Key Tronic(KTCC) - 2022 Q3 - Quarterly Report

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