Key Tronic(KTCC) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (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 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 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 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 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] - 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] - 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] - 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses revenue growth offset by declining profitability due to supply chain issues, alongside a rising order backlog Results of Operations 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][88] Capital Resources and Liquidity 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] - 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] - 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][127] Risks and Uncertainties that May Affect Future Results 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][133][139] - The company is dependent on a limited number of suppliers for critical components and has experienced shortages, which can curtail or delay production[141] - Technology risks include cybersecurity incidents that could disrupt operations or misappropriate confidential data, and disruptions to information systems[156][159] - 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][170] Item 3. Quantitative and Qualitative Disclosures about Market Risk 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] - 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] Item 4. Controls and Procedures 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] - No significant changes were made to internal controls over financial reporting during the second quarter of fiscal 2022[184] PART II. OTHER INFORMATION Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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] Item 6. Exhibits 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] Signatures