Key Tronic(KTCC) - 2021 Q4 - Annual Report

Explanatory Note 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] - These errors did not lead to a restatement of previously issued financial statements[8] PART I. FINANCIAL INFORMATION Item 1. Financial Statements (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 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 | $7,607 | 6.6% | Condensed Consolidated Statements of Income This section details the Company's financial performance over specific periods, showing net sales, gross profit, operating income, and net income Condensed Consolidated Statements of Income Highlights (in thousands, except per share): | Metric | Three Months Ended Dec 26, 2020 | Three Months Ended Dec 28, 2019 | Change ($) | 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 | $0.08 | 36.4% | Condensed Consolidated Statements of Comprehensive Income This section presents the Company's comprehensive income, including net income and other comprehensive income items like unrealized gains or losses on hedging instruments Condensed Consolidated Statements of Comprehensive Income Highlights (in thousands): | Metric | Three Months Ended Dec 26, 2020 | Three Months Ended Dec 28, 2019 | Change ($) | | :-------------------------------- | :------------------------------ | :------------------------------ | :--------- | | 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 | $5,286 | Condensed Consolidated Statements of Cash Flows This section outlines the Company's cash inflows and outflows from operating, investing, and financing activities over specific periods Condensed Consolidated Statements of Cash Flow Highlights (Six Months Ended, in thousands): | Activity | Dec 26, 2020 | Dec 28, 2019 | Change ($) | | :-------------------------------- | :----------- | :----------- | :--------- | | 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 | $4,508 | Condensed Consolidated Statements of Shareholders' Equity This section details changes in the Company's shareholders' equity, including net income and other comprehensive income, over specific periods Condensed Consolidated Statements of Shareholders' Equity Highlights (Six Months Ended, in thousands): | Metric | Dec 26, 2020 | Dec 28, 2019 | Change ($) | | :-------------------------------- | :----------- | :----------- | :--------- | | 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 This section provides detailed explanations and additional information supporting the condensed consolidated financial statements 1. Basis of Presentation 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][24] - 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] - 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] - 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] 2. Significant Accounting Policies 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][28][31] - 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][35][36][37] 3. Inventories 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 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] - 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][44] 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 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] 6. Income Taxes 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][52] - 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] - 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][96] 7. Earnings Per Share 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 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][60] 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 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] - Warranty reserves were $11,000 as of December 26, 2020, down from $15,000 as of June 27, 2020[64] 10. Derivative Financial Instruments 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] - 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] - 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] - The liabilities from these terminations ($148,400 and $776,500) will be amortized to interest expense over their original terms[68] 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 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] - The carrying values of cash, receivables, and current liabilities approximate their fair value[72] 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 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] - Other contracts recognize revenue 'point-in-time' upon shipment, and engineering services revenue is recognized over time as performed[75] 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][79] 13. Leases 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 $20,071 thousand Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance, condition, and future outlook, covering business overview, executive summary, critical accounting policies, and risk analysis Overview This section introduces Key Tronic as a leading contract manufacturer offering comprehensive design and manufacturing services globally - Key Tronic is a leading contract manufacturer offering design and manufacturing services from facilities in the United States, Mexico, China, and Vietnam, providing full engineering services, materials management, worldwide manufacturing, assembly, in-house testing, and global distribution[84] - The Company's mission is to deliver superior manufacturing and engineering services at the lowest total cost for high-quality products, fostering long-term relationships through its 'Trust, Commitment, Results' philosophy[86] Executive Summary This section provides a high-level summary of the Company's recent financial performance, key operational highlights, and significant events Q2 FY2021 Financial Performance (vs. Q2 FY2020, in millions, except per share): | Metric | Q2 FY2021 | Q2 FY2020 | Change ($) | 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] - The concentration of top three customers' net sales slightly decreased to 35.9% from 37.0%[88] - The Company incurred approximately $1.8 million in additional COVID-19 related costs in Q2 FY2021[90] - 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] - 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] - Net cash used in operating activities for the six months ended December 26, 2020, was $16.8 million, with $3.1 million available on the revolving credit facility[98] Critical Accounting Policies and Estimates This section highlights the accounting policies and estimates that require significant judgment and can materially impact the financial statements - The preparation of financial statements requires significant estimates and assumptions, including revenue recognition, inventory reserves, allowance for doubtful accounts, accrued warranty, income taxes, share-based compensation, impairment of long-lived assets, derivatives and hedging activity, and long-term incentive compensation accrual[100][101][103] Results of Operations (Three Months Ended December 26, 2020 with the Three Months Ended December 28, 2019) This section analyzes the Company's financial performance for the three months ended December 26, 2020, compared to the same period in the prior year Q2 FY2021 vs. Q2 FY2020 Performance (in thousands): | Metric | Dec 26, 2020 | Dec 28, 2019 | Change ($) | 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 | $756 | 91.7% | | Effective income tax rate | 15.6% | 15.4% | 0.2 ppt | - | - Net sales increased due to new program wins and demand, partially offset by COVID-19 related shutdowns and labor shortages in Juarez[107] - Gross profit percentage improved due to increased revenue and streamlining efforts in the Juarez facility[108] - RD&E and SG&A expenses increased primarily due to higher payroll, with SG&A partially offset by reduced travel[111][112] - Interest expense rose due to increased debt[113] - The effective tax rate increased slightly due to foreign currency transactions[114] Results of Operations (Six Months Ended December 26, 2020 with the Six Months Ended December 28, 2019) This section analyzes the Company's financial performance for the six months ended December 26, 2020, compared to the same period in the prior year H1 FY2021 vs. H1 FY2020 Performance (in thousands): | Metric | Dec 26, 2020 | Dec 28, 2019 | Change ($) | 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] - Gross profit percentage improved primarily due to streamlining efforts in Juarez facilities[119] - Provision for obsolete inventory increased significantly to $446,000 from $41,000[120] - RD&E expenses increased due to engineering payroll[121] - SG&A expenses increased due to employee-related costs, partially offset by reduced travel[122] - Interest expense increased due to a higher average balance on the line of credit[123] - The effective tax rate increased due to foreign currency transactions[124] 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 | $145.5 | The increase in backlog was primarily due to increased demand for home-consumer products, healthcare, and home exercise equipment, influenced by the COVID-19 pandemic. Backlog consists of purchase orders expected to ship within 12 months but is not an accurate measure of future net sales CAPITAL RESOURCES AND LIQUIDITY This section discusses the Company's sources of capital and its ability to meet short-term and long-term financial obligations Cash Flow Summary (Six Months Ended, in millions): | Activity | Dec 26, 2020 | Dec 28, 2019 | Change ($) | | :-------------------------------- | :----------- | :----------- | :--------- | | 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][128][129] - Cash used in investing activities increased due to equipment purchases for new programs[130] - Cash provided by financing activities increased due to higher borrowings under the revolving line of credit and term loans[132] - 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] - The Company believes projected cash from operations, revolving credit, and leasing will meet future capital requirements[134] - Repatriation of $1.3 million cash held by foreign subsidiaries as of December 26, 2020, would incur approximately $83,000 in withholding taxes[134] Off-Balance Sheet Arrangements and Contractual Obligations 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] - A summary of contractual obligations was included in the annual report on Form 10-K for fiscal year ended June 27, 2020[135] Risks and Uncertainties That May Affect Future Results 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][141] - Quarterly results can fluctuate due to macroeconomic conditions, customer demand volatility, new program timing, pricing, and material costs[139] - 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][147][148] - 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][150][151][152][153][154][155][157][160][161][162][174] Item 3. Quantitative and Qualitative Disclosures about Market Risk 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] - As of December 26, 2020, $89.9 million was outstanding on the revolving credit facility and $10.7 million on equipment financing[183] - 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] - As of December 26, 2020, $23.8 million in foreign currency forward contracts were outstanding with a fair value of $4.6 million[184] Item 4. Controls and Procedures 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] - 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] - 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] - 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] PART II. OTHER INFORMATION Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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] - 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] Item 6. Exhibits 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] 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]