Strattec Security Corp 2027 Q1 Earnings Call

Thank you, and good morning, everyone. We appreciate you joining us for Strattec's First Quarter Fiscal 2027 Financial Results Conference Call. Joining me on the call today are Jennifer Slater, our President and Chief Executive Officer, and Matthew Pauli, our Senior Vice President and Chief Financial Officer. Jen and Matt will review our first quarter financial results, the progress we are making in our transformation, and our outlook for fiscal 2027. 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 2 for the safe harbor statement. As you are aware, we may make forward-looking statements during the formal discussion and 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 and in other documents filed by the company with Securities and Exchange Commission. You can find those documents on our website as well. I also want to point out that during today's call, we will discuss certain non-GAAP financial measures, which we believe are useful in evaluating our performance. You should not consider this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP measures with the most directly comparable GAAP measures in the tables accompanying the earnings release and in the supplemental slides.

With that, I'll turn the call over to Jen, who will begin with slide 3.

Thank you, Deb, and good morning, everyone. Our first quarter results reflect continued progress in transforming Strattec into a more resilient, higher-performing business. We generated $10.8 million in cash from operations, delivered gross margin of 16.5% on sales of $147.2 million, and ended the quarter with $111.8 million in cash and no debt. We achieved these results against lower customer production volumes and continued inflation and foreign currency pressure. While sales and earnings declined from the prior year quarter, gross margin improved 90 basis points sequentially on lower sales, and adjusted EBITDA increased to $13.5 million from $12.5 million in the fourth quarter. We believe this demonstrates the progress we are making in improving the underlying performance of the business. We remain focused on the actions within our control: improving productivity, reducing our cost structure, serving our customers, and allocating capital with discipline.

As an example, during the quarter, we implemented additional restructuring actions in our Mexico operations that are expected to generate $1.3 million in annualized savings. Including these actions, the annualized savings associated with restructuring initiatives implemented since we began the transformation in fiscal 2025 are over $10 million. It is worth highlighting that we believe there are meaningful additional opportunities to improve our cost position through supply chain improvements, automation, and more efficient manufacturing processes. These opportunities are important both to supporting margins in the current environment and to strengthen our long-term competitive position. Our cash generation also gives us flexibility to advance our strategy while returning capital to shareholders. During the quarter, we repurchased approximately 68,000 shares for $5 million while continuing to build our cash balance. We also are investing in our strategic initiatives for future growth and the sustainability of the business.

Slide 4 highlights how our operating transformation and financial strength support the next phase of Strattec's development. We are continuing to develop plans for additional productivity enhancements and cost reductions. At the same time, we are engaging with more prospective customers and building the relationships needed to support longer-term growth. Our commercial efforts remain centered on Permission, Motion, and Hold. Permission enables secure vehicle entry, Motion encompasses powered access systems, and Hold includes latching solutions designed for safety, strength, and durability. This framework aligns our commercial, innovation, and engineering teams around the access experience we deliver and the opportunities we see with customers. Organic growth in automotive takes time. We are working to engage earlier in customers' development processes, increase our content on existing platforms, pursue new platforms, and expand our customer relationships.

In parallel, we are evaluating acquisitions that could accelerate customer diversification, enhance our product offerings, and increase our scale. We have an active funnel of acquisition targets and incurred $2.4 million in business development expenses during the quarter, primarily related to advancing these opportunities. Our approach remains disciplined. We are evaluating acquisitions based on strategic fit, financial returns, capital requirements, and execution risk. Our strong balance sheet gives us the ability to pursue strategic growth, but we will remain mindful on how we deploy capital to create long-term shareholder value. In addition, we will be balanced regarding growth and returning capital to shareholders. Importantly, pursuing strategic growth does not detract from our focus on improving the business we operate today. We will continue to invest in productivity, automation, and operational execution while maintaining the financial flexibility to navigate industry variability.

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. First quarter net sales were $147.2 million, a decrease of $5.2 million or 3.4% compared with $152.4 million in the prior year period. Lower customer production volumes reduced sales by $6.2 million, which was partially offset by $1 million in net pricing benefits. For context, North American automotive production declined 3.8% in the quarter, including production at our three largest customers declining 6.8%. Our results benefited somewhat from the production levels of the program mix for the customers we serve, as well as the benefit of our pricing actions. The charts on this slide show our sales across customers and product categories. While our business remains concentrated with our top three customers, we also serve other OEMs, tier-one suppliers, and commercial customers. Diversifying our customer and product base remains a critical element to our growth strategy.

Please turn to slide six. First quarter gross profit was $24.3 million compared with $26.3 million in the prior year period. Gross margin was 16.5%, down 80 basis points year-over-year. The comparison reflects lower production volumes and $1.4 million of unfavorable foreign currency effects. Foreign currency negatively impacted the year-over-year gross margin comparison by approximately 90 basis points. We also experienced elevated premium freight and overtime in the quarter as a result of supply chain challenges. Partially offsetting these pressures were pricing benefits, $900,000 in restructuring savings, lower overhead costs, and favorable mix. Sequentially, gross margin improved from 15.6% in the fourth quarter to 16.5% despite lower sales. This improvement reflects continued progress with our transformation, although we recognize there's more work to improve the operating consistency and reduce costs. Please turn to slide seven.

Selling, administrative, and engineering expenses were $17.9 million or 12.2% of sales compared with $15.9 million or 10.4% of sales in the prior year quarter. The increase primarily reflected $2.4 million in business development expenses. We also continue to invest in the talent and outside support needed to advance our transformation. These increases were partially offset by $1.2 million in incremental engineering and development cost recoveries. Excluding business development, business transformation, and executive transition costs, adjusted SAE expenses declined $200,000 to $15 million or 10.2% of sales. On an adjusted basis, we are at the top end of our long-term target range of 10%-11% of sales without the benefit from the engineering cost recoveries. Nonetheless, as revenue remains soft through the year, we expect near-term adjusted SAE to run somewhat above our longer-term range as we make selective investments, primarily headcount, to support the transformation.

Please turn to slide 8. Our transformation actions have enabled us to generate bottom-line profit despite volume and cost headwinds and the investments we are making in the business. Net income attributable to Strattec was $4.8 million or $1.19 per diluted share compared with $8.5 million or $2.07 per diluted share in the prior year quarter. The decline primarily reflects lower volume, unfavorable foreign currency effects of approximately $2 million on a pre-tax basis, and the business development expenses we discussed. Our effective tax rate was 26.2% compared with 21.6% in the prior year period. The current quarter rate included discrete tax items, including a $400,000 increase in reserves for uncertain tax positions.

On an adjusted basis, first quarter net income attributable to Strattec was $7.5 million or $1.85 per diluted share compared with $9.2 million or $2.22 per diluted share in the prior year quarter. Adjusted EBITDA was $13.5 million or 9.2% of sales compared with $15.6 million or 10.2% of sales in the prior year period. Please turn to slide 9. We generated $10.8 million in cash from operations during the quarter compared with $11.3 million in the prior year period. Cash generation remained strong despite lower net income and benefited from customer collections. During the quarter, we returned $5 million to shareholders through the repurchase of approximately 68,000 shares. We ended the quarter with no debt and $111.8 million in cash and cash equivalents, up from the $108.2 million at fiscal year-end. Our capital allocation priorities remain consistent.