Participants

Deborah K. Pawlowski; IR; Strattec Security Corp

Jennifer L. Slater; President, Chief Executive Officer; Strattec Security Corp

Matthew Pauli; Chief Financial Officer, Senior Vice President; Strattec Security Corp

John Franzreb; Analyst; Sidoti & Company

Guy Baron; Analyst; Springview Capital Management LP

Brian Sponheimer; Analyst; Gabelli Funds

Presentation

Operator

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. The question and answer session will follow the formal presentation. (Operator instructions)
Now, my pleasure at this time to introduce Deborah Pawlowski, Investor Relations for STRATTEC. Please please go ahead.

Deborah K. Pawlowski

Thank you and good morning, everyone. We greatly appreciate you joining us for STRATTEC's second quarter fiscal '25 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 2 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 comparable GAAP measures in the tables accompanying the earnings release and slides. With that if you would turn to slide 3, I will turn it over to Jen to begin.

Jennifer L. Slater

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 this whole '24. 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 4. 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 analyzed savings that will be partially recognized beginning in the third quarter or the quarter we are operating in now. We recognize $300,000 of restructuring costs resulting in a very quick payback.
We also identified that our Milwaukee facility which is $350,000 square feet, 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. And 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 is 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 5. 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 and 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 volume cost value content, and volume. Engineered latches grew 20% over last year's second quarter for the same reasons. This more than offset the continued decline in our mature product line of keys and lock sets.
Let me turn it over to Matt now to cover our financial results in more detail.

Matthew Pauli

Thanks Jen, and good morning, everyone moving to slide 6. Gross profit was up $3.7 million to $17.2 million, a 27% increase compared to the second quarter last year. The $3.5million 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 points benefit of favorable foreign exchange. Excluding the impact of currency and the prior 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 slide7, 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. Off note no bonus provision was taken in the comparator period. We also have $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 8, 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, second quarter.
Lastly, slide 9 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 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.

Question and Answer Session

Operator

Thank you. We'll now be conducting a question and answer session. (Operator instructions)
John Franzreb, Sidoti & Company.

John Franzreb

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 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 L. Slater

Hi John. Thanks for the question. You know, I feel really positive about the progress that we're making. But I still think we're really early in the process. We're, 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

Okay, fair enough. And in the prepared remarks, you mentioned the benefit of the higher value products as far as benefiting the 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 they were say a year ago?

Jennifer L. Slater

Yeah. So in our power access products with our power sliding doors and power liftgates, we've seen some good growth. And just demand from customers and program launches there.

John Franzreb

Understood. You mentioned about $8 million of new pricing starting in the third quarter. Can you give us a little background of how you're able to achieve that, that kind of new pricing after getting a fair amount recognized last year?

Jennifer L. Slater

Yeah. I think as you know, with our automotive customers, we enter into longer term agreements. And 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 is they may be extending those programs. So really 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, you know, near term economics.

Matthew Pauli

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

That's good to hear. It's good to see the balance. And regarding the tooling, should we kind of view this is probably a stable go forward level or do you think there's more to achieve as far as tooling benefits?

Matthew Pauli

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

Okay. I'll actually ended it there and let somebody else take some questions. Thanks for answering my questions, everybody.

Jennifer L. Slater

Thank you, John.

Operator

Guy Baron, Springview Capital.

Guy Baron

Hi Jen and Matt. Question. The prior, 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. So how did you -- is that a midpoint or is that a -- or is there a range to that $8 million of pricing that you expect to get?

Jennifer L. Slater

Yeah. It's the projected annualized value of the impact based on our projected sales.

Guy Baron

So there's some upside and some potential downside to that based on demand?

Jennifer L. Slater

Based on our customer production.

Guy Baron

Okay. And then when should you -- when do you expect to cycle the 20% the wage increases in Mexico?

Matthew Pauli

Yeah, we saw the last impact of that here in our second quarter. So that was the 20% increase was the merit or 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

So the impact of that will kind of diminish as we go forward, on a quarterly basis?

Matthew Pauli

You'll still see the impact of the 12% merit increase as we go through the balance of the year here.

Guy Baron

Okay. And then on the on the real estate, on the headquarters, I saw you listed it for $17 million. Has it been received so far? What do you, what are you seeing out there in terms of the market?

Matthew Pauli

Yeah, we just listed the facility in January. So we're early in the process. But I'd say is I think the brokers are happy with the activity and the interest in the facility right now.

Guy Baron

Okay. What, how long do you see that process taking?

Jennifer L. Slater

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

And then, and then high level question really is on your kind of run rate even without power, right? So you did, I think adjusted even do $18 million or 19 million in the first half of this year. And typically your seasonality is such that you generate like 30% or 35% of your annual EBITDA in the first half. And you know, 70% or so in the second, which implies full year EBITDA range can be, $50 million, $55 million just based on these on the performance that you have achieved so far this year. Is that a good run rate? Because that would be yeah, that would be a really nice number.

Matthew Pauli

No, I don't, think that's necessarily the run rate. I think if you look at it, our, 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

Got it great. Alright, thank you so much.

Jennifer L. Slater

Thank you, Guy.

Operator

Brian Sponheimer, Gabelli Funds.

Brian Sponheimer

Hi, good morning Jen, Matt, and Deb, thanks for getting me on here. Couple 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. But you know, assuming that the Milwaukee headquarters is a positive sale and the continues to improve, how are you thinking about financial structure for the business going forward?

Jennifer L. Slater

Yeah, thanks for that question. Obviously the cash is important for us right now as we navigate through potential tariff impact. But as we think about our strategic (technical difficulty) 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. And then I think we get, a more longer term focus after that.

Brian Sponheimer

Went off the balance sheet of the cruel for post retirement. Didn't ask that last quarter. But can you just talk about that? That's a little bit bigger than it's been in the past?

Matthew Pauli

Yeah, the in the quarter, we did make a reclassification the balance sheet. It's just a flip from current liabilities to long term liabilities. So it's associated with our Mexican post-retirement benefits. Previously, the balance was reported as short term and it proper it properly should be reported as a long term liability. So just a balance sheet classification.

Brian Sponheimer

Anything change about what did you do anything or was it just improperly?

Matthew Pauli

It's just a a balance sheet classification. The liability was properly stated and the expense was properly recorded in the past.

Brian Sponheimer

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.
But 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 L. Slater

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. So 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. And then 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

All right, thanks. Any other questions I'll take off line.

Jennifer L. Slater

Okay, thanks Brian.

Operator

Guy Baron, Springview Capital.

Guy Baron

Hey quick follow up. On the on the customer side, you mentioned really good progress with the Ford and GM and Kia, what is the Stellantis, they've been having problems? They're a big customer. Are you seeing that. I assume that was, that was a headwind and over the last couple of quarters. Do you -- where do you see that going? Where, how is that business, that customer trending for you?

Jennifer L. Slater

Yeah, a lot of our sales are dependent on what platforms we're on. But, we haven't seen while they've been managing their inventory. We haven't seen any significant changes with the platforms that were on, with Stellantis and the products we provide.

Guy Baron

Okay. Are you, how do -- how are yourselves with that year of the year in the quarter?

Matthew Pauli

They were down about 10% in the quarter on a year-over-year basis.

Guy Baron

Okay. All right. Thank you.

Jennifer L. Slater

Thanks, Guy.

Operator

Thank you. This will conclude today's question and answer session and also we'll conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time and have a wonderful day.