Key Tronic Corporation (NASDAQ:KTCC) Q3 2022 Earnings Conference Call May 5, 2022 5:00 PM ET Company Participants Brett Larsen – Chief Financial Officer Craig Gates – President & Chief Executive Officer Conference Call Participants Bill Dezellem – Tieton Capital Sheldon Grodsky – Grodsky & Associates George Melas – MKH Management Bill Dezellem – Tieton Capital Operator Good day and welcome to the Q3 Fiscal 2022 Key Tronic Corporation Conference Call. Today's conference is being recorded. At this time, I'd l ...

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) The unaudited statements show increased assets and liabilities, with higher sales but lower net income and a cash use from operations [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets and liabilities grew, driven by higher inventories and accounts payable, while shareholders' equity slightly decreased Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | January 1, 2022 | July 3, 2021 | | :--- | :--- | :--- | | **Total current assets** | $343,551 | $299,252 | | Inventories, net | $157,750 | $137,329 | | **Total assets** | **$410,507** | **$361,846** | | **Total current liabilities** | $167,128 | $126,705 | | Accounts payable | $131,842 | $92,823 | | Revolving loan | $96,435 | $90,362 | | **Total liabilities** | **$287,872** | **$238,141** | | **Total shareholders' equity** | **$122,635** | **$123,705** | [Condensed Consolidated Statements of Income](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income) Quarterly and six-month net sales increased, but higher costs led to a significant decline in net income Consolidated Income Statement Summary (in thousands, except per share data) | Metric | Three Months Ended Jan 1, 2022 | Three Months Ended Dec 26, 2020 | Six Months Ended Jan 1, 2022 | Six Months Ended Dec 26, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $134,456 | $128,262 | $267,218 | $251,469 | | Gross profit | $9,808 | $10,622 | $19,946 | $20,637 | | Operating income | $1,651 | $2,720 | $3,745 | $5,516 | | Net income | $587 | $1,580 | $1,402 | $3,299 | | Net income per share — Diluted | $0.05 | $0.14 | $0.13 | $0.30 | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Cash used in operations improved, while financing activities provided cash, resulting in a net decrease in cash equivalents Consolidated Cash Flow Summary (in thousands) | Activity | Six Months Ended Jan 1, 2022 | Six Months Ended Dec 26, 2020 | | :--- | :--- | :--- | | Cash used in operating activities | $(10,528) | $(16,823) | | Cash used in investing activities | $(2,764) | $(6,963) | | Cash provided by financing activities | $10,865 | $28,240 | | **Net (decrease) increase in cash** | **$(2,427)** | **$4,454** | | **Cash and cash equivalents, end of period** | **$1,046** | **$5,007** | [Notes to Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Key notes detail COVID-19 impacts, an expanded credit facility, revenue recognition policies, and a tax holiday in Vietnam - The company has seen extreme shifts in demand, supply chain risks, and increased costs due to the **COVID-19 pandemic**, which can materially impact operating results[23](index=23&type=chunk) - On September 3, 2021, the company amended its loan agreement with Bank of America, **increasing its credit facility from $93 million to $120 million**, maturing in September 2026[36](index=36&type=chunk) - The company received a tax holiday in Vietnam for its principal product line, resulting in a **zero percent tax rate for four years** starting in fiscal 2021, followed by reduced rates for subsequent years[51](index=51&type=chunk) - The majority of revenue is **recognized 'over-time'** using a cost-to-cost input method, as products are customer-specific with no alternative use and the company has an enforceable right to payment[70](index=70&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=18&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses revenue growth offset by declining profitability due to supply chain issues, alongside a rising order backlog [Results of Operations](index=21&type=section&id=Results%20of%20Operations) Net sales rose due to customer reimbursements, but gross margin and operating income fell due to supply chain and legal costs Financial Performance Comparison - Three Months Ended | Metric | Q2 FY2022 | Q2 FY2021 | $ Change | % Point Change (Margin) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $134.5M | $128.3M | +$6.2M | N/A | | Gross profit | $9.8M | $10.6M | -$0.8M | -1.0% | | Gross Margin | 7.3% | 8.3% | N/A | -1.0% | | Operating income | $1.7M | $2.7M | -$1.0M | -0.9% | | Net income | $0.6M | $1.6M | -$1.0M | -0.8% | Financial Performance Comparison - Six Months Ended | Metric | H1 FY2022 | H1 FY2021 | $ Change | % Point Change (Margin) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $267.2M | $251.5M | +$15.7M | N/A | | Gross profit | $19.9M | $20.6M | -$0.7M | -0.7% | | Gross Margin | 7.5% | 8.2% | N/A | -0.7% | | Operating income | $3.7M | $5.5M | -$1.8M | -0.8% | | Net income | $1.4M | $3.3M | -$1.9M | -0.8% | - Legal costs related to the SEC's review of a whistleblower complaint totaled approximately **$0.7 million during the second quarter**, impacting net income[86](index=86&type=chunk)[88](index=88&type=chunk) [Capital Resources and Liquidity](index=24&type=section&id=Capital%20Resources%20and%20Liquidity) Operating cash flow was negative due to working capital changes, but the company maintains sufficient liquidity via its credit facility - **Net cash used in operating activities** for the six months ended January 1, 2022 was **$10.5 million**, compared to $16.8 million used in the prior year period[120](index=120&type=chunk) - The company had an **order backlog of approximately $333.1 million** on January 1, 2022, a significant increase from $218.7 million a year prior, attributed to higher demand and supply chain delays[119](index=119&type=chunk) - As of January 1, 2022, the company had **$97.0 million in borrowings** on its revolving credit facility, with **$17.3 million remaining available**[93](index=93&type=chunk)[127](index=127&type=chunk) [Risks and Uncertainties that May Affect Future Results](index=25&type=section&id=Risks%20and%20Uncertainties%20that%20May%20Affect%20Future%20Results) The company faces significant risks from customer concentration, supply chain disruptions, foreign operations, and cybersecurity threats - Business risks include **dependency on a concentrated customer base**, potential fluctuations in quarterly results, and operational challenges in foreign manufacturing facilities[131](index=131&type=chunk)[133](index=133&type=chunk)[139](index=139&type=chunk) - The company is **dependent on a limited number of suppliers** for critical components and has experienced shortages, which can curtail or delay production[141](index=141&type=chunk) - Technology risks include **cybersecurity incidents** that could disrupt operations or misappropriate confidential data, and disruptions to information systems[156](index=156&type=chunk)[159](index=159&type=chunk) - The company has incurred and may continue to **incur significant expenses related to the Audit Committee's internal investigation** and is cooperating with the SEC, which could lead to further costs, penalties, or litigation[169](index=169&type=chunk)[170](index=170&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) The company is exposed to market risks from variable interest rates on its debt and foreign currency fluctuations in Mexico and China - The company is subject to **interest rate risk on its $97.0 million outstanding borrowings** under its asset-based revolving credit facility, as rates fluctuate with LIBOR[180](index=180&type=chunk) - The company faces foreign currency exchange risk from its operations in Mexico and China and **hedges a portion of its Mexican peso exposure with forward contracts**, with a notional value of $13.9 million outstanding as of January 1, 2022[181](index=181&type=chunk) [Item 4. Controls and Procedures](index=32&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls - Based on an evaluation as of the end of the period, management concluded that the company's **disclosure controls and procedures were effective**[183](index=183&type=chunk) - **No significant changes were made to internal controls** over financial reporting during the second quarter of fiscal 2022[184](index=184&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=33&type=section&id=Item%201.%20Legal%20Proceedings) Ongoing legal actions are not expected to have a material adverse effect on the company's financial condition - The company is involved in various legal actions arising in the ordinary course of business, which management **does not expect to have a material adverse effect** on its financial condition[185](index=185&type=chunk) [Item 1A. Risk Factors](index=33&type=section&id=Item%201A.%20Risk%20Factors) No material changes have been made to the risk factors disclosed in the company's most recent Annual Report on Form 10-K - 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 3, 2021[186](index=186&type=chunk) [Item 6. Exhibits](index=33&type=section&id=Item%206.%20Exhibits) This section lists filed exhibits, including required CEO/CFO certifications and interactive data files - **Exhibits filed include certifications from the CEO and CFO**, as well as Inline XBRL data files[187](index=187&type=chunk) [Signatures](index=34&type=section&id=Signatures)

Financial Data and Key Metrics Changes - For Q2 fiscal 2022, total revenue was $134.5 million, an increase from $128.3 million in the same period of fiscal 2021, representing a growth of approximately 1.7% [6] - Net income for Q2 fiscal 2022 was $0.6 million or $0.05 per share, down from $1.6 million or $0.14 per share in Q2 fiscal 2021 [10] - Gross margin decreased to 7.3% from 8.3% year-over-year, and operating margin fell to 1.2% from 2.1% [9] Business Line Data and Key Metrics Changes - Revenue related to customer reimbursements for tooling and equipment increased by approximately $10 million compared to the previous year [7] - The company experienced a decrease in inventory turns due to supply chain-related production delays [11] Market Data and Key Metrics Changes - The company faced ongoing global supply chain disruptions, including parts supply issues and increased transportation costs, which have significantly impacted production [8][22] - Labor costs and shortages of production staff were also noted as challenges affecting operations [22] Company Strategy and Development Direction - The company plans to invest selectively in production equipment and efficiency improvements to prepare for growth [15] - Key Tronic aims to capitalize on the increasing demand for North American production as companies seek to diversify their supply chains away from Asia [26][27] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about future growth prospects, citing a growing backlog and increased customer demand [18][19] - However, they acknowledged that supply chain disruptions and pandemic-related challenges continue to pose risks [18][29] Other Important Information - Legal costs related to the SEC's review of a whistleblower complaint totaled approximately $0.7 million during the quarter [9] - The company expects Q3 fiscal 2022 revenue to be between $130 million and $140 million, with earnings of approximately $0.05 to $0.10 per diluted share [16] Q&A Session Summary Question: Can you characterize the size of the new programs won? - The new programs range from $5 million to $15 million per year, with one significant program expected to contribute approximately $80 million in annual revenue [34][36] Question: How has the supply chain situation changed over the last quarter? - The supply chain situation has stabilized, but lead times remain long, and there are still surprises regarding shipment delays [39] Question: What is the anticipated revenue growth from U.S. facilities? - U.S. facilities are expected to see a 35% increase in annual revenue due to new business wins and increased production [25][50] Question: What is the expected CapEx for the fiscal year? - The company expects total capital expenditures to be around $6 million for the fiscal year, down from previous forecasts [14][100] Question: How are customer reimbursements for tooling and equipment viewed? - Customer reimbursements are seen as a favorable indicator of future production, as they indicate serious commitment from customers [69][72]

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 2, 2021 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 2022 Earnings Conference Call November 2, 2021 5:00 PM ET Company Participants Brett Larsen - Chief Financial Officer Craig Gates - President & 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 Key Tronic Corporation First Quarter Fiscal 2022 Conference Call. Today's conference is being recorded. At this time, I would like to turn t ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________________________________________________________ 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 3, 2021 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 __________________________________ ...

Financial Data and Key Metrics Changes - For Q4 FY2021, the company reported revenue of approximately $132.6 million, up 14% from $116 million in the same period of FY2020 [4] - Total revenue for FY2021 was $518.7 million, the highest annual revenue in the company's history, up 15% from $449.5 million in FY2020 [4] - Net income for Q4 FY2021 was $200,000 or approximately $0.02 per share, compared to $1.5 million or $0.14 per share in Q4 FY2020 [5] - For FY2021, net income was $4.3 million or $0.39 per share, compared to $4.8 million or $0.44 per share in FY2020 [10] - Gross margin improved to 8.1% and operating margin to 1.8% for FY2021, up from 7.8% and 1.5% respectively in FY2020 [9] Business Line Data and Key Metrics Changes - The company faced significant revenue constraints due to worldwide supply chain issues, impacting both new and existing customer demand [5] - Operating income for FY2021 was $9.5 million, a 40% increase from the prior year [10] - The company incurred additional costs due to supply chain issues, including factory downtime and overtime expenses [6] Market Data and Key Metrics Changes - Trade receivables decreased by $2.6 million from the prior quarter, with days sales outstanding (DSOs) increasing to about 76 days [12] - The company maintained total working capital of $172 million and a current ratio of 2.4:1 [13] Company Strategy and Development Direction - The company plans to increase its credit facility to $120 million to enhance liquidity and manage potential risks [13] - Capital expenditures for FY2021 were about $10.6 million, with plans to invest in production equipment and efficiency improvements [14] - The company is focusing on winning new EMS programs and expanding its business, particularly in North America, due to increasing demand and supply chain challenges [21][23] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about future growth despite ongoing supply chain disruptions and the COVID-19 crisis [17] - The company expects to report revenue of approximately $125 million to $135 million for Q1 FY2022, with significant uncertainty surrounding these estimates [15] - Management noted that demand remains strong, with potential revenue exceeding $160 million if all parts were available [55] Other Important Information - The company is cooperating with the SEC regarding an internal investigation, which has resulted in additional expenses [9] - The internal investigation cost the company in excess of $1.5 million for the year [65] Q&A Session Summary Question: Can you discuss the new program won in Q3 that led to adding square footage in Juarez? - The program involves moving business from China and is based on customer response time [34][35] Question: What is the revenue potential of the new program? - The Q3 program is expected to generate between $20 million and $50 million annually, while Q4 wins are between $5 million and $15 million [38] Question: What caused the change in revenue guidance for Q4? - The change was primarily due to component availability and new program ramps [42] Question: Is there a demand issue? - The company is experiencing the highest demand in its history, with no demand issues reported [54] Question: How much did the internal investigation cost? - The cost exceeded $1.5 million for the year [65] Question: How much of the $700 million demand was related to COVID products? - It is estimated that the demand would drop to around $600 million without COVID-related products [75] Question: What is the expected gross margin target? - The long-term goal is to achieve a gross margin above 9% [90]

[Explanatory Note](index=3&type=section&id=Explanatory%20Note) The Company filed this Quarterly Report late due to an internal investigation by the Audit Committee, which found inventory and cost of goods sold were improperly recorded, but no restatement was required - The Company filed this Quarterly Report on Form 10-Q late due to an internal investigation by the Audit Committee, which concluded that inventory and cost of goods sold were improperly recorded at its Oakdale, MN facility during Q4 FY2020 and H1 FY2021, resulting from deficiencies in internal control over financial reporting[8](index=8&type=chunk) - These errors did not lead to a restatement of previously issued financial statements[8](index=8&type=chunk) PART I. FINANCIAL INFORMATION [Item 1. Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents the unaudited condensed consolidated financial statements, including balance sheets, income statements, comprehensive income, cash flows, and shareholders' equity, along with detailed notes [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section provides a snapshot of the Company's financial position, detailing assets, liabilities, and shareholders' equity at specific points in time **Condensed Consolidated Balance Sheet Highlights (in thousands):** | Metric | Dec 26, 2020 | Jun 27, 2020 | Change ($) | Change (%) | | :-------------------------------- | :----------- | :----------- | :--------- | :--------- | | Cash and cash equivalents | $5,007 | $553 | $4,454 | 805.4% | | Trade receivables, net | $100,105 | $86,123 | $13,982 | 16.2% | | Inventories, net | $119,439 | $115,020 | $4,419 | 3.8% | | Total current assets | $267,147 | $242,764 | $24,383 | 10.0% | | Total assets | $330,522 | $304,861 | $25,661 | 8.4% | | Accounts payable | $69,937 | $80,204 | $(10,267) | -12.8% | | Total current liabilities | $93,755 | $112,219 | $(18,464) | -16.4% | | Revolving loan | $89,357 | $60,094 | $29,263 | 48.7% | | Total liabilities | $207,358 | $189,304 | $18,054 | 9.5% | | Total shareholders' equity | $123,164 | $115,557 | $7,607 | 6.6% | [Condensed Consolidated Statements of Income](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income) This section details the Company's financial performance over specific periods, showing net sales, gross profit, operating income, and net income **Condensed Consolidated Statements of Income Highlights (in thousands, except per share):** | Metric | Three Months Ended Dec 26, 2020 | Three Months Ended Dec 28, 2019 | Change ($) | Change (%) | | :-------------------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Net sales | $128,262 | $116,722 | $11,540 | 9.9% | | Gross profit | $10,622 | $8,122 | $2,500 | 30.8% | | Gross profit % | 8.3% | 7.0% | 1.3 ppt | - | | Operating income | $2,720 | $1,498 | $1,222 | 81.6% | | Operating income % | 2.1% | 1.3% | 0.8 ppt | - | | Net income | $1,580 | $824 | $756 | 91.7% | | Net income per share — Diluted | $0.14 | $0.08 | $0.06 | 75.0% | | Metric | Six Months Ended Dec 26, 2020 | Six Months Ended Dec 28, 2019 | Change ($) | Change (%) | | :-------------------------------- | :---------------------------- | :---------------------------- | :--------- | :--------- | | Net sales | $251,469 | $222,007 | $29,462 | 13.3% | | Gross profit | $20,637 | $17,395 | $3,242 | 18.6% | | Gross profit % | 8.2% | 7.8% | 0.4 ppt | - | | Operating income | $5,516 | $4,037 | $1,479 | 36.6% | | Operating income % | 2.2% | 1.8% | 0.4 ppt | - | | Net income | $3,299 | $2,376 | $923 | 38.8% | | Net income per share — Diluted | $0.30 | $0.22 | $0.08 | 36.4% | [Condensed Consolidated Statements of Comprehensive Income](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) This section presents the Company's comprehensive income, including net income and other comprehensive income items like unrealized gains or losses on hedging instruments **Condensed Consolidated Statements of Comprehensive Income Highlights (in thousands):** | Metric | Three Months Ended Dec 26, 2020 | Three Months Ended Dec 28, 2019 | Change ($) | | :-------------------------------- | :------------------------------ | :------------------------------ | :--------- | | Net income | $1,580 | $824 | $756 | | Unrealized gain (loss) on hedging instruments, net of tax | $2,926 | $778 | $2,148 | | Comprehensive income | $4,506 | $1,602 | $2,904 | | Metric | Six Months Ended Dec 26, 2020 | Six Months Ended Dec 28, 2019 | Change ($) | | :-------------------------------- | :---------------------------- | :---------------------------- | :--------- | | Net income | $3,299 | $2,376 | $923 | | Unrealized gain (loss) on hedging instruments, net of tax | $4,194 | $(169) | $4,363 | | Comprehensive income | $7,493 | $2,207 | $5,286 | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section outlines the Company's cash inflows and outflows from operating, investing, and financing activities over specific periods **Condensed Consolidated Statements of Cash Flow Highlights (Six Months Ended, in thousands):** | Activity | Dec 26, 2020 | Dec 28, 2019 | Change ($) | | :-------------------------------- | :----------- | :----------- | :--------- | | Net cash used in operating activities | $(16,823) | $(8,438) | $(8,385) | | Net cash used in investing activities | $(6,963) | $(1,969) | $(4,994) | | Net cash provided by financing activities | $28,240 | $10,305 | $17,935 | | Net increase (decrease) in cash and cash equivalents | $4,454 | $(102) | $4,556 | | Cash and cash equivalents, end of period | $5,007 | $499 | $4,508 | [Condensed Consolidated Statements of Shareholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders'%20Equity) This section details changes in the Company's shareholders' equity, including net income and other comprehensive income, over specific periods **Condensed Consolidated Statements of Shareholders' Equity Highlights (Six Months Ended, in thousands):** | Metric | Dec 26, 2020 | Dec 28, 2019 | Change ($) | | :-------------------------------- | :----------- | :----------- | :--------- | | Total shareholders' equity, beginning balances | $115,557 | $114,459 | $1,098 | | Net income | $3,299 | $2,376 | $923 | | Unrealized gain (loss) on hedging instruments, net | $4,194 | $(169) | $4,363 | | Total shareholders' equity, ending balances | $123,164 | $116,807 | $6,357 | [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations and additional information supporting the condensed consolidated financial statements [1. Basis of Presentation](index=9&type=section&id=1.%20Basis%20of%20Presentation) This note describes the framework and principles used to prepare the unaudited interim financial statements, including compliance with SEC rules and the impact of management estimates - The financial statements are unaudited and prepared in accordance with SEC rules, condensing certain annual disclosures, with management's estimates and assumptions used, and interim results not necessarily indicative of the full year[23](index=23&type=chunk)[24](index=24&type=chunk) - The Company's fiscal year is 52/53 weeks, ending on the Saturday closest to June 30, with the periods ended December 26, 2020, and December 28, 2019, being 13 and 26 weeks, respectively[24](index=24&type=chunk) - The COVID-19 pandemic has caused extreme shifts in customer demand, supply chain, and logistics risks, potentially impacting operating results due to closures, cost fluctuations, and labor shortages[25](index=25&type=chunk) - An immaterial disclosure error regarding inventory classification (raw materials vs. finished goods/work-in-process) was corrected, with no change to the total inventory balance[26](index=26&type=chunk) [2. Significant Accounting Policies](index=9&type=section&id=2.%20Significant%20Accounting%20Policies) This note outlines the key accounting principles and methods applied in preparing the financial statements, including revenue recognition, inventory valuation, and tax accounting - The Company computes basic and diluted EPS, uses foreign currency forward contracts as cash flow hedges to manage Mexican peso expense variability, and accounts for income taxes using the asset and liability method with an estimated annual effective tax rate[27](index=27&type=chunk)[28](index=28&type=chunk)[31](index=31&type=chunk) - Recently issued accounting standards (ASU 2021-01, ASU 2020-03, ASU 2019-12, ASU 2016-13) are being assessed for their impact, with ASU 2019-12 not expected to have a material impact and ASU 2016-13 effective in FY2024[34](index=34&type=chunk)[35](index=35&type=chunk)[36](index=36&type=chunk)[37](index=37&type=chunk) [3. Inventories](index=11&type=section&id=3.%20Inventories) This note provides details on the composition and valuation of the Company's inventory balances, including reserves and customer payments **Inventory Balances (in millions):** | Metric | Dec 26, 2020 | Jun 27, 2020 | | :-------------------------------- | :----------- | :----------- | | Total inventory, net | $119.4 | $115.0 | | Reserves, customer payments, and customer deposits | $13.6 | $17.3 | Substantially all inventory balances are raw materials [4. Long-Term Debt](index=11&type=section&id=4.%20Long-Term%20Debt) This note describes the Company's long-term debt arrangements, including credit facilities, equipment financing, and debt maturities - On August 14, 2020, the Company replaced its Wells Fargo credit agreement with a new five-year, **$93 million asset-based senior secured revolving credit facility** with Bank of America, maturing August 14, 2025, with **$89.9 million outstanding** and **$3.1 million available** as of December 26, 2020[39](index=39&type=chunk) - The Company also entered into two equipment financing facilities: a **$5.0 million facility** (August 14, 2020, 4.85% interest, maturing August 14, 2025) with **$4.7 million outstanding**, and a **$6.0 million facility** (November 24, 2020, 5.52% interest, maturing April 24, 2026) with **$6.0 million outstanding**[41](index=41&type=chunk)[44](index=44&type=chunk) **Debt Maturities (in thousands):** | Fiscal Years Ending | Amount | | :------------------ | :----- | | 2021 (remaining 6 months) | $654 | | 2022 | $2,143 | | 2023 | $2,190 | | 2024 | $2,239 | | 2025 | $2,290 | | Thereafter | $91,073 | | Total debt | $100,589 | | Unamortized debt issuance costs | $(529) | | Long-term debt, net | $100,060 | The Company was in compliance with all financial covenants as of December 26, 2020 [5. Trade Accounts Receivable Purchase Programs](index=12&type=section&id=5.%20Trade%20Accounts%20Receivable%20Purchase%20Programs) This note provides information on the Company's participation in trade accounts receivable purchase programs, including sales activity - The Company did not sell any accounts receivables during the six months ended December 26, 2020, in contrast to approximately **$35.0 million of accounts receivables sold** during the six months ended December 28, 2019[50](index=50&type=chunk) [6. Income Taxes](index=12&type=section&id=6.%20Income%20Taxes) This note details the Company's income tax provisions, including expected repatriation of foreign earnings, tax credits, and the impact of recent tax legislation - The Company expects to repatriate approximately **$8.0 million of foreign earnings**, primarily from China, which may incur approximately **$0.8 million in withholding taxes**, while other unremitted foreign earnings are expected to remain permanently reinvested[51](index=51&type=chunk)[52](index=52&type=chunk) - As of December 26, 2020, the Company has **$8.6 million in gross federal R&D tax credits**, with **$3.0 million recognized as uncertain tax benefits**, resulting in a net deferred tax benefit of **$5.6 million**[53](index=53&type=chunk) - The CARES Act provisions, including NOL carryovers and increased business interest deduction limits, are not expected to have a material impact on the Company's financial position, results of operations, or cash flows, and the Company elected to claim 100% of AMT credits for the 2018 tax year in Q4 FY2020[54](index=54&type=chunk)[96](index=96&type=chunk) [7. Earnings Per Share](index=13&type=section&id=7.%20Earnings%20Per%20Share) This note provides a reconciliation of basic and diluted earnings per share, detailing the impact of common stock awards **Earnings Per Share Reconciliation (in thousands, except per share):** | Metric | Three Months Ended Dec 26, 2020 | Three Months Ended Dec 28, 2019 | | :-------------------------------- | :------------------------------ | :------------------------------ | | Net income | $1,580 | $824 | | Weighted average shares outstanding—basic | 10,760 | 10,760 | | Effect of dilutive common stock awards | 625 | 117 | | Weighted average shares outstanding—diluted | 11,385 | 10,877 | | Net income per share—basic | $0.15 | $0.08 | | Net income per share—diluted | $0.14 | $0.08 | | Antidilutive SARs not included | — | 725 | | Metric | Six Months Ended Dec 26, 2020 | Six Months Ended Dec 28, 2019 | | :-------------------------------- | :---------------------------- | :---------------------------- | | Net income | $3,299 | $2,376 | | Weighted average shares outstanding—basic | 10,760 | 10,760 | | Effect of dilutive common stock awards | 280 | 51 | | Weighted average shares outstanding—diluted | 11,040 | 10,811 | | Net income per share—basic | $0.31 | $0.22 | | Net income per share—diluted | $0.30 | $0.22 | | Antidilutive SARs not included | 324 | 725 | [8. Share-based Compensation](index=14&type=section&id=8.%20Share-based%20Compensation) This note details the Company's share-based compensation plans, including the types of awards, vesting conditions, and related expenses - The Company's incentive plan offers various equity and liability awards, with SARs including a performance condition based on Return on Invested Capital (ROIC) goals relative to a peer group, vesting after three years and expiring after five years[59](index=59&type=chunk)[60](index=60&type=chunk) **Share-based Compensation Expense (in thousands):** | Period | Dec 26, 2020 | Dec 28, 2019 | | :-------------------------------- | :----------- | :----------- | | Three Months Ended | $51 | $67 | | Six Months Ended | $114 | $141 | As of December 26, 2020, total unrecognized compensation expense was approximately **$0.4 million**, expected to be recognized over a weighted average period of 2.14 years [9. Commitments and Contingencies](index=14&type=section&id=9.%20Commitments%20and%20Contingencies) This note outlines the Company's legal proceedings, claims, and warranty reserves, assessing their potential financial impact - The Company is involved in ordinary course litigation and claims, which management believes will not have a material adverse effect on financial position, results of operations, or cash flow[63](index=63&type=chunk) - Warranty reserves were **$11,000** as of December 26, 2020, down from **$15,000** as of June 27, 2020[64](index=64&type=chunk) [10. Derivative Financial Instruments](index=14&type=section&id=10.%20Derivative%20Financial%20Instruments) This note describes the Company's use of derivative financial instruments, such as foreign currency forward contracts and interest rate swaps, for hedging purposes - As of December 26, 2020, the Company had **$23.8 million in outstanding foreign currency forward contracts**, maturing through December 2021, to hedge Mexican peso denominated expenses[65](index=65&type=chunk) - No new contracts were entered into during the three or six months ended December 26, 2020, while **$6.3 million and $13.0 million of contracts were settled**, respectively[66](index=66&type=chunk) - Two interest rate swap contracts with Wells Fargo Bank, entered into on November 6, 2019, were terminated on August 14, 2020, due to the new loan agreement with Bank of America[67](index=67&type=chunk) - The liabilities from these terminations (**$148,400 and $776,500**) will be amortized to interest expense over their original terms[68](index=68&type=chunk) **Fair Value of Derivative Instruments (in thousands):** | Derivative Type | Balance Sheet Location | Dec 26, 2020 Fair Value | Jun 27, 2020 Fair Value | | :-------------------------------- | :--------------------- | :---------------------- | :---------------------- | | Foreign currency forward contracts | Other current assets | $4,613 | — | | Foreign currency forward contracts | Other long-term assets | — | $1,097 | | Foreign currency forward contracts | Other current liabilities | — | $(1,960) | | Foreign currency forward contracts | Other long-term liabilities | — | $(17) | | Interest rate swap | Other current liabilities | — | $(347) | | Interest rate swap | Other long-term liabilities | — | $(610) | As of December 26, 2020, the net unrealized gain expected to be reclassified into earnings within the next 12 months is approximately **$3.6 million** [11. Fair Value Measurements](index=17&type=section&id=11.%20Fair%20Value%20Measurements) This note explains how the Company measures the fair value of its financial instruments, categorizing them by input levels (Level 1, 2, or 3) - The Company's foreign currency forward contracts are measured on a recurring basis using Level 2 inputs (observable market data) and are reported as accumulated other comprehensive gain (loss) in shareholders' equity[71](index=71&type=chunk) - The carrying values of cash, receivables, and current liabilities approximate their fair value[72](index=72&type=chunk) **Fair Value of Financial Assets (in thousands):** | Asset Type | Level 1 | Level 2 | Level 3 | Total Fair Value | | :-------------------------------- | :------ | :------ | :------ | :--------------- | | Foreign currency forward contracts (Dec 26, 2020) | — | $4,613 | — | $4,613 | | Foreign currency forward contracts (Jun 27, 2020) | — | $1,097 | — | $1,097 | **Fair Value of Financial Liabilities (in thousands):** | Liability Type | Level 1 | Level 2 | Level 3 | Total Fair Value | | :-------------------------------- | :------ | :------ | :------ | :--------------- | | Interest rate swap (Jun 27, 2020) | — | $(957) | — | $(957) | | Foreign currency forward contracts (Jun 27, 2020) | — | $(1,977) | — | $(1,977) | [12. Revenue](index=17&type=section&id=12.%20Revenue) This note details the Company's revenue recognition policies, including methods for recognizing revenue over time or at a point in time, and disaggregation of revenue by recognition method - The Company recognizes revenue primarily from manufacturing services, with the majority recognized 'over-time' using the input cost-to-cost method for customer-specific products with no alternative use and an enforceable right to payment[74](index=74&type=chunk) - Other contracts recognize revenue 'point-in-time' upon shipment, and engineering services revenue is recognized over time as performed[75](index=75&type=chunk) **Disaggregation of Revenue (in thousands):** | Recognition Method | Three Months Ended Dec 26, 2020 | Three Months Ended Dec 28, 2019 | Six Months Ended Dec 26, 2020 | Six Months Ended Dec 28, 2019 | | :----------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Over-Time | $125,534 | $115,118 | $246,370 | $219,144 | | Point-in-Time | $2,728 | $1,604 | $5,099 | $2,863 | | Total | $128,262 | $116,722 | $251,469 | $222,007 | Contract assets decreased from **$23,753 thousand to $22,635 thousand** during the six months ended December 26, 2020[78](index=78&type=chunk)[79](index=79&type=chunk) [13. Leases](index=19&type=section&id=13.%20Leases) This note provides information on the Company's lease arrangements, including lease costs, right-of-use assets, and lease liabilities **Lease Cost (in thousands):** | Lease Cost Type | Three Months Ended Dec 26, 2020 | Six Months Ended Dec 26, 2020 | | :-------------------------------- | :------------------------------ | :---------------------------- | | Operating lease cost (Cost of sales) | $1,137 | $2,301 | | Operating lease cost (SG&A) | $333 | $671 | | Total lease cost | $1,470 | $2,972 | **Operating Lease Balances (Dec 26, 2020, in thousands):** | Metric | Amount | | :-------------------------------- | :----- | | Operating lease right of use assets | $17,672 | | Operating lease liabilities | $17,428 | | Weighted-average remaining lease term | 6.30 years | | Weighted-average discount rate | 4.06% | Future undiscounted lease payments total **$20,071 thousand** [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=20&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the Company's financial performance, condition, and future outlook, covering business overview, executive summary, critical accounting policies, and risk analysis [Overview](index=20&type=section&id=Overview) This section introduces Key Tronic as a leading contract manufacturer offering comprehensive design and manufacturing services globally - Key Tronic is a leading contract manufacturer offering design and manufacturing services from facilities in the United States, Mexico, China, and Vietnam, providing full engineering services, materials management, worldwide manufacturing, assembly, in-house testing, and global distribution[84](index=84&type=chunk) - The Company's mission is to deliver superior manufacturing and engineering services at the lowest total cost for high-quality products, fostering long-term relationships through its 'Trust, Commitment, Results' philosophy[86](index=86&type=chunk) [Executive Summary](index=20&type=section&id=Executive%20Summary) This section provides a high-level summary of the Company's recent financial performance, key operational highlights, and significant events **Q2 FY2021 Financial Performance (vs. Q2 FY2020, in millions, except per share):** | Metric | Q2 FY2021 | Q2 FY2020 | Change ($) | Change (%) | | :-------------------------------- | :-------- | :-------- | :--------- | :--------- | | Total Revenue | $128.3 | $116.7 | $11.6 | 9.9% | | Gross Profit % | 8.3% | 7.0% | 1.3 ppt | - | | Operating Income % | 2.1% | 1.3% | 0.8 ppt | - | | Net Income | $1.6 | $0.8 | $0.8 | 100.0% | | Diluted EPS | $0.14 | $0.08 | $0.06 | 75.0% | - Revenue growth was driven by new customer programs and increased demand from existing customers, despite constraints from COVID-19 related shutdowns and labor shortages in Juarez[87](index=87&type=chunk) - The concentration of top three customers' net sales slightly decreased to **35.9%** from **37.0%**[88](index=88&type=chunk) - The Company incurred approximately **$1.8 million in additional COVID-19 related costs** in Q2 FY2021[90](index=90&type=chunk) - An internal investigation concluded improper recording of inventory and cost of goods sold at the Oakdale, MN facility, identifying accounting errors and internal control deficiencies, but no restatement was required, with investigation costs of **$0.7 million** incurred in Q3 FY2021[97](index=97&type=chunk) - The Company maintains a strong balance sheet with a **current ratio of 2.8** and a **debt-to-equity ratio of 0.8** as of December 26, 2020[98](index=98&type=chunk) - Net cash used in operating activities for the six months ended December 26, 2020, was **$16.8 million**, with **$3.1 million available** on the revolving credit facility[98](index=98&type=chunk) [Critical Accounting Policies and Estimates](index=22&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section highlights the accounting policies and estimates that require significant judgment and can materially impact the financial statements - The preparation of financial statements requires significant estimates and assumptions, including revenue recognition, inventory reserves, allowance for doubtful accounts, accrued warranty, income taxes, share-based compensation, impairment of long-lived assets, derivatives and hedging activity, and long-term incentive compensation accrual[100](index=100&type=chunk)[101](index=101&type=chunk)[103](index=103&type=chunk) [Results of Operations (Three Months Ended December 26, 2020 with the Three Months Ended December 28, 2019)](index=23&type=section&id=Results%20of%20Operations%20(Three%20Months%20Ended%20December%2026,%202020%20with%20the%20Three%20Months%20Ended%20December%2028,%202019)) This section analyzes the Company's financial performance for the three months ended December 26, 2020, compared to the same period in the prior year **Q2 FY2021 vs. Q2 FY2020 Performance (in thousands):** | Metric | Dec 26, 2020 | Dec 28, 2019 | Change ($) | Change (%) | | :-------------------------------- | :----------- | :----------- | :--------- | :--------- | | Net sales | $128,262 | $116,722 | $11,540 | 9.9% | | Gross profit | $10,622 | $8,122 | $2,500 | 30.8% | | Gross profit % | 8.3% | 7.0% | 1.3 ppt | - | | RD&E expenses | $2,392 | $1,720 | $672 | 39.1% | | SG&A expenses | $5,510 | $4,904 | $606 | 12.4% | | Operating income | $2,720 | $1,498 | $1,222 | 81.6% | | Interest expense, net | $848 | $524 | $324 | 61.8% | | Net income | $1,580 | $824 | $756 | 91.7% | | Effective income tax rate | 15.6% | 15.4% | 0.2 ppt | - | - Net sales increased due to new program wins and demand, partially offset by COVID-19 related shutdowns and labor shortages in Juarez[107](index=107&type=chunk) - Gross profit percentage improved due to increased revenue and streamlining efforts in the Juarez facility[108](index=108&type=chunk) - RD&E and SG&A expenses increased primarily due to higher payroll, with SG&A partially offset by reduced travel[111](index=111&type=chunk)[112](index=112&type=chunk) - Interest expense rose due to increased debt[113](index=113&type=chunk) - The effective tax rate increased slightly due to foreign currency transactions[114](index=114&type=chunk) [Results of Operations (Six Months Ended December 26, 2020 with the Six Months Ended December 28, 2019)](index=24&type=section&id=Results%20of%20Operations%20(Six%20Months%20Ended%20December%2026,%202020%20with%20the%20Six%20Months%20Ended%20December%2028,%202019)) This section analyzes the Company's financial performance for the six months ended December 26, 2020, compared to the same period in the prior year **H1 FY2021 vs. H1 FY2020 Performance (in thousands):** | Metric | Dec 26, 2020 | Dec 28, 2019 | Change ($) | Change (%) | | :-------------------------------- | :----------- | :----------- | :--------- | :--------- | | Net sales | $251,469 | $222,007 | $29,462 | 13.3% | | Gross profit | $20,637 | $17,395 | $3,242 | 18.6% | | Gross profit % | 8.2% | 7.8% | 0.4 ppt | - | | RD&E expenses | $4,637 | $3,380 | $1,257 | 37.2% | | SG&A expenses | $10,484 | $9,978 | $506 | 5.1% | | Operating income | $5,516 | $4,037 | $1,479 | 36.6% | | Interest expense, net | $1,529 | $1,234 | $295 | 23.9% | | Net income | $3,299 | $2,376 | $923 | 38.8% | | Effective income tax rate | 17.3% | 15.2% | 2.1 ppt | - | - Net sales increased due to successful ramp of new customer programs and increased demand, despite COVID-19 related constraints[118](index=118&type=chunk) - Gross profit percentage improved primarily due to streamlining efforts in Juarez facilities[119](index=119&type=chunk) - Provision for obsolete inventory increased significantly to **$446,000** from **$41,000**[120](index=120&type=chunk) - RD&E expenses increased due to engineering payroll[121](index=121&type=chunk) - SG&A expenses increased due to employee-related costs, partially offset by reduced travel[122](index=122&type=chunk) - Interest expense increased due to a higher average balance on the line of credit[123](index=123&type=chunk) - The effective tax rate increased due to foreign currency transactions[124](index=124&type=chunk) [BACKLOG](index=25&type=section&id=BACKLOG) This section provides information on the Company's order backlog, including its value and the factors influencing its changes **Order Backlog (in millions):** | Date | Amount | | :---------------- | :----- | | Dec 26, 2020 | $218.7 | | Dec 28, 2019 | $145.5 | The increase in backlog was primarily due to increased demand for home-consumer products, healthcare, and home exercise equipment, influenced by the COVID-19 pandemic. Backlog consists of purchase orders expected to ship within 12 months but is not an accurate measure of future net sales [CAPITAL RESOURCES AND LIQUIDITY](index=26&type=section&id=CAPITAL%20RESOURCES%20AND%20LIQUIDITY) This section discusses the Company's sources of capital and its ability to meet short-term and long-term financial obligations **Cash Flow Summary (Six Months Ended, in millions):** | Activity | Dec 26, 2020 | Dec 28, 2019 | Change ($) | | :-------------------------------- | :----------- | :----------- | :--------- | | Net cash used in operating activities | $(16.8) | $(8.4) | $(8.4) | | Net cash used in investing activities | $(7.0) | $(2.0) | $(5.0) | | Net cash provided by financing activities | $28.2 | $10.3 | $17.9 | Operating cash flow usage increased due to higher accounts receivable (no factoring in H1 FY2021 vs. **$35.0 million factored** in H1 FY2020), increased inventory, and decreased accounts payable[127](index=127&type=chunk)[128](index=128&type=chunk)[129](index=129&type=chunk) - Cash used in investing activities increased due to equipment purchases for new programs[130](index=130&type=chunk) - Cash provided by financing activities increased due to higher borrowings under the revolving line of credit and term loans[132](index=132&type=chunk) - As of December 26, 2020, **$3.1 million was available** under the revolving credit facility, down from **$22.6 million** in the prior year[133](index=133&type=chunk) - The Company believes projected cash from operations, revolving credit, and leasing will meet future capital requirements[134](index=134&type=chunk) - Repatriation of **$1.3 million cash** held by foreign subsidiaries as of December 26, 2020, would incur approximately **$83,000 in withholding taxes**[134](index=134&type=chunk) [Off-Balance Sheet Arrangements and Contractual Obligations](index=27&type=section&id=Off-Balance%20Sheet%20Arrangements%20and%20Contractual%20Obligations) This section discloses any material off-balance sheet arrangements and changes to contractual obligations since the last annual report - There have been no material changes in contractual obligations outside the ordinary course of business since June 27, 2020[135](index=135&type=chunk) - A summary of contractual obligations was included in the annual report on Form 10-K for fiscal year ended June 27, 2020[135](index=135&type=chunk) [Risks and Uncertainties That May Affect Future Results](index=27&type=section&id=Risks%20and%20Uncertainties%20That%20May%20Affect%20Future%20Results) This section identifies various factors that could adversely impact the Company's financial performance and operations - Operations in Mexico, China, and Vietnam are subject to risks including staffing difficulties, political/economic instability, regulatory changes, longer payment cycles, trade barriers, governmental fund transfer restrictions, natural disasters, and potential COVID-19 related closures/labor constraints[137](index=137&type=chunk)[141](index=141&type=chunk) - Quarterly results can fluctuate due to macroeconomic conditions, customer demand volatility, new program timing, pricing, and material costs[139](index=139&type=chunk) - Dependence on a small number of customers and limited suppliers for critical components poses significant risks, including order reductions, cancellations, and supply shortages, exacerbated by COVID-19[145](index=145&type=chunk)[147](index=147&type=chunk)[148](index=148&type=chunk) - Other risks include intense industry competition, credit risk concentration, ability to secure/maintain credit arrangements, foreign currency exchange rate fluctuations (especially with COVID-19 impacts on hedging), reliance on key personnel, maintaining technological expertise, start-up costs for new programs, interest rate changes, environmental compliance, stock price volatility, and potential disruptions to information systems[149](index=149&type=chunk)[150](index=150&type=chunk)[151](index=151&type=chunk)[152](index=152&type=chunk)[153](index=153&type=chunk)[154](index=154&type=chunk)[155](index=155&type=chunk)[157](index=157&type=chunk)[160](index=160&type=chunk)[161](index=161&type=chunk)[162](index=162&type=chunk)[174](index=174&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=34&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section details the Company's exposure to market risks, primarily focusing on interest rate risk and foreign currency exchange risk, and how these risks are managed - The Company is exposed to interest rate risk from its asset-based senior secured revolving credit facility and equipment financing facilities, which have fluctuating LIBOR-based interest rates[183](index=183&type=chunk) - As of December 26, 2020, **$89.9 million was outstanding** on the revolving credit facility and **$10.7 million** on equipment financing[183](index=183&type=chunk) - Foreign currency exchange risk arises from operations in Mexico, China, and Vietnam, with the Company using Mexican peso forward contracts to hedge a portion of its Mexican peso denominated expenses[184](index=184&type=chunk) - As of December 26, 2020, **$23.8 million in foreign currency forward contracts** were outstanding with a fair value of **$4.6 million**[184](index=184&type=chunk) [Item 4. Controls and Procedures](index=34&type=section&id=Item%204.%20Controls%20and%20Procedures) This section addresses the effectiveness of the Company's disclosure controls and internal control over financial reporting, identifying a material weakness related to inventory accounting and outlining remedial actions - Management concluded that the Company's disclosure controls and procedures were not effective as of December 26, 2020, due to a material weakness in internal control over financial reporting[186](index=186&type=chunk) - This weakness stemmed from improperly recorded inventory and cost of goods sold at the Oakdale, MN facility, resulting from accounting errors and deficiencies in controls over inventory accounting and monitoring activities[188](index=188&type=chunk) - Despite the material weakness, management asserts that the condensed consolidated financial statements in this Form 10-Q fairly present the Company's financial position, results of operations, and cash flows in conformity with U.S. GAAP[186](index=186&type=chunk) - Remedial actions include implementing additional review levels for significant balance sheet accounts, analyzing inventory balances and revenue, reviewing manual journal entries, system upgrades for inventory cost determination, changes in finance/accounting reporting structures, and enhanced training and monitoring controls for inventory accounting at domestic facilities[190](index=190&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=36&type=section&id=Item%201.%20Legal%20Proceedings) This section states that the Company is involved in various legal actions in the ordinary course of business, which management believes will not materially impact its financial position, results of operations, or cash flows - The Company is party to certain lawsuits or claims in the ordinary course of business, which management does not believe will have a material adverse effect on its consolidated financial position, results of operations, or cash flows[194](index=194&type=chunk) [Item 1A. Risk Factors](index=36&type=section&id=Item%201A.%20Risk%20Factors) This section refers to the risk factors discussed in Item 2 (MD&A) and Item 3 (Market Risk) of this Form 10-Q, and highlights two new material risk factors identified since the last annual report - Information regarding risk factors is primarily found 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[195](index=195&type=chunk) - Two new risk factors have been added: (1) the identified material weakness in internal control over financial reporting and the potential adverse impact if not remediated, and (2) risks associated with the Audit Committee's internal investigation, including expenses, diversion of resources, regulatory investigations, and litigation[196](index=196&type=chunk) [Item 6. Exhibits](index=36&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and CFO, and Inline XBRL documents - Exhibits include certifications of the Chief Executive Officer and Chief Financial Officer (pursuant to Exchange Act Rules 13(a)-14, 15(d)-14, and 18 U.S.C. 1350), and various Inline XBRL taxonomy extension documents[196](index=196&type=chunk) [Signatures](index=37&type=section&id=Signatures) This section contains the official signatures of the Company's authorized officers, confirming the submission of the report - The report is signed by Craig D. Gates, President and Chief Executive Officer (Principal Executive Officer), and Brett R. Larsen, Executive Vice President of Administration, Chief Financial Officer and Treasurer (Principal Financial Officer), both dated July 6, 2021[200](index=200&type=chunk)

Key Tronic Corporation (NASDAQ:KTCC) Q2 2021 Earnings Conference Call January 26, 2021 5:00 PM ET Company Participants Brett Larsen - Chief Financial Officer Craig Gates - President & Chief Executive Officer Conference Call Participants Bill Dezellem - Tieton Capital George Melas - MKH Management Scott Bundy - Moors & Cabot Operator Good day and welcome to the Q2 Fiscal Year 2021 Key Tronic Corporation Conference Call. Today's conference is being recorded. At this time, IÂ'd like to turn the conference over ...

Part I: Financial Information [Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) Unaudited Q3 2020 financials show increased assets and liabilities, with net sales up 17% to $123.2 million and net income of $1.7 million [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of September 26, 2020, total assets increased to $317.8 million, total liabilities rose to $199.2 million, and shareholders' equity reached $118.6 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | September 26, 2020 | June 27, 2020 | | :--- | :--- | :--- | | **Total current assets** | $256,065 | $242,764 | | **Total assets** | $317,812 | $304,861 | | **Total current liabilities** | $101,650 | $112,219 | | **Revolving loan** | $80,414 | $60,094 | | **Total liabilities** | $199,205 | $189,304 | | **Total shareholders' equity** | $118,607 | $115,557 | [Condensed Consolidated Statements of Income](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income) Net sales for Q1 FY2021 increased 17.0% to $123.2 million, resulting in a net income of $1.7 million or $0.16 per diluted share Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Three Months Ended Sep 26, 2020 | Three Months Ended Sep 28, 2019 | | :--- | :--- | :--- | | **Net sales** | $123,207 | $105,285 | | **Gross profit** | $10,015 | $9,273 | | **Operating income** | $2,796 | $2,539 | | **Net income** | $1,719 | $1,552 | | **Net income per share — Diluted** | $0.16 | $0.14 | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Q1 FY2021 saw $9.4 million cash used in operations, $3.2 million in investing, and $13.5 million provided by financing activities Consolidated Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended Sep 26, 2020 | Three Months Ended Sep 28, 2019 | | :--- | :--- | :--- | | **Cash used in operating activities** | $(9,439) | $(10,313) | | **Cash used in investing activities** | $(3,186) | $(1,271) | | **Cash provided by financing activities** | $13,543 | $11,487 | | **Net increase (decrease) in cash** | $918 | $(97) | [Notes to Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Notes detail COVID-19 risks, a new $93 million Bank of America loan, 'over-time' revenue recognition, and foreign currency hedging - The company has identified significant risks and uncertainties related to the **COVID-19 pandemic**, which could materially impact operating results through shifts in customer demand, supply chain disruptions, and increased costs[25](index=25&type=chunk) - On August 14, 2020, the Company entered into a new five-year, **$93 million asset-based senior secured revolving credit facility with Bank of America**, with **$80.7 million outstanding** and **$12.3 million available** as of September 26, 2020[37](index=37&type=chunk) - The majority of the company's revenue is recognized **'over-time'** using a **cost-to-cost method**, due to products having no alternative use and enforceable payment rights[70](index=70&type=chunk) - The company uses **foreign currency forward contracts** to hedge Mexican peso fluctuations, with **$30.0 million notional outstanding** as of September 26, 2020, and terminated interest rate swaps in August 2020[60](index=60&type=chunk)[61](index=61&type=chunk)[62](index=62&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=18&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q1 FY2021 revenue growth of 17% to $123.2 million, gross margin decline due to COVID-19 costs, and increased backlog to $201.9 million [Executive Summary](index=18&type=section&id=Executive%20Summary) Q1 FY2021 revenue grew 17% to $123.2 million, but gross margin declined to 8.1% due to COVID-19 costs, with new program wins - Revenue for Q1 fiscal 2021 was **$123.2 million**, a **17% increase** from $105.3 million in the prior-year period[83](index=83&type=chunk) - Gross margin decreased to **8.1% from 8.8%** year-over-year, primarily due to additional costs from the **COVID-19 crisis**[86](index=86&type=chunk) - New program wins included products for **audio/video editing, indoor air quality, utility meters, warehouse management, and automation**[83](index=83&type=chunk)[89](index=89&type=chunk) [Results of Operations](index=20&type=section&id=RESULTS%20OF%20OPERATIONS) Q1 FY2021 net sales increased 17.0% to $123.2 million, but gross profit margin declined to 8.1% due to COVID-19 costs, and the effective tax rate rose to 18.7% Comparison of Operations (in thousands) | Metric | Q1 FY2021 | Q1 FY2020 | $ Change | % Point Change (of Net Sales) | | :--- | :--- | :--- | :--- | :--- | | **Net sales** | $123,207 | $105,285 | $17,922 | — | | **Gross profit** | $10,015 | $9,273 | $742 | (0.7)% | | **Operating income** | $2,796 | $2,539 | $257 | (0.1)% | | **Net income** | $1,719 | $1,552 | $167 | (0.1)% | - The **$17.9 million increase in net sales** was driven by higher demand for new and current programs, partially constrained by **COVID-19 related labor shortages in Juarez**[99](index=99&type=chunk) - The effective tax rate increased to **18.7% from 15.1%**, primarily due to reduced federal research and development tax credits[107](index=107&type=chunk) [Backlog](index=21&type=section&id=BACKLOG) Order backlog significantly increased to approximately $201.9 million as of September 26, 2020, driven by COVID-19 related demand Order Backlog Comparison | Date | Backlog Amount | | :--- | :--- | | September 26, 2020 | ~$201.9 million | | September 28, 2019 | ~$159.9 million | - The increase in backlog was related to the **COVID-19 pandemic's effect on customer demand**, particularly for home-consumer products, healthcare, and home exercise equipment[108](index=108&type=chunk) [Capital Resources and Liquidity](index=22&type=section&id=CAPITAL%20RESOURCES%20AND%20LIQUIDITY) Net cash used in operations was $9.4 million, driven by increased receivables and inventory, with $12.3 million available on the credit facility - Net cash used in operating activities was **$9.4 million**, compared to $10.3 million in the prior-year period[110](index=110&type=chunk) - The company did not factor any accounts receivable in Q1 2021, unlike **$17.8 million factored in Q1 2020**, contributing to the increased accounts receivable balance[111](index=111&type=chunk)[113](index=113&type=chunk) - As of September 26, 2020, the company had approximately **$12.3 million available** under its asset-based revolving credit facility[117](index=117&type=chunk) [Risks and Uncertainties](index=23&type=section&id=RISKS%20AND%20UNCERTAINTIES%20THAT%20MAY%20AFFECT%20FUTURE%20RESULTS) Key risks include COVID-19 impacts, foreign operations challenges, customer/supplier concentration, and demand volatility affecting quarterly results - The **COVID-19 pandemic** presents significant risks, including shifts in customer demand, facility closures, labor constraints, and supply chain disruptions[126](index=126&type=chunk)[128](index=128&type=chunk) - Operations in **Mexico, China, and Vietnam** are subject to risks like political/economic instability, regulatory changes, trade barriers, and natural disasters[121](index=121&type=chunk)[125](index=125&type=chunk) - A majority of sales come from a **small number of customers**, and loss of orders could adversely affect business due to non-long-term contracts[129](index=129&type=chunk)[130](index=130&type=chunk) - Dependence on a **limited number of suppliers** for critical components creates risk of operational interruptions from shortages or price increases[131](index=131&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=29&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company faces market risks from fluctuating interest rates on its debt and foreign currency exchange rates, mitigated by forward contracts - The company is exposed to **interest rate risk** from its asset-based senior revolving credit facility, with **$80.7 million outstanding** as of September 26, 2020, subject to LIBOR fluctuations[160](index=160&type=chunk) - The company faces **foreign currency exchange risk** from operations in Mexico, China, and Vietnam, using **Mexican peso forward contracts** totaling **$30.0 million outstanding** to hedge expenses[161](index=161&type=chunk) [Controls and Procedures](index=29&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of September 26, 2020, with no significant changes in internal controls - Management, including the CEO and CFO, concluded that disclosure controls and procedures are **effective** as of the reporting period end[162](index=162&type=chunk) - No **significant changes** were made to the company's internal control over financial reporting during the quarter[164](index=164&type=chunk) Part II: Other Information [Legal Proceedings](index=30&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in various ordinary course legal actions, which management expects will not materially affect financial position - The company is involved in various legal actions arising in the ordinary course of business, which management does not expect to have a **material adverse effect** on its financial condition[166](index=166&type=chunk) [Risk Factors](index=30&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended June 27, 2020 - 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 June 27, 2020[167](index=167&type=chunk) [Exhibits](index=30&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with Form 10-Q, including CEO and CFO certifications and XBRL data files - The exhibits filed include **CEO and CFO certifications** pursuant to Exchange Act Rules and 18 U.S.C. 1350, along with **XBRL Interactive Data Files**[168](index=168&type=chunk)