Strattec Security Corp: Form 10-Q for the period ended Apr 2, 2023

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis should be read in conjunction with STRATTEC SECURITY CORPORATION’s accompanying Condensed Consolidated Financial Statements and Notes thereto and its 2022 Form 10-K, which was filed with the Securities and Exchange Commission on September 8, 2022. Also, refer to discussion of prior period corrections under Basis of Financial Statements included in the Notes to Condensed Consolidated Financial Statements in this Form 10-Q. Unless otherwise indicated, all references to quarters and years refer to fiscal quarters and fiscal years.

Outlook

Refer to discussion of Risks and Uncertainties included in the Notes to Condensed Consolidated Financial Statements beginning on page 8 of this Form 10-Q.

Starting during the fourth quarter of our fiscal year ended June 2020, the automotive industry has experienced significant volatility originally due to the COVID-19 pandemic which resulted in periods of shutdowns as well as a subsequent demand-led production recovery. During the fourth quarter of fiscal year 2021, we were also impacted by supply chain shortages in the automotive supply chain of critical electronic component parts, primarily semiconductor chips, and certain raw materials which impacted the production schedules for our customers and, therefore, our production levels and have, in turn, adversely impacted pricing for our raw materials and purchased components. These shortages continued throughout our fiscal 2022, which resulted in some of our customers temporarily closing several of their assembly plants or reducing their production schedules in North America.

While supply chain shortages continually improved over the first nine months of fiscal year 2023 relative to the prior year period, adverse inflationary pricing and wage conditions have persisted in spite of improvements in the supply chain. The sales outlook from our customers over the remainder of fiscal year 2023 continues to project a stable sales environment. However, this sales outlook is contingent on continued progress toward stability for supply chains post COVID-19 pandemic, and minimal disruption of the North American and overall global economy due to higher inflation and interest rates and the economic implications from the conflict in the Ukraine and other international political unrest, including any potential trade disruption stemming from U.S. / China geopolitical and economic relations.

From a gross profit margin perspective, we anticipate a continuation of an unfavorable Mexican peso to U.S. dollar exchange rate and inflationary pressures on purchased materials and labor for the remainder of fiscal year 2023 and into fiscal year 2024. Seeking pricing recovery from our customers for inflationary costs continues to be a prime focus of ours, however, given the long-term nature of our supply agreements, such negotiations are not customary and therefore, have outcomes that are difficult to predict.

Analysis of Results of Operations

Three months ended April 2, 2023 compared to the three months ended March 27, 2022

Net sales to each of our customers or customer groups in the current year quarter and prior year quarter were as follows (in millions):

22

The quarter-over-quarter sales increase of $11.2 million was due to improved global semiconductor chip availability in the current year quarter relative to the prior year quarter. The following items specifically impacted sales to the above noted customer groups between quarters:

• Sales to General Motors Company, Ford Motor Company and Hyundai/Kia were positively impacted in the current year quarter due to higher vehicle production volumes resulting from improved global semiconductor chip availability relative to the prior year quarter. Sales growth to General Motors Company in the current year quarter was attributed to higher production volumes of their GMC and Chevrolet pickup trucks and certain SUVs for which we supply a wide range of components. Increased sales to Ford Motor Company in the current year quarter were due to higher production volumes of their F-Series Super Duty Pickup for which we supply a wide range of components. Sales to Hyundai / Kia increased quarter-over-quarter due to higher levels of production of the Kia Carnival minivan in the current year quarter as compared to the prior year quarter.
• The decrease in sales to Stellantis between quarters resulted primarily from its plant shutdowns in the current year quarter, which reduced production volumes compared to the prior year quarter especially as it related to the Chrysler Pacifica minivan, the Jeep Compass and the Dodge Ram pickup truck, as well as lower production volumes of their passenger car vehicles for which we supply components.
• Sales to Tier 1 Customers improved in the current year quarter compared to the prior year quarter due to higher vehicle production volumes relating to the improvement in semiconductor chip availability referenced above.
• Sales to Commercial and Other OEM Customers, which are comprised of aftermarket products and vehicle access control products, such as latches, fobs, driver controls and door handles, declined in the current year quarter as compared to the prior year quarter due to the allocation of available semiconductor chips toward the production of components for production vehicles, rather than these aftermarket products.

Total cost of goods sold increased $15.9 million between quarterly periods. The increase in labor and overhead costs and related reduction in direct material costs as a percentage of total cost of goods sold was the result of a warranty provision of $1.3 million recorded during the current year quarter based on additional information that became available during the current year quarter related to our share of the costs associated with a customer's specific warranty claim involving our product. Excluding this warranty provision, direct material as a percentage of total cost of goods sold was 67.0 percent and labor and overhead as a percentage of cost of goods sold was 33.0 percent for the quarter ended April 2, 2023. The increase in direct material costs and its related percentage of cost of goods sold between quarters was due to the aforementioned increase in sales, higher costs for purchased components and a shift toward products with a higher proportion of material costs as a percent of their total cost of goods sold.

Labor and overhead costs increased $5.9 million between quarters. Labor and overhead costs were impacted by the following:

Cost Increases:

• The U.S. dollar value of our Mexican operations was negatively impacted by approximately $1.9 million in the current year quarter as compared to the prior year quarter due to an unfavorable Mexican peso to U.S. dollar exchange rate between quarterly periods. The average U.S. dollar / Mexican peso exchange rate decreased to approximately 18.56 pesos to the dollar in the current year quarter from approximately 20.42 pesos to the dollar in the prior year quarter.
• Mexico wages and benefits increased $1.8 million in the current year quarter as compared to the prior year quarter as a result of a January 1, 2023 government mandated minimum wage increase.
• The current year quarter includes a $1.3 million warranty provision associated with a customer's specific warranty claim involving our product.
• Freight costs increased $700,000 between quarterly periods due to an increase in fuel costs and supply chain disruptions.

Cost Decrease:

• Royalty costs paid on sales of certain aftermarket products decreased $545,000 in the current year quarter as compared to the prior year quarter due to lower volumes in these aftermarket products stemming from the current semiconductor chip shortage.

Gross profit dollars in the current year quarter decreased $4.6 million as compared to the prior year quarter driven by the aforementioned inflationary pressures on direct material and labor and overhead costs as well as by the strengthening of the Mexican peso against the U.S. dollar. The resulting decrease in gross profit as a percentage of net sales was 4.7 percentage points from the prior year quarter to the current year quarter.

Engineering, selling and administrative expenses in the current year quarter and prior year quarter were as follows:

Engineering, selling and administrative expenses increased in the current year quarter as compared to the prior year quarter due to higher outside expenditures on new product development associated with utilizing third party vendors for a portion of our development work.

Loss from operations was $2.5 million in the current year quarter compared to income from operations of $3.4 million in the prior year quarter due a reduction in gross profit margin dollars and higher engineering, selling and administrative expenses between quarters, all as discussed above.

The equity earnings of joint ventures were $819,000 in the current year quarter compared to $577,000 in the prior year quarter. Improved profitability from our VAST LLC joint venture resulted from improved profitability in VAST China's operations between quarters. During the prior year quarter, VAST China experienced a fire at their Taicang plant. As a result, certain door handle and painting operations were temporarily transferred to their Jingzhou facility and another supplier. The transfer of production negatively impacted VAST China's profitability in the quarter ended March 27, 2022. We currently believe a presence in the China market is a key component of our global strategy. We anticipate that it will contribute to our overall long-term market and financial strength as the China market continues to expand and as it seeks to rebound from the ongoing impacts of the COVID-19 pandemic and resulting supply chain shortages of critical electronic component parts. Our VAST LLC joint venture in India continues to have near break-even operating results and our VAST LLC joint venture in Brazil continues to report losses.

Included in Other (Expense) Income, net in the current year quarter and prior year quarter were the following items (in thousands):

Set forth below is a discussion of the items comprising certain of the components of our Other (Expense) Income, net:

• Foreign currency transaction losses resulted from activity associated with foreign denominated assets held by our Mexican subsidiaries.
• The Rabbi Trust assets fund our amended and restated supplemental executive retirement plan. The investments held in the Trust are considered trading securities.
• We entered into the Mexican peso currency forward contracts during fiscal 2023 and 2022 to reduce earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. Unrealized gains and losses on the peso forward contracts recognized as a result of mark-to-market adjustments as of April 2, 2023 may or may not be realized in future periods, depending on actual Mexican peso to U.S. dollar exchange rates experienced during the balance of the contract period.
• Pension and postretirement plan costs include the components of net periodic benefit cost other than the service cost component. During the current year quarter, a charge of $217,000 was included in pension and postretirement plan costs related to $863,000 of SERP benefits that were cash settled using Rabbi trust assets.

Our effective tax rate was (4.2)% and 1.2% for the three months ended April 2, 2023 and March 27, 2022, respectively. The effective tax rate for the three-month period ended April 2, 2023 was impacted by an increase in our fiscal year pre-tax net loss estimate as the end of the current year quarter as compared to our estimate as of January 1, 2023. The effective tax rate in the prior year period was impacted by adjustments we made to the amounts of our fiscal 2021 estimated foreign tax credits and estimated tax impacts associated with our investment in VAST LLC. These true-up adjustments resulted from the filing of our US income tax returns during the quarter ended March 27, 2022 and were attributable to actual results included in non-US income tax returns, which are filed on a calendar year basis, and which differ from estimates included in our fiscal 2021 tax provision. The adjustment amounts recorded during the three-month period ended March 27, 2022 totaled $740,000. Our effective tax rate for the three-month period ended March 27, 2022 excluding these adjustments was 18.9 percent. Our effective tax rate differs from the statutory tax rate due to the application of the Global Intangible Low Taxed Income (GILTI) tax provisions, our available R&D tax credit and the non-controlling interest portion of our pre-tax income. The non-controlling interest portion impacts the effective tax rate as ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entities are taxed as partnerships for U.S. tax purposes.

Nine months ended April 2, 2023 compared to the nine months ended March 27, 2022

Net sales to each of our customers or customer groups in the current year period and prior year period were as follows (in millions):

The period-over-period sales increase of $31.5 million was due to improved global semiconductor chip availability in the current year period relative to the prior year period. The following items specifically impacted sales to the above noted customer groups between periods:

• Sales to General Motors Company, Ford Motor Company and Hyundai/Kia were positively impacted in the current year period due to higher vehicle production volumes resulting from improved global semiconductor chip availability relative to the prior year period. Sales growth to General Motors Company in the current year period was attributed to higher production volumes of their GMC and Chevrolet pickup trucks and certain SUVs for which we supply a wide range of components. Increased sales to Ford Motor Company in the current year period were due to higher production volumes of their F-Series Super Duty Pickup for which we supply a wide range of components. Sales to Hyundai / Kia increased period-over-period due to higher levels of production of the Kia Carnival minivan in the current year period as compared to the prior year period.
• The decrease in net sales to Stellantis was driven primarily by its plant shutdowns which resulted in decreased production volumes in the current year compared to the prior year especially as it related to the Chrysler Pacifica minivan, the Jeep Compass and the Dodge Ram pickup truck, as well as lower production volumes of their passenger car vehicles for which we supply components.
• Sales to Tier 1 Customers improved in the current year period compared to the prior year period due to higher vehicle production volumes relating to the improvement in semiconductor chip availability referenced above.
• Sales to Commercial and Other OEM Customers, which are comprised of aftermarket products and vehicle access control products, such as latches, fobs, driver controls and door handles, declined in the current year period as compared to the prior year period due to the allocation of available semiconductor chips toward the production of components for production vehicles, rather than these aftermarket products.

Total cost of goods sold increased $43.7 million between year to date periods. A warranty provision of $1.3 million recorded during the current year period, which was based on additional information that became available during the current year to date period related to our share of the costs associated with a customer's specific warranty claim involving our product, impacted the proportion of direct material costs and labor and overhead costs as a percent of total cost of goods sold. Excluding this warranty provision, the current year period direct material costs were 66.5 percent of cost of goods sold and labor and overhead costs were 33.5 percent of cost of goods sold for the nine-month period ended April 2, 2023. The increase in direct material costs between periods was primarily due to the aforementioned increase in sales, higher costs for raw material and purchased components and a shift toward products with a higher proportion of material costs as a percent of their total cost of goods sold. The increase in the proportion of direct material costs as a percent of total cost of goods sold between periods, excluding warranty costs, was due to its higher rate of growth compared with that for labor and overhead, which benefited from improved overhead absorption associated with higher sales between the periods.

Labor and overhead costs increased $12.5 million between periods. The variable portion of labor and overhead costs increased in the current year period commensurate with the production volume increase required to support the increased sales volumes compared to prior year period. Labor and overhead costs were further impacted by the following:

Cost Increase:

• Mexico wages and benefits increased $5.1 million in the current year period as compared to the prior year period as a result of January 1, 2022 and January 1, 2023 government mandated minimum wage increases.
• The U.S. dollar value of our Mexican operations was negatively impacted by approximately $2.9 million in the current year period as compared to the prior year period due to an unfavorable Mexican peso to U.S. dollar exchange rate between year-to-date periods. The average U.S. dollar / Mexican peso exchange rate decreased to approximately 19.44 pesos to the dollar in the current year period from approximately 20.44 pesos to the dollar in the prior year period.
• Freight costs increased $2.3 million between year-to-date periods due to an increase in fuel costs and supply chain disruptions.
• The current year period includes a $1.3 million warranty provision associated with a customer's specific warranty claim involving our product.

Cost Decreases:

• Royalty costs paid on sales of certain aftermarket products decreased $1.6 million in the current year period as compared to the prior year period due to lower volumes in these aftermarket products stemming from the current semiconductor chip shortage.
• Production efficiencies that controlled headcount at our Mexico facilities resulted in reduced labor and benefit costs of approximately $700,000 in the current year period as compared to the prior year period.
• Prior year period costs included lump sum bonuses totaling $100,000 paid to our Milwaukee represented hourly workers upon the ratification of a new four-year labor contract, which contract is effective through November 1, 2025.

Gross profit dollars in the current year period decreased $12.2 million as compared to the prior year period driven by the aforementioned inflationary pressures on direct material and labor and overhead costs as well as by the strengthening of the Mexican peso against the U.S. dollar. The resulting decrease in gross profit as a percentage of net sales was 4.5 percentage points from the prior year period to the current year period.

Engineering, selling and administrative expenses in the current year period and prior year period were as follows:

Engineering, selling and administrative expenses increased in the current year period in comparison to the prior year period due to higher outside expenditures on new product development costs associated with utilizing third party vendors for a portion of our development work, an increase in engineering costs related to our ADAC-STRATTEC LLC door handle and exterior trim products, and increased salary and recruiting costs.

Loss from operations was $7.4 million in the current year period compared to income from operations of $7.4 million in the prior year period due to the aforementioned reduction in gross profit margin dollars and an increase in engineering, selling and administrative expenses between periods.

The equity earnings of joint ventures were $1.9 million in the current year period compared to $941,000 in the prior year period. Improved profitability from our VAST LLC joint venture resulted from increased net sales and increased profitability in VAST China’s operations between periods. VAST China’s sales and profitability improvement in the current year period due to an improved semiconductor chip availability environment compared with that of the prior year period. Additionally, during the prior year quarter, VAST China experienced a fire at their Taicang plant. As a result, certain door handle and painting operations were temporarily transferred to their Jingzhou facility and another supplier. The transfer of production negatively impacted VAST China's profitability in the year to date period ended March 27, 2022. We currently believe a presence in the China market is a key component of our global strategy. We anticipate that it will contribute to our overall long-term market and financial strength as the China market continues to expand and as it seeks to rebound from the ongoing impacts of the COVID-19 pandemic and resulting supply chain shortages of critical electronic component parts. Our VAST LLC joint venture in India continues to have near break-even operating results and our VAST LLC joint venture in Brazil continues to report losses.

Included in Other (Expense) Income, net in the current year period and prior year period were the following items (in thousands):

Set forth below is a discussion of the items comprising certain of the components of our Other (Expense) Income, net:

• Foreign currency transaction losses resulted from activity associated with foreign denominated assets held by our Mexican subsidiaries.
• The Rabbi Trust assets fund our amended and restated supplemental executive retirement plan. The investments held in the Trust are considered trading securities.
• We entered into the Mexican peso currency forward contracts during fiscal 2023 and 2022 to reduce earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. Unrealized gains and losses on the peso forward contracts recognized as a result of mark-to-market adjustments as of April 2, 2023 may or may not be realized in future periods, depending on actual Mexican peso to U.S. dollar exchange rates experienced during the balance of the contract period.
• Pension and postretirement plan costs include the components of net periodic benefit cost other than the service cost component. During the current year period, a charge of $217,000 was included in pension and postretirement plan costs related to $863,000 of SERP benefits that were cash settled using Rabbi trust assets.

Our effective tax rate was 21.8% and 4.0% for the nine months ended April 2, 2023 and March 27, 2022, respectively. The reduction in our effective tax rate in the prior year nine-month period as compared to the respective current year period was due to adjustments we made to the amounts of our fiscal 2021 estimated foreign tax credits and estimated tax impacts associated with our investment in VAST LLC. These true-up adjustments resulted from the filing of our US income tax returns during the quarter ended March 27, 2022 and were attributable to actual results included in non-US income tax returns, which are filed on a calendar year basis, and which differ from estimates included in our fiscal 2021 tax provision. The adjustment amounts recorded during the nine-month period ended March 27, 2022 totaled $1.0 million. Our effective tax rate for the nine-month period ended March 27, 2022 excluding these adjustments was 15.7 percent. Our effective tax rate differs from the statutory tax rate due to the application of the Global Intangible Low Taxed Income (GILTI) tax provisions, our available R&D tax credit and the non-controlling interest portion of our pre-tax income. The non-controlling interest portion impacts the effective tax rate as ADAC-STRATTEC LLC and STRATTEC POWER ACCESS LLC entities are taxed as partnerships for U.S. tax purposes.

Liquidity and Capital Resources

Working Capital (in millions)

Outstanding Receivable Balances from Major Customers

Our primary source of cash flow is from our major customers, which include General Motors Company, Stellantis and Ford Motor Company. As of the date of filing this Form 10-Q with the Securities and Exchange Commission, all of our major customers are making payments on their outstanding accounts receivable in accordance with the payment terms included on their purchase orders. A summary of our outstanding receivable balances from our major customers as of April 2, 2023 was as follows (in millions):

Cash Balances in Mexico

We earn a portion of our operating income in Mexico. As of April 2, 2023, $1.7 million of our $12.1 million cash and cash equivalents balance was held in Mexico. These funds are available for repatriation as deemed necessary.

Cash Flow Analysis (in millions)

The reduction in cash provided by operating activities between periods was due reduced profitability in the current year period as compared to the prior year period partially offset by a decrease in cash used for working capital requirements between periods. Working capital requirement changes between periods were comprised of the following items (in millions):

28

Set forth below is a summary of the items impacting the change in our working capital requirements between year to date periods:

• Accounts receivable balances increased in both the current and prior year periods. The increases reflect increased sales levels as of the end our third quarter during both fiscal periods.
• The change in inventory levels reflected a decrease during the current year period and an increase during the prior year period. The current year period decrease was due to a reduction in inventory balances to align with historical customer production patterns. The prior year period increase was due to an inventory build-up while our OEM customers experienced reduced production schedules due to certain part shortages, including for semiconductor chips.
• The change in other assets includes an increase in balances during both the current and prior year to date periods. Customer tooling balances increased during both year to date periods. Additionally, the current year period includes an increase in value added tax recoverable balances related to our operations in Mexico. Customer tooling balances change due to the timing of tooling development spending required to meet customer production requirements and the timing of related customer billings for tooling cost reimbursement. Value added tax returns are filed and are pending settlement.
• Accounts payable and accrued liability balances increased in both the current and prior periods. Accounts payable balances for each period reflected the timing of purchases and payments with our vendors based on normal, established payment terms. Additionally, the current year period accrued liability balances included an increase in value added tax payable balances related to our operations in Mexico while the prior year period accrued liability balances included a decrease due to the $6.6 million payment of fiscal 2021 bonuses, which bonuses were accrued as of June 2021 and paid in August 2021. Value added tax returns are filed and are pending settlement.

Net cash used in investing activities included capital expenditures made in support of requirements for new product programs and the upgrade and replacement of existing equipment of $13.7 million during the current year period and $9.4 million during the prior year period. Net cash used in investing activities also included an investment in our VAST LLC joint venture of $237,000 in the current year period and $75,000 in the prior year period. The investments were made for the purpose of funding general expenses for Sistema Accesso Veicular Ltda, our Brazilian joint venture.

Net cash provided by financing activities during the current year period of $9.6 million included increased borrowings under our credit facilities of $13.0 million, which was primarily in support of financing tooling development costs for new customer programs. These tooling development costs will be reimbursed by the customer upon formal acceptance of the products produced with the tools. Net cash provided by financing activities was further impacted by $164,000 received for the exercise of stock options under our stock incentive plan and purchases under our employee stock purchase plan, $3.0 million of repayments of borrowings under our credit facilities and $600,000 of dividend payments to non-controlling interests in our subsidiaries. Net cash used in financing activities during the prior year period of $316,000 included $11 million of repayments of borrowings under our credit facilities and $1.2 million of dividend payments to non-controlling interests in our subsidiaries, mostly offset by increased borrowings under our credit facilities of $11.0 million and $884,000 received for the exercise of stock options under our stock incentive plan and purchases under our employee stock purchase plan.

VAST LLC Cash Requirements

We currently anticipate that VAST China has adequate debt facilities in place over the remainder of our 2023 fiscal year to cover the future operating and capital requirements of its business. During the nine-month period ended April 2, 2023, capital contributions totaling $711,000 were made to VAST LLC for purposes of funding operations in Brazil for the remainder of 2023 fiscal year. STRATTEC's portion of the capital contributions totaled $237,000. During the nine months ended March 27, 2022, capital contributions totaling $225,000 were made to VAST for purposes of funding operations in Brazil. STRATTEC's portion of the capital contributions totaled $75,000. During the nine months ended April 2, 2023 and March 27, 2022, VAST LLC made no capital contributions to Minda-VAST Access Systems. We currently anticipate no required future capital contributions to Minda-VAST Access Systems over the remainder of our 2023 fiscal year.

Future Capital Expenditures

We anticipate total capital expenditures will be approximately $16.0 million to $18.0 million in fiscal 2023, of which $13.7 million has been made through April 2, 2023, in support of requirements for new product programs and the upgrade and replacement of existing equipment.

Stock Repurchase Program

Our Board of Directors has authorized a stock repurchase program to buy back outstanding shares of our common stock. Shares authorized for buy back under the program totaled 3,839,395 at April 2, 2023. A total of 3,655,322 shares have been repurchased over the life of the program through April 2, 2023, at a cost of approximately $136.4 million. No shares were repurchased during the nine-month periods ended April 2, 2023 or March 27, 2022. Additional repurchases may occur from time to time and are expected to continue to be funded by cash flow from operations and current cash balances. Based on the current economic environment and our preference to conserve cash for other uses, we anticipate modest or no stock repurchase activity for the remainder of fiscal year 2023.

Credit Facilities

STRATTEC has a $40 million secured revolving credit facility (the “STRATTEC Credit Facility”) with BMO Harris Bank N.A. ADAC-STRATTEC LLC has a $25 million secured revolving credit facility (the “ADAC-STRATTEC Credit Facility”) with BMO Harris Bank N.A., which is guaranteed by STRATTEC. The credit facilities both expire August 1, 2024. Borrowings under either credit facility are secured by our U.S. cash balances, accounts receivable, inventory, and fixed assets located in the U.S. Interest on borrowings under the STRATTEC Credit Facility were at varying rates based, at our option, on LIBOR plus 1.25 percent or the bank’s prime rate through February 22, 2023. Interest on borrowings under the ADAC-STRATTEC Credit Facility were at varying rates based, at our option, on LIBOR plus 1.25 percent or the bank’s prime rate through February 6, 2023. Subsequent to these dates, interest on borrowings under both credit facilities were at varying rates based, at our option, on SOFR plus 1.35 percent or the bank's prime rate. Both credit facilities contain a restrictive financial covenant that requires the applicable borrower to maintain a minimum net worth level. The ADAC-STRATTEC Credit Facility includes an additional restrictive financial covenant that requires the maintenance of a minimum fixed charge coverage ratio. As of April 2, 2023, we were in compliance with all other financial covenants required by these credit facilities. Outstanding borrowings under the STRATTEC Credit Facility totaled $8 million at April 2, 2023. There were no outstanding borrowings under the STRATTEC Credit Facility at July 3, 2022. Increased borrowings under the STRATTEC Credit Facility were primarily in support of financing tooling development costs for new customer programs, which will be reimbursed by the customer upon formal acceptance of the products produced by the tools. The average outstanding borrowings and weighted average interest rate on the STRATTEC Credit Facility loans were approximately $3.8 million and 5.1 percent, respectively, during the nine months ended April 2, 2023. Outstanding borrowings under the ADAC-STRATTEC Credit Facility totaled $13 million at April 2, 2023 and $11 million at July 3, 2022. The average outstanding borrowings and weighted average interest rate on the ADAC-STRATTEC Credit Facility loans were approximately $12.2 million and 4.9 percent, respectively, during the nine months ended April 2, 2023.

Joint Ventures and Majority Owned Subsidiaries

Refer to the discussion of Investment in Joint Ventures and Majority Owned Subsidiaries and discussion of Equity Earnings (Loss) of Joint Ventures included elsewhere in Notes to Condensed Consolidated Financial Statements within this Form 10-Q.

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act, are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act are accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures were effective at reaching a level of reasonable assurance. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures. We have designed our disclosure controls and procedures to reach a level of reasonable assurance of achieving the desired control objectives.

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II

Other Information

There have been no material changes to the risk factors disclosed in our Form 10-K as filed with the Securities and Exchange Commission on September 8, 2022, except as follows:

Our current revolving credit facilities, as discussed further under Credit Facilities, expire August 1, 2024. We rely on our credit facilities to provide us with adequate working capital to operate our business and fund our capital expenditures. Further escalation of the aforementioned global inflationary pressures on our operating results may impact our ability to achieve our covenants in the short term and our ability to negotiate favorable terms in the long term, including interest rates and debt covenants, in the extension of our current credit facility.