus on cost reduction and process improvement. It is expected to ultimately generate significant benefits to our bottom line.

After winning record amounts of new business in Fiscal Year 2016, this year we were faced with very challenging timelines for design and production. I want to thank our Associates for their efforts to satisfy our customers' needs and expectations. However, as part of this effort, we were faced with unusually high costs of external engineering services to execute on the new business. Those high engineering costs will not have to be repeated this year as we shift from a design phase to a production phase. Instead of costing money, production will begin to benefit us with additional sales and margin.

Lastly, we restructured our organization to ensure that our design and manufacturing processes meet stricter quality standards. A comprehensive Quality Improvement Plan was developed and is currently being implemented. The benefits of those changes are now just beginning to be realized.

## VAST

VAST (Vehicle Access System Technology) is a unique partnership between STRATTEC and two privately owned companies, WITTE Automotive of Velbert Germany and ADAC Automotive of Grand Rapids, Michigan. We are now in the process of re-branding ourselves as the VAST Automotive Group, which is a better description of our partnership and our global business. Our jointly owned business in China remains strong and is showing good results. We are also seeing the benefits from better coordination between VAST China and the other VAST locations throughout the world. We are pleased with the progress made by our organizations in leveraging our collective strengths, technologies and global footprint.

## SUMMARY

We have already taken actions to grow our business, focus our strategies and find ways to be more cost efficient and become more profitable. I appreciate the efforts of nearly 4000 STRATTEC Associates for working hard and taking steps to create a bright future for all of us. We are committed to make Fiscal 2018 a better year and to position ourselves for continued growth in profitability.

On behalf of your Board of Directors, your management team and myself, thank you, our fellow shareholders, for your continuing support during a year of less favorable results.

Sincerely,

![](images/4_0.jpg)

Frank J. Krejci

President & Chief Executive Officer