Strattec Security Corp (STRT) Q3 2026 Earnings Call Transcript

Greetings, and welcome to the Stratech Third Quarter Fiscal Year 2026 Financial Results.

At this time, all participants are in your listen-only mode.

A brief question and answer session will follow the form of presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Deborah Pawlowski, Investor Relations for Stratech. Please go ahead.

Thank you, and good morning, everyone. We appreciate you joining us for Strattac's third quarter fiscal 2026 financial results conference call. Joining me on the call today are Jennifer Slater, our president and chief executive officer, and Matthew Pauley, our senior vice president and chief financial officer. Jen and Matt will review our financial results, the progress we are making on our transformation, and our outlook. 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 two for the safe harbor statement. As you are aware, we may make some forward-looking statements on this call during the formal discussion, as well as 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, as as well as with other documents filed by the Company with Securities and Exchange Commission. You can find these documents on our website as well. I want to also point out that during today's call, we will discuss some non-GAAP measures. We believe these will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAPS. We have provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release and slides. So with that, I'll turn the call over to Jen, who will begin with slide three.

Thank you, Deb, and good morning, everyone. We delivered another solid quarter and continued to make progress on our transformation despite a challenging automotive environment. Our previously completed restructuring actions delivered $1.9 million in savings this quarter. This is a peak level as we lap some of the benefits from the prior year restructuring actions. We generated $11.4 million of operating cash flow in the quarter and ended the third quarter with $107 million of cash on hand. That liquidity gives us flexibility to continue investing in the business, support customers, and navigate a dynamic industry backdrop. While sales were down from prior year, the decline was in line with expectations, and we continued to improve profitability, generate strong cash flow, and maintain a very strong balance sheet. Despite lower revenue and ongoing foreign exchange headwinds, gross margin expanded to 16.5%, supported by restructuring savings, recoveries tied to canceled customer programs, and continued operational focus. As highlighted on slide four, our priority remains the execution of our transformation plan with discipline and consistency. We are working to build a more predictable, higher performing company and that means staying focused on daily operational execution while continuing to put the right processes, talent and systems in place. During the quarter, we made additional changes within our Mexico operations that are expected to provide $800,000 in incremental annualized savings beginning in the fourth quarter. More broadly, the actions we have taken over the last several quarters help to improve the way the business operates and better aligns our cost structure with the business we have Equally as important as our focus on improving our cost structure is the transformation for how we approach growth. As you know, the automotive industry is long cycle and cyclical with intense competition and more recently, there have also been challenging external factors, such as tariffs and supply chain challenges within our business and the broader industry. As a result, our strategic growth initiatives are centered on how we build a sustainable business that can deliver resilient and predictable growth, even in a challenging industry. From a commercial standpoint, we are focused on capturing additional content with our current customers by deepening our relationships and being involved in advanced development on new platforms. In addition, we are starting to develop relationships with a more diverse set of customers that have U.S. production sites and looking to source locally. We are also focused on innovation and a product strategy that is anchored to engineering-led access systems organized into three core product categories of permission, motion, and hold. The team is busy defining technical product roadmaps that are aligned with customer requirements and current and future technologies. We are very early in our execution on these growth initiatives. Importantly, we have the balance sheet and financial flexibility to support our efforts and the broader transformation of StratTech. With that, I'll turn the call over to Matt to walk through the financial details.

Thanks, Jen, and good morning, everyone. Please turn to slide five. As Jen pointed out, sales in the quarter were down four and a half percent as lower volume and EV program cancellations were only partially offset by pricing benefits and tariff recoveries. The annual impact of the customer cancellations on reduced EV platforms is about nine million, of which about two-thirds we've already seen in our year-to-date fiscal 2026 results. Our largest declines by customer were with Ford and Hyundai Kia, which were both down a little over 10% year-over-year in the quarter. During the quarter, we did see higher sales to Tier 1 customers and Stellantis as they increased production. By product, door handles and keys and lock sets were steady, while power access and latches were down year-over-year. Please turn to slide six. Gross profit for the quarter was $22.7 million compared with $23.1 million in the prior year period. While gross profit dollars were modestly down on lower sales, gross margin improved by 50 basis points year over year to 16.5%, reflecting the value of our transformation actions. The quarter benefited from restructuring savings of approximately $1.7 million as well as recoveries related to canceled customer programs. Those benefits were partially offset by higher labor and benefit costs, incremental tariff costs, and a meaningful foreign exchange headwind. As we previously communicated, the annual cost of incremental tariffs has been approximately five to seven million, of which about half were IEPA tariffs. We had recovered a majority of the tariff costs on a delayed basis through price increases or pass-throughs to OEMs, and will now pursue past IEPA tariff recoveries from the government, which we will have to then pass back to our customers. On a year-to-date basis, we continue to see the benefits of pricing actions, operational improvements, and restructuring savings come through in our margins, although foreign exchange remains an ongoing headwind. Overall, we believe these results show that we are improving the underlying earnings power of the business, even in a softer production environment. Please turn to slide 7. Selling administrative and engineering expenses were $17.6 million in the quarter, or 12.8% of sales, compared with $16 million, or 11.1% of sales, in the prior year period. The increase reflects continued business transformation activity, executive transition costs, higher salaries and benefits, and third-party engineering support. At the same time, these expenses also reflect investments we are making to strengthen the As Jen mentioned, we are continuing to upgrade talent, improve internal capabilities, and support the systems and processes needed to create a more effective and scalable operating We remain focused on cost discipline, and over time, we still expect SAE to move closer to our targeted operating range. For now, the reported expense level reflects both the work required to transform the business and the near-term investments needed to support that effort. Please turn to slide 8. Net income attributable to Stratec in the third quarter was $3.2 million, or $0.78 per diluted share, compared with $5.4 million, or $1.32 per diluted share, in the prior year quarter. On an adjusted basis, net income was $3.7 million, or $0.90 per diluted share. The year-over-year decline in quarterly earnings was primarily driven by unfavorable changes in foreign exchange, which was a headwind in both cost-of-good sold and other income and expense. Non-operating other income and expense in the prior year included a $235,000 foreign currency gain, while the current year included a $900,000 currency loss. the majority of which is unrealized losses on peso-forward contracts, driven by the sudden and short-lived strengthening of the U.S. dollar at the end of the quarter. The currency loss had a $0.16 negative impact on earnings per share. Based on the accounting mark-to-market requirements for the forward contracts, this could reverse at the end of the fourth quarter, given where the peso is trading today. On a year-to-date basis, earnings per share was up 46% over the prior year period, reflecting the cumulative benefits of cost reduction actions, productivity improvements, and stronger underlying operating performance. Adjusted EBITDA was $10.1 million in the quarter compared to $12.5 million in the prior year period. FX was the primary reason for the decline. On a year-to-date basis, adjusted EBITDA was $37.9 million, a 23% increase over the prior year period. Turning to slide nine, the business continues to demonstrate that it is a strong cash generator with cash from operations in the third quarter of $11.4 million. We ended the quarter with $107 million in cash and cash equivalents. We also continued to reduce debt associated with the joint venture credit facility, and subsequent to quarter end, that facility was replaced with a new revolving credit agreement that extended the maturity and eliminated the Stratech guarantee on borrowings. Our balance sheet remains a significant strength. It supports investments in organic growth, continued process modernization and automation, the flexibility needed to manage through cyclical industry conditions, and enables us to execute on our plans for growth. Please turn to slide 10. As we look ahead, we continue to expect a moderate market environment, including the impact of canceled EV programs and lower production on certain key platforms. At the same time, we believe the business is better positioned than it was a year ago with a stronger operating foundation and clearer priorities. We expect revenue in the fourth quarter will be down 3 to 4 percent year over year, reflecting the same dynamics that we saw in the third quarter. As we've mentioned before, over the next few years, we are targeting gross margin of 18 to 20 percent, which assumes the peso at its five-year average of 1950. We are currently operating in the 16-plus range. Over the next several years, we are targeting SAE of approximately 10 to 11 percent of revenue, excluding unusual items. Our focus remains on continuing to improve operational performance, maintaining cost discipline, supporting customers effectively, and generating cash. Over time, we remain focused on building a stronger and more consistently profitable business through a combination of cost improvements, modernization efforts, and more effective positioning for future customer awards. With that, I'll turn it back to Jen to cover slide 11.

Thanks, Matt. We presented our vision last quarter, which reflects the broader transformation taking place at Stratech and the role we aim to play in safe and secure access solutions. Our vision is to be the most trusted global leader in safe and secure access solutions for the automotive and mobility industries by creating the ultimate access experience for consumers. As we discussed previously, we have been working to sharpen how we align internally around a common purpose and how we present these changes externally. This work supports our internal culture and organizational alignment so the team is engaged with the direction of the company and the role that they play in that future. It also reinforces the importance of innovation, collaboration, and accountability as we continue to transform the business. We believe the actions we are taking are building a stronger company with improved resilience, better earnings power, and a clearer path to long-term value creation. We have a strong balance sheet, an engaged leadership team, and sharper strategic focus. We are confident in the progress we are making and the opportunities ahead. With that, operator, we can open the call for questions.

Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Once again, that's star 1 to ask a question at this time. One moment while we poll for the first question. The first question comes from John Franz Reb with Sidoti & Company. Please proceed.

Good morning, everyone, and thanks for taking the questions. Good morning. I'd like to start with the $600,000 in canceled programs. I'm curious if those are programs that you walked away from or if those are programs that the customer canceled.

Yeah, I'll let Matt talk a little bit more about the financials. but the canceled programs are really what you've seen in the headlines from our customers on a shift of EV programs back to ICE in North America. And so that's really just the impact of those decisions that the customer made.

Yeah, and John, it's about $1.3 million of a benefit in our results. About half of it's in cost of goods sold, and the other half is within SAE. And it's really recovery of costs that we previously had expensed for the development on those programs.

Okay. I guess the reason I phrased the question the way I did was that I know that there's a review of unprofitable or less profitable programs. So I'm curious where you stand in that evaluation.

Yeah, we did a portfolio review first, and that's why we made the decision not to continue to invest in our switch portfolio. portfolio. And then we continue, obviously, to look at opportunities for cost optimization versus pricing opportunities. So that's an ongoing effort for us, John, but nothing in this quarter related to that.

Got it. And since we're talking about particular product lines, I saw in the presentation that power access was down. Maybe can we talk to why that was the case?

Yes. That really was just timing of builds from our customers, you know, between Hyundai, Kia and Ford. So we don't see that impacting long term. That's really more just of a timing of a build impact. All right.

Fair enough. I guess I'll ask one more question. I'll get back into queue. What is needed to move the gross margin from the 16% threshold to the 18% target range? What are the levers you need to pull still?

Yeah, I think we're pleased with the progress that we've made so far on gross margin. We've talked about the fact that, you know, we still feel early in the transformation and there's still a lot of work to do on cost optimization. So we'll continue to have very granular focus on further cost opportunities that will help that gross margin. The other piece is, as you mentioned, the portfolio review on pricing. We've talked about in the past that we had really taken the low-hanging fruit, but we're continuing to look at where there's further opportunities on pricing. And then longer term, you know, volume is important. So I think at this volume level, we're confident we can get to the 18% to the 20%, but volume always matters longer term.

Yeah, the only thing I'd add, John, is if you look at our gross margin, you know, last fiscal year it was, you know, 15%. If I look at it on a trailing 12-month basis, kind of at the end of the third quarter here, it's just north of 16.5% on a trailing 12-month basis. So we are seeing improvement in our gross margins, the actions that we've taken to kind of right-size the cost structure and improve the margins so we feel comfortable kind of with the target. The items we have line of sight, too, to get to the 18% to 20%.

And I think it also is a proof point for our cash generation because we've continued to have stable cash generation from the improvements that we've put into the fundamentals of the business.

All right. I lied then. What were the changes actually made in Mexico that were beneficial?

We implemented additional restructuring action in Mexico. That's what's driving the additional savings that you'll see starting here in the fourth quarter. It's about $800,000.

And I think, John, that's where we continue to have opportunity. What we're balancing is making sure that as we optimize the business, we don't impact delivery or quality for our customers. So it's a measured approach of getting our cost structure in the right way. Part of it is just looking at the way we do our business and improving processes. Part of it is the automation activities, the simple automation activities that we've talked about, and continuing to look at benchmark cost structures against where we're at. So this is where we think, you know, there's continued opportunity, but it's really in a balanced measure to make sure that we are not impacting our customers from a quality and a delivery standpoint while we right-size our cost structure.

Fair enough. Okay, now I'll get back into Q. Thank you very much, everybody.

Thank you, John. Once again, ladies and gentlemen, to ask a question, please press star 1 on your telephone keypad. At this time there are no further questions. I would like to thank everyone for their participation in today's conference. You may disconnect your lines at this time. Have a great day.