Strattec Security - Earnings Call - Q2 2025
February 7, 2025
Executive Summary
- Revenue grew 9.6% year over year to $0.130B on new program launches and higher-value content; sequentially, sales declined versus Q1 on seasonality and customer inventory normalization.
- Gross margin expanded to 13.2% (+180 bps YoY) on FX tailwinds and volume; Adjusted EBITDA rose to $8.0M (6.1% of sales), up from $5.0M (4.3%) a year ago.
- Diluted EPS was $0.32 (GAAP) vs. $0.26 YoY, and Adjusted diluted EPS was $0.65 vs. $0.36 YoY, reflecting cost actions and pricing; sequential EPS declined from Q1 ($0.92) as FX hedges swung to a loss and ES&A rose.
- Operations generated $9.4M of cash; cash ended at $42.6M (+$8.2M Q/Q). Management highlighted $1.2M annualized savings from Milwaukee shift reduction and proactive tariff planning as key catalysts.
What Went Well and What Went Wrong
What Went Well
- Higher-value content and new launches drove broad-based sales growth; Power Access +27% YoY and Engineered Latches +20% YoY were standout categories (“higher value content in Power Access and Latches”).
- Cost optimization actions: elimination of a shift in Milwaukee expected to generate ~$1.2M annual savings; working capital initiatives reduced pre-production tooling balances by ~$10.5M year-to-date (“we continued to unlock value on our balance sheet”).
- Pricing progress: commercial team identified ~$8M in annualized pricing improvements, expected to begin in Q3, supporting margin trajectory (“we should begin to realize the improved pricing in the third quarter”).
What Went Wrong
- Keys & locksets continued to decline, weighing on mix; category revenues fell to $20.1M from $24.6M YoY.
- FX hedging losses and other expense swung to a $0.5M charge versus $1.1M income in the prior year, pressuring EPS despite operational improvement.
- Mexico labor inflation: government-mandated increases (20% prior January; ~12% this January) raised costs by ~$1.4M in Q2, limiting ex-FX margin expansion.
Transcript
Operator (participant)
Greetings and welcome to the Strattec Security Corporation Second Quarter Fiscal Year 2025 Financial Results. At this time, all participants are in listen-only mode. A Q&A session will follow the formal presentation. If anyone today should require operator assistance, please press star zero from your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure at this time to introduce Deborah Pawlowski, Investor Relations for Strattec. Please go ahead.
Deborah Pawlowski (Head of Investor Relations)
Thank you and good morning, everyone. We greatly appreciate you joining us for Strattec's Second Quarter Fiscal 2025 Financial Results Conference Call. With me on the call today are Jennifer Slater, President and CEO, and Matthew Pauli, Vice President and Chief Financial Officer. For those of you who may be newer to the story, Matt just recently joined us as CFO in mid-November last year. Jen and Matt are going to review our second quarter 2025 financial results and provide an update on the progress being made to transform Strattec. 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 well as with other documents filed by the company with the Securities and Exchange Commission. You can find these documents on our website as well. I want to point out that during today's call, we will discuss some non-GAAP measures which we believe 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 GAAP.
We have provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release and slides. With that, if you would turn to slide three, I will turn it over to Jen to begin. Jen?
Jennifer Slater (President and CEO)
Thank you, Deb, and welcome, everyone. I am encouraged with the progress we are making to transform Strattec into a stronger, sustainable business with improved earnings power. I appreciate your time today to learn more about this progress. Let me first touch on some highlights of our second quarter results. We had another solid quarter of performance and generated $9.4 million in cash from operations in the quarter, bringing us to about $21 million in the first half of our fiscal year. This is much improved over the use of cash for the first half of fiscal 2024. Revenue grew almost 10% despite last year's second quarter, benefiting from $4 million in retroactive pricing. Margins also improved with adjusted EBITDA margin expanding 180 basis points. Of note, we continue to execute on our strategic priorities of stabilizing the business, optimizing costs, and evaluating our product portfolio to advance our transformation.
I'll address this more fully if you would turn to slide four. Our focus on operational excellence and optimizing our cost structure resulted in the elimination of one shift in our Milwaukee operations. This change will provide $1.2 million in annualized savings that will be partially recognized beginning in the third quarter or the quarter we are operating in now. We recognized $300,000 of restructuring costs resulting in a very quick payback. We also identified that our Milwaukee facility, which is 350,000 sq ft, is roughly twice as much manufacturing space that we require for the stamping, die-casting, plating, and other operations we have in the facility. The building has been listed for sale, and the results of the process will help inform our next steps. We are continuing to review our manufacturing operations to identify more ways to reduce costs in the business.
Yes, the elephant in the room is tariffs. While this continues to be a fluid situation, our ongoing efforts to optimize our costs will help in some respects, along with our strong balance sheet. Regardless, we are being proactive in conversation with our customers and suppliers to better understand the implications and develop any necessary countermeasures. Chey Varto, our new Chief Commercial Officer, has hit the ground running, and our commercial team recently captured about $8 million in new annualized pricing. Of course, the pricing gains are dependent on customer demand and the volume of related products being shipped, but we expect that we should begin to realize the improved pricing in the third quarter. We continue to improve our working capital specifically by working down our pre-production tooling cost balances.
The strong effort of the team has reduced the balance by $10.5 million, or nearly 50%, since the start of this fiscal year. Importantly, I believe the investments we are making in upgrading and enabling our talent pool are resulting in accelerating the pace of change here at Strattec. Much of what we are discussing on the call today, such as right-sizing our operations, the pricing gains, and the metrics to better understand our underlying performance, are direct outcomes of our investment in our team. Let me talk to the drivers behind our revenue growth on slide five. Second quarter sales increased $11 million as a result of new product launches and higher demand for our products that more than offset end-of-life programs. Much of this growth is higher value content in Power Access and Latches. In addition, we have customers that are building inventory to address their production plans.
Sales of Power Access products were up 27% year over year on new programs, higher value content, and volume. Engineered Latches grew 20% over last year's second quarter for the same reasons. This more than offsets the continued decline in our mature product line of keys and locksets. Let me turn it over to Matt now to cover our financial results in more detail.
Matthew Pauli (VP and CFO)
Thanks, Jen, and good morning, everyone. Moving to slide six, gross profit was up $3.7 million-$17.2 million, a 27% increase compared to the second quarter last year. The $3.5 million benefit of favorable FX and higher production volumes more than offset headwinds from the prior year one-time net pricing recovery of $2.9 million and increased labor costs. Labor costs were up $1.4 million, reflecting the 20% government-mandated wage increase in Mexico. We also accrued $600,000 for bonuses this year. Gross margin expanded to 13.2% with a 270 basis point benefit of favorable foreign exchange. Excluding the impact of currency and the prior year one-time pricing recoveries, we delivered about 100 basis points of margin expansion. I should touch on tariffs here a little.
As is true with the majority of the automotive industry, we are heavily reliant on our assembly operations in Mexico and our global supply chain to provide product to our customers. Approximately 70% of our sales are shipped to the US or picked up by a customer at our distribution center in El Paso. The remaining 30% are sold to OEMs globally. We have certain actions we can take and a few levers to pull. Where the tariff situation lands will also feed into our strategic evaluation of our footprint from a longer-term perspective. Moving to slide seven, engineering, selling, and administrative expenses, or ES&A, totaled $15 million, a $1.6 million increase compared with last year's second quarter. Half of the increase was related to an $800,000 annual bonus provision. Of note, no bonus provision was taken in the comparator period.
We also had $300,000 of incremental non-cash stock compensation expense, $300,000 of restructuring costs, and $200,000 of costs related to the transformation of Strattec. We are investing in people and processes to drive greater predictability and a stronger earnings profile. On slide eight, net income for the second quarter was up 29% to $1.3 million, or $0.32 per diluted share. Offsetting the benefit of higher operating income and a $300,000 increase in investment income was a $1.5 million increase in other expenses related to gains and losses on our FX hedging activity. As you will notice in the news release, we are now presenting two non-GAAP measures of adjusted EBITDA and adjusted net income. Given the investments being made to turn Strattec into a more predictable and better-performing business, we believe these metrics will help you understand the underlying performance of the business.
We are also using these metrics internally as well to measure our performance. We have provided the reconciliation tables for each period and the full year of fiscal 2024 for your information. Adjusted EBITDA for the quarter was $8 million, up 60% compared to the same period last year. Adjusted EBITDA margin expanded 180 basis points to 6.1% due to higher sales volume, favorable changes in FX rates, and cost management initiatives. On an adjusted non-GAAP basis, net income for the second quarter was $2.6 million, or $0.65 per diluted share. This was up 81% from the prior year's second quarter. Lastly, slide nine highlights our solid balance sheet, financial flexibility, and capital priorities. Free cash flow increased by $12.5 million versus last year's second quarter due to improved operating performance and reduced net working capital.
Most of the working capital decline was related to the continued effort to recover pre-production costs from our customers. We ended the quarter with $42.6 million in cash. I'm reevaluating the capital expenditures for the year and expect to have a better understanding of our needs when we report the third quarter. In the meantime, CapEx of just under $1 million in the second quarter and $3 million in the first half of the year was primarily related to new product programs and equipment upgrades. Our capital priorities as we advance through the transformation of the business are internally focused on operational efficiencies, productivity tools, and organic growth initiatives.
While the current tariff situation creates a potential challenge in the near term, we are encouraged with the actions we are taking to advance Strattec through operational excellence, strengthening our commercial initiatives, capturing the value of our innovation, and creating an energized and experienced team. With that, Operator, we can open the line for questions.
Operator (participant)
Thank you. We'll now be conducting a Q&A session. If you'd like to ask a question at this time, please press star one from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to withdraw your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. One moment, please, while we pull for questions. Thank you. Thank you. Our first question comes from the line of John Franzreb with Sidoti & Company. Please proceed with your questions.
John Franzreb (Senior Equity Analyst)
Good morning, everyone, and thanks for taking the questions, and congratulations on a good quarter. Jen, I'd like to start with your assessment of the progress that you've made as far as the evaluation of the company. In your opinion, how far along are you, and when do you think the process will finally be initially completed, at least?
Jennifer Slater (President and CEO)
Hi, John. Thanks for the question. I feel really positive about the progress that we're making, but I still think we're really early in the process. I'm seven months in, and I would say we're making good, we're proud of some of the things that we're doing, but there's a lot more work to do, John.
John Franzreb (Senior Equity Analyst)
Okay, fair enough. In the prepared remarks, you mentioned the benefit of higher value products as far as benefiting not only the top line, but I'm assuming the margin profile. Can you give us some examples of those products and maybe talk a little bit about why they're doing better today than we were, say, a year ago?
Jennifer Slater (President and CEO)
Yeah. So in our Power Access products with our Power Sliding Doors and Power Liftgates, we've seen some good growth in just demand from customers and program launches there.
John Franzreb (Senior Equity Analyst)
Understood. You mentioned about $8 million of new pricing starting in the third quarter. Can you give us a little background of how you were able to achieve that kind of new pricing after getting a fair amount recognized last year?
Jennifer Slater (President and CEO)
Yeah. I think, as you know, with our automotive customers, we enter into longer-term agreements. One of the things that Chey Varto has done is really worked with our customers and understood where we were in our contract life and where they wanted us to continue to support them as they may be extending those programs. That pricing is just a representation of some of the work that she's done with the team and where customers are extending programs or outside of the contract life and we're recognizing near-term economics.
Matthew Pauli (VP and CFO)
This is Matt. I just add that the pricing that we achieved is across multiple different of our product categories and across multiple different OEMs.
John Franzreb (Senior Equity Analyst)
That's good to hear. It's good to see the balance. Regarding the tooling, should we kind of view this as probably a stable go-forward level, or do you think there's more to achieve as far as tooling benefits?
Matthew Pauli (VP and CFO)
Yeah, I think we've made significant progress on the tooling balance in the first half of the year. I think there's a little bit left to go, but the pace of change or the pace of reduction will level out here in the back half of the year.
John Franzreb (Senior Equity Analyst)
Okay. I'll actually end it there, and let somebody else take some questions. Thanks for answering my questions, everybody.
Matthew Pauli (VP and CFO)
Thank you.
Jennifer Slater (President and CEO)
Thank you, John.
Operator (participant)
Thank you. Our next question is from the line of Guy Baron with Springview Capital. Please proceed with your questions.
Guy Baron (Managing Partner and Portfolio Manager)
Hi, Jen and Matt.
Matthew Pauli (VP and CFO)
How are you?
Jennifer Slater (President and CEO)
Thanks, Matt.
Guy Baron (Managing Partner and Portfolio Manager)
Question. John already asked some of the questions that I had, but on the $8 million in annualized pricing, is that a midpoint of a range? Because you said that it depends on customer demand. How did you is that a midpoint, or is there a range to that $8 million of pricing that you expect to get?
Jennifer Slater (President and CEO)
Yeah, it's the projected annualized value of the impact based on our projected sales.
Guy Baron (Managing Partner and Portfolio Manager)
There's some upside and some potential downside to that based on demand?
Jennifer Slater (President and CEO)
Yeah, based on our customer production.
Guy Baron (Managing Partner and Portfolio Manager)
Okay. Okay. When do you expect to cycle the 20% wage increases in Mexico?
Matthew Pauli (VP and CFO)
Yeah, we saw the last impact of that here in our second quarter. That was the 20% increase, was the mandated increase last January. This January, the merit increase was much less than the 20%. It was close to 12% in Mexico.
Guy Baron (Managing Partner and Portfolio Manager)
The impact of that will kind of diminish as we go forward on a quarterly basis?
Matthew Pauli (VP and CFO)
You'll still see the impact of the 12% merit increase as we go through the balance of the year here.
Guy Baron (Managing Partner and Portfolio Manager)
Okay. On the real estate on the headquarters, I saw you listed it for $17 million. How's that been received so far? What are you seeing out there in terms of the market?
Matthew Pauli (VP and CFO)
Yeah, we just listed the facility in January, so we're early in the process. What I'd say is I think the brokers are happy with the activity and the interest in the facility right now.
Guy Baron (Managing Partner and Portfolio Manager)
Okay. How long do you see that process taking?
Jennifer Slater (President and CEO)
It's really hard for us to anticipate, but it's still going to take us some time to get through the full process.
Guy Baron (Managing Partner and Portfolio Manager)
Okay. High-level question really is on your kind of run rate EBITDA power, right? You did, I think, adjusted EBITDA of $18 million or $19 million in the first half of this year. Typically, your seasonality is such that you generate like 30% or 35% of your annual EBITDA in the first half and 70% or so in the second, which implies full year EBITDA range can be $50 million-$55 million just based on the performance that you have achieved so far this year. Is that a good run rate? Because that would be a really nice number.
Matthew Pauli (VP and CFO)
No, I don't think that's necessarily the run rate. I think if you look at it, our sales are slightly higher in the back half of the year than the first half of the year. I think if you're looking at historical periods, keep in mind there was a lot of one-time retro pricing in the prior year, which makes that comparison maybe a little bit difficult on a go-forward basis.
Guy Baron (Managing Partner and Portfolio Manager)
Got it. Great. Thank you so much.
Jennifer Slater (President and CEO)
Thank you, Guy.
Operator (participant)
Our next question is from the line of Brian Sponheimer with Gabelli Funds. Please proceed with your questions.
Brian Sponheimer (Research Analyst)
Hi, good morning, Jen, Matt, and Deb. Thanks for getting me on here. A couple of quick ones about balance sheet. Obviously, sitting with quite a bit of cash now on the balance sheet, obviously, you have some needs as it relates to how you want to potentially move the footprint. Assuming that the Milwaukee headquarters is a positive sale and the business continues to improve, how are you thinking about financial structure for the business going forward?
Jennifer Slater (President and CEO)
Yeah, thanks for that question, Brian. Obviously, the cash is important for us right now as we navigate through potential tariff impacts. As we think about our strategic priorities moving forward, like you said, internally, we're focused on some of the things that we need from a cash perspective to realize our operational efficiencies and making sure we've got the right processes and technologies in place. We're also looking at our product portfolio and where we may need to invest organically for our customers to continue growth. I think we get into a more longer-term focus after that.
Brian Sponheimer (Research Analyst)
Going off the balance sheet, the accrual for post-retirement, I did not ask that last quarter, but can you just talk about that? That is a little bit bigger than it has been in the past.
Matthew Pauli (VP and CFO)
Yeah. In the quarter, we did make a reclassification on the balance sheet. It's just a flip from current liabilities to long-term liabilities. It's associated with our Mexican post-retirement benefits. Previously, the balance was reported as short-term, and it properly should be reported as a long-term liability. It's just a balance sheet classification.
Brian Sponheimer (Research Analyst)
Anything change about what?
Matthew Pauli (VP and CFO)
No.
Brian Sponheimer (Research Analyst)
Did you do anything, or was it just improperly?
Matthew Pauli (VP and CFO)
It's just a balance sheet classification. The liability was properly stated, and the expense was properly recorded in the past.
Brian Sponheimer (Research Analyst)
Got it. Okay. Just kind of thinking about products and what you're finding, clearly, Power Access is doing great, have some headwinds on the lock and key set side. As you're kind of getting your really planting your roots here, Jen, anywhere in particular that outside of Power Access, you see some opportunities to really grow the production base from a customer standpoint?
Jennifer Slater (President and CEO)
We are. 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. We go out from there, Brian, and look at what other opportunities do we have organically on our products to grow with the current capabilities that we have today.
Brian Sponheimer (Research Analyst)
Okay. All right. Thanks. Any other questions? I'll take offline.
Jennifer Slater (President and CEO)
Okay. Thanks, Brian.
Operator (participant)
Thank you. Thank you. Our next question is from Guy Baron with Springview Capital. Please proceed with your questions.
Guy Baron (Managing Partner and Portfolio Manager)
Hey, quick follow-up. On the customer side, you mentioned really good progress with Ford and GM and Kia. What about Stellantis? They've been having problems. They're a big customer. Are you seeing that? I assume that was a headwind over the last couple of quarters. Where do you see that going? How is that business, that customer trending for you?
Jennifer Slater (President and CEO)
Yeah. A lot of our sales are dependent on what platforms we're on. We haven't seen, while they've been managing their inventory, we haven't seen any significant changes with the platforms that we're on with Stellantis and the products we provide.
Guy Baron (Managing Partner and Portfolio Manager)
Okay. How were your sales with them year over year in the quarter?
Matthew Pauli (VP and CFO)
They were down about 10% in the quarter on a year-over-year basis.
Guy Baron (Managing Partner and Portfolio Manager)
Okay. All right. Thank you.
Jennifer Slater (President and CEO)
Thanks, Guy.
Operator (participant)
Thank you. This will conclude today's Q&A session, and also will conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time and have a wonderful day.