Strattec Security Corp: Form 10-Q for the period ended Mar 31, 2024

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 2023 Form 10-K, which was filed with the SEC on September 7, 2023. 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

The key highlight of our fiscal year-to-date results has been $25.8 million of customer pricing increases, equating to $21.3 million gross margin improvement after factoring in the $4.5 million paid to key suppliers for negotiated price increases. Furthermore, of this $21.3 million gross margin improvement, $13.2 million is considered “ongoing” as it relates to present program price increases that will carry forward to subsequent years. For full fiscal year 2024, we now anticipate an annualized increase in “ongoing” pricing, net of higher costs paid to suppliers, to exceed the higher end of our originally targeted range of $10.0 million to $15.0 million. We do not anticipate any further material one-time retroactive pricing adjustments for the remainder of the fiscal year.

When excluding the $7.0 million of customer pricing from our third quarter net sales growth over prior year, we saw an increase in sales of 5.2% primarily driven by the launch of new product programs. We anticipate such growth will continue into the fourth quarter and into fiscal 2025.

From a cost of sales perspective, we anticipate continued cost pressures on our Mexican operations due to the current strength of the Mexican Peso relative to the U.S. Dollar and higher wages in Mexico driven by the Mexican government’s minimum wage increases, which have increased manufacturing costs fiscal year-to-date by $7.9 million and $4.6 million respectively. Additionally, we have experienced higher shipping costs fiscal year-to-date of $3.1 million, primarily driven by expedited shipping associated with the launch of new product programs. We expect some continuation of these higher costs while we implement the launch of the remaining new products.

To help offset the increased costs of our Mexican operations, we implemented a salaried staffing reduction in our Mexican operations in the 2024 first quarter that is projected to reduce costs by an annualized amount of approximately $800,000. Additionally, we anticipate our focus on reducing non-employee cost of sales will generate between $4 million and $5 million in savings in the full fiscal year, excluding the aforementioned higher shipping costs, driven by improved cost of raw materials and production efficiencies.

Regarding the balance sheet, we expect the balance of reimbursable customer tooling will begin to decrease significantly in the fourth quarter and continue decreasing in the first half of fiscal 2025 as we normalize to near historical levels by the end of the calendar year 2024 with the completed launch of the associated programs. We expect the Mexican VAT (see Note on page 8) will return to historical levels in first half of fiscal 2025 with the closing of the periods under audit. As for net inventory, we reduced our inventory balance by $10.8 million in the third quarter as we worked to reverse the inventory build that occurred in the first half of the fiscal year due to delays in new product launches and lower than anticipated sales. We remain committed to improving our inventory turn over the coming quarters. Lastly, we plan on renewing our ADAC-STRATTEC credit facility in the fourth quarter.

For our fiscal 2024 capital expenditures, we continue to anticipate to spend between $9 million to $12 million.

Analysis of Results of Operations

Three months ended March 31, 2024 compared to the three months ended April 2, 2023

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

The quarter-over-quarter sales increase of $13.6 million reflects net price increases from our major OEM customers of $7.0 million, which is primarily attributed to ongoing increases in current part prices. In addition to the net price increases, the following items specifically impacted sales to the noted customer groups between quarters:

• Sales to General Motors Company were positively impacted by a favorable shift in product mix with increased sales of higher priced power access and user interface control products and reduced sales of lower priced key and lockset products.
• Sales to Ford Motor Company were positively impacted by added power end gate content we supply on the F-Series Super Duty Pickup and by new tailgate latch content supplied on the Ford F-Series Pickups.
• Sales to Stellantis were negatively impacted by reduced customer vehicle production volumes and reduced content we supply for the Dodge Ram Pickup and several passenger car programs ending.
• Sales to Tier 1 Customers improved in the current year quarter compared to the prior year quarter due to new door hardware content on the F-Series Super Duty Pickup, which is sold to a Tier 1 customer.
• 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, were positively impacted by sales for new business awarded from Aston Martin.
• Sales to Hyundai / Kia were positively impacted due to an overall increase in customer vehicle production volumes between quarters.

Prior year quarter reclassifications have been made for consistency with current year quarter presentation.

Total cost of goods sold increased $8.9 million between quarterly periods. The quarter-over-quarter increase in direct material costs of $3.5 million was the result of the net increase in sales volumes and content we supply, as discussed above, and $1.2 million of negotiated material price increases paid to key suppliers, which were primarily attributable to ongoing operations. These unfavorable impacts were partially offset by reduced zinc costs of approximately $850,000 in the current year quarter as compared to the prior year quarter. The quarter-over-quarter increase in labor and overhead costs of $5.4 million was impacted by the following:

Cost Increases:

• The U.S. dollar value of our Mexican operations was negatively impacted by approximately $2.1 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 periods. The average U.S. dollar / Mexican peso exchange rate decreased to approximately 16.97 pesos to the dollar in the current year quarter from approximately 18.56 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 annual wage increases, including a January 1, 2024 20 percent government mandated minimum wage increase.
• The current year quarter includes expense provisions of $942,000 under our incentive bonus plan. No bonus expense provisions were recorded in the prior year quarter.
• Freight costs increased $778,000 between quarterly periods due to a change in shipping terms with a major supplier that occurred in June 2023 and an increase in expedited shipments.
• Current year quarter reductions in our finished and work in process inventories resulted in unfavorable absorption of labor and overhead costs in the current year quarter as compared to the prior year quarter.

Cost Decreases:

• The prior year quarter included a $1.3 million warranty provision associated with a customer's specific warranty claim involving our product.
• Mexico wages and benefits decreased by $384,000 due to a September 2023 salaried staff reduction in Mexico and current year period production efficiencies that controlled headcount and hours worked.

Gross profit margin improvement between quarterly periods was driven by pricing increases achieved during the current year quarter, as discussed above, reduced zinc and warranty costs between quarterly periods and production efficiencies in Mexico. These favorable impacts were partially offset by an unfavorable U.S. dollar to Mexican peso exchange rate combined with Mexico wage increases, higher freight costs, bonus expense provisions recorded in the current year quarter and unfavorable absorption of our fixed overhead costs in the current year quarter as compared to the prior year quarter, all as discussed above.

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

Engineering, selling and administrative expenses were consistent between quarterly periods. Reductions in new product development costs with third-party vendors in the current year quarter as compared to the prior year quarter were offset by current year quarter expense provisions of $817,000 under our incentive bonus plan. No bonus expense provisions were recorded in the prior year quarter.

Income from operations was $2.0 million in the current year quarter compared to loss from operations of $2.5 million in the prior year quarter due to improvement in gross profit margin dollars as discussed above.

Equity earnings of joint ventures was $819,000 in the prior year quarter. Effective June 30, 2023, STRATTEC sold its one-third interest in VAST LLC to WITTE. Refer to the discussion of the Equity Restructuring Agreement within Joint Ventures and Majority Owned Subsidiaries included in the Notes to Financial Statements within this Form 10-Q for additional information regarding the sale of STRATTEC's VAST LLC interest to WITTE Automotive.

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 gains and 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 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 March 31, 2024 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.

Our effective tax rate was 32.7 percent and (4.2) percent for the three-month periods ended March 31, 2024 and April 2, 2023, respectively. The effective rate estimate for the three-month period ended March 31, 2024 increased as compared to the prior year quarter as a result of a shift in our global earnings mix. The effective tax rate for the three-month period ended April 2, 2023 was impacted by an increase in our fiscal year 2023 pre-tax net loss estimate as of the end of our April 2, 2023 quarter as compared to our estimate as of our January 1, 2023 quarter. The change in our effective tax rate between quarterly periods was also impacted by the sale of our interest in VAST LLC and the purchase of the remaining non-controlling interest in SPA, which were both effective June 30, 2023. Our prior year period 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 is taxed as a partnership for U.S. tax purposes. SPA was taxed as a partnership in our fiscal 2023.

Nine months ended March 31, 2024 compared to the nine months ended April 2, 2023

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 $34.0 million reflects net price increases from our major OEM customers of $25.8 million of which $15.9 million is attributed to ongoing increases in current part prices and $9.9 million relates to one-time retroactive price increases for parts shipped in the prior fiscal year for which the price increases were finalized during the current year-to-date period. Period-over-period sales were not materially impacted by the UAW strike. In addition to the net price increases, the following items specifically impacted sales to the noted customer groups between year-to-date periods:

• Sales to General Motors Company were positively impacted by a favorable shift in product mix with increased sales of higher priced power access and user interface control products and reduced sales of lower priced key and lockset products.
• Sales to Ford Motor Company were positively impacted by added power end gate content we supply on the F-Series Super Duty Pickup and by new tailgate latch content supplied on the Ford F-Series Pickups.
• Excluding the impact of net price increases described above, sales to Stellantis were negatively impacted by several passenger car programs ending during the current year period, customer plant shutdowns during the current year period negatively impacting Chrysler Pacifica minivan production, and reduced customer vehicle production volumes and reduced content we supply on the Dodge Ram Pickup.
• Sales to Tier 1 Customers improved in the current year period compared to the prior year period due to new door hardware content on the F-Series Super Duty Pickup, which is sold to a Tier 1 customer.
• 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, were positively impacted by sales for new business awarded from Aston Martin in the current year period.
• Sales to Hyundai / Kia were positively impacted due to an overall increase in customer vehicle production volumes between year-to-date period.

Prior year period reclassifications have been made for consistency with current year period presentation.

Total cost of goods sold increased $17.0 million between year-to-date periods. The period-over-period increase in direct material costs of $4.8 million was the result of the net increase in sales volumes and content we supply, as discussed above, and $4.5 million of negotiated material price increases paid to key suppliers. Price increases paid to suppliers attributed to ongoing operations totaled $2.7 million while the remaining $1.8 million relates to one-time retroactive price increases. The impact of material price increases paid to suppliers was partially offset by reduced zinc costs of approximately $2.4 million in the current year period as compared to the prior year period. The period-over-period increase in labor and overhead costs of $12.2 million was impacted by the following:

Cost Increases:

• The U.S. dollar value of our Mexican operations was negatively impacted by approximately $7.9 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 periods. The average U.S. dollar / Mexican peso exchange rate decreased to approximately 17.13 pesos to the dollar in the current year period from approximately 19.44 pesos to the dollar in the prior year period.
• Mexico wages and benefits increased $4.6 million in the current year period as compared to the prior year period as a result of annual wage increases, including January 1, 2023 and January 1, 2024 20 percent government mandated minimum wage increases.
• Freight costs increased $3.1 million between year-to-date periods due to an increase in shipments from foreign vendors, a change in shipping terms with a major supplier that occurred in June 2023, and an increase in expedited shipments.
• The current year period includes expense provisions of $942,000 under our incentive bonus plan. No bonus expense provisions were recorded in the prior year period.

Cost Decreases:

• Mexico wages and benefits decreased by $1.5 million due to a September 2023 salaried staff reduction in Mexico and current year period production efficiencies that controlled headcount and hours worked.
• The prior year period included a $1.3 million warranty provision associated with a customer's specific warranty claim involving our product.
• Absorption of our labor and overhead costs was favorable in the current year period as compared to the prior year period due to larger reductions in finished and work in process inventories in the prior year period.

Gross profit margin improvement between year-to-date periods was driven by pricing increases achieved during the current year period as discussed above. The net impact of one-time retroactive customer and supplier pricing in the current year period increased the gross profit margin percentage by 1.8 percentage points. Additional current year period favorable impacts to the gross profit margin included ongoing customer price increases and other sales increases, as discussed above, reduced zinc and warranty costs between year-to-date periods, favorable absorption resulting from increased production and production efficiencies in Mexico. These favorable impacts were partially offset by ongoing price increases paid to suppliers, an unfavorable U.S. dollar to Mexican peso exchange rate combined with the mandatory Mexican minimum wage increase in 2023, higher freight costs, and bonus expense provisions recorded in the current year period, all as discussed above.

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

Engineering, selling and administrative expenses increased $1.5 million between year-to-date periods. The current year period includes one-time charges of approximately $1 million associated with the transition of our Chief Executive Officer and expense provisions of $817,000 under our incentive bonus plan. No bonus expense provisions were recorded in the prior year period.

Income from operations was $8.1 million in the current year period compared to loss from operations of $7.4 million in the prior year period due to improvement in gross profit margin dollars partially offset by an increase in engineering, selling and administrative expenses as discussed above.

Effective June 30, 2023, STRATTEC sold its one-third interest in VAST LLC to WITTE. Refer to the discussion of the Equity Restructuring Agreement within Joint Ventures and Majority Owned Subsidiaries included in the Notes to Financial Statements within this Form 10-Q for additional information regarding the sale of STRATTEC's VAST LLC interest to WITTE Automotive. The equity loss of joint ventures was $269,000 in the current year period compared to equity earnings of joint ventures of $1.9 million in the prior year period. The current year period equity loss of joint ventures was the result of additional professional fees incurred during the period related to the sale of STRATTEC's interest in VAST LLC. The $269,000 is an adjustment to the gain on sale of VAST LLC of $110,000, which was recorded in our fiscal 2023. Our adjusted loss on sale of VAST LLC totals $159,000.

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 gains and 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 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 March 31, 2024 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.

Our effective tax rate was 25.7 percent and 21.8 percent for the nine-month periods ended March 31, 2024 and April 2, 2023, respectively. The change in our effective tax rate between periods was impacted by the sale of our interest in VAST LLC and the purchase of the remaining non-controlling interest in SPA, which were both effective June 30, 2023. Our prior year period 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 is taxed as a partnership for U.S. tax purposes. SPA was taxed as a partnership in our fiscal 2023.

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 March 31, 2024 was as follows (in millions):

Cash Balances in Mexico

We earn a portion of our operating income in Mexico. As of March 31, 2024, $1.7 million of our $9.6 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 to an increase in working capital requirements between periods partially offset by improved profitability in the current year period as compared to the prior year period. Working capital requirement changes between periods were comprised of the following items (in millions):

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

• Accounts receivable balances increased in the current year period and in the prior year period. The increases reflect increased sales levels as of the end of our third quarter during both fiscal periods.
• The change in inventory levels reflected a decrease during the prior year period as a result of efforts to align inventory balances with historical customer production patterns during the March 2023 quarter.
• The change in other assets includes an increase in balances during both the current and prior year to date periods. Customer tooling balances and value-added tax recoverable balances related to our operations in Mexico increased during both periods. Customer tooling balances changed 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 recoverable balances increased $11.4 million during the current year period due to a temporary issue with our Mexican tax certification. Although the certification issue was resolved during the quarter ended December 31, 2023, we were required to pay VAT on all parts temporarily imported into Mexico before seeking reimbursement for periods in which the certification issue was outstanding, which periods are now open to audit with the Mexican tax authority. The temporary increases in the VAT recoverable balance will remain elevated until the periods under audit are closed. Value-added tax recoverable balances increased during the prior year period due to filed returns that were under audit and pending settlement. The prior year audits have since been closed.
• Accounts payable and accrued liability balances increased in the prior year period. The increased accounts payable balances reflected the timing of purchases and payments with our vendors based on normal, established payment terms. Additionally, the accrued liability balances included an increase in value-added tax payable balances related to our operations in Mexico due to filed returns that were under audit and pending settlement. The prior year audits have since been closed.

Net cash used in investing activities during the current year period of $4.1 million included capital expenditures made in support of requirements for new product programs and the upgrade and replacement of existing equipment of $6.1 million, offset by $2.0 million in proceeds received from the sale of our investment in VAST LLC, which sale was effective during the fourth quarter of our fiscal 2023. Net cash used in investing activities during the prior year period of $13.9 million included capital expenditures made in support of requirements for new product programs and the upgrade and replacement of existing equipment of $13.7 million and investments in our VAST LLC joint venture of $237,000.

Net cash provided by financing activities of $55,000 during the current year period included $2 million of borrowings under our credit facility, which borrowings were repaid during the period resulting in no net impact to the change in cash during the period, and $55,000 received for purchases under our employee stock purchase plan. Net cash provided by financing activities of $9.6 million during the prior year period included $13 million of additional borrowings under our credit facility and $164,000 received for the exercise of stock options under our stock incentive plan and purchases under our employee stock purchase plan, partially offset by $3.0 million of repayments of borrowings under our credit facilities and $600,000 of dividend payments to non-controlling interests in our subsidiaries.

We anticipate total capital expenditures will be approximately $9 million to $12 million in fiscal 2024, of which $6.1 million has been made through March 31, 2024, 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 March 31, 2024. A total of 3,655,322 shares have been repurchased over the life of the program through March 31, 2024, at a cost of approximately $136.4 million. No shares were repurchased during the nine-month periods ended March 31, 2024 or April 2, 2023. 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 2024.

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 STRATTEC Credit Facility expires August 1, 2026. The ADAC-STRATTEC Credit Facility expires August 1, 2024. We are working with BMO Harris Bank on a renewal of the ADAC-STRATTEC Credit Facility for completion in our fiscal 2024. Borrowings under either credit facility are secured by our U.S. cash balances, accounts receivable, inventory, and fixed assets. Interest on borrowings under the STRATTEC Credit Facility were at varying rates based, at our option, on the bank's prime rate or LIBOR plus 1.25 percent through February 22, 2023, SOFR plus 1.35 percent for the period February 23, 2023 through September 5, 2023, and SOFR plus 1.85 percent subsequent to September 5, 2023. Interest on borrowings under the ADAC-STRATTEC Credit Facility were at varying rates based, at our option, on the bank's prime rate or LIBOR plus 1.25 percent through February 6, 2023 and SOFR plus 1.35 percent subsequent to February 6, 2023. 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 March 31, 2024, we were in compliance with all financial covenants required by these credit facilities. There were no outstanding borrowings under the STRATTEC Credit Facility at March 31, 2024 or July 2, 2023. The average outstanding borrowings and weighted average interest rate on the STRATTEC Credit Facility loans were approximately $44,000 and 8.5 percent, respectively, during the nine-month period ended March 31, 2024. Outstanding borrowings under the ADAC-STRATTEC Credit Facility totaled $13.0 million at March 31, 2024 and at July 2, 2023. The average outstanding borrowings and weighted average interest rate on the ADAC-STRATTEC Credit Facility loans were approximately $13.0 million and 6.7 percent, respectively, during the nine-month period ended March 31, 2024.

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 7, 2023.