Strattec's Q1 2026 Earnings Call: Contradictions on Automation, Supply Chain, Tariffs, and Customer Expansion

Date of Call: October 31, 2025

Financials Results

• Revenue: Revenue grew nearly 10% in the quarter (10% sales growth noted)
• Gross Margin: 17.3%, up 370 basis points year-over-year
• Operating Margin: Adjusted EBITDA margin 10.2%, up 310 basis points year-over-year

Guidance:

• Q2/Q3 volume risk from an aluminum supplier fire and semiconductor restrictions; full-year impact remains uncertain
• Full-year CapEx budget ~$12.5M (~2% of sales); expect CapEx to be higher over the next several quarters to support modernization
• Additional Mexico restructuring to deliver ~ $1.0M annualized savings, expected to be fully realized in Q3
• Automation projects with <1-year payback; benefits expected to appear in the second half of the fiscal year
• Cash ~ $90M, ~$53M available on revolver; amended $40M revolver extended to Oct 2028; M&A discussions in very early stages

Business Commentary:

* Revenue and Margin Improvement: - Strattec Security Corporation reported revenue growth of nearly 10% in Q1 2026, alongside a gross profit margin expansion of 370 basis points and an EBITDA margin expansion of 310 basis points to 10.2%. - The improvements were driven by higher sales, strategic pricing actions, cost reduction activities, and $1.3 million in restructuring savings.

• Cash Generation and Balance Sheet Strength:
• The company generated solid cash flow of $11 million in the quarter and ended with over $90 million in cash on the balance sheet.

• This was achieved despite investing in business transformation and is attributed to disciplined financial management and improved operational efficiency.

• Automotive Industry Challenges and Strategic Responses:

• Strattec faces two major external challenges: an aluminum supplier fire impacting production and international trade restrictions on a chip supplier causing semiconductor shortages.

• The company is managing these issues by building finished goods inventories, automating operations, and assessing its operations and product portfolio to drive value, ensuring alignment with customer needs.

• Investment in Automation and Modernization:

• Strattec is investing in automation and modernization efforts, including automated assembly stations in Mexico and consolidating test labs in Auburn Hills, Michigan.

• The focus on automation is expected to provide simple and transformational manufacturing benefits, ensuring flexibility and cost efficiency.

• Future Growth and Transformation Plan:

• The company is looking into potential M&A opportunities to support long-term growth and has extended its revolving credit facility until October 2028.
• This strategic planning is aimed at positioning Strattec for future growth and enabling it to capitalize on new market opportunities.

Sentiment Analysis:

Overall Tone: Neutral

• Management highlighted strong operating progress — revenue up nearly 10%, gross margin +370 bps to 17.3% and adjusted EBITDA margin 10.2% — while warning of near-term headwinds from a supplier fire and semiconductor restrictions that create uncertain volume timing.

Q&A:

• Question from John Franzreb (Sidoti & Company, LLC): What can you share with us that's new compared to what we discussed in fourth quarter results regarding your ongoing review of operations?
  Response: They've moved from basic stabilization to deploying simple automation in manual assembly with plans to scale automation more broadly and consider transformational automation for future products.

• Question from John Franzreb (Sidoti & Company, LLC): How should we think about the change in CapEx as you start to automate? What does the CapEx budget for 2026 look like versus 2025?
  Response: Full-year CapEx budget is about $12.5M (~2% of sales); automation costs have come down so automation is not a significant incremental CapEx burden.

• Question from John Franzreb (Sidoti & Company, LLC): Can you talk about the Mexico restructuring you referenced and its expected timing/benefit?
  Response: They completed further reviews and restructuring in Mexico; actions will drive efficiency and deliver additional favorable results beginning in Q3.

• Question from John Franzreb (Sidoti & Company, LLC): On the footprint changes, sale-leaseback and relocating labs/offices — what's the thought process and expected outcome?
  Response: The sale-leaseback and relocations are designed to rightsize and optimize space, improve process flow, consolidate the test lab closer to customers, and provide flexibility for future operations.

• Question from John Franzreb (Sidoti & Company, LLC): Can you quantify the potential impact and timing from the aluminum supplier fire and semiconductor disruptions?
  Response: They expect near-term volume impact in Q2 (possibly into Q3) but cannot quantify the full-year effect yet due to uncertainty; customers will attempt to make up lost production over time.

• Question from Ethan Star (Private Investor): What types of return on investments do you expect from automation and when might such returns show up in quarterly results?
  Response: Automation projects have paybacks of less than one year and benefits should start to show in the second half of the fiscal year.

• Question from Ethan Star (Private Investor): Are you able to share anything about developing relationships with other North American vehicle manufacturers?
  Response: They are engaging additional North American OEMs but provided no specifics; targeting expansion for power access and digital key products beyond current customers.

Contradiction Point 1

Transformation and Automation Initiatives

This contradiction highlights differing perspectives on the progress and focus of the company's transformation and automation initiatives, which are crucial for operational efficiency and cost management.

What's new compared to the fourth quarter results? - John Franzreb(Sidoti & Company, LLC)

2026Q1: And I'll maybe just add on that, John, just to give you an example. There's really simple automation processes that we're starting with. So where you're manually putting a screw into a part, we've proven that, that's an easy thing to automate. Automation costs really have come down. And so they're quick payback to look at those simple ways to automate our processes. - Jennifer Slater(CEO)

How far along are you in the transformation, and how long until most of it is completed? - John Franzreb(Sidoti)

2025Q4: We're still in the early stages of the transformation, having focused on low hanging fruit this past fiscal year. Further transformation efforts will be more long-term. - Jennifer Slater(CEO)

Contradiction Point 2

Impact of Production Shortages and Supply Chain Constraints

This contradiction reveals differing assessments of the impact of production shortages and supply chain constraints on the company's operations and financial outlook.

Given the cautionary outlook in Slide #9 for next quarter, can you quantify the potential impact of the fire and semiconductor production disruption and provide timing for normalization? - John Franzreb(Sidoti & Company, LLC)

2026Q1: When we started the year, John, we said that we would really be in line with North America production because we would be lapping some of our launches and the pricing actions that we had last fiscal year. And with that in line, we thought we would be flat to modestly down. That didn't anticipate the supplier issue or the chip shortage. - Jennifer Slater(CEO)

How far along are you in the transformation process and how long will it take to complete it? - John Franzreb(Sidoti)

2025Q4: We expect our operations to return to normal levels in fiscal year 2026. We are making plans to increase capacity in our Mexico operation, which will support growth, and we plan to add capacity to support launches planned for the fiscal year 2027. We expect to benefit from additional launch volumes over the next 2 years and pricing actions on our existing products. - Jennifer Slater(CEO)

Contradiction Point 3

Tariff Impact and Mitigation

It involves the company's strategy to manage tariff impacts on its operations and finances, affecting both internal planning and investor expectations.

Can you quantify the potential impact of the fire on semiconductor production disruptions and the timeline for operations to return to normal? - Unknown Attendee (Private Investor)

2026Q1: tariff-related inflation has not been limited to specific parts or products. - Jennifer Slater(CEO)

What was the absolute impact of tariffs in Q3? And how much could be reduced via logistics or suppliers? - John Franzreb (Sidoti)

2025Q3: STRATTEC is managing tariff exposure through logistics changes, customer recovery talks, and sourcing shifts. They expect to mitigate the full exposure, about $9 million to $12 million annually. - Jennifer Slater(CEO) and Matthew Pauli(CFO)

Contradiction Point 4

Automation Investment and Return on Investment

It involves the company's approach to automation and the expected return on investment, impacting strategic decisions and investor expectations.

How will automation impact CapEx changes? What is the CapEx budget for 2026 compared to 2025? - John Franzreb (Sidoti & Company, LLC)

2026Q1: And I'll maybe just add on that, John, just to give you an example. There's really simple automation processes that we're starting with. So where you're manually putting a screw into a part, we've proven that, that's an easy thing to automate. Automation costs really have come down. And so they're quick payback to look at those simple ways to automate our processes. - Jennifer Slater(CEO)

Will the leverage in the sales snapshot be similar to the year-to-date level? - Stacy Rasgon (Bernstein Research)

2025Q3: With respect to our 4Q CapEx budget, much of that will be dedicated to further automation efforts and other facility improvements. - Matthew Pauli(CFO)

Contradiction Point 5

Expansion of Customer Base

It highlights differing perspectives on the company's efforts to expand its customer base, which is a critical factor for growth and long-term success.

Can you provide any details on Strattec's relationships with other North American vehicle manufacturers? - Unknown Attendee (Private Investor)

2026Q1: As we start thinking about where do we have opportunity with our power access products and our digital key, we're looking to support the customers we have today, but also expand our customer base. - Jennifer Slater(CEO)

Are there opportunities to grow production beyond Power Access from a customer standpoint? - Brian Sponheimer (Gabelli Funds)

2025Q2: As we're working on our internal focus on operational improvement, we're parallel pathing our strategic work on our portfolio and our customer base. You talked about Power Access. That's the easy part for us to look at to see what other addressable customers within transportation could use that product portfolio. - Jennifer Slater(CEO)