Strattec Security (NASDAQ:STRT) reported first-quarter financial results on Friday. The transcript from the company’s first-quarter earnings call has been provided below.
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Summary
Strattec Security reported first quarter fiscal 2027 sales of $147.2 million, a decrease of 3.4% year-over-year, with a gross margin of 16.5% and generated $10.8 million in cash from operations, ending the quarter with $111.8 million in cash and no debt.
The company is undergoing a transformation to improve productivity and reduce costs, including implementing restructuring actions in Mexico expected to save $1.3 million annually, resulting in over $10 million in annualized savings since fiscal 2025.
Future guidance indicates challenges due to expected declines in North American automotive production and material cost inflation, but the company aims to maintain gross margins between 15% to 16% with potential improvements from productivity enhancements.
Strategic initiatives include customer diversification, supply chain improvements, and potential acquisitions to enhance product offerings and scale, supported by a robust cash position and a disciplined approach to capital allocation.
Management highlighted continued engagement with existing and prospective customers, focusing on growth areas like vehicle entry and latching solutions, while also evaluating acquisition targets to accelerate diversification and scale.
Full Transcript
OPERATOR
Greetings, and welcome to the Strattec Security first quarter fiscal year 2027 financial results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Deborah Pawlowski, Investor Relations for Strattec Security.
Thank you, Deborah. You may begin.
Deborah Pawlowski (Investor Relations)
Thank you, and good morning, everyone. We appreciate you joining us for Strattec Security’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 Polley, 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 the 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.
So with that, I’ll turn the call over to Jen, who will begin with slide 3.
Jennifer Slater (President and Chief Executive Officer)
Thank you, Deb, and good morning, everyone. Our first quarter results reflect continued progress in transforming Strattec Security 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 25 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 Security’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 customer 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.
Matthew Polley (Senior Vice President and Chief Financial Officer)
Thanks, Jen, and good morning, everyone. Please turn to slide 5. 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 1 suppliers, and commercial customers. Diversifying our customer and product base remains a critical element to our growth strategy.
Please turn to slide 6. 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 is more work to improve the operating consistency and reduce costs. Please turn to slide 7. 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 continued 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% to 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 Security 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 pretax 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 Security 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 remains 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. We will fund customer programs and organic growth, invest in automation and modernization, and maintain the flexibility to manage through automotive cycles. We will also return capital through opportunistic share repurchases and pursue disciplined acquisitions. We view these priorities as complementary. Improving the performance and cash generation of the existing business gives us the flexibility to invest in our future and pursue strategic growth while maintaining our commitment to a strong balance sheet.
Please turn to slide 10. We continue to expect a challenging automotive environment in fiscal 2027. Current third-party forecasts indicate about a 2% decline in North American automotive production for our fiscal year, including production at the Detroit 3 down nearly 6%. We expect our second quarter to be similar to our expectations for the year. Lower volume is expected to be a headwind to gross margin for the balance of the fiscal year, with material cost inflation being offset by the benefit of foreign currency exchange.
Based on what we are seeing today, given the current circumstances, we expect the gross margin should be in the range of 15% to 16% for the year. As we identify and implement further productivity enhancements, we will work towards improving that and continue towards our target gross margin of 18% to 20%. In the long term, our focus is on improving the underlying cost structure so that the business can perform better and more consistently across different production environments.
Excluding unusual items, we expect SAE costs to be at a quarterly run rate of $16.5 million to $17 million in fiscal 2027 as we invest in the business. Longer term, however, we expect SAE expenses to run at 10% to 11% of sales. At the end of the quarter, we had $104 million outstanding in peso contracts that were locked in at an average exchange rate of 1815. From a currency perspective, at the current peso to U.S. dollar exchange rate of 1867, we shouldn’t see the year-over-year headwind to gross margin in the second quarter that we experienced in the first quarter.
However, the mark-to-market on these hedges is reflected in other expense, and at the current rates becomes a larger expense. Because the contracts are marked on the last day of the quarter, the change in other expense will vary based on the peso to U.S. dollar currency at that point in time. We expect our normalized fiscal 2027 effective tax rate to be in the range of 23% to 25%. We also continue to expect normal operating cash flow run rate at approximately $10 million per quarter, subject to working capital variability.
Our first quarter cash generation keeps us on track for approximately $40 million for the fiscal year. With that, I’ll turn the call back to Jen to close with slide 11.
Jennifer Slater (President and Chief Executive Officer)
Thanks, Matt. We began fiscal 27 with continued progress in improving the business and generating cash. Our transformation is strengthening our underlying operating structure, while our balance sheet gives us the flexibility to invest in the next phase of Strattec Security’s development. Our priorities are clear: continue improving productivity and operational execution; pursue additional cost reductions through supply chain improvements and automation; build stronger and more diverse customer relationships to win future program opportunities around Permission, Motion, and Hold; evaluate acquisitions that can accelerate diversification and add scale; and allocate capital with discipline, including returning cash to shareholders through opportunistic repurchases.
We recognize the challenges presented by lower industry production and the variability of foreign currency pressure. We also recognize that we have more work to do within our own operations. We will remain focused on serving customers, improving performance, and building a stronger business for the long term. I want to thank our employees for their continued commitment and hard work, and our shareholders for their support. With that, operator, we can open the call for questions.
OPERATOR
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.
Our first question is from John Franzrad with Sidoti and Company. Please proceed with your question.
John Franzrad (Analyst at Sidoti & Company)
Good morning, everyone, and thanks for taking the questions. I’d like to start with the guide. You just did a gross margin of 16.6, but you’re suggesting that there’ll be pressure on the year going forward, even though you’re suggesting that your FX benefits will offset higher material costs. What prompts you to have the outlook of a lower gross margin than you just recorded in the first quarter?
Matthew Polley (Senior Vice President and Chief Financial Officer)
Thanks for the question, John. We just finished the first quarter roughly at 16.6% in gross margin. When we look forward, obviously we’ve got lower volumes. That’s the biggest reason for the range on the gross margin going forward of 15% to 16%. As you mentioned, we’ll have a benefit from currency if the currency rates stay where they are, especially in the back half of the year. And then we are seeing some material cost inflation, not so much in the first quarter, but as we look forward.
But we’ll look to offset that internally. And then the second option there on the material cost is price increases or discussions with passing through inflation with our customers. And then obviously there’s the restructuring benefits that we implemented here in the first quarter that will benefit us in the second half of the year. But you’ve got the annual merit as well.
Jennifer Slater (President and Chief Executive Officer)
And, John, that lower volume obviously is just related to North America production and the holiday schedules in Q2.
John Franzrad (Analyst at Sidoti & Company)
Yeah, I mean, I recognize that, but we just had a quarter. We had lower volumes not only under the Big Three, but other North American production. So I kind of assumed that was kind of embedded in the outlook.
Matthew Polley (Senior Vice President and Chief Financial Officer)
Yeah, it is.
John Franzrad (Analyst at Sidoti & Company)
Okay. Similar question on the SAE number, it seems to me that if you kind of strip everything out in the quarter, on a, call it, a recurring basis, you did about $15 million. But it also sounds like the E&D cost recoveries are also embedded in that number. Is that how I should be thinking about SAE on a go-forward basis? You know, go ahead.
Matthew Polley (Senior Vice President and Chief Financial Officer)
That’s correct, John. So it’s about $15 million of adjusted SAE costs in the quarter, but that included about a million of E&D, which is kind of recoveries for our engineering efforts, which are very lumpy based on the projects. So if you adjust for that, it’s probably $16.5 million.
John Franzrad (Analyst at Sidoti & Company)
How frequently do they occur?
Matthew Polley (Senior Vice President and Chief Financial Officer)
I would say they’re frequent, but not to the magnitude that we saw in the first quarter.
John Franzrad (Analyst at Sidoti & Company)
Got it. And it seems to me that M&A is becoming increasingly likely. Can you kind of give us a sense of size of an acquisition that you’re looking at? It’s been a while since you’ve done one. And given the charge that you took in the quarter, can we expect something by the end of this calendar year?
Jennifer Slater (President and Chief Executive Officer)
Yeah, I think to your question on size—sorry, John, I’m getting a little feedback. So on your question on size, you know, there’s not an exact formula because all acquisitions are not created equal, and you can’t buy what’s not for sale. And that was part of the reason why we advanced our framework early on. We are advancing, and some of the expense really is just related to we don’t want to take the prioritization off of the transformation of our core business.
And in some cases we need supplemental capability. So that is really through advisors to help us with both those things so we can continue the progress on the transformation while we advance our thinking through M&A. And then your timing question, obviously, for all the things that I just talked about, is hard to talk about. You know, what is the right timing there?
John Franzrad (Analyst at Sidoti & Company)
Okay, thank you. I’ll get back into queue.
Jennifer Slater (President and Chief Executive Officer)
Thank you, John.
OPERATOR
Once again, if you would like to ask a question, please press star one on your telephone keypad. Our next question is from Ethan Starr. Please proceed with your question.
Ethan Starr
Yes, thank you. What progress have you made on getting more business for Strattec Security and future new models, including new content and innovations, please?
Jennifer Slater (President and Chief Executive Officer)
Hi, Ethan. Thanks for the question. When we think about growth, we really complement what I had just answered on inorganic to organic. And as we’ve discussed, automotive is a long-cycle business, and so the next two years we will follow North American production. We are actively engaged with our current customers and new customers to determine what opportunities and platforms we have confidence on. We’re making great progress there. We really won’t have line of sight to something beyond the next two years until probably the end of our fiscal year.
What I want to make sure that we’re doing, as you know, it is a bit of a technical sales, and because of the nature of long cycle, we want to make sure we have confidence in what we’re seeing as future wins. And that takes time.
Ethan Starr
Sure. That’s understandable. I appreciate—that’s very helpful. The only other comment I have is that, considering where the stock is currently trading, I hope you will continue to repurchase shares.
Jennifer Slater (President and Chief Executive Officer)
Yeah. As we talked about, Ethan, that is part of how we’re thinking about deploying our capital. We’re investing in our business, we’re evaluating M&A, and balancing that with return to shareholders.
Ethan Starr
Okay, great. Thank you very much.
Jennifer Slater (President and Chief Executive Officer)
Thanks, Ethan.
OPERATOR
Once again, if you would like to ask a question, please press star one on your telephone keypad. This now concludes our question-and-answer session. Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. Please disconnect your lines and have a wonderful day.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.