Strattec Security (NASDAQ:STRT) reported what management described as a “strong” second quarter of fiscal 2026, highlighting higher profitability and cash generation despite a challenging macro backdrop that included supply chain issues in the automotive industry, moderating vehicle production, and foreign exchange pressure.
Second-quarter results: sales growth and margin expansion
President and CEO Jennifer Slater said sales increased 6% in the quarter, driven by pricing, favorable mix, higher content value, new program launches, and tariff recovery. Strattec reported gross margin of 16.5%, an expansion of 330 basis points from the prior year’s quarter. Slater said net income “nearly quadrupled” year-over-year to about $5.0 million, or $1.21 per diluted share, with adjusted earnings per share of $1.71.
Drivers of profitability and key headwinds
Pauli attributed the quarter’s gross margin improvement to multiple factors, including approximately $3.1 million from pricing actions. He also cited higher production volumes and improved leverage as Strattec built inventories by $7 million, which he said was intended to improve responsiveness to customers and reduce expedited logistics costs. In addition, the company recorded $1.7 million in restructuring savings during the quarter from cost optimization initiatives.
Management also detailed several offsets to margin gains:
- $1.2 million of higher labor costs in Mexico tied to annual merit increases
- Approximately $900,000 of increased tariff costs
- Approximately $1.6 million of unfavorable foreign exchange impact, which management expects to remain a headwind through the year
Pauli provided an additional reference point for currency sensitivity, stating that every 5% change in the U.S. dollar relative to the Mexican peso represents an estimated $4 million annualized impact to gross margin.
On a year-to-date basis, Pauli said gross margin expanded 350 basis points to 16.9%, reflecting $8 million in cumulative pricing actions (including tariff recoveries), higher production volumes, and $3 million in restructuring savings, partially offset by $2.3 million in elevated Mexico labor costs and $2.1 million in unfavorable foreign exchange. Pauli said Strattec believes it has raised its baseline gross margin into the 15%–16% range as it advances toward its longer-term margin goal.
Operating expenses, restructuring actions, and transformation investments
Selling, administrative, and engineering (SAE) expenses increased to $17.9 million, or 13% of sales, compared with the prior-year quarter. Pauli said the year-over-year increase was driven by:
- $1.7 million of one-time expenses related to a voluntary retirement program
- $800,000 of additional business transformation costs
- $700,000 of talent investments
Those costs were partially offset by $1.1 million in lower executive transition expenses versus the prior year, Pauli said. Year to date, SAE was 11.6% of sales, and Pauli said that excluding the voluntary retirement charge, expenses were within the company’s expected long-term range of 10%–11%.
During the Q&A, management reiterated that expectation, with Pauli telling analysts the company still expects SAE to run in the 10%–11% range in the back half of the fiscal year.
Slater said the voluntary retirement program, combined with other fiscal 2026 restructuring actions, is expected to generate $3.4 million in annualized savings. In response to an analyst question on timing, Pauli clarified that the company saw about $400,000 of benefit in the second quarter, with savings expected to phase in to roughly $800,000 per quarter by the fourth quarter.
Cash flow, balance sheet strength, and capital priorities
Strattec reported second-quarter operating cash flow of $13.9 million, up 48% year-over-year, and year-to-date operating cash flow of $25.2 million, up 21%. Pauli said the improvement was driven by higher net income and partially offset by the inventory investment made during the quarter.
Capital expenditures were $2.6 million in the quarter, focused on new product programs and new equipment. Free cash flow was $11.3 million for the quarter and $21.0 million year to date. Pauli said the company expects fiscal 2026 capital expenditures to be less than $10 million and reiterated an expectation of approximately $40 million of operating cash flow on an annual basis.
The company ended the quarter with $99 million in cash and total debt of $2.5 million, which Pauli said is related to Strattec’s joint venture. He added that the company paid down $2.5 million of debt during the quarter, reducing total debt from $8 million at the end of the prior fiscal year.
Pauli outlined Strattec’s capital allocation priorities as follows:
- Investments to support organic growth and new customer programs
- Process modernization and automation initiatives aimed at efficiency and footprint improvement
- Preserving flexibility amid an uncertain automotive market
- Evaluating M&A as a potential lever for longer-term growth
Industry outlook and product focus
On the demand environment, Slater said North American automotive production “is not looking as challenging as originally expected” at the beginning of fiscal 2026, but industry forecasts still call for flat to moderately down production. Pauli said Strattec expects a slight sequential sales improvement in the third quarter, but forecast second-half sales to be down approximately 3%–4% year over year.
In Q&A, Slater addressed prior concerns about supply chain disruptions. She said a supplier fire affecting some of Strattec’s customers created slight impact on certain platforms, which customers are looking to make up over the full year, while “chip” challenges were worked through with “minimum impact” to sales during the quarter.
On growth initiatives, Slater said Strattec is focused on access products and digital key discussions with existing and prospective North American customers, while noting the long automotive sales cycle. She said the “very earliest” potential timing for new customer wins would be 2029, and likely longer term, depending on qualification and model launch schedules. She also emphasized that once the company is specified on a platform, it typically remains for the life of the platform, usually five to seven years.
Slater also provided an update on a product line review, reiterating that the company deprioritized its switch business earlier in the year because it was not the right fit from a profit and value perspective. She said Strattec remains focused on power access products—drive units, latching mechanisms, and door handles—along with digital key technology, which she described as the next-generation technology of a traditional key fob.
About Strattec Security (NASDAQ:STRT)
Strattec Security Corporation is a Wisconsin‐based designer and manufacturer of mechanical and electronic locking systems for the global automotive market. Established more than five decades ago, the company supplies original equipment manufacturers (OEMs) and the aftermarket with a broad portfolio of lock and key solutions tailored to passenger cars, light trucks and commercial vehicles.
The company’s product range includes mechanical locking systems such as door lock cylinders, ignition lock modules, key blanks and door handles, as well as electromechanical and keyless‐entry systems.
