STRATTEC SECURITY CORPORATION

for Strat Tech. Please go ahead. Thank you, and good morning, everyone. We greatly appreciate you joining us for Strat Tech's second quarter fiscal 25 financial results conference call. With me on the call today are Jennifer Slater, President and CEO, and Matthew Pawley, 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 Stratec. You can find a copy of the news release in 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 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 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?

Thank you, Deb, and welcome, everyone. I am encouraged with the progress we are making to transform Strat Tech 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 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 continued 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 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. Shea Vardo, 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 Stratec. Much of what we are discussing on the call today, such as rightsizing 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 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 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.

Thanks, Jen, and good morning, everyone. Moving to slide six, gross profit was up $3.7 million to $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 U.S. 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 Stratec. 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 Stratec 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 from 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 9 highlights our solid balance sheet, financial flexibility, and capital priorities. Pre-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 am 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 Stratec 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.