We continue to actively manage our cost structure and implemented an additional restructuring action during the quarter that is expected to provide approximately $1 million in annualized savings that will be fully realized in the third quarter of this fiscal year. We also had solid cash generation of $11 million and ended the quarter with just over $90 million of cash on the balance sheet. We believe this provides us the capital to continue to execute on our transformation plans while providing a cushion during these rather turbulent times for the automotive industry.
I’ll talk more about the short-term automotive industry headwinds that have been layered on top of the impact of tariffs after Matt covers the details of the quarter results.
Matthew Pauley: Thanks, Jen, and good morning, everyone. Let’s begin with Slide six. First quarter gross profit increased $7.4 million or approximately 40% on 10% sales growth while gross margin expanded by 370 basis points to 17.3%. Gross profit improvement was a result of strategic pricing actions, higher production volumes, some modest contributions from tooling, and $1.3 million of restructuring savings. These gains more than offset $500,000 in unfavorable foreign currency dollars, $200,000 in net tariff expenses, and a $1.1 million increase in statutory labor rates in Mexico. Sequentially, gross margin improved 60 basis points on relatively similar revenue as bonus accruals normalized and tariff recoveries helped to offset the unfavorable impact of foreign currency and higher warranty reserves.
Selling, administrative, and engineering expenses or SAE were $15.9 million, a $2 million increase year over year reflecting the investments in the business transformation. As a percentage of sales, SAE was 10.4%, somewhat similar to the prior year and within our expected long-term range of 10% to 11%. Let’s move to slide seven where we summarize our profitability. Net income attributable to Strattec Security Corporation for the quarter on both a GAAP and an adjusted basis was up meaningfully year over year, reflecting the progress we’ve been making with the transformation even as we invest to drive the progress. Adjusted EBITDA was $15.6 million representing an adjusted EBITDA margin of 10.2%.
Our results reflect the team’s commitment to delivering sustainable margin improvement. As I’ve noted before, over the long term, we believe the business model would suggest low teen EBITDA margins. Reaching the double-digit level, we believe demonstrates the validity of this expectation. Now turning to slide eight, which highlights our cash flow, balance sheet, and capital priorities. Operating cash flow was more normalized at $11.3 million for the quarter, coincidentally similar to the first quarter of the prior year. We had capital expenditures of $1.5 million in the quarter or about 1% of sales. While we are investing in the business, we tend to not be capital intensive.
We expect CapEx to be higher over the next several quarters as we advance our plans to accommodate the changes we are making to modernize the business. We now have $90 million of cash and $53 million available under our revolving credit facilities. Subsequent to the end of the first quarter, we did enter into an amended and restated $40 million revolving credit facility which extended the maturity until October 2028. We believe we are in a secure position with our cash balance to continue to advance our transformation plans as well as begin to investigate what M&A may look like for us.
I’ll caution that we are in the very early stages of this discussion internally about what that scenario could be. Right now, we won’t have much more to add to the conversation, but we believe acquisitions could be a part of our longer-term future growth. If you turn to Slide nine, I’ll hand it back to Jen to review the conditions in the automotive industry and the actions we’re taking.
Jennifer Slater: Thanks, Matt. As you know, we are heavily dependent on volume to deliver profit. I am sure you are all aware of two significant events that have impacted auto production. First, an aluminum supplier had a fire in its facility, which will impact production levels for some of our major customers during our second quarter and potentially into our third fiscal quarter. The return to full production and restocking dealer inventory levels for our customers can take months to make up for lost time. The second major event is the result of international trade restrictions on a chip supplier that has caused shortages of semiconductor chips to the automotive industry.
At this time, we do not know the full impact of how our OEM customers will respond as the industry looks for alternative sources. We will use this time to build finished good inventories to be able to better serve our OEM and aftermarket customers, reduce expedite costs, and be prepared for anticipated demand rebound as OEM customers catch up for lost production time. Importantly, we will continue to monitor demand signals and take appropriate actions to align our cost structure as needed. Despite these constant industry macros that disrupt progress, we are in a better position to manage the current issues facing our major customers than we would have been last year.
Let me update you on our transformation plan. We have started modernizing our operations with automation. While some of the improvements we are making may seem menial, each one makes a difference. For example, we are starting to automate certain manual assembly stations in our Mexico operations. These relatively simple automation projects have been validated, and we are applying this automation process to other production lines. Our commercial efforts are centered on gaining new customers as well as future vehicle platforms with existing customers. To do this well requires a deep understanding of our products, cost structure, and where our value add is generated.
We still have more work to do on this front, but we are continually assessing our operations and product portfolio to drive value. Regarding the sale of our Milwaukee facility and the modernization program, we have come to the conclusion that our best route is a sale leaseback. This should provide us a better return on the building, reduce the challenges of moving production operations, allow us to rightsize our floor space requirement, and redesign production flow. In conjunction with this decision, we will be consolidating our test lab to Auburn Hills, Michigan. This will put it closer to the customer and the commercial team for greater collaboration on oversight.
We also plan to move the corporate offices to a more modernized facility to advance our culture and enable better productivity. We have been producing results that demonstrate the effect of our efforts to drive profitability, and we believe we have a great foundation upon which to grow. I’d be remiss not to thank the team that has made this happen. With that, operator, we’re ready to open the line 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 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 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 comes from the line of John Franzreb with Sidoti. Please proceed with your question.
John Franzreb: Good morning, everyone. Congratulations on another good quarter, and thanks for taking the questions. Jen, I’d like to start with your ongoing review of operations. What can you share with us that’s new compared to what we discussed in the fourth quarter results?
Jennifer Slater: Hi, John. Good morning. Thanks for your question. I touched a bit on some of the automation work we’re doing, and I think, you know, as we go through this transformation and we really started with the basics, now moving on to where there are simple processes that we can leverage automation. And then for new or for future products, we’ll look at, you know, are there more transformative ways to automate our manufacturing. It’s really just a progression of our thinking as we’re stabilizing the underlying operations and moving to the next phase of modernization.
John Franzreb: And how should we think about the change in CapEx as you start to automate? What does the CapEx budget say for 2026 look like versus 2025?
Matthew Pauley: Hey, John. It’s Matt. You know, on a full-year basis, our CapEx budget is about $12.5 million. So it’s about 2% of our sales. But the automation, like, you know, the cost of automation has come down over the years, so it’s not a significant investment from a CapEx standpoint.
Jennifer Slater: And I’ll maybe just add on to that, John, just to give you an example. You know, there’s really simple automation processes that we’re starting with. So where you’re manually putting a screw into a part, we’ve proven that’s an easy thing to automate. Automation costs really have come down, and so they’re quick payback to look at those simple ways to automate our processes.
Matthew Pauley: You may want to talk on the Mexico restructuring too. The most recent.
Jennifer Slater: Yeah. I think we also talked about that. We did do, you know, we continue to look at our cost structure, John. And so we have done another look at our Mexico operations. We continue to drive efficiency in Mexico, and so we will see in our Q3 more favorability from further restructuring that we’ve done in Mexico.
John Franzreb: And, actually, that kind of dovetails nicely into maybe you looking at the footprint of the company, relocating the labs, changing corporate offices, and now going to a sale leaseback in the Milwaukee facility. Can you just talk about your thought process and some of the moves you’re making here? And does that maybe optimize what you think the manufacturing and the corporate footprint should look like on a go-forward basis?
Jennifer Slater: Yeah. I think it gives us flexibility. So we’re optimizing for what we need today, making sure we’re utilizing the space, getting a better process flow, moving the things and consolidating where we’re closer to the customer like the test lab. And then driving our continued culture change. So it’s an ongoing process, John, to make sure that we’re leveraging the footprint that we have to where our business is today and where we think we’re going to be in the future, along with providing ourselves flexibility.
John Franzreb: Okay. And in slide number nine, you’re signaling a cautionary outlook, certainly in the next quarter and change. Can you talk about the potential impact to the company on the fire and the semiconductor production disruption? You know, can you kind of quantify what you are thinking? And you know, the timing of all this becoming normalizing again?
Jennifer Slater: So when we started the year, John, we said that, you know, we would really be in line with North America production because we would be lapping some of our launches and the pricing actions that we had last fiscal year. And with that, you know, in line, we thought we would be modestly flat or flat to modestly down. That didn’t anticipate the supplier issue or the chip shortage. We do see that will be an impact here in the quarter because our customers have already announced some time out. I know our customers will work like they always do to make as much of that up as they can, and it will be a timing issue.
But right now, there’s too much uncertainty to say what the full impact of those will be for the full year for us.
John Franzreb: Okay. With that, I have enough time. I’ll get back into the queue.
Jennifer Slater: Thank you, John.
Operator: Thank you. We have no further questions at this time. I’d like to turn the call back over to management. I’m sorry. I would like to turn the call back over to management for closing comments.
Jennifer Slater: No. I just saw that we had an investor hop into the queue, Christine. Maybe we can take them.
Operator: Our next question is from Ethan Starr, a private investor. Please proceed with your question.
Ethan Starr: Thank you. Great quarter. And my question is regarding the automation products that you are using to further improve gross margins. What types of return on investments do you expect from those, and when might such returns show up in quarterly results?
Matthew Pauley: Yes. It’s less than a one-year payback, Ethan. And I think we’ll start to see some of those results in the second half of this fiscal year.
Ethan Starr: Okay. Great. And then on page four of the slide deck, it says that Strattec Security Corporation is developing relationships with other North American vehicle manufacturers. Are you able to tell us anything about this at present?
Jennifer Slater: No. Not specifics, Ethan, but, you know, we have talked about that we’ve had pretty limited customer reach with the North American OEs. And our products can add value to customers in the region. And so as we start thinking about where do we have opportunity with our power access products and our digital key, we’re looking to support the customers we have today but also expand our customer base.
Ethan Starr: Okay. Great. Thank you very much.
Matthew Pauley: Thanks, Ethan.
Operator: We have no further questions at this time. I’d like to turn the floor back over to management for closing comments.
Deborah Pawlowski: Thank you very much, everybody, for joining us here today. We will be presenting Monday at the Gabelli Automotive Symposium in Las Vegas. So we will be posting the presentation associated with that on our website Monday. And in the meantime, if you have any questions, my contact information is on the website, and I look forward to talking with you. Have a great day. Thank you.
Operator: Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
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Strattec (STRT) Q1 2026 Earnings Call Transcript was originally published by The Motley Fool
