Key Tronic Corporation (NASDAQ:KTCC) Q1 2024 Earnings Conference Call October 31, 2023 5:00 PM ET Company Participants Brett Larsen - CFO Craig Gates - President and CEO Conference Call Participants Bill Dezellem - Tieton Capital Sheldon Grodsky - Grodsky Associates George Melas - MKH Management Operator Good day, and welcome to the Key Tronic First Quarter Fiscal 2024 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Brett Larsen. Please go ahe ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION FORM 10-K ____________________________________________________________ ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 1, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD FROM TO Commission File Number 0-11559 ____________________________________________________________ KEY TRONIC CORPORATION (Exact name of registrant as speci ...

FORM 10-Q ____________________________________________________________ ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED April 1, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD FROM TO . UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________________________________________________________ Commission File Number: 0-11559 ______________________ ...

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20%28Unaudited%29) This section presents Key Tronic Corporation's unaudited condensed consolidated financial statements and accompanying notes [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) | Metric | December 31, 2022 (in thousands) | July 2, 2022 (in thousands) | | :--------------------------------- | :------------------------------- | :-------------------------- | | Cash and cash equivalents | $810 | $1,707 | | Trade receivables, net | $134,290 | $135,876 | | Inventories | $171,749 | $155,741 | | Total current assets | $361,647 | $340,008 | | Total assets | $430,248 | $406,923 | | Accounts payable | $140,704 | $121,393 | | Total current liabilities | $173,469 | $163,667 | | Total liabilities | $302,937 | $282,045 | | Total shareholders' equity | $127,311 | $124,878 | - Total assets increased by **$23.3 million** from July 2, 2022, to December 31, 2022, primarily driven by increases in inventories and contract assets[9](index=9&type=chunk) - Total liabilities increased by **$20.89 million**, mainly due to higher accounts payable and revolving loan balances[9](index=9&type=chunk) [Condensed Consolidated Statements of Income](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income) | Metric (in thousands) | Three Months Ended Dec 31, 2022 | Three Months Ended Jan 1, 2022 | Six Months Ended Dec 31, 2022 | Six Months Ended Jan 1, 2022 | | :-------------------- | :------------------------------ | :----------------------------- | :---------------------------- | :--------------------------- | | Net sales | $123,708 | $134,456 | $260,971 | $267,218 | | Gross profit | $8,920 | $9,808 | $19,299 | $19,946 | | Operating income | $3,608 | $1,651 | $6,969 | $3,745 | | Net income | $967 | $587 | $2,119 | $1,402 | | Net income per share—Basic | $0.09 | $0.05 | $0.20 | $0.13 | - Net sales decreased by **8.0%** for the three months ended December 31, 2022, compared to the prior year, and by **2.3%** for the six months ended December 31, 2022[11](index=11&type=chunk) - Operating income significantly increased for both periods, driven by a gain on insurance proceeds[11](index=11&type=chunk) [Condensed Consolidated Statements of Comprehensive Income](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) | Metric (in thousands) | Three Months Ended Dec 31, 2022 | Three Months Ended Jan 1, 2022 | Six Months Ended Dec 31, 2022 | Six Months Ended Jan 1, 2022 | | :-------------------- | :------------------------------ | :----------------------------- | :---------------------------- | :--------------------------- | | Net income | $967 | $587 | $2,119 | $1,402 | | Unrealized gain (loss) on hedging instruments, net of tax | $59 | $(1,084) | $212 | $(2,615) | | Comprehensive income (loss) | $1,026 | $(497) | $2,331 | $(1,213) | - Comprehensive income improved significantly, moving from a loss of **$(497) thousand** in the prior year to a gain of **$1,026 thousand** for the three months ended December 31, 2022, primarily due to an unrealized gain on hedging instruments[14](index=14&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) | Metric (in thousands) | Six Months Ended Dec 31, 2022 | Six Months Ended Jan 1, 2022 | | :-------------------- | :---------------------------- | :--------------------------- | | Net income | $2,119 | $1,402 | | Cash used in operating activities | $(10,031) | $(10,528) | | Cash used in investing activities | $(359) | $(2,764) | | Cash provided by financing activities | $9,493 | $10,865 | | Net decrease in cash and cash equivalents | $(897) | $(2,427) | | Cash and cash equivalents, end of period | $810 | $1,046 | - Net cash used in operating activities slightly decreased to **$10.0 million** for the six months ended December 31, 2022, from **$10.5 million** in the prior year, primarily due to changes in working capital components[18](index=18&type=chunk)[124](index=124&type=chunk) - Cash used in investing activities significantly decreased to **$0.4 million**, largely due to proceeds from insurance recoveries[18](index=18&type=chunk)[128](index=128&type=chunk) [Condensed Consolidated Statements of Shareholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders%27%20Equity) | Metric (in thousands) | Dec 31, 2022 (6 months) | Jan 1, 2022 (6 months) | | :-------------------- | :---------------------- | :--------------------- | | Total shareholders' equity, beginning balances | $124,878 | $123,705 | | Net income | $2,119 | $1,402 | | Unrealized gain (loss) on hedging instruments, net | $212 | $(2,615) | | Total shareholders' equity, ending balances | $127,311 | $122,635 | - Total shareholders' equity increased to **$127.3 million** as of December 31, 2022, from **$124.9 million** at the beginning of the six-month period, driven by net income and an unrealized gain on hedging instruments[20](index=20&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) [Note 1. Basis of Presentation](index=9&type=section&id=Note%201.%20Basis%20of%20Presentation) - The financial statements are unaudited and prepared in accordance with SEC rules, with certain information condensed or omitted compared to annual statements[23](index=23&type=chunk) - The Company's fiscal year is 52/53 weeks, ending on the Saturday closest to June 30. The reported periods (three and six months ended December 31, 2022, and January 1, 2022) were both 13-week periods[24](index=24&type=chunk) - The COVID-19 pandemic has caused extreme shifts in demand, supply chain, and logistics risks, potentially impacting operating results due to closures, demand fluctuations, freight costs, labor shortages, and currency exchange fluctuations[25](index=25&type=chunk) [Note 2. Significant Accounting Policies](index=9&type=section&id=Note%202.%20Significant%20Accounting%20Policies) - Certain prior period reclassifications were made for presentation conformity, with no effect on reported income, comprehensive income, cash flows, total assets, or shareholders' equity[26](index=26&type=chunk) - The Company uses foreign currency forward contracts as cash flow hedges to manage variability of foreign currency fluctuations for expenses in its Mexico facilities, with no ineffectiveness recorded[28](index=28&type=chunk)[29](index=29&type=chunk) - The Company is assessing the impact of recently issued accounting standards, including ASU 2021-01 (Reference Rate Reform), ASU 2020-03 (Codification Improvements to Financial Instruments), and ASU 2016-13 (Credit Losses), with ASU 2016-13 effective in Q1 FY2024[34](index=34&type=chunk)[35](index=35&type=chunk)[36](index=36&type=chunk) [Note 3. Inventories](index=10&type=section&id=Note%203.%20Inventories) | Metric | December 31, 2022 (in millions) | July 2, 2022 (in millions) | | :--------- | :------------------------------ | :------------------------- | | Inventories | $171.7 | $155.7 | - Inventories increased by **$16.0 million** from July 2, 2022, to December 31, 2022, with substantially all balances being raw materials[37](index=37&type=chunk) [Note 4. Long-Term Debt](index=11&type=section&id=Note%204.%20Long-Term%20Debt) - As of December 31, 2022, the Company had an outstanding balance of **$107.6 million** under its **$120 million** asset-based revolving credit facility with Bank of America, with **$1.8 million** available for future borrowings[38](index=38&type=chunk) - An amendment to the loan agreement on August 26, 2022, removed the cash flow leverage ratio covenant and increased the interest rate by **25 basis points**[39](index=39&type=chunk) | Debt Type | Interest Rate Range (Dec 31, 2022) | Interest Rate Range (Jul 2, 2022) | | :-------------------- | :--------------------------------- | :-------------------------------- | | Outstanding Debt | 4.85% - 7.44% | 3.25% - 5.52% | **Debt Maturities as of December 31, 2022 (in thousands):** | Fiscal Years Ending | Amount | | :------------------ | :----- | | 2023 (remaining 6 months) | $1,101 | | 2024 | $2,239 | | 2025 | $2,290 | | 2026 | $1,187 | | 2027 | $110,130 | | Total debt | $116,947 | - The Company was in compliance with all financial covenants, including a fixed charge coverage ratio, as of December 31, 2022[45](index=45&type=chunk) [Note 5. Income Taxes](index=12&type=section&id=Note%205.%20Income%20Taxes) - The Company expects to repatriate approximately **$8.1 million** of foreign earnings in the future, which may incur approximately **$0.8 million** in withholding taxes from China[46](index=46&type=chunk)[47](index=47&type=chunk) - As of December 31, 2022, the Company has **$10.8 million** in gross federal research and development tax credits, with **$3.1 million** recorded as unrecognized tax benefits, resulting in a net deferred tax benefit of **$7.7 million**[48](index=48&type=chunk) - The Inflation Reduction Act of 2022 is being evaluated, but the Company does not currently believe it will have a material impact on its financial position, results of operations, or cash flows[49](index=49&type=chunk) [Note 6. Earnings Per Share](index=12&type=section&id=Note%206.%20Earnings%20Per%20Share) **EPS Reconciliation (in thousands, except per share):** | Metric | Three Months Ended Dec 31, 2022 | Three Months Ended Jan 1, 2022 | Six Months Ended Dec 31, 2022 | Six Months Ended Jan 1, 2022 | | :--------------------------------------- | :------------------------------ | :----------------------------- | :---------------------------- | :--------------------------- | | Net income | $967 | $587 | $2,119 | $1,402 | | Weighted average shares outstanding—basic | 10,762 | 10,762 | 10,762 | 10,762 | | Effect of dilutive common stock awards | 70 | 295 | 70 | 293 | | Weighted average shares outstanding—diluted | 10,832 | 11,057 | 10,832 | 11,055 | | Net income per share—basic | $0.09 | $0.05 | $0.20 | $0.13 | | Net income per share—diluted | $0.09 | $0.05 | $0.20 | $0.13 | | Antidilutive SARs not included | 904 | 629 | 904 | 619 | [Note 7. Share-based Compensation](index=13&type=section&id=Note%207.%20Share-based%20Compensation) - The Company's incentive plan offers various equity and liability awards, including SARs with performance conditions based on Return on Invested Capital (ROIC) goals[54](index=54&type=chunk)[55](index=55&type=chunk) **Share-based Compensation Expense (in thousands):** | Period | December 31, 2022 | January 1, 2022 | | :-------------------- | :---------------- | :-------------- | | Three Months Ended | $62 | $75 | | Six Months Ended | $102 | $143 | - As of December 31, 2022, total unrecognized compensation expense related to unvested share-based compensation was approximately **$0.5 million**, expected to be recognized over a weighted average period of **1.96 years**[57](index=57&type=chunk) [Note 8. Commitments and Contingencies](index=13&type=section&id=Note%208.%20Commitments%20and%20Contingencies) - The Company is involved in ordinary course lawsuits and claims, which management believes will not have a material adverse effect on financial position, results of operations, or cash flow[58](index=58&type=chunk) **Warranty Reserve (in thousands):** | Date | Amount | | :---------------- | :----- | | December 31, 2022 | $83 | | July 2, 2022 | $31 | - The Company recorded a gain from insurance recoveries, net of losses, of **$2.7 million** and **$3.6 million** for the three and six months ended December 31, 2022, respectively, due to storm damage at its Arkansas facility[61](index=61&type=chunk) [Note 9. Derivative Financial Instruments](index=14&type=section&id=Note%209.%20Derivative%20Financial%20Instruments) - As of December 31, 2022, the Company had no outstanding foreign currency forward contracts and did not enter into or settle any during the three and six months ended December 31, 2022[63](index=63&type=chunk)[64](index=64&type=chunk) - Previous interest rate swap contracts related to Wells Fargo Bank borrowings were terminated in August 2020 and their liability positions are being amortized to interest expense[65](index=65&type=chunk)[66](index=66&type=chunk) **Gain (Loss) on Derivative Instruments, Net of Tax (in thousands):** | Period | Unrealized gain (loss) on hedging instruments, net | | :-------------------- | :----------------------------------------------- | | Three Months Ended Dec 31, 2022 | $59 | | Six Months Ended Dec 31, 2022 | $212 | [Note 10. Revenue](index=15&type=section&id=Note%2010.%20Revenue) - For the majority of contracts, revenue is recognized 'over-time' using the input cost-to-cost method due to the unique nature of customer-specific products and enforceable right to payment[70](index=70&type=chunk) **Contract Assets Activity (in thousands) for Six Months Ended December 31, 2022:** | Metric | Amount | | :-------------------------- | :----- | | Beginning balance, July 2, 2022 | $21,974 | | Revenue recognized | $254,207 | | Amounts collected or invoiced | $(247,852) | | Ending balance, December 31, 2022 | $28,329 | **Disaggregation of Revenue (in thousands):** | Recognition Method | Three Months Ended Dec 31, 2022 | Three Months Ended Jan 1, 2022 | Six Months Ended Dec 31, 2022 | Six Months Ended Jan 1, 2022 | | :----------------- | :------------------------------ | :----------------------------- | :---------------------------- | :--------------------------- | | Over-Time | $119,649 | $128,126 | $254,207 | $257,607 | | Point-in-Time | $4,059 | $6,330 | $6,764 | $9,611 | | Total | $123,708 | $134,456 | $260,971 | $267,218 | [Note 11. Leases](index=17&type=section&id=Note%2011.%20Leases) **Total Lease Cost (in thousands):** | Period | December 31, 2022 | January 1, 2022 | | :-------------------- | :---------------- | :-------------- | | Three Months Ended | $4,744 | $2,482 | | Six Months Ended | $7,200 | $4,667 | **Lease Balances as of December 31, 2022 (in thousands):** | Metric | Operating Leases | Financing Leases | | :-------------------------------- | :--------------- | :--------------- | | Right of Use Assets | $18,652 | $10,258 | | Lease Liabilities | $18,652 | $9,006 | | Weighted-average remaining lease term (years) | 4.84 | 2.08 | | Weighted-average discount rate | 4.0% | 8.8% | **Future Undiscounted Lease Payments as of December 31, 2022 (in thousands):** | Fiscal Years Ending | Operating Leases | Finance Leases | | :------------------ | :--------------- | :------------- | | 2023 (remaining 6 months) | $2,877 | $2,607 | | 2024 | $5,048 | $3,960 | | 2025 | $3,987 | $2,539 | | 2026 | $3,365 | $107 | | 2027 | $2,464 | $71 | | Thereafter | $3,240 | — | | Total undiscounted lease payments | $20,981 | $9,284 | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=19&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the Company's financial performance, condition, and operations, including policies and risks [Overview](index=19&type=section&id=Overview) - Key Tronic is a leading contract manufacturer offering design and manufacturing services from facilities in the United States, Mexico, China, and Vietnam[84](index=84&type=chunk) - The Company provides full engineering services, materials management, worldwide manufacturing, assembly, in-house testing, and global distribution[84](index=84&type=chunk) - The mission is to provide superior manufacturing and engineering services at the lowest total cost for the highest quality products, fostering long-term mutually beneficial business relationships[86](index=86&type=chunk) [Executive Summary](index=20&type=section&id=Executive%20Summary) **Q2 Fiscal Year 2023 Financial Highlights (in millions, except EPS):** | Metric | Q2 FY23 | Q2 FY22 | Change (%) | | :-------------------- | :------ | :------ | :--------- | | Total Revenue | $123.7 | $134.5 | (8.0)% | | Gross Profit % | 7.2% | 7.3% | (0.1) pp | | Operating Income % | 2.9% | 1.2% | 1.7 pp | | Net Income | $1.0 | $0.6 | 66.7% | | Diluted EPS | $0.09 | $0.05 | 80.0% | - Revenue was delayed by approximately **$20 million** in Q2 FY23 due to a six-week delay in starting production for a large power equipment program, though production is now increasing in Q3[87](index=87&type=chunk)[104](index=104&type=chunk) - The concentration of net sales from the top three customers decreased to **27.7%** in Q2 FY23 from **33.3%** in the prior year, with expectations for further decrease[88](index=88&type=chunk) - Operating income and net income improved significantly, primarily driven by a **$2.7 million** gain on insurance claims related to storm damage[91](index=91&type=chunk)[92](index=92&type=chunk) - New programs were won in outdoor power equipment, battery management, automated sprinklers, and biometric sensor technology[93](index=93&type=chunk) - The Company maintains a strong balance sheet with a current ratio of **2.1** and a debt to equity ratio of **0.9** as of December 31, 2022, with sufficient liquidity[95](index=95&type=chunk) [Critical Accounting Policies and Estimates](index=21&type=section&id=CRITICAL%20ACCOUNTING%20POLICIES%20AND%20ESTIMATES) - Preparation of financial statements requires significant estimates and assumptions that affect reported amounts[97](index=97&type=chunk) - Revenue Recognition - Inactive, Obsolete, and Surplus Inventory Valuation - Allowance for Doubtful Accounts - Income Taxes [Results of Operations](index=22&type=section&id=RESULTS%20OF%20OPERATIONS) [Comparison of the Three Months Ended December 31, 2022 with the Three Months Ended January 1, 2022](index=22&type=section&id=Comparison%20of%20the%20Three%20Months%20Ended%20December%2031%2C%202022%20with%20the%20Three%20Months%20Ended%20January%201%2C%202022) **Three Months Ended Financial Performance (in thousands):** | Metric | Dec 31, 2022 | Jan 1, 2022 | $ Change | % Point Change | | :-------------------------------- | :----------- | :---------- | :------- | :------------- | | Net sales | $123,708 | $134,456 | $(10,748) | — % | | Gross profit | $8,920 | $9,808 | $(888) | (0.1)% | | Research, development and engineering | $2,287 | $2,498 | $(211) | (0.1)% | | Selling, general and administrative | $5,735 | $5,659 | $76 | 0.4 % | | Gain on insurance proceeds, net of losses | $(2,710) | — | $(2,710) | (2.2)% | | Operating income | $3,608 | $1,651 | $1,957 | 1.7 % | | Interest expense, net | $2,507 | $1,095 | $1,412 | 1.2 % | | Income before income taxes | $1,101 | $556 | $545 | 0.5 % | | Income tax provision | $134 | $(31) | $165 | 0.1 % | | Net income | $967 | $587 | $380 | 0.4 % | - Net sales decreased by **$10.7 million (8.0%)** primarily due to a six-week delay in a large power equipment program, which delayed approximately **$20 million** in revenue[103](index=103&type=chunk)[104](index=104&type=chunk) - Gross profit percentage slightly decreased from **7.3%** to **7.2%** due to business interruption from storm damage, preparations for sales growth, and increased labor costs[105](index=105&type=chunk) - Operating income increased by **$1.96 million**, largely driven by a **$2.7 million** gain on insurance proceeds[102](index=102&type=chunk)[108](index=108&type=chunk) - Interest expense increased by **$1.4 million** due to higher interest rates and an increased average balance on the line of credit[110](index=110&type=chunk) [Comparison of the Six Months Ended December 31, 2022 with the Six Months Ended January 1, 2022](index=23&type=section&id=Comparison%20of%20the%20Six%20Months%20Ended%20December%2031%2C%202022%20with%20the%20Six%20Months%20Ended%20January%201%2C%202022) **Six Months Ended Financial Performance (in thousands):** | Metric | Dec 31, 2022 | Jan 1, 2022 | $ Change | % Point Change | | :-------------------------------- | :----------- | :---------- | :------- | :------------- | | Net sales | $260,971 | $267,218 | $(6,247) | — % | | Cost of sales | $241,672 | $247,272 | $(5,600) | 0.1 % | | Gross profit | $19,299 | $19,946 | $(647) | (0.1)% | | Research, development and engineering | $4,583 | $4,947 | $(364) | (0.1)% | | Selling, general and administrative | $11,391 | $11,254 | $137 | 0.2 % | | Gain on insurance proceeds, net of losses | $(3,644) | — | $(3,644) | (1.4)% | | Operating income | $6,969 | $3,745 | $3,224 | 1.3 % | | Interest expense, net | $4,394 | $2,087 | $2,307 | 0.9 % | | Income before income taxes | $2,575 | $1,658 | $917 | 0.4 % | | Income tax provision | $456 | $256 | $200 | 0.1 % | | Net income | $2,119 | $1,402 | $717 | 0.3 % | - Net sales decreased by **$6.2 million (2.3%)** due to the delayed power equipment program, partially offset by successful ramp-up of new customer programs in Q1 FY23[114](index=114&type=chunk)[115](index=115&type=chunk) - Gross profit percentage slightly decreased from **7.5%** to **7.4%** due to storm damage, preparations for sales growth, and increased labor costs[116](index=116&type=chunk) - Operating income increased by **$3.2 million**, significantly influenced by a **$3.6 million** gain on insurance proceeds[113](index=113&type=chunk) - Interest expense increased by **$2.3 million** due to higher interest rates and an increased average balance on the line of credit[121](index=121&type=chunk) [Backlog](index=24&type=section&id=BACKLOG) **Order Backlog (in millions):** | Date | Amount | | :---------------- | :----- | | December 31, 2022 | $404.0 | | January 1, 2022 | $333.1 | - The increase in order backlog is attributed to increased demand and ongoing supply chain issues causing production delays[123](index=123&type=chunk) - Order backlog consists of purchase orders expected to ship within **12 months** but is not an accurate measure of future net sales due to potential changes in shipment dates[123](index=123&type=chunk) [Capital Resources and Liquidity](index=24&type=section&id=CAPITAL%20RESOURCES%20AND%20LIQUIDITY) **Net Cash Flow (in millions):** | Activity | Six Months Ended Dec 31, 2022 | Six Months Ended Jan 1, 2022 | | :-------------------- | :---------------------------- | :--------------------------- | | Operating activities | $(10.0) | $(10.5) | | Investing activities | $(0.4) | $(2.8) | | Financing activities | $9.5 | $10.9 | - Cash used in operating activities was primarily driven by increases in inventory and accounts receivable, partially offset by increases in accounts payable and other liabilities[125](index=125&type=chunk) - Cash used in investing activities decreased due to proceeds from insurance, while financing activities were mainly borrowings and repayments under the revolving line of credit[128](index=128&type=chunk)[130](index=130&type=chunk) - The Company believes projected cash from operations, available revolving credit, and leasing capabilities will meet future working and fixed capital requirements, despite anticipated slowdowns in collections and increasing inventory[132](index=132&type=chunk) - Approximately **$1.3 million** of cash was held by foreign subsidiaries as of December 31, 2022, with potential withholding taxes of **$32,000** for repatriation[133](index=133&type=chunk) [Off-Balance Sheet Arrangements and Contractual Obligations](index=25&type=section&id=OFF-BALANCE%20SHEET%20ARRANGEMENTS%20AND%20CONTRACTUAL%20OBLIGATIONS) - There have been no material changes in contractual obligations outside the ordinary course of business since July 2, 2022[134](index=134&type=chunk) [Risks and Uncertainties That May Affect Future Results](index=25&type=section&id=RISKS%20AND%20UNCERTAINTIES%20THAT%20MAY%20AFFECT%20FUTURE%20RESULTS) [Risks Related to Our Business and Strategy](index=25&type=section&id=RISKS%20RELATED%20TO%20OUR%20BUSINESS%20AND%20STRATEGY) - International operations in Mexico, China, and Vietnam are subject to risks including political/economic instability, regulatory changes, longer payment cycles, trade barriers, and natural disasters - Loss of tax incentives in foreign locations or restrictions on cash transfers could increase taxes or incur penalties - Quarterly operating results may fluctuate due to macroeconomic conditions, customer demand volatility, new program timing, and changes in pricing or material costs - Dependence on a small number of customers means a decline in sales from any major customer could materially affect the business - Reliance on a limited number of suppliers for critical components exposes the Company to supply shortages and price increases, potentially disrupting operations - The highly competitive contract manufacturing industry could lead to price reductions, reduced margins, and loss of market share - Fluctuations in foreign currency exchange rates, particularly the Mexican peso and Chinese renminbi, could increase operating costs, with current hedging only for Mexican peso expenses [Technology Risks](index=29&type=section&id=TECHNOLOGY%20RISKS) - Operations are subject to cyberattacks, which could lead to data breaches, operational disruptions, and increased costs - Disruptions to information systems, including outages or data loss, could adversely affect operations - Failure to maintain technological and manufacturing process expertise in a rapidly changing industry could harm the business [Risks Related to Capital and Financing](index=30&type=section&id=RISKS%20RELATED%20TO%20CAPITAL%20AND%20FINANCING) - Cash and cash equivalents are exposed to concentrations of credit risk with high credit quality institutions - Ability to secure and maintain sufficient credit arrangements is crucial; failure to renew or meet covenants could lead to immediate debt repayment - Adverse changes in interest rates for borrowings, particularly the revolving line of credit and term loan, could negatively affect financial condition, especially with the transition away from LIBOR - The Company's stock price is volatile and subject to wide fluctuations due to various factors, including operating results, market conditions, and internal investigations [Risks Related to Our Controls and Procedures and the Internal Investigation](index=30&type=section&id=RISKS%20RELATED%20TO%20OUR%20CONTROLS%20AND%20PROCEDURES%20AND%20THE%20INTERNAL%20INVESTIGATION) - A previously identified material weakness in internal control over financial reporting, though remediated, poses a risk if future deficiencies arise, potentially leading to misstatements or restatements - Matters related to the Audit Committee's internal investigation, including expenses, diversion of resources, regulatory investigations (SEC), and potential litigation, could adversely affect the business and financial condition - Inherent limitations in control systems mean there is no absolute assurance against errors, theft, or fraud, or timely reporting of all material information [Legal and Accounting Risks](index=31&type=section&id=LEGAL%20AND%20ACCOUNTING%20RISKS) - Involvement in various legal proceedings could result in substantial costs and diversion of resources, even for claims without merit - Changes in securities laws and regulations (e.g., Sarbanes-Oxley, Dodd-Frank) increase compliance costs and the risk of noncompliance - Changes in financial accounting standards (U.S. GAAP, FASB, SEC) may affect reported financial condition or results of operations and increase implementation costs [General Risks](index=32&type=section&id=GENERAL%20RISKS) - Insurance coverage levels may be insufficient for potential damages, claims, or losses, potentially negatively impacting net income - Complications with acquisitions, including financing, integration difficulties, loss of key personnel/customers, and exposure to unanticipated liabilities, could harm the business [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=33&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section details the Company's exposure to and management of market risks, including interest rate and foreign currency exchange risks - The Company is exposed to interest rate risk on its secured debt, including a **$107.6 million** asset-based senior secured revolving credit facility and **$7.8 million** in equipment financing facilities, which fluctuate with LIBOR rates[185](index=185&type=chunk) - Foreign currency exchange risk arises from operations in Mexico and China, where transactions occur in currencies other than the U.S. dollar. The Company uses Mexican peso forward contracts to hedge a portion of Mexican peso denominated expenses but had no outstanding contracts as of December 31, 2022[186](index=186&type=chunk) [Item 4. Controls and Procedures](index=33&type=section&id=Item%204.%20Controls%20and%20Procedures) This section reports on the evaluation of disclosure controls and procedures and internal control changes - Management, under the supervision of the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures and concluded they were effective as of December 31, 2022[187](index=187&type=chunk)[188](index=188&type=chunk) - There have been no significant changes in internal controls over financial reporting during the three months ended December 31, 2022, that materially affected or are reasonably likely to materially affect them[189](index=189&type=chunk) [PART II. OTHER INFORMATION](index=32&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=33&type=section&id=Item%201.%20Legal%20Proceedings) This section addresses the Company's involvement in legal actions arising in the ordinary course of business - The Company is involved in various legal actions in the ordinary course of business, which management believes will not have a material adverse effect on its consolidated financial position, results of operations, or cash flows[190](index=190&type=chunk) [Item 1A. Risk Factors](index=33&type=section&id=Item%201A.%20Risk%20Factors) This section refers to risk factors that could affect the Company's future results, as detailed elsewhere in the report - Information regarding risk factors is presented in Item 2, 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and Item 3, 'Quantitative and Qualitative Disclosures about Market Risk' of this Form 10-Q[191](index=191&type=chunk) - There are no material changes to the risk factors set forth in the Company's Annual Report on Form 10-K for the year ended July 2, 2022[191](index=191&type=chunk) [Item 6. Exhibits](index=34&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed as part of the Form 10-Q, including corporate documents, certifications, and XBRL data - 3.1 Articles of Incorporation - 3.2 Bylaws, as amended - 31.1 Certification of Chief Executive Officer - 31.2 Certification of Chief Financial Officer - 32.1 Certification of Chief Executive Officer (18 U.S.C. 1350) - 32.2 Certification of Chief Financial Officer (18 U.S.C. 1350) - 101.INS Inline XBRL Instance Document - 101.SCH Inline XBRL Taxonomy Extension Schema Document - 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document - 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document - 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document - 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document - 104 Cover Page Interactive Data File [Signatures](index=35&type=section&id=Signatures) This section contains the official signatures of the Company's authorized executive officers, certifying the report filing - The report is duly signed by Craig D. Gates, President and Chief Executive Officer, and Brett R. Larsen, Executive Vice President of Administration, Chief Financial Officer and Treasurer, on February 9, 2023[195](index=195&type=chunk)[197](index=197&type=chunk)

Key Tronic Corporation (NASDAQ:KTCC) Q2 2023 Earnings Conference Call January 31, 2023 5:00 PM ET Company Participants Brett Larsen - Chief Financial Officer Craig Gates - President and Chief Executive Officer Conference Call Participants Bill Dezellem - Tieton Capital Sheldon Grodsky - Grodsky Associates George Melas - MKH Management Operator Good day, and welcome to the Second Quarter Fiscal 2023 Key Tronic Corporation Conference Call. Today's conference is being recorded. At this time, I'd like to turn t ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________________________________________________________ FORM 10-Q ____________________________________________________________ ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD FROM TO . Commission File Number 0-11559 _____________________ ...

Key Tronic Corporation (NASDAQ:KTCC) Q1 2023 Earnings Conference Call November 1, 2022 5:00 PM ET Company Participants Brett Larsen – Chief Financial Officer Craig Gates – President and Chief Executive Officer Conference Call Participants Bill Dezellem – Tieton Capital Sheldon Grodsky – Grodsky Associates George Melas – MKH Management Operator Good day, ladies and gentlemen, and welcome to the First Quarter Fiscal 2023 Key Tronic Corporation Conference Call. Today’s conference is being recorded. At this tim ...

Washington, D.C. 20549 ____________________________________________________________ FORM 10-K ____________________________________________________________ UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD FROM TO Commission File Number 0-11559 ____________________________________________________________ KEY TRONIC CORPORATION (Exact name of registrant as specified in its charter) _____________________ ...

Key Tronic Corporation (NASDAQ:KTCC) Q4 2022 Earnings Conference Call August 9, 2022 5:00 PM ET Company Participants Brett Larsen - Chief Financial Officer Craig Gates - President and CEO Conference Call Participants Bill Dezellem - Tieton Capital Sheldon Grodsky - Grodsky Associates George Melas - MKH Management Operator Good day. And welcome to the Fourth Quarter and Year End Fiscal 2022 Key Tronic Corporation Conference Call. Today’s conference is being recorded. At this time, I would like to turn the co ...

PART I. FINANCIAL INFORMATION This section encompasses the unaudited condensed consolidated financial statements and management's discussion and analysis of Key Tronic Corporation's financial performance and condition [Item 1. Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20%28Unaudited%29) This section presents the unaudited condensed consolidated financial statements of Key Tronic Corporation and its subsidiaries, including balance sheets, statements of income, comprehensive income, cash flows, and shareholders' equity, along with detailed notes explaining the basis of presentation, significant accounting policies, and specific financial line items [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section presents the company's financial position, detailing assets, liabilities, and shareholders' equity at specific reporting dates Consolidated Balance Sheet Highlights (in thousands) | Metric | April 2, 2022 | July 3, 2021 | | :-------------------------------- | :------------ | :----------- | | Total current assets | $344,083 | $299,252 | | Total assets | $411,426 | $361,846 | | Total current liabilities | $164,338 | $126,705 | | Total liabilities | $287,400 | $238,141 | | Total shareholders' equity | $124,026 | $123,705 | [Condensed Consolidated Statements of Income](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income) This section outlines the company's financial performance over specific periods, reporting net sales, gross profit, operating income, and net income Consolidated Statements of Income Highlights (in thousands, except per share) | Metric | Three Months Ended April 2, 2022 | Three Months Ended April 3, 2021 | Nine Months Ended April 2, 2022 | Nine Months Ended April 3, 2021 | | :----------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Net sales | $138,391 | $134,600 | $405,609 | $386,069 | | Gross profit | $11,508 | $11,096 | $31,454 | $31,733 | | Operating income | $2,789 | $2,576 | $6,534 | $8,092 | | Net income | $1,007 | $867 | $2,409 | $4,166 | | Net income per share — Basic | $0.09 | $0.08 | $0.22 | $0.39 | | Net income per share — Diluted | $0.09 | $0.08 | $0.22 | $0.38 | [Condensed Consolidated Statements of Comprehensive Income](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) This section presents the company's total comprehensive income, including net income and other comprehensive income items like unrealized gains or losses on hedging instruments Consolidated Statements of Comprehensive Income Highlights (in thousands) | Metric | Three Months Ended April 2, 2022 | Three Months Ended April 3, 2021 | Nine Months Ended April 2, 2022 | Nine Months Ended April 3, 2021 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Net income | $1,007 | $867 | $2,409 | $4,166 | | Unrealized gain (loss) on hedging instruments, net of tax | $309 | $(632) | $(2,306) | $3,562 | | Comprehensive income | $1,316 | $235 | $103 | $7,728 | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section details the company's cash inflows and outflows from operating, investing, and financing activities over specific periods Consolidated Statements of Cash Flow Highlights (in thousands) | Activity | Nine Months Ended April 2, 2022 | Nine Months Ended April 3, 2021 | | :------------------------ | :------------------------------ | :------------------------------ | | Cash used in operating activities | $(11,636) | $(17,684) | | Cash used in investing activities | $(4,074) | $(9,655) | | Cash provided by financing activities | $13,959 | $28,067 | | Net (decrease) increase in cash and cash equivalents | $(1,751) | $728 | | Cash and cash equivalents, end of period | $1,722 | $1,281 | [Condensed Consolidated Statements of Shareholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders%27%20Equity) This section provides a detailed breakdown of changes in the company's shareholders' equity, including common stock, retained earnings, and accumulated other comprehensive income Consolidated Statements of Shareholders' Equity Highlights (in thousands) | Metric | April 2, 2022 (Ending Balance) | April 3, 2021 (Ending Balance) | | :----------------------------------- | :----------------------------- | :----------------------------- | | Total shareholders' equity | $124,026 | $123,460 | | Common stock | $47,399 | $47,121 | | Retained Earnings | $76,861 | $74,277 | | Accumulated other comprehensive income | $(234) | $2,062 | [Notes to Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements, covering accounting policies, estimates, and specific financial line items [Note 1. Basis of Presentation](index=8&type=section&id=1.%20Basis%20of%20Presentation) This note describes the basis for preparing the unaudited financial statements, including compliance with SEC rules, management estimates, and the impact of the COVID-19 pandemic - The financial statements are unaudited and prepared in accordance with SEC rules, condensing certain annual disclosures, with management's estimates and assumptions being crucial, and interim results potentially not predicting full-year outcomes[21](index=21&type=chunk) - The Company's fiscal year ends on the Saturday closest to June 30, with the three-month period ended April 2, 2022, being **13 weeks**, compared to **14 weeks** in the prior year's comparable period[22](index=22&type=chunk) - The COVID-19 pandemic has caused significant shifts in demand, supply chain, and logistics risks, potentially impacting future operating results due to closures, costs, labor shortages, and currency fluctuations[23](index=23&type=chunk) [Note 2. Significant Accounting Policies](index=8&type=section&id=2.%20Significant%20Accounting%20Policies) This note outlines the key accounting policies applied in the financial statements, including reclassifications, foreign currency hedging, and the assessment of new accounting standards - Certain prior period reclassifications were made for presentation consistency, with **no impact** on reported income, comprehensive income, cash flows, total assets, or shareholders' equity[24](index=24&type=chunk) - The Company uses foreign currency forward contracts as cash flow hedges to manage variability in Mexican peso-denominated expenses, with gains/losses reported in AOCI and reclassified to earnings[26](index=26&type=chunk)[27](index=27&type=chunk) - The Company is assessing the impact of recently issued accounting standards, including ASU 2021-01 (Reference Rate Reform), ASU 2020-03 (Codification Improvements to Financial Instruments), and ASU 2016-13 (Credit Losses), with plans to adopt them as they become effective[32](index=32&type=chunk)[33](index=33&type=chunk)[34](index=34&type=chunk) [Note 3. Inventories](index=10&type=section&id=3.%20Inventories) This note details the composition and value of the company's inventory, primarily consisting of raw materials Total Inventory (in millions) | Date | Amount | | :------------ | :----------- | | April 2, 2022 | $155.1 | | July 3, 2021 | $137.3 | - Substantially all inventory balances consist of raw materials[35](index=35&type=chunk) [Note 4. Long-Term Debt](index=10&type=section&id=4.%20Long-Term%20Debt) This note provides information on the company's long-term debt, including credit facility amendments, outstanding balances, interest rates, and covenant compliance - The Company amended its loan agreement with Bank of America on September 3, 2021, increasing the credit facility from **$93 million to $120 million**, maturing September 3, 2026[36](index=36&type=chunk) Revolving Credit Facility Outstanding Balance (in millions) | Date | Outstanding Balance | | :------------ | :------------------ | | April 2, 2022 | $99.7 | | July 3, 2021 | $90.9 | - As of April 2, 2022, **$15.8 million** was available for future borrowings under the revolving credit facility[36](index=36&type=chunk) - Interest rates on outstanding debt as of April 2, 2022, range from **3.25% to 5.52%**, consistent with July 3, 2021[42](index=42&type=chunk) - The Company was in compliance with all financial covenants (fixed charge coverage ratio and cash flow leverage ratio) as of April 2, 2022[45](index=45&type=chunk) [Note 5. Income Taxes](index=11&type=section&id=5.%20Income%20Taxes) This note discusses the company's income tax provisions, including expected foreign earnings repatriation, withholding taxes, tax credits, and tax holidays - The Company expects to repatriate approximately **$7.5 million** of foreign earnings in the future, primarily for domestic capital requirements, potential acquisitions, and tax strategies[46](index=46&type=chunk) - Future repatriations from China may incur approximately **$0.8 million** in withholding tax, with no anticipated offsetting foreign tax credits in the U.S[47](index=47&type=chunk) - As of April 2, 2022, the Company has **$7.0 million** in gross federal research and development tax credits, with **$2.7 million** recorded as unrecognized tax benefits[48](index=48&type=chunk) - Vietnam was awarded a tax holiday, resulting in a **zero percent tax rate for four years** starting FY2021, then **five percent for nine years**, and **ten percent for one year**, with a valuation allowance recorded against the Vietnam net operating loss deferred tax asset (**$0.2 million**) in Q3 FY2021[51](index=51&type=chunk) [Note 6. Earnings Per Share](index=11&type=section&id=6.%20Earnings%20Per%20Share) This note reconciles basic and diluted earnings per share, detailing the calculation of weighted average shares outstanding and the impact of dilutive awards EPS Reconciliation (in thousands, except per share) | Metric | Three Months Ended April 2, 2022 | Three Months Ended April 3, 2021 | Nine Months Ended April 2, 2022 | Nine Months Ended April 3, 2021 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Net income | $1,007 | $867 | $2,409 | $4,166 | | Weighted average shares outstanding—basic | 10,762 | 10,760 | 10,762 | 10,760 | | Effect of dilutive common stock awards | 300 | 669 | 297 | 280 | | Weighted average shares outstanding—diluted | 11,062 | 11,429 | 11,059 | 11,040 | | Net income per share—basic | $0.09 | $0.08 | $0.22 | $0.39 | | Net income per share—diluted | $0.09 | $0.08 | $0.22 | $0.38 | | Antidilutive SARs not included | 619 | 188 | 619 | 314 | [Note 7. Share-based Compensation](index=12&type=section&id=7.%20Share-based%20Compensation) This note describes the company's share-based incentive plans, compensation expense recognition, and unrecognized compensation expense for unvested awards - The Company's incentive plan offers various equity and liability awards to employees and non-employee directors, with compensation cost recognized over the vesting period[55](index=55&type=chunk) - Stock Appreciation Rights (SARs) include a performance condition based on Return on Invested Capital (ROIC) goals relative to a peer group, vesting after three years and expiring in five[56](index=56&type=chunk) Share-based Compensation Expense (in thousands) | Period | Amount | | :--------------------------------------- | :----------- | | Three months ended April 2, 2022 | $75 | | Three months ended April 3, 2021 | $18 | | Nine months ended April 2, 2022 | $218 | | Nine months ended April 3, 2021 | $132 | - As of April 2, 2022, total unrecognized compensation expense for unvested share-based arrangements was approximately **$0.5 million**, expected to be recognized over a weighted average period of **1.98 years**[58](index=58&type=chunk) [Note 8. Commitments and Contingencies](index=13&type=section&id=8.%20Commitments%20and%20Contingencies) This note outlines the company's involvement in legal actions and details warranty reserves, assessing their potential financial impact - The Company is involved in ordinary course lawsuits and claims, but management believes these will not materially adversely affect financial position, results of operations, or cash flow[59](index=59&type=chunk) - Warranty reserves were approximately **$28,000** as of April 2, 2022, and **$25,000** as of July 3, 2021, based on estimates of product return rates and repair/replacement costs[60](index=60&type=chunk) [Note 9. Derivative Financial Instruments](index=13&type=section&id=9.%20Derivative%20Financial%20Instruments) This note describes the company's use of derivative financial instruments, primarily foreign currency forward contracts, for hedging purposes and their fair value - As of April 2, 2022, the Company had **$6.7 million** in outstanding foreign currency forward contracts, maturing through June 2022, with an estimated fair value of **$344,000**[61](index=61&type=chunk)[63](index=63&type=chunk) - For the nine months ended April 2, 2022, the Company entered into **$13.9 million** of foreign currency forward contracts and settled **$17.8 million**[62](index=62&type=chunk) - Previous interest rate swap contracts related to Wells Fargo Bank term loan and line of credit were terminated on August 14, 2020, and their liability positions are being amortized to interest expense[63](index=63&type=chunk)[64](index=64&type=chunk) - The net unrealized gain expected to be reclassified into earnings within the next 12 months is approximately **$267,000** as of April 2, 2022[66](index=66&type=chunk) [Note 10. Fair Value Measurements](index=15&type=section&id=10.%20Fair%20Value%20Measurements) This note explains the fair value measurement of financial instruments, particularly foreign currency forward contracts, using observable market data - Foreign currency forward contracts are measured on a recurring basis using **Level 2 inputs** (observable market data) and qualify for hedge accounting, with unrealized gains or losses reported in AOCI[67](index=67&type=chunk) Fair Value of Financial Assets (in thousands) | Financial Assets | April 2, 2022 (Level 2) | July 3, 2021 (Level 2) | | :-------------------------------- | :---------------------- | :--------------------- | | Foreign currency forward contracts | $344 | $3,614 | - The carrying values of cash, receivables, and current liabilities approximate their fair value, and long-term debt (revolving credit facility, lease liability, equipment loan) also approximates fair value due to variable floating interest rates[68](index=68&type=chunk)[69](index=69&type=chunk) [Note 11. Revenue](index=15&type=section&id=11.%20Revenue) This note details the company's revenue recognition policies, distinguishing between 'over-time' and 'point-in-time' methods and providing a disaggregation of revenue - Revenue recognition primarily involves manufacturing service agreements (MSAs) and customer purchase orders, with transaction prices fixed and no significant variable pricing components[70](index=70&type=chunk) - For most contracts, revenue is recognized 'over-time' using the input cost-to-cost method, as products are customer-specific with no alternative use and the Company has an enforceable right to payment[72](index=72&type=chunk) - For other contracts, revenue is recognized 'point-in-time' upon shipment, while revenue from engineering services is recognized over time as performed[72](index=72&type=chunk) Disaggregation of Revenue (in thousands) | Recognition Method | Three Months Ended April 2, 2022 | Three Months Ended April 3, 2021 | Nine Months Ended April 2, 2022 | Nine Months Ended April 3, 2021 | | :----------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Over-Time | $134,980 | $133,124 | $392,587 | $379,494 | | Point-in-Time | $3,411 | $1,476 | $13,022 | $6,575 | | Total | $138,391 | $134,600 | $405,609 | $386,069 | [Note 12. Leases](index=17&type=section&id=12.%20Leases) This note provides information on the company's operating and financing leases, including lease costs, liabilities, right-of-use assets, and weighted-average lease terms - The Company holds operating and financing leases for facilities and equipment, with initial terms ranging from **1 to 10 years**[77](index=77&type=chunk) Total Lease Cost (in thousands) | Lease Type | Three Months Ended April 2, 2022 | Nine Months Ended April 2, 2022 | | :--------------- | :------------------------------- | :------------------------------ | | Operating lease cost | $1,829 | $5,418 | | Financing lease cost | $278 | $1,356 | | Total lease cost | $2,107 | $6,774 | Lease Liabilities and Right-of-Use Assets (in thousands) | Metric | April 2, 2022 | | :----------------------------------- | :------------ | | Operating lease right of use assets | $17,838 | | Operating lease liabilities | $17,796 | | Financing lease right of use assets | $9,698 | | Financing lease liabilities | $8,757 | - Weighted-average remaining lease terms are **5.39 years** for operating leases (**4.0% discount rate**) and **2.69 years** for financing leases (**8.5% discount rate**)[77](index=77&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=18&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the Company's financial performance, condition, and future outlook, discussing key operational results, liquidity, and the various risks and uncertainties that could impact the business [Overview](index=18&type=section&id=Overview) This section introduces Key Tronic as a leading contract manufacturer, highlighting its comprehensive services, international capabilities, and mission to deliver superior manufacturing solutions - Key Tronic is a leading contract manufacturer offering design and manufacturing services from facilities in the United States, Mexico, China, and Vietnam[82](index=82&type=chunk) - The Company provides full engineering services, materials management, worldwide manufacturing, assembly, in-house testing, and global distribution[82](index=82&type=chunk) - International production capabilities offer benefits like improved supply-chain management, reduced inventories, lower transportation costs, and faster product fulfillment[83](index=83&type=chunk) - The Company's mission is to deliver superior manufacturing and engineering services at the lowest total cost for high-quality products, fostering long-term relationships through its 'Trust, Commitment, Results' philosophy[84](index=84&type=chunk) [Executive Summary](index=19&type=section&id=Executive%20Summary) This section provides a high-level overview of the company's recent financial performance, key operational highlights, and strategic positioning for future growth Q3 FY22 Financial Highlights (in millions, except per share) | Metric | Q3 FY22 | Q3 FY21 | Change (%) | | :----------------- | :----------- | :----------- | :--------- | | Total Revenue | $138.4 | $134.6 | 2.8% | | Gross Profit % | 8.3% | 8.2% | +0.1 pp | | Operating Income % | 2.0% | 1.9% | +0.1 pp | | Net Income | $1.0 | $0.9 | 11.1% | | Diluted EPS | $0.09 | $0.08 | 12.5% | - Revenue growth was constrained by global supply chain and transportation issues, despite higher customer demand[85](index=85&type=chunk) - Concentration of top three customers' net sales decreased to **34.4%** in Q3 FY22 from **37.9%** in Q3 FY21, as new customer programs ramped[86](index=86&type=chunk) - Net income for Q3 FY22 was impacted by approximately **$0.06 per diluted share** in legal costs related to the SEC's review of a whistleblower complaint[88](index=88&type=chunk) - The Company won new programs in outdoor recreation, RFID, industrial connectivity, and electric mobility products during Q3 FY22, anticipating significant growth in fiscal 2023 and beyond[89](index=89&type=chunk) - Global events like the war in Ukraine and China's COVID lockdowns are driving a favorable trend of contract manufacturing returning to North America, positioning the Company for demand growth[90](index=90&type=chunk) - The Company maintains a strong balance sheet with a current ratio of **2.1** and a debt-to-equity ratio of **0.9** as of April 2, 2022, with **$15.8 million** available on its revolving credit facility[93](index=93&type=chunk) [Critical Accounting Policies and Estimates](index=20&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section discusses the significant estimates and assumptions required for preparing financial statements and outlines the critical accounting policies that impact reported results - The preparation of consolidated financial statements requires significant estimates and assumptions, which are based on historical results and future expectations, and actual results may vary[94](index=94&type=chunk) - Critical accounting policies include Revenue Recognition, Inactive, Obsolete, and Surplus Inventory Reserve, Allowance for Doubtful Accounts, Accrued Warranty, Income Taxes, Share-Based Compensation, Impairment of Long-Lived Assets, Derivatives and Hedging Activity, and Long-Term Incentive Compensation Accrual[97](index=97&type=chunk) [Results of Operations](index=21&type=section&id=Results%20of%20Operations) This section analyzes the company's financial performance over specific periods, detailing changes in net sales, gross profit, operating expenses, and net income [Comparison of the Three Months Ended April 2, 2022 with the Three Months Ended April 3, 2021](index=21&type=section&id=Comparison%20of%20the%20Three%20Months%20Ended%20April%202%2C%202022%20with%20the%20Three%20Months%20Ended%20April%203%2C%202021) This section compares the company's financial performance for the three-month periods, highlighting changes in key revenue and expense metrics Q3 FY22 vs Q3 FY21 Financial Performance (in thousands) | Metric | April 2, 2022 | % of Net Sales | April 3, 2021 | % of Net Sales | $ Change | % Point Change | | :----------------------------------- | :------------ | :------------- | :------------ | :------------- | :------- | :------------- | | Net sales | $138,391 | 100.0% | $134,600 | 100.0% | $3,791 | —% | | Gross profit | $11,508 | 8.3% | $11,096 | 8.2% | $412 | 0.1% | | Research, development and engineering | $2,526 | 1.8% | $2,655 | 2.0% | $(129) | (0.2)% | | Selling, general and administrative | $6,193 | 4.5% | $5,865 | 4.4% | $328 | 0.1% | | Operating income | $2,789 | 2.0% | $2,576 | 1.9% | $213 | 0.1% | | Interest expense, net | $1,551 | 1.1% | $1,020 | 0.8% | $531 | 0.3% | | Income before income taxes | $1,238 | 0.9% | $1,556 | 1.2% | $(318) | (0.3)% | | Income tax provision | $231 | 0.2% | $689 | 0.5% | $(458) | (0.3)% | | Net income | $1,007 | 0.7% | $867 | 0.6% | $140 | 0.1% | - Net sales increased by **2.8%** due to new customer programs and increased demand, but were constrained by global supply chain and logistics issues[100](index=100&type=chunk)[101](index=101&type=chunk) - Gross profit margin improved by **0.1 percentage point to 8.3%**, driven by increased sales, partially offset by supply chain constraints and COVID-19 related expenses[102](index=102&type=chunk) - RD&E expenses decreased by **$0.1 million** due to lower engineering payroll, while SG&A expenses increased by **$0.3 million** primarily due to higher legal expenses related to an internal investigation[106](index=106&type=chunk)[107](index=107&type=chunk) - Interest expense increased by **$0.5 million** due to a higher average balance on the line of credit and increased interest rates[108](index=108&type=chunk) - The effective tax rate decreased to **18.7%** from **44.3%** primarily due to a valuation allowance against Vietnam's net operating loss deferred tax asset and a true-up of federal R&D tax credits in the prior year[109](index=109&type=chunk) [Comparison of the Nine Months Ended April 2, 2022 with the Nine Months Ended April 3, 2021](index=22&type=section&id=Comparison%20of%20the%20Nine%20Months%20Ended%20April%202%2C%202022%20with%20the%20Nine%20Months%20Ended%20April%203%2C%202021) This section compares the company's financial performance for the nine-month periods, detailing changes in net sales, profitability, and tax rates Nine Months Ended April 2, 2022 vs April 3, 2021 Financial Performance (in thousands) | Metric | April 2, 2022 | % of Net Sales | April 3, 2021 | % of Net Sales | $ Change | % Point Change | | :----------------------------------- | :------------ | :------------- | :------------ | :------------- | :--------- | :------------- | | Net sales | $405,609 | 100.0% | $386,069 | 100.0% | $19,540 | —% | | Gross profit | $31,454 | 7.8% | $31,733 | 8.2% | $(279) | (0.4)% | | Research, development and engineering | $7,473 | 1.8% | $7,292 | 1.9% | $181 | (0.1)% | | Selling, general and administrative | $17,447 | 4.3% | $16,349 | 4.2% | $1,098 | 0.1% | | Operating income | $6,534 | 1.6% | $8,092 | 2.1% | $(1,558) | (0.5)% | | Interest expense, net | $3,638 | 0.9% | $2,549 | 0.7% | $1,089 | 0.2% | | Income before income taxes | $2,896 | 0.7% | $5,543 | 1.4% | $(2,647) | (0.7)% | | Income tax provision | $487 | 0.1% | $1,377 | 0.4% | $(890) | (0.3)% | | Net income | $2,409 | 0.6% | $4,166 | 1.1% | $(1,757) | (0.5)% | | Effective income tax rate | 16.8% | | 24.8% | | | | - Net sales increased by **5.1%** due to new customer programs and increased demand, but were constrained by global supply chain and logistics issues[112](index=112&type=chunk)[113](index=113&type=chunk) - Gross profit margin decreased by **0.4 percentage points to 7.8%**, primarily due to supply chain constraints and COVID-19 related expenses[114](index=114&type=chunk) - RD&E expenses increased by **$0.2 million** due to higher engineering payroll, while SG&A expenses increased by **$1.1 million** primarily due to higher legal expenses related to an internal investigation[116](index=116&type=chunk)[117](index=117&type=chunk) - Interest expense increased by **$1.1 million** due to a higher average balance on the line of credit and increased interest rates[118](index=118&type=chunk) - The effective tax rate decreased to **16.8%** from **24.8%** primarily due to a valuation allowance against Vietnam's net operating loss deferred tax asset and a true-up of federal R&D tax credits in the prior year[119](index=119&type=chunk) [Backlog](index=24&type=section&id=BACKLOG) This section provides an overview of the company's order backlog, explaining its increase due to demand and supply chain issues, and its expected shipment timeframe Order Backlog (in millions) | Date | Amount | | :------------ | :----------- | | April 2, 2022 | $384.1 | | April 3, 2021 | $236.6 | - The significant increase in order backlog is attributed to higher demand and increasing supply chain issues delaying production[120](index=120&type=chunk) - Order backlog consists of purchase orders expected to ship within the next 12 months, but shipment dates are subject to change[120](index=120&type=chunk) [Capital Resources and Liquidity](index=24&type=section&id=CAPITAL%20RESOURCES%20AND%20LIQUIDITY) This section discusses the company's cash flow from operating, investing, and financing activities, its available credit, and its ability to meet future capital requirements Net Cash Flow from Operating Activities (in millions) | Period | Amount | | :----------------------------------- | :----------- | | Nine months ended April 2, 2022 | $(11.6) | | Nine months ended April 3, 2021 | $(17.7) | - Cash used in operating activities for the nine months ended April 2, 2022, was primarily due to increases in accounts receivable (**$27.6 million**) and inventory (**$18.3 million**), partially offset by an increase in accounts payable (**$32.4 million**)[122](index=122&type=chunk) Cash Flow from Investing and Financing Activities (in millions) | Activity | Nine Months Ended April 2, 2022 | Nine Months Ended April 3, 2021 | | :----------------------------------- | :------------------------------ | :------------------------------ | | Cash used in investing activities | $(4.1) | $(9.7) | | Cash provided by financing activities | $14.0 | $28.1 | - Primary investing activity was purchasing equipment for increased production, while financing activities were dominated by borrowings and repayments under the revolving line of credit and term loans[125](index=125&type=chunk)[127](index=127&type=chunk) - As of April 2, 2022, **$15.8 million** was available under the asset-based revolving credit facility[127](index=127&type=chunk) - The Company believes projected cash from operations, revolving credit, and leasing will meet future capital requirements, with approximately **$1.7 million** of cash held by foreign subsidiaries, incurring an estimated **$43,000** in withholding taxes for repatriation[128](index=128&type=chunk) [Off-Balance Sheet Arrangements and Contractual Obligations](index=24&type=section&id=OFF-BALANCE%20SHEET%20ARRANGEMENTS%20AND%20CONTRACTUAL%20OBLIGATIONS) This section confirms that there have been no material changes to the company's contractual obligations or off-balance sheet arrangements since the last annual report - There have been no material changes in contractual obligations outside the ordinary course of business since July 3, 2021[129](index=129&type=chunk) [Risks and Uncertainties that May Affect Future Results](index=25&type=section&id=RISKS%20AND%20UNCERTAINTIES%20THAT%20MAY%20AFFECT%20FUTURE%20RESULTS) This section identifies various risks and uncertainties, including operational, technological, financial, and legal factors, that could materially impact the company's future financial results [RISKS RELATED TO OUR BUSINESS AND STRATEGY](index=25&type=section&id=RISKS%20RELATED%20TO%20OUR%20BUSINESS%20AND%20STRATEGY) This section details risks associated with international operations, market fluctuations, customer and supplier dependency, foreign currency, and new program inefficiencies - Operations in Mexico, China, Vietnam, and the U.S. are subject to risks including political/economic instability, regulatory changes, longer payment cycles, trade barriers, and natural disasters[131](index=131&type=chunk)[136](index=136&type=chunk) - Quarterly results can fluctuate due to macroeconomic conditions, customer demand volatility, new program timing, and pricing changes, with COVID-19 causing extreme demand shifts and supply chain disruptions[133](index=133&type=chunk)[136](index=136&type=chunk) - The Company is highly dependent on a small number of customers; a decline in sales or loss of major customers could materially affect the business[139](index=139&type=chunk)[140](index=140&type=chunk) - Reliance on a limited number of suppliers for critical components exposes the Company to shortages and price increases, which can interrupt operations and delay shipments[141](index=141&type=chunk)[142](index=142&type=chunk) - Fluctuations in foreign currency exchange rates, particularly the Mexican peso and Chinese renminbi, can increase operating costs, though Mexican peso expenses are partially hedged[145](index=145&type=chunk) - Start-up costs and inefficiencies from new or transferred programs can adversely affect operating results, and these costs may not be recoverable if programs are canceled or fail to meet sales volumes[148](index=148&type=chunk) [TECHNOLOGY RISKS](index=28&type=section&id=TECHNOLOGY%20RISKS) This section outlines risks related to cybersecurity threats, information system disruptions, and the necessity of maintaining technological and manufacturing expertise - The Company is exposed to cyberattacks, which could disrupt operations, lead to misappropriation of confidential information, and incur significant mitigation costs[157](index=157&type=chunk)[158](index=158&type=chunk)[159](index=159&type=chunk) - Disruptions to information systems, including data loss or outages due to various events, could adversely affect critical functions like financial reporting and inventory management[160](index=160&type=chunk) - Failure to maintain technological and manufacturing process expertise in a rapidly changing industry could adversely affect the business, as customer success depends on timely new product introductions[161](index=161&type=chunk) [RISKS RELATED TO CAPITAL AND FINANCING](index=29&type=section&id=RISKS%20RELATED%20TO%20CAPITAL%20AND%20FINANCING) This section addresses risks concerning credit arrangements, interest rate fluctuations, stock price volatility, and the management of cash and cash equivalents - Cash and cash equivalents are exposed to credit risk from high-credit quality institutions, with balances potentially exceeding federal depository insurance limits[162](index=162&type=chunk) - The ability to secure and maintain sufficient credit arrangements is crucial; failure to renew agreements or meet financial covenants could lead to immediate debt repayment[163](index=163&type=chunk) - Exposure to interest rate risk on the revolving line of credit and term loan means significant changes in interest rates could adversely affect results, especially with the transition away from LIBOR[164](index=164&type=chunk)[165](index=165&type=chunk) - The Company's stock price is volatile, subject to fluctuations from operating results, earnings estimates, the Audit Committee's internal investigation, and broader market conditions[166](index=166&type=chunk) [RISKS RELATED TO OUR CONTROLS AND PROCEDURES AND THE INTERNAL INVESTIGATION](index=30&type=section&id=RISKS%20RELATED%20TO%20OUR%20CONTROLS%20AND%20PROCEDURES%20AND%20THE%20INTERNAL%20INVESTIGATION) This section discusses risks related to internal control weaknesses, the ongoing internal investigation, potential regulatory inquiries, and the inherent limitations of control systems - A previously identified material weakness in internal control over financial reporting, though remediated as of July 3, 2021, could recur, potentially leading to misstatements or restatements[167](index=167&type=chunk)[168](index=168&type=chunk) - Matters related to the Audit Committee's internal investigation, including legal, accounting, and professional service expenses, regulatory inquiries (e.g., SEC), and potential litigation, could adversely affect the business[169](index=169&type=chunk)[170](index=170&type=chunk)[171](index=171&type=chunk) - Inherent limitations in control systems mean they cannot prevent all errors or fraud, and misstatements may occur and go undetected[172](index=172&type=chunk) [LEGAL AND ACCOUNTING RISKS](index=31&type=section&id=LEGAL%20AND%20ACCOUNTING%20RISKS) This section covers risks arising from legal proceedings, changes in securities laws and regulations, and modifications to financial accounting standards - Involvement in various legal proceedings, even without merit, can result in substantial costs and diversion of resources, potentially affecting financial condition and results of operations[173](index=173&type=chunk) - Changes in securities laws and regulations (e.g., Sarbanes-Oxley, Dodd-Frank) increase compliance costs, legal, financial, and accounting expenses, and the risk of noncompliance[174](index=174&type=chunk) - Changes in financial accounting standards (U.S. GAAP) can significantly affect reported financial condition or results, and increase implementation costs and internal control modifications[175](index=175&type=chunk) [GENERAL RISKS](index=31&type=section&id=GENERAL%20RISKS) This section addresses broader risks such as insufficient insurance coverage and the inherent challenges and potential adverse impacts of acquisitions - Insurance coverage may not be sufficient for all potential damages, claims, or losses, and a significant uninsured claim could negatively impact net income[176](index=176&type=chunk) - Acquisitions involve numerous risks, including potential loss of key employees/customers, internal control deficiencies, liquidity constraints, and unanticipated liabilities, which could harm profitability and operating results[178](index=178&type=chunk)[179](index=179&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=32&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section details the Company's exposure to market risks, specifically interest rate risk on its secured debt and foreign currency exchange risk from international operations, and the strategies employed to manage these risks - The Company is exposed to fluctuating interest rates on its secured debt, including a **$99.7 million** asset-based senior secured revolving credit facility and **$8.4 million** in equipment financing facilities, which fluctuate with LIBOR rates[180](index=180&type=chunk) - Foreign currency exchange risk arises from operations in foreign locations, with transactions in currencies other than the U.S. dollar, and the Company uses Mexican peso forward contracts to hedge a portion of its Mexican peso-denominated expenses[181](index=181&type=chunk) - As of April 2, 2022, **$6.7 million** of foreign currency forward contracts were outstanding with a fair value of **$344,000**[181](index=181&type=chunk) [Item 4. Controls and Procedures](index=32&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms management's evaluation of the effectiveness of the Company's disclosure controls and procedures and reports on any significant changes in internal control over financial reporting - Management, under the supervision of the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures and concluded they were effective as of April 2, 2022[182](index=182&type=chunk)[183](index=183&type=chunk) - There have been no significant changes in internal controls over financial reporting during the three months ended April 2, 2022, that materially affected or are reasonably likely to materially affect them[184](index=184&type=chunk) PART II. OTHER INFORMATION This section includes additional information not covered in the financial statements, such as legal proceedings, risk factors, exhibits, and official signatures [Item 1. Legal Proceedings](index=33&type=section&id=Item%201.%20Legal%20Proceedings) This section addresses the Company's involvement in legal actions, stating management's opinion on their potential impact - The Company is involved in various legal actions arising in the ordinary course of business[185](index=185&type=chunk) - Management believes the ultimate disposition of these matters will not have a material adverse effect on the consolidated financial position, results of operations, or cash flows[185](index=185&type=chunk) [Item 1A. Risk Factors](index=33&type=section&id=Item%201A.%20Risk%20Factors) This section refers to the comprehensive discussion of risk factors detailed elsewhere in the report - Information regarding risk factors is provided in Item 2, 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and Item 3, 'Quantitative and Qualitative Disclosures about Market Risk' of this Form 10-Q[186](index=186&type=chunk) - There are no material changes to the risk factors set forth in Part I Item 1A in the Company's Annual Report on Form 10-K for the year ended July 3, 2021[186](index=186&type=chunk) [Item 6. Exhibits](index=33&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed as part of the Form 10-Q, including corporate documents, certifications, and XBRL-related files - The exhibits include Articles of Incorporation, Bylaws, Certifications of Chief Executive Officer and Chief Financial Officer (pursuant to Exchange Act Rules and 18 U.S.C. 1350), and various Inline XBRL documents[187](index=187&type=chunk) [Signatures](index=34&type=section&id=Signatures) This section contains the official signatures of the registrant's authorized officers, affirming the due submission of the report - The report is duly signed on behalf of Key Tronic Corporation by Craig D. Gates, President and Chief Executive Officer, and Brett R. Larsen, Executive Vice President of Administration, Chief Financial Officer and Treasurer, on May 11, 2022[189](index=189&type=chunk)[191](index=191&type=chunk)