Strattec Security Corp 2026 Q4 Earnings Call

Thank you, and good morning, everyone. We appreciate you joining us for Strattec's fourth quarter and fiscal 2026 financial results conference call. Joining me on the call today are Jennifer Slater, our President and Chief Executive Officer, and Matthew Polly, our Senior Vice President and Chief Financial Officer. Jen and Matt will review our fourth quarter and full year financial results, the progress we are making on 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 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 the Securities and Exchange Commission. You can find these 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 the results prepared in accordance with GAAP. We 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.

Thank you, Deb, and good morning, everyone. Fiscal 2026 was a year of progress as we continued to reshape Strattec into a more resilient, higher-performing business. We delivered record annual revenue of $579.4 million, expanded full-year gross margin by 150 basis points to 16.5%, generated $46.3 million in operating cash flow, and ended the year with $108.2 million of cash and no debt. In the fourth quarter, sales of $151.8 million were better than expected and essentially flat with the prior year period. These results were achieved in a dynamic automotive environment. Throughout the year, we managed fluctuating North American production levels, the evolving tariff environment, foreign exchange headwinds, and customer cancellations of certain EV programs.

We believe that our fiscal 2026 results are an affirmation that the transformation is delivering, our teams are executing, and we have the resiliency to offset a meaningful portion of these external pressures through pricing, cost actions, and operational improvement. During the year, we realized approximately $6 million of savings from restructuring actions. We also continued to invest in our commercial organization, innovation capabilities, and the operating infrastructure needed to improve our margin profile. We are continuing to evolve our approach to growth. Automotive is a long cycle and cyclical industry, so it's critical that we engage customers earlier and more strategically in their development process. This is relatively new concept for Strattec that historically did not have a process around a future-looking sales pipeline and only engaged with the customer when an RFQ was received.

We have invested in our team and are in the early stages of developing the foundation around a future-looking development process with a focused product portfolio around three pillars: Permission, Motion, and Hold. Permission includes secure vehicle entry technologies. Motion encompasses powered access systems, and Hold includes latching products designed for safety, strength, and durability. This framework better aligns our commercial, innovation, and engineering teams around customers' evolving access needs and future program opportunities. Our consistent cash generation also allowed us to return $7.4 million to shareholders in the form of share buybacks in the fourth quarter, and our board of directors has authorized a new $40 million stock repurchase program, which we intend to use to offset equity share dilution and opportunistically buy back shares. Slide four highlights the disciplined execution of our transformation plan. We are working to improve how the business operates every day.

Since fiscal 2025, we have implemented restructuring actions that have delivered $9.5 million of savings. This past year, we consolidated our test lab operations in Auburn Hills and continued to invest in equipment and improve manufacturing flow at our Milwaukee operations. We also implemented new tools for sales pipeline management, financial consolidation, benefits administration, and expense reporting. These technology innovations help us make better decisions, enhance accountability, simplify processes, and create a more scalable operating platform. In addition, we introduced culture pillars centered on innovation, collaboration, and accountability, reinforced by a recognition program that highlights team members who put those values into action. The culture element of our transformation is critical to our success.

Our strong balance sheet and cash balance of $108.2 million give us the flexibility to invest in organic growth and modernization, maintain an appropriate cushion for industry variability, repurchase shares opportunistically, and evaluate M&A opportunities that can provide scale and diversification. With that, I'll turn the call over to Matt to walk through the financial details.

Thanks, Jen, and good morning, everyone. Fourth quarter net sales were $151.8 million, essentially unchanged from the prior year period. This result was better than expected, as we originally had estimated fourth quarter sales to be down 3%-4% based on third-party estimates of OEM build rates at the time. Actual OEM production levels for the quarter came in down just 1.4%. Compared with the prior year period, we had $3.2 million lower sales from OEM canceled EV programs, which offset $1.4 million in pricing benefits and certain customer inventory builds. For the full year, net sales increased to $579.4 million from $565.1 million in the prior year, which represents a 2.5% increase. Pricing contributed 2%, with volume growth being less than 1%, consistent with the overall North American automotive market.

Sales growth was stronger in the first half of the fiscal year as macroeconomic conditions reduced OEM production builds and EV program shifts weighed on second half sales. Our customer and product mix remains diversified across leading OEMs, tier 1 customers and commercial accounts, as well as across our various product lines. Please turn to Slide 6. Fourth quarter gross profit was $23.6 million, compared with $25.4 million in the prior year period, and gross margin was 15.6%. The fourth quarter comparison was affected by unfavorable foreign exchange rates and lower tooling gains. On a constant currency basis, gross margin improved, reflecting lower tariff costs, pricing, and restructuring savings, partially offset by higher cost of quality. For the full year, gross profit increased to $95.4 million from $84.6 million in fiscal 2025, and gross margin expanded 150 basis points to 16.5%.

Importantly, this demonstrates the continued progress we are making in improving the underlying cost structure of the business, even while managing external headwinds. Please turn to Slide 7. Selling, admin, and engineering expenses were $17.5 million in the fourth quarter or 11.5% of sales, compared with $16.9 million or 11.1% of sales in the prior year quarter. The increase primarily reflected business transformation costs as well as higher salaries and benefits. These expenses were partially offset by lower engineering and professional fees and restructuring savings. Higher business transformation costs in the quarter primarily related to the use of outside advisors to advance strategic initiatives, including the transformation of our Milwaukee operations and advancing our focus on M&A alternatives that could deliver shareholder value. For fiscal 2026, SAE expenses were $68.8 million or 11.9% of sales, compared with $61.8 million or 10.9% of sales in fiscal 2025.

The full year increase includes investments in salaries and benefits, business transformation, restructuring, and executive transitions. It also reflects targeted investments in commercial, innovation, quality, procurement, supply chain, IT, and program management capabilities. We remain focused on managing expenses with discipline. Excluding unusual items, our longer term objective is to operate SG&A in a range of approximately 10%-11% of revenue. In the near term, we will continue to make selective investments that support our transformation and position Strattec for future growth. Please turn to Slide 8. Net income attributable to Strattec in the fourth quarter was $3.9 million or $0.95 per diluted share, compared with $8.3 million or $2.01 per diluted share in the prior year quarter. Fiscal 2026 fourth quarter GAAP earnings reflected incremental business transformation and executive transition costs as well as $2.9 million of discrete income tax adjustments associated with changes in tax regulations.

On an adjusted basis, fourth quarter net income attributable to Strattec was $8.4 million and adjusted diluted earnings per share was $2.06, unchanged from the prior year period. Adjusted EBITDA was $12.5 million, compared with $13 million in the prior year quarter, with adjusted EBITDA margin affected principally by foreign exchange. For fiscal 2026, earnings per share grew 9% to $5, validating the impact of our transformation actions against the macro headwinds discussed today. We believe we have built a stronger business that can be more durable through the automotive cycles. Full year adjusted EBITDA increased to $50.5 million, up 15% from fiscal 2025, and adjusted EBITDA margin was 8.7%. Our fiscal year financial performance, which includes a 100 basis point improvement in adjusted EBITDA margins, illustrates an improved earnings base. Please turn to Slide 9.