The recent strengthening of the peso against the dollar, as well as the latest minimum wage increase in Mexico, have all contributed to the shrinking profits of Glendale's automotive supplier Strattec.
Strattec's (Nasdaq STRT) $1.3 million provision against possible warranty claims has put pressure on the company's earnings. Strattec's president and CEO Frank Krejci refused to reveal the name of the customer or vehicle involved, nor the Strattec product.
Strattec's fiscal third quarter ended April 2, with a loss of $2.3m, or 57c per diluted share. This compares to a profit of $3.1m, or 80c, a year ago.
Strattec reported a loss despite revenues increasing by almost 10% to $127.2 millions in the quarter.
Krejci, the company's CEO, said that sales volumes have continued to improve since the pandemic years.
Krejci stated that there was a general trend of a slight increase in the number of people. 'Hopefully, things will continue to go in this direction.'
Stellantis, the parent company of Jeep/Ram/Dodge, was the only customer to decrease purchases. Strattec stated that the decrease in sales was primarily due to plant closures during the last quarter.
Andres Manuel Obrador, the Mexican president, promised to increase wages. The country has increased minimum wages in recent years. The government, business and labor sectors have all pledged to support a 20% increase in 2023.
Strattec employs about 3,000 people in three plants located in Juarez, Mexico, across the border from El Paso in Texas. There is also a plant north of Mexico City in Leon. The company's headquarters and factory in Glendale remain open.
Krejci stated that the increases in the minimum wage in Mexico only affect the Strattec workers at the bottom of their pay scale.
He said, 'It is not a huge amount of money per person.' "But there are thousands of people, so this is a significant rise."
Krejci added that the recent weakness of the U.S. Dollar against the peso has also increased the employment costs for Strattec in Mexico by 10%. He said that despite the higher costs of employment in Mexico, the labor costs there are still lower than in the United States.
Strattec continues to have a limited ability to pass on increases in costs to its customers, which is also affecting profits. Krejci stated that the company enters into long-term agreements with automakers, who are unwilling to accept price increases.
John Franzreb, an analyst at Sidoti & Company, said that despite an improvement in the production of automobiles by Strattec due to increased costs.
Franzreb wrote that Strattec's latest quarterly report showed that the company would be hard pressed to improve its profitability profile until the commodity prices drop or the currency situation improves.
Strattec reported revenues of 360.7 million dollars for the first nine-months of its fiscal year, compared to $329.2 millions a year ago.
The company reported a loss of $4,000,000, or $0.01 per share diluted, for the nine month period, compared to a profit of $6.6,000,000, or $1.70 during the same period in fiscal 2022.