Strattec (STRT) Q1 2027 Earnings Call Transcript

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DATE

Friday, Oct. 30, 2026

CALL PARTICIPANTS

• Investor Relations - Deborah Pawlowski
• President and Chief Executive Officer - Jennifer Slater
• Senior Vice President and Chief Financial Officer - Matthew Pauli

TAKEAWAYS

• Net Sales -- $147.2 million, decreasing 3.4% year over year as lower customer production volumes were partially offset by $1.0 million in net pricing benefits.
• North American Automotive Production -- decreased 3.8% during the quarter, with production at the company's three largest customers declining 6.8%.
• Gross Margin -- 16.5%, representing an 80 basis point decline compared to the prior-year period due to lower volumes and unfavorable foreign currency effects of $1.4 million.
• Sequential Gross Margin -- improved from 15.6% in the fourth quarter of fiscal 2026 to 16.5%, reflecting progress in the operational transformation despite lower sales.
• Adjusted EBITDA -- $13.5 million, or 9.2% of net sales, compared to $15.6 million or 10.2% of net sales in the prior-year period.
• Cash from Operations -- $10.8 million, benefiting from strong customer collections despite lower net income.
• Cash Balance -- $111.8 million at quarter end, with zero debt and an increase from $108.2 million at the end of fiscal 2026.
• Share Repurchases -- $5 million for approximately 68,000 shares, leaving $35.0 million remaining under the current authorization.
• Mexico Restructuring Savings -- $1.3 million in expected annualized savings from additional actions implemented in the company's Mexico operations.
• Cumulative Transformation Savings -- exceeded $10 million in annualized savings from restructuring initiatives implemented since fiscal 2025.
• Business Development Expenses -- $2.4 million, primarily related to evaluating an active funnel of potential acquisition targets.
• Adjusted SAE Expenses -- $15.0 million or 10.2% of sales when excluding business development and transformation costs, falling within the company's target range of 10% to 11%.
• GAAP Diluted EPS -- $1.19, compared with $2.07 in the prior-year period, impacted by lower volume and higher noncontrolling interest.
• Adjusted Diluted EPS -- $1.85, representing a decrease from $2.22 in the prior-year quarter.
• Fiscal 2027 Production Outlook -- expected to decline approximately 2% for North American automotive production, including a nearly 6% decline for the Detroit Three.
• Fiscal 2027 Gross Margin Guidance -- 15% to 16%, with lower volume expected to act as a headwind for the remainder of the fiscal year.
• Fiscal 2027 SAE Guidance -- projected quarterly run rate of $16.5 million to $17 million as the company continues investing in its transformation.
• Fiscal 2027 Cash Flow Guidance -- approximately $40 million for the full fiscal year, assuming a run rate of $10 million per quarter.
• Peso Forward Contracts -- 104 million pesos locked in at an average exchange rate of 18.15.
• Effective Tax Rate -- 26.2% for the quarter, including a $400,000 increase in reserves for uncertain tax positions.
• Engineering and Development Cost Recoveries -- totaled $1.2 million in the quarter, which management described as frequent but varying in magnitude.

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RISKS

• Matthew Pauli stated, "Lower volume is expected to be a headwind to gross margin for the balance of the fiscal year," reflecting anticipated production declines in North America.
• Jennifer Slater noted that the company achieved its results "against lower customer production volumes and continued inflation and foreign currency pressure."
• Matthew Pauli warned that the mark-to-market on peso hedges "becomes a larger expense" at current exchange rates, impacting the other expense line item.

SUMMARY

Strattec Security Corporation (NASDAQ:STRT) reported that its first quarter results reflect ongoing transformation efforts aimed at creating a more resilient business model. Management stated that the company is focusing on operational productivity and cost structure reductions to mitigate lower customer production volumes in North America. The company is actively evaluating an acquisition funnel to accelerate customer and geographic diversification while maintaining a debt-free balance sheet. Management emphasized the Permission, Motion, and Hold framework to drive long-term organic growth through system-level access experiences.

• CEO Jennifer Slater stated, "We have an active funnel of acquisition targets and incurred $2.4 million in business development expenses during the quarter, primarily related to advancing these opportunities."
• Management noted that automotive production for the company's three largest customers declined 6.8% in the first quarter, exceeding the overall North American production decline of 3.8%.
• CFO Matthew Pauli attributed the sequential gross margin improvement to "continued progress with our transformation," although he noted that further work is required to improve operating consistency.
• President Jennifer Slater stated, "This framework aligns our commercial, innovation, and engineering teams around the access experience we deliver and the opportunities we see with customers."
• Management indicated that engineering and development cost recoveries of $1.2 million in the quarter were lumpy and likely to occur with less magnitude in future periods.
• The company intends to maintain its long-term gross margin target of 18% to 20% through supply chain improvements and automation.

INDUSTRY GLOSSARY

• Detroit Three: The three largest North American automotive manufacturers, comprising General Motors, Ford Motor Company, and Stellantis.
• Hold: A Strattec product category providing precision-engineered latching solutions for vehicle safety and durability.
• Motion: A Strattec product category delivering powered access systems, such as power sliding doors and liftgates.
• Permission: A Strattec product category enabling secure vehicle entry through mechanical and electronic systems.
• VAST Automotive Group: A global automotive alliance between Strattec, WITTE Automotive, and ADAC Automotive that provides a coordinated international footprint for automotive access products.

Full Conference Call Transcript

Operator: Welcome to the Strattec First Quarter Fiscal Year 2027 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Deborah Pawlowski, Investor Relations for Strattec. Thank you, Deborah. You may begin.

Deborah Pawlowski: Thank you, and good morning, everyone. We appreciate you joining us for Strattec's First Quarter Fiscal 2027 Financial Results Conference Call. Joining me on the call today are Jennifer Slater, our President and Chief Executive Officer, and Matthew Pauli, our Senior Vice President and Chief Financial Officer. Jen and Matt will review our first quarter financial results, the progress we are making in our transformation, and our outlook for fiscal 2027. You can find a copy of the news release and the slides that accompany our conversation today on the Investor Relations section of the company's website. If you are reviewing those slides, please turn to slide 2 for the safe harbor statement.

As you are aware, we may make forward-looking statements during the formal discussion and during the Q&A. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from what is stated on today's call. These risks and uncertainties and other factors are discussed in the earnings release and in other documents filed by the company with Securities and Exchange Commission. You can find those documents on our website as well. I also want to point out that during today's call, we will discuss certain non-GAAP financial measures, which we believe are useful in evaluating our performance.

You should not consider this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP measures with the most directly comparable GAAP measures in the tables accompanying the earnings release and in the supplemental slides. With that, I'll turn the call over to Jen, who will begin with slide 3.

Jennifer Slater: Thank you, Deb, and good morning, everyone. Our first quarter results reflect continued progress in transforming Strattec into a more resilient, higher-performing business. We generated $10.8 million in cash from operations, delivered gross margin of 16.5% on sales of $147.2 million, and ended the quarter with $111.8 million in cash and no debt. We achieved these results against lower customer production volumes and continued inflation and foreign currency pressure. While sales and earnings declined from the prior year quarter, gross margin improved 90 basis points sequentially on lower sales, and adjusted EBITDA increased to $13.5 million from $12.5 million in the fourth quarter. We believe this demonstrates the progress we are making in improving the underlying performance of the business.

We remain focused on the actions within our control: improving productivity, reducing our cost structure, serving our customers, and allocating capital with discipline. As an example, during the quarter, we implemented additional restructuring actions in our Mexico operations that are expected to generate $1.3 million in annualized savings. Including these actions, the annualized savings associated with restructuring initiatives implemented since we began the transformation in fiscal 2025 are over $10 million. It is worth highlighting that we believe there are meaningful additional opportunities to improve our cost position through supply chain improvements, automation, and more efficient manufacturing processes. These opportunities are important both to supporting margins in the current environment and to strengthen our long-term competitive position.

Our cash generation also gives us flexibility to advance our strategy while returning capital to shareholders. During the quarter, we repurchased approximately 68,000 shares for $5 million while continuing to build our cash balance. We also are investing in our strategic initiatives for future growth and the sustainability of the business. Slide 4 highlights how our operating transformation and financial strength support the next phase of Strattec's development. We are continuing to develop plans for additional productivity enhancements and cost reductions. At the same time, we are engaging with more prospective customers and building the relationships needed to support longer-term growth. Our commercial efforts remain centered on Permission, Motion, and Hold.

Permission enables secure vehicle entry, Motion encompasses powered access systems, and Hold includes latching solutions designed for safety, strength, and durability. This framework aligns our commercial, innovation, and engineering teams around the access experience we deliver and the opportunities we see with customers. Organic growth in automotive takes time. We are working to engage earlier in customers' development processes, increase our content on existing platforms, pursue new platforms, and expand our customer relationships. In parallel, we are evaluating acquisitions that could accelerate customer diversification, enhance our product offerings, and increase our scale. We have an active funnel of acquisition targets and incurred $2.4 million in business development expenses during the quarter, primarily related to advancing these opportunities.

Our approach remains disciplined. We are evaluating acquisitions based on strategic fit, financial returns, capital requirements, and execution risk. Our strong balance sheet gives us the ability to pursue strategic growth, but we will remain mindful on how we deploy capital to create long-term shareholder value. In addition, we will be balanced regarding growth and returning capital to shareholders. Importantly, pursuing strategic growth does not detract from our focus on improving the business we operate today. We will continue to invest in productivity, automation, and operational execution while maintaining the financial flexibility to navigate industry variability. With that, I'll turn the call over to Matt to walk through the financial details.

Matthew Pauli: Thanks, Jen, and good morning, everyone. Please turn to slide 5. First quarter net sales were $147.2 million, a decrease of $5.2 million or 3.4% compared with $152.4 million in the prior year period. Lower customer production volumes reduced sales by $6.2 million, which was partially offset by $1 million in net pricing benefits. For context, North American automotive production declined 3.8% in the quarter, including production at our three largest customers declining 6.8%. Our results benefited somewhat from the production levels of the program mix for the customers we serve, as well as the benefit of our pricing actions. The charts on this slide show our sales across customers and product categories.

While our business remains concentrated with our top three customers, we also serve other OEMs, tier-one suppliers, and commercial customers. Diversifying our customer and product base remains a critical element to our growth strategy. Please turn to slide 6. First quarter gross profit was $24.3 million compared with $26.3 million in the prior year period. Gross margin was 16.5%, down 80 basis points year-over-year. The comparison reflects lower production volumes and $1.4 million of unfavorable foreign currency effects. Foreign currency negatively impacted the year-over-year gross margin comparison by approximately 90 basis points. We also experienced elevated premium freight and overtime in the quarter as a result of supply chain challenges.

Partially offsetting these pressures were pricing benefits, $900,000 in restructuring savings, lower overhead costs, and favorable mix. Sequentially, gross margin improved from 15.6% in the fourth quarter to 16.5% despite lower sales. This improvement reflects continued progress with our transformation, although we recognize there's more work to improve the operating consistency and reduce costs. Please turn to slide 7. Selling, administrative, and engineering expenses were $17.9 million or 12.2% of sales compared with $15.9 million or 10.4% of sales in the prior year quarter. The increase primarily reflected $2.4 million in business development expenses. We also continue to invest in the talent and outside support needed to advance our transformation.

These increases were partially offset by $1.2 million in incremental engineering and development cost recoveries. Excluding business development, business transformation, and executive transition costs, adjusted SAE expenses declined $200,000 to $15 million or 10.2% of sales. On an adjusted basis, we are at the top end of our long-term target range of 10%-11% of sales without the benefit from the engineering cost recoveries. Nonetheless, as revenue remains soft through the year, we expect near-term adjusted SAE to run somewhat above our longer-term range as we make selective investments, primarily headcount, to support the transformation. Please turn to slide 8.

Our transformation actions have enabled us to generate bottom-line profit despite volume and cost headwinds and the investments we are making in the business. Net income attributable to Strattec was $4.8 million or $1.19 per diluted share compared with $8.5 million or $2.07 per diluted share in the prior year quarter. The decline primarily reflects lower volume, unfavorable foreign currency effects of approximately $2 million on a pre-tax basis, and the business development expenses we discussed. Our effective tax rate was 26.2% compared with 21.6% in the prior year period. The current quarter rate included discrete tax items, including a $400,000 increase in reserves for uncertain tax positions.

On an adjusted basis, first quarter net income attributable to Strattec was $7.5 million or $1.85 per diluted share compared with $9.2 million or $2.22 per diluted share in the prior year quarter. Adjusted EBITDA was $13.5 million or 9.2% of sales compared with $15.6 million or 10.2% of sales in the prior year period. Please turn to slide 9. We generated $10.8 million in cash from operations during the quarter compared with $11.3 million in the prior year period. Cash generation remained strong despite lower net income and benefited from customer collections. During the quarter, we returned $5 million to shareholders through the repurchase of approximately 68,000 shares.

We ended the quarter with no debt and $111.8 million in cash and cash equivalents, up from the $108.2 million at fiscal year-end. Our capital allocation priorities remain consistent. We will fund customer programs and organic growth, invest in automation and modernization, and maintain the flexibility to manage through automotive cycles. We will also return capital through opportunistic share repurchases and pursue disciplined acquisitions. We view these priorities as complementary. Improving the performance and cash generation of the existing business gives us the flexibility to invest in our future and pursue strategic growth while maintaining our commitment to a strong balance sheet. Please turn to slide 10. We continue to expect a challenging automotive environment in fiscal 2027.

Current third-party forecasts indicate about a 2% decline in North American automotive production for our fiscal year, including production at the Detroit Three, down nearly 6%. We expect our second quarter to be similar to our expectations for the year. Lower volume is expected to be a headwind to gross margin for the balance of the fiscal year, with material cost inflation being offset by the benefit of foreign currency exchange based on what we are seeing today. Given the current circumstances, we expect the gross margin should be in the range of 15%-16% for the year.

As we identify and implement further productivity enhancements, we will work towards improving that and continue towards our target gross margin of 18%-20% in the long term. Our focus is on improving the underlying cost structure so that the business can perform better and more consistently across different production environments. Excluding unusual items, we expect SAE costs to be at a quarterly run rate of $16.5 million-$17 million in fiscal 2027 as we invest in the business. Longer term, however, we expect SAE expenses to run at 10%-11% of sales. At the end of the quarter, we had 104 million outstanding in peso contracts that were locked in at an average exchange rate of 18.15.

From a currency perspective, at the current peso to U.S. dollar exchange rate of 18.67, we shouldn't see the year-over-year headwind to gross margin in the second quarter that we experienced in the first quarter. However, the mark-to-market on these hedges is reflected in other expense, and at the current rates, becomes a larger expense. Because the contracts are marked on the last day of the quarter, the change in other expense will vary based on the peso to U.S. dollar currency at that point in time. We expect our normalized fiscal 2027 effective tax rate to be in the range of 23%-25%.

We also continue to expect normal operating cash flow run rate at approximately $10 million per quarter, subject to working capital variability. Our first quarter cash generation keeps us on track for approximately $40 million for the fiscal year. With that, I'll turn the call back to Jen to close with slide 11.

Jennifer Slater: Thanks, Matt. We began fiscal 2027 with continued progress in improving the business and generating cash. Our transformation is strengthening our underlying operating structure, while our balance sheet gives us the flexibility to invest in the next phase of Strattec's development. Our priorities are clear: continue improving productivity and operational execution, pursue additional cost reductions through supply chain improvements and automation, build stronger and more diverse customer relationships to win future program opportunities around Permission, Motion, and Hold, evaluate acquisitions that can accelerate diversification and add scale, and allocate capital with discipline, including returning cash to shareholders through opportunistic repurchases. We recognize the challenges presented by lower industry production and the variability of foreign currency pressure.

We also recognize that we have more work to do within our own operations. We will remain focused on serving customers, improving performance, and building a stronger business for the long term. I want to thank our employees for their continued commitment and hard work, and our shareholders for their support. With that, operator, we can open the call for questions.

Operator: Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from John Franzreb with Sidoti & Co. Please proceed with your question.

John Franzreb: Good morning, everyone, and thanks for taking the questions. I'd like to start with the guide. You just did a gross margin of 16.6%, but you are suggesting that there will be pressure on the year going forward, even though you are suggesting that your FX benefits will offset higher material costs. What prompts you to have the outlook of a lower gross margin than you just recorded in the first quarter?

Matthew Pauli: Thanks for the question, John. We just finished the first quarter roughly at 16.6% in gross margin. When we look forward, obviously we have got lower volumes. That is the biggest reason for the range on the gross margin going forward of 15%-16%. As you mentioned, we will have a benefit from currency if the currency rates stay where they are, especially in the back half of the year. Then we are seeing some material cost inflation, not so much in the first quarter, but as we look forward. But we will look to offset that internally. Then the second option there on the material cost piece is price increases or discussions with passing through inflation with our customers.

Obviously, there is the restructuring benefits that we implemented here in the first quarter, they will benefit us in the second half of the year, but you have got the annual merit as well.

Jennifer Slater: John, that lower volume obviously is just related to North America production and the holiday schedules in Q2.

John Franzreb: Yeah. I recognize that, but we just had a quarter, we had lower volumes, not only in the Big Three, but other North American production. So, I kind of assumed that was kind of embedded in the outlook.

Jennifer Slater: Yeah, it is.

John Franzreb: Okay. Similar question on the SAE number. It seems to me that if you kind of strip everything out in the quarter on a, call it a current basis, you did about $15 million, but it also sounds like the E&D cost recoveries are also embedded in that number. Is that how I should be thinking about SAE on a go-forward basis?

Matthew Pauli: That's-

John Franzreb: Go ahead.

Matthew Pauli: That is correct, John. It is about $15 million of adjusted SAE costs in the quarter, but that included about $1 million fee of ED&D, which is kind of recoveries for our engineering efforts, which are very lumpy based on the projects. If you adjust for that, it is probably $16.5 million.

John Franzreb: That is right. How frequently do they occur? Yes.

Matthew Pauli: I would say they are frequent, but not to the magnitude that we saw in the first quarter.

John Franzreb: Got it. M&A is becoming increasingly likely. Can you give us a sense of size of an acquisition that you are looking at? It has been a while since you have done one, and given the charge that you took in the quarter, can we expect something by the end of this calendar year?

Jennifer Slater: Yeah, I think, yeah, to your question on size. Sorry, John, I am getting a little feedback. So, on your question on size, there is not an exact formula because all acquisitions are not created equal, and you cannot buy what is not for sale, and that was part of the reason why that we advanced our framework early on. We are advancing, and some of the expense really is just related to we do not want to take the prioritization off of the transformation of our core business, and in some cases, we need supplemental capability.

So, that is really through advisors to help us with both those things so we can continue the progress on the transformation while we advance our thinking through M&A. Then your timing question, obviously, for all the things that I just talked about, is hard to talk about what is the right timing there.

John Franzreb: Okay. Thank you. I will get back into queue.

Jennifer Slater: Thank you, John.

Operator: Once again, if you would like to ask a question, please press star one on your telephone keypad. Our next question is from Ethan Starr. Please proceed with your question.

Ethan Starr: Yes, thank you. What progress have you made on getting more business for Strattec in future new models, including new content and innovations, please?

Jennifer Slater: Hi, Ethan. Thanks for the question. When we think about growth, we really complement what I had just answered on inorganic to organic. As we've discussed, automotive is a long-cycle business, so the next two years, we will follow North American production. We are actively engaged with our current customers and new customers to determine what opportunities and platforms we have confidence on. We're making great progress there. We really won't have line of sight to something beyond the next two years until probably the end of our fiscal year.

What I want to make sure that we're doing, as you know, it is a bit of a technical sales, and because of the nature of long cycle, we want to make sure we have confidence in what we're seeing as future wins, and that takes time.

Ethan Starr: Sure, that's understandable, and I appreciate that. It's very helpful. The only other comment I have is that considering where the stock is currently trading, I hope you will continue to repurchase shares.

Jennifer Slater: Yeah. As we talked about, Ethan, that is part of how we're thinking about deploying our capital. We're investing in our business, we're evaluating M&A, and balancing that with return to shareholders.

Ethan Starr: Okay, great. Thank you very much.

Jennifer Slater: Thanks, Ethan.

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