CFO Matt Pauli. Following the presentation, there will be time for Q&A. Please utilize the Q&A icon to submit questions, and I will present them to management. With that said, thank you, everyone, for being here. The floor is yours.
Good afternoon, everybody. I'm Jennifer Slater, President and CEO of Strattec, and as John said, I'm here today with Matt Pauli, our CFO, to tell you more about Strattec. Before we start, I want to make your notice to the Safe Harbor Statement that covers us for any forward-looking statements that we may make during the presentation and the Q&A session. First, for those of you who may not be familiar with Strattec, we were founded in 1908 and became public in 1995. We're an automotive supplier that provides highly engineered and innovative solutions across a wide range of products that you can find on your vehicle, from the power tailgates to front latches and key fobs. Historically, our primary customers we've served are the North American OE customers with Ford, General Motors, and Stellantis.
You can see we have a relatively balanced product portfolio, with the majority of our products serving directly original equipment customers. About 8% of our revenue is through the aftermarket. Our headquarters are here in Milwaukee, Wisconsin. We have a customer center and testing facility in Auburn Hills, Michigan. We have a distribution facility in El Paso, Texas, and then we have assembly facilities located between Juárez, with three facilities, and León, Mexico. Our core capabilities are design and engineering, test and validation, zinc die casting, stamping, injection molding, assembly, plating, painting, and PCBA manufacturing. Since I joined Strattec last July, we've been singularly focused on transforming the business across four strategic initiatives. First, it's critically important to make sure that we have the right capabilities, culture, and alignment.
We have a full new executive team and have been making progress with key capabilities throughout the other layers of the organization. We are also focused on increasing communication and expectations on our culture pillars to make sure we are approaching innovation not just at a product level, enhancing our collaboration and driving our results. We're also refocusing on the customer to make sure we have the appropriate external view of our business, which is fundamental to our growth. Clear and consistent communication, goal alignment, and prioritization have been key in our culture and leadership transformation. Secondly, to make sure we're driving results on our key priorities, we instituted a strong business operating system. This has allowed us to make the improvement in our margin, cash flow, and helps us continuously evaluate and address our cost structure.
As we think about our revenue growth, we took a strong look at our pricing opportunities, and we're able to capitalize on some low-hanging fruit in short-term opportunities. While I feel we addressed these low-hanging fruit, our commercial team continues to build the capability to think about pricing in a more strategic manner. Finally, but extremely important to us, we've been on a journey to modernize our business. The starting point was very low, so extremely simple things like automating our benefits, moving from paper expense reports, and building other basic business processes have been critical in the transformation to help enable our teams to focus on the more critical items that drive our business. I'm extremely proud of the progress the team has made. We've navigated a significant amount of change in the business, as well as a significant amount of change in the external environment.
But there's still a significant amount of work to be done on the underlying operations and laying the groundwork for our long-term growth. Really, we're still in early innings of our transformation story. Translating those actions into results, we've been able to improve our margins and cash balance steadily over the past five quarters. As I mentioned, we have more to do, but I'm pleased that our transformation actions are delivering results. Our products have primarily been categorized in three categories. With security and authorization, that is where the history of our company started with locks, key cylinders, and key fobs. We're looking at enhancing this technology with next-generation digital key fob, which I will talk about in a few slides. Our vehicle access business was started with an acquisition with Delphi in 2008 and provides tailgates, liftgates, hood, and front latching mechanisms.
We also have a joint venture partner, which we deliver door handles to automotive customers. I'm proud of some of the capabilities that our engineering team has taken to leverage what we know in security and authorization and vehicle access to create a new product platform with new customers that we hadn't addressed historically. But as we look at where we want to prioritize our growth, we see this as a crowded space with steering wheel switches, electronic modules, and paddle shifters. As technology advances, we see less and less of these in a vehicle. So for a market that's already served, we are prioritizing growth with the other two areas of our business. Talking a bit more about our power access products, we have a strong depth of technical expertise to provide strong value for our customers.
Our products combine the electronics engineering, software engineering, and manufacturing expertise to drive seamless system performance to the end-item consumer. Historically, we've had strong relationships with the North American OEMs, as I mentioned, and we feel as access proliferates across the business, we have the opportunity to provide increased content across a wider subset of customers, increasing our addressable market. Really, starting in North America as those customers are looking for supply local to local. Shifting into our digital key technology, I'd like to spend a few moments talking a bit on what this is. This is the next generation of a key fob for your vehicle that integrates seamlessly with your phone using Bluetooth and ultra-wideband connection technology. So from a consumer perspective, the natural consumer doesn't necessarily recognize this technology change, but it is critical as vehicles advance.
As these advancements are made in vehicle access, we do feel strongly that key fobs will still be an important part of the majority of vehicles over the next 10 years. We're also finding that customers who are going away from the mechanical lock and key fob are looking to put these back into their product planning for transferability, safety, and security. Our products are uniquely positioned based on our long-standing history to provide software electronics packaging that meets customer requirements along with a strong USMCA manufacturing footprint. To sum things up, we expect our revenue to closely follow North American production in fiscal year 2026. In Q2 specifically, there have been several things that we have been navigating with our customers to make sure that we have continuity of supply. These have all been publicly mentioned as far as an aluminum fire, customers have been navigating.
We've recently had some Mexico border issues creating further supply chain challenges and Nexperia chip issues. We are very proud of the margin improvements and cash generation that we've delivered from our transformation actions and continue to be focused on our transformation. With some of the big rocks dealt with operationally, we're now providing a heavier focus on our products and our growth, and with that, I'm going to turn it over to Matt to talk a bit about our financials.
Thanks, Jen. I'll review our financials before we open it up for question and answer. As a reminder, we are at June 30th, fiscal year end, so we recently completed our fiscal first quarter. Our first quarter sales were $152 million, which was up 10% on a year-over-year basis. Our performance in the past quarter was better than the North American automotive market, which was up about 5% for the same period. In the first quarter, we benefited from a favorable sales mix, the impact of pricing that was largely implemented in January of 2025. New program launches also were a benefit of $2 million in the quarter, but they've leveled out here over the last several quarters, and there's a lull in new program launches as we look forward.
On the right-hand side of the slide, you can see our annual sales trend for the last four years, which equates to about a 4% annual growth rate. Keep in mind, fiscal 2022 for us was negatively impacted by industry-wide chip shortages. But since then, you see consistent growth primarily from existing customers and pricing actions. On a trailing 12-month basis, our sales are $578 million. And as Jen mentioned, on a going-forward basis, we expect our sales growth to closely follow OEM production levels. Next, if we look at our cost structure, including gross margin and SAE, or Sales, Admin, and Engineering expenses. In our first quarter, our gross margins improved to 17.3%. The significant improvement in gross margins compared to the prior year was a result of pricing actions, restructuring benefits, and higher sales volumes.
During the second half of last year, we implemented various restructuring actions both in Milwaukee and in Mexico, which will generate about $5 million of annual savings, and we also implemented an additional restructuring action in our first quarter. As a reminder, we have one production facility here in Milwaukee and multiple facilities in Mexico. Therefore, government-mandated labor increases in Mexico and currency impact our financial results. In the first quarter, FX was a headwind of about $500 million. When we look at our SAE, they were 10.4% in the first quarter, which is consistent with our longer-term expectations of SAE in the 10%-11% as we continue to invest in the business.
Then, just looking at our profitability, this slide really illustrates the efforts of the team in delivering on our transformation, which has resulted in improved financial results from a net income, adjusted net income, or adjusted EBITDA basis. Our first quarter highlights include $9.2 million of adjusted net income, which is $2.22 a share, and adjusted EBITDA of $15.6 million, which resulted in a 10% EBITDA margin. Next, if we look at our cash generation and capital flexibility, from a liquidity standpoint, we have $90 million of cash on the balance sheet and only $5 million of debt outstanding, which relates to a 51% owned joint venture that has a separate revolving credit facility. During the first quarter, we generated $11 million of cash from operations, which is pretty consistent with the prior year.
Right after the end of the first quarter, we did extend our existing credit facility for an additional three years, which provides us greater flexibility. Lastly, from a capital priorities perspective, just a few comments. We currently have sufficient liquidity just given the cash on the balance sheet and our new revolver that I mentioned to weather any of the uncertainties or the cyclicality of the North American automotive market. As a result, Jen and I have the benefit of not focusing on liquidity and leverage on a daily basis, but focusing on the transformation. On a short-term basis, our capital priorities are more internally focused, focused on driving the transformation. There's some CapEx investments that are required there, as well as supporting organic growth opportunities.
And then, from a longer-term perspective, we've recently initiated a process to develop a framework for M&A, which could be of use for our cash in the future. Lastly, I'll leave you with the Strattec investment rationale. If I were to summarize the Strattec opportunity, we're a transformation story. The team has made significant progress over the last 18 months, but there's still a lot of opportunity for us to tackle and improve the business. The team has executed on some of the low-hanging fruit, including pricing actions, restructuring, significant reduction in working capital, while also working to improve the business processes and managing some of the industry-wide challenges like tariffs and supply chain. As we look forward, our approach will be balanced both in driving additional commercial opportunities and also improving our cost structure.
And lastly, we've got a new leadership team that's excited about the opportunity to transform the business and a great balance sheet to support us in those efforts. With that, I'd open it up for question- and- answer.
Thank you, everybody. If you have a question, please submit it to the Q&A icon and I'll present it to management. With that said, Jennifer, you've been there for almost a year and a half now. I'm just curious about what your perspective is now of Strattec compared to when you started at the firm. How has that changed or evolved over the past year?
So when I came here, I thought there must be something special about Strattec because it historically had been a long-standing supplier in the automotive industry. And I recognized that there was opportunity to bring operational rigor into the business, and that excited me. I would say 18 months later, there are obviously always things that you find that you recognize there may be more opportunities, but I'm still very optimistic about what my initial perspective of was the business and where we are today. We've delivered a tremendous amount during the 18 months. And we were talking about this earlier, John. What we forget is we also navigated a very complicated tariff situation in the middle of that. And to me, that just shows what a great team we have and how resilient they are and what a great foundation of a business we have here.
Great, great. Where do you stand on the product portfolio review? It sounds like that you're willing to add to new product lines, be it internally developed or via M&A. Are there also lines that you may want to subtract that are money losers?
Yeah. As we did the portfolio review, that's definitely why we made the decision to continue supporting customers from a continuity standpoint in our switch business, but shifting our resources to prioritize our growth and our power access and then advancing technology of our existing core business. I feel pretty confident that we're positioned well from a product standpoint, especially in power access, to continue to drive diversification across our customer base, starting in North America because we have a strong North America footprint. With everything going on in the supply chain, customers are really looking for local-to-local supply. I think we have enough to do there internally that that's where we're prioritizing our internal activities. Then, as Matt mentioned, longer term, we're putting together a framework as we continue to think about how would we want to complement that potentially through M&A.
Got it. Let's move to the audience here. We got some questions coming in. One question about the competitive landscape. Can you talk a little bit about it? What's stopping a competitor from going and directly taking market share?
Yeah. Our customers are long-cycle customers, so as we work with our customers, we're typically working one to two years ahead of a request for quote or sourcing, and then the launch of that vehicle is three to four years after sourcing. Once you're on a platform, you're typically on a platform for the life of the vehicle, which is typically five to seven years, so I think that timeline shows the long nature part and stickiness once you're specced into a platform of continuing to support that platform. As we think about next-generation product growth or customer growth, we're starting now with those customer conversations that would realize revenue in 2029 or 2030 just due to the nature of how the sourcing goes.
Another question is about market share. Can you estimate the market share you have in any of your product lines?
I would say we have pretty good coverage in our security and authorization business. But if you think about our addressable customer set, more than 60% of our revenue comes from Ford, General Motors, and Stellantis. And you look at what the production build is, this is where we have opportunity to continue to grow from a market share standpoint.
Got it. Question about international markets. I guess they weren't around when we had all the JVs. So maybe one interesting international growth opportunity.
Yeah. There's plenty of international customers that are in our market where we have opportunity to expand again that are looking to get a more local supply chain for their products manufactured within the North America region. And that's where we're starting. I think there's enough opportunity there first. And it's important. There's a lot going on here. And one of the most important things that I would say Matt and I have found is prioritizing where the team is working to drive the biggest value, both top and bottom line, is important. And so we're prioritizing North America as we're looking at our growth opportunities first.
I also add to that, we do support non-US OEMs today. So we've got Hyundai, Kia, and Korea that we support out of our WARAS operations. We have a couple OEMs in Europe as well.
Got it. Let's combine this question with maybe something you brought up in your presentation. The bridge to 17%-20% on the gross margin profile, how much is it going to be cost takeouts versus pricing versus volume leverage? How do you see that playing out?
Yeah. I think when I think about those three pieces, it's kind of equal contributors from all three of those. So I think you saw in our fiscal 2025 results, our gross margins were 15%. Our long-term goal is to kind of get to the 18%-20% range. In our first quarter, we were 17% at a healthy sales level of about $150 million.
So that gives us confidence that we can get to the longer-term objective of the 18%-20%. But it is a combination of pricing. I think we addressed some of the low-hanging fruit, but we didn't necessarily have a good pricing discipline in the business 18 months ago. So there's some opportunity on pricing. Jen talked about the growth opportunity, which it's with our existing customers, increasing our wallet share, new customers, and then thinking about our business a bit broader in transportation instead of just North American automotive. And then the last piece is really around operational excellence. So we've got excess capacity in our facilities to support growth, both from an equipment and a brick-and-mortar standpoint. But we're doing some simple automation right now. There's other improvement opportunities on the shop floor. And then also looking at our supply chain and our sourcing piece. So kind of equal contributors from those three levers.
Yep. You mentioned something that has also been brought up in the Q&A here. The automation process, can you talk a little bit about where you stand on cost cuts for the current fiscal year and the automation process, if that's going to require additional capital spending? How does that kind of play out?
Yeah. It's been a phased approach. I think our first look is more about headcount to support the operations that we've had, and we've made some progress there. We're continuing to address it from a simple headcount standpoint before you get to thinking about automation. And then step one as we approach automation, it's very simple. So there's cases where we have a manual operation to install a screw. We're looking to automate that with a robot. We've demonstrated that we can already do that. So it's more about a read across. We see those simple automation projects as quick turnarounds with easy payback. So we're going to continue to focus on that. Then we would look to more complex automation and more opportunity to utilize flex lines. And thirdly, anything with a footprint. Like Matt said, we do have opportunity to grow.
We want to make sure that we've got a footprint to accommodate that growth and then longer term, make sure that we've got the right optimized footprint.
I would say, John, our operating model is really asset light, right? So I don't think investing in some of the automation doesn't change our estimate of kind of CapEx at kind of the 2%-2.5% of sales as we look forward. And generally, we look for less than a two-year payback on those investments.
Yeah. The calculation to drive automation really has changed over time as automation and technology has continued to become more affordable. So that calculation on what makes sense, there's a lot more things that make sense and quicker payback just because of the trend in technology for automation coming down over time.
Another question from the audience about automotive technologies. Do you see any that will make an impact on your outlook in the near term?
So we often joke that if there was someone who had a crystal ball on the North American production forecast, we'd be really excited. But the thing that I look at, and this is why we say we're going to follow North America production, the benefit of our product portfolio is we really have a powertrain-agnostic product portfolio. So platform volume matters, but it's not like we're managing different investments between an ICE product portfolio and electric vehicle product portfolio. So besides the normal fluctuation in North America production and fluctuation within our addressable customer set, there's nothing else unique in the market that would impact our revenue.
No other power liftgate type rollouts coming that we should anticipate?
I think that's where we're focusing our growth, right, John, is with customers that would have that power accessibility, where do we have opportunity to provide already proven technology in the market? We talk a little bit about typically accessibility and power accessibility starts with more premium segments and then proliferates throughout car segments. We're looking at that as a positive trend as well besides just the opportunity for more penetration.
You touched on tariffs earlier. Can you just review where we stand on the tariff impacts?
Yeah.
Yeah. I can summarize. A majority of our product comes out of Mexico. Over 95% of our product is USMCA compliant, which is a huge benefit for us. On an annual basis, tariffs are roughly $5-$7 million of cost before any mitigation. But we've done a lot of the team has done a lot of work around mitigating those tariffs. We've changed some of our supply chain. We've changed some of our logistics routes. We've also implemented a price increase in the aftermarket, and we're working with the OEMs on recovering those costs. We've spent a lot of time over the last 12 months on tariffs, but I think the team has done a good job on largely mitigating the impact from a P&L perspective.
Now, the recoveries from the OEMs are on a bit of a delayed basis, but we feel comfortable that we've mitigated most of those costs.
So the $5-$7 million would be completely offset by the end of this fiscal year. Is that the timeline we should be thinking about, or is it longer than that?
I think it's longer than that. Obviously, there's different documentation that you have to provide to the customers. And so we're continuing to work through that.
Yeah. If anything, we're just expecting it to be a timing lag, not an impact to the bottom line longer term.
You mentioned that you expect to mirror the production cycles of your end markets. What are you thinking about in 2026 relative to 2025, the total production? And on a calendar basis, I'm talking about the total production kind of outlook. What are you hearing?
Yeah. What we were saying is what we're expecting for first half of calendar year 2026 is that the market would be moderate to slightly down. We haven't seen anything different than that, although I would say third-party estimates every month have a little bit more favorable view of what that's going to look like. But from a planning perspective, we're still planning moderate to slightly down.
Got it. Question about the cash on the books. You have a lot of it. You have a clean balance sheet. You have some borrowing capacity that you just upped. Maybe talk about the cash and what do you think the best use of it is?
Yeah. I think, as you mentioned, we've got $90 million of cash on the balance sheet. A lot of that was generated in our last fiscal year where we really had a focus on kind of reducing our working capital, some pre-production balances. So we generated over $70 million of cash flow from operations last year. I'd say roughly half of that was kind of one-time kind of cleanup of the assets on the balance sheet. And then the other half was kind of the normal operating cash flow to expect going forward.
I think, as I mentioned in kind of the presentation, our preference is to continue to add to that cash on the balance sheet in the short term, just given some of the uncertainties, and it provides a good buffer for us. We'll continue to invest in kind of internal growth and operational improvements, and then on a longer-term basis, we'll kind of evaluate the use for that cash.
Okay. It looks like we've addressed almost everybody's question here in the Q&A, so I'll close it out with this. Do you have any final comments and maybe any thoughts about what people are underappreciating or not recognizing about the Strattec story?
Yeah. I think my closing comment and what's underappreciated is, in this transformation, we're still in early innings. We think there's still a lot more to do, and we're really focused on continuing to build a strong foundation as we're building what our growth opportunities are longer term, so Matt and I are very excited about where we are and where we're going.
Great. Jen, Matt, thank you very much for taking time out today. We appreciate you being here. I hope everybody has a great day.
Thanks, John.
Thank you. Bye.