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What changed in KEY TRONIC CORP's 10-K — 2023 vs 2024

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Paragraph-level year-over-year comparison of KEY TRONIC CORP's 2023 and 2024 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2024 report.

+261 added−200 removedSource: 10-K (2024-10-15) vs 10-K (2022-09-14)

Top changes in KEY TRONIC CORP's 2024 10-K

261 paragraphs added · 200 removed · 148 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeFor the fiscal years 2022, 2021 and 2020, the five largest customers in each year accounted for 40%, 40% and 41% of combined total net sales, respectively. We continue to diversify our customer base by adding additional programs and customers.
Biggest changeSales can, however, fluctuate significantly between quarters from changes in customers and customer demand due to the concentration of sales generated by our largest customers. 5 For the fiscal years 2024, 2023, and 2022, the five largest customers in each year accounted for 34 percent, 35 percent, and 39 percent of combined total net sales, respectively.
We use computer-aided design techniques and software to assist in preparation of the tool design layout and component placement, to reduce tooling and production costs, improve component and product quality, and enhance turnaround time during product development. 5 We purchase materials and components for our products from many different suppliers, including both domestic and international sources.
We use computer-aided design techniques and software to assist in preparation of the tool design layout and component placement, to reduce tooling and production costs, improve component and product quality, and enhance turnaround time during product development. We purchase materials and components for our products from many different suppliers, including both domestic and international sources.
Given our competitive advantages and the growing pressure for new potential customers to move forward with their outsourcing strategies, we feel that we are strongly positioned to win new business in coming periods and grow our revenue and profits. 4 The contract manufacturing industry is intensely competitive.
Given our competitive advantages and the growing pressure for new potential customers to move forward with their outsourcing strategies, we feel that we are strongly positioned to win new business in coming periods and grow our revenue and profits. The contract manufacturing industry is intensely competitive.
There are numerous competitors in the contract manufacturing industry, many of which have substantially more resources and are more geographically diverse than we are. Some of our competitors have similar international production capabilities, large financial resources and some have substantially greater manufacturing, research and development, and marketing resources.
There are numerous competitors in the contract manufacturing industry, many of which have substantially more resources and are more geographically diverse than we are. Some of our competitors have similar international production capabilities, large financial resources and some have 6 substantially greater manufacturing, research and development, and marketing resources.
Foreign Markets Information concerning net sales and long-lived assets (property, plant, and equipment) by geographic areas is set forth in Footnote “Enterprise-Wide Disclosures” of the “Notes to Consolidated Financial Statements” of this Annual Report on Form 10-K and that information is incorporated herein by reference.
Foreign Markets Information concerning net sales and long-lived assets (property, plant, and equipment) by geographic areas is set forth in Note 11 - “Enterprise-Wide Disclosures” of the “Notes to Consolidated Financial Statements” of this Annual Report on Form 10-K and that information is incorporated herein by reference.
Larsen was an audit manager for the public accounting firm BDO USA, LLP. He also held various auditing and supervisory positions with Grant Thornton LLP from 1997 to 2002. Mr. Larsen has a Bachelor of Science degree in Accounting and a Masters degree in Accounting from Brigham Young University and is a Certified Public Accountant. PHILIP S.
Larsen was an audit manager for the public accounting firm BDO USA, LLP. He also held various auditing and supervisory positions with Grant Thornton LLP from 1997 to 2002. Mr. Larsen has a Bachelor of Science degree in Accounting and a Masters degree in Accounting from Brigham Young University and is a Certified Public Accountant. ANTHONY G.
However, material costs and liabilities may arise from these requirements or from new or modified requirements, which could have a material adverse effect on our business and results of operations. 6 Information about Our Executive Officers.
However, material costs and liabilities may arise from these requirements or from new or modified requirements, which could have a material adverse effect on our business and results of operations.
The following table summarizes the customers that represented 10% or more of total net sales during the last three fiscal years: Percentage of Net Sales by Fiscal Year 2022 2021 2020 Customer A 13% * * Customer B 12% 24% 18% There can be no assurance that the Company’s principal customers will continue to purchase products from the Company at current levels.
The following table summarizes the customers that represented 10 percent or more of total net sales during the last two fiscal years: Percentage of Net Sales by Fiscal Year 2024 2023 2022 Customer A 20% 12% 12% Customer B * * 13% There can be no assurance that the Company’s principal customers will continue to purchase products from the Company at current levels.
BRETT R. LARSEN – Executive Vice President of Administration, Chief Financial Officer, and Treasurer Mr. Larsen, age 49, has served as Executive Vice President of Administration, Chief Financial Officer, and Treasurer since July 2015. Previously, he was Vice President of Finance and Controller from February 2010 to July 2015.
LARSEN – President and Chief Executive Officer Mr. Larsen, age 51, has served as President and Chief Executive Officer since July 2024. Previously he was the Executive Vice President of Administration, Chief Financial Officer, and Treasurer from July 2015 through June 2024. He was Vice President of Finance and Controller from February 2010 to July 2015.
The table below sets forth the name, current age and current position of our executive officers and other significant employees: Name Age Positions Held Executive Officers Craig D. Gates 63 President and Chief Executive Officer Brett R. Larsen 49 Executive Vice President of Administration, Chief Financial Officer, and Treasurer Philip S.
Information about Our Executive Officers The table below sets forth the name, current age, and current position of our executive officers and other significant employees: Name Age Positions Held Executive Officers Brett R. Larsen 51 President and Chief Executive Officer Anthony G. Voorhees 50 Executive Vice President of Administration, Chief Financial Officer, and Treasurer Philip S.
As of July 2, 2022, we had 4,897 full-time employees compared to 5,450 on July 3, 2021, and 5,741 on June 27, 2020. Since we can have significant fluctuations in product demand, we seek to maintain flexibility in our workforce by utilizing skilled temporary labor in some of our manufacturing facilities in addition to full-time employees.
As of June 29, 2024, we had 4,122 full-time employees compared to 5,447 on July 1, 2023. Since we can have significant fluctuations in product demand, we seek to maintain flexibility in our workforce by utilizing skilled temporary labor in some of our manufacturing facilities in addition to full-time employees.
We expect net sales to our five largest customers as a percentage of total net sales to approximate current levels going forward.
We aim to diversify our customer base by adding additional programs and customers. We expect net sales to our five largest customers as a percentage of total net sales to approximate current levels going forward.
Orebaugh served as Director of Engineering since May 2013. From April 2010 to May 2013, he served as Manager of Engineering. From January 2000 to April 2010 he served as Lead Mechanical Engineer. Prior to that, he served as Mechanical Engineer from October 1998 to January 2000 and Associate Mechanical Engineer since October 1997. Mr.
From January 2000 to April 2010 he served as Lead Mechanical Engineer. Prior to that, he served as Mechanical Engineer from October 1998 to January 2000 and Associate Mechanical Engineer since October 1997. Mr. Orebaugh holds a BA in Mechanical Engineering from Gonzaga University.
HOCHBERG – Executive Vice President of Business Development Mr. Hochberg, age 60, has been Executive Vice President of Business Development since July 2012. Prior to this, Mr. Hochberg served as Vice President of Business Development from October 2009 through June 2012. He was Director of Business Development and Program Management from July 2008 to October 2009. Mr.
Hochberg served as Vice President of Business Development from October 2009 through June 2012. He was Director of Business Development and Program Management from July 2008 to October 2009. Mr. Hochberg served as Director of Business Development from October 2004 to July 2008 and as Director of EMS Sales and Marketing from July 2000 to October 2004.
Backlog On July 30, 2022, our order backlog was valued at approximatel y $407.8 million, compared to approximately $303.2 million on July 31, 2021. The amount of backlog is not necessarily indicative of future sales but can be indicative of trends in expected future sales revenue.
Backlog On June 29, 2024, our order backlog was valued at approximatel y $249.6 million, compared to approximately $343.0 million on July 1, 2023. The amount of backlog is not necessarily indicative of future sales but can be indicative of trends in expected future sales revenue.
Hochberg served as Director of Business Development from October 2004 to July 2008 and as Director of EMS Sales and Marketing from July 2000 to October 2004. Prior to joining Key Tronic, Mr. Hochberg worked for Quinton Instrument Company as their Director of Marketing and Product Management from 1992 to 2000.
Prior to joining Key Tronic, Mr. Hochberg worked for Quinton Instrument Company as their Director of Marketing and Product Management from 1992 to 2000. From 1988 to 1992, he was employed by SpaceLabs Medical as their Business Development Marketing Manager. Mr.
He also holds a MBA from Gonzaga University. DAVID H. KNAGGS – Executive Vice President of Quality, Regulatory Affairs and Information Systems Mr. Knaggs, age 41, has been Executive Vice President of Quality and Information Systems since May 2021. Previously, he was Vice President of Quality and Regulatory Affairs from November 2017 to May 2021.
Knaggs, age 43, has been Executive Vice President of Quality, Regulatory Affairs, and Information Systems since May 2021. Previously, he was Vice President of Quality and Regulatory Affairs from November 2017 to May 2021. He was Vice President of Quality since October 2016. Before joining Key Tronic, Mr.
Sales of the majority of our products have not historically been seasonal in nature, but may be seasonal in the future if there are changes in the types of products manufactured. Sales can, however, fluctuate significantly between quarters from changes in customers and customer demand due to the concentration of sales generated by our largest customers.
Sales of the majority of our products have not historically been seasonal in nature, but may be seasonal in the future if there are changes in the types of products manufactured.
Mackleit, age 54, has been Executive Vice President of Operations since December 2019. Prior to this, Mr. Mackleit served as Vice President of Program Management since July 2012. He served as Director of Program Management from July 2008 through June 2012. From May 2006 to July 2008 he served as Principal Program Manager.
Mackleit served as Vice President of Program Management since July 2012. He served as Director of Program Management from July 2008 through June 2012. From May 2006 to July 2008 he served as Principal Program Manager. Prior to that, he served as Program Manager from March 2002 to May 2006 and Associate Program Manager from August 2000 to March 2002.
From 1988 to 1992, he was employed by SpaceLabs Medical as their Business Development Marketing Manager. Mr. Hochberg has an MBA from the University of British Columbia, a BA in Psychology, with a minor in Business from Washington University in St. Louis. 7 DUANE D. MACKLEIT – Executive Vice President of Operations Mr.
Hochberg has an MBA from the University of British Columbia, a BA in Psychology, with a minor in Business from Washington University in St. Louis. DUANE D. MACKLEIT – Executive Vice President of Operations Mr. Mackleit, age 56, has been Executive Vice President of Operations since December 2019. Prior to this, Mr.
Orebaugh holds a BA in Mechanical Engineering from Gonzaga University. MARK COURTNEY – Vice President of Supply Chain Mark Courtney, age 56, has been Vice President of Supply Chain of the company since August 2019.
MARK COURTNEY – Vice President of Supply Chain 8 Mark Courtney, age 58, has been Vice President of Supply Chain of the company since August 2019.
Hochberg 60 Executive Vice President of Business Development Duane D. Mackleit 54 Executive Vice President of Operations David H. Knaggs 41 Executive Vice President of Quality and Information Systems Chad T. Orebaugh 51 Executive Vice President of Engineering Mark Courtney 56 Vice President of Supply Chain Executive Officers CRAIG D. GATES – President and Chief Executive Officer Mr.
Hochberg 62 Executive Vice President of Customer Relations and Integration Duane D. Mackleit 56 Executive Vice President of Operations David H. Knaggs 43 Executive Vice President of Quality, Regulatory Affairs, and Information Systems Chad T. Orebaugh 53 Executive Vice President of Engineering Mark Courtney 58 Vice President of Supply Chain 7 Executive Officers BRETT R.
He has a Bachelor of Science degree in Mechanical Engineering with a minor in mathematics from the University of Washington. CHAD T. OREBAUGH – Executive Vice President of Engineering Mr. Orebaugh, age 51, has been Executive Vice President of Engineering since September 2021. Previously he served as Vice President of Engineering since April 2017. Prior to this, Mr.
OREBAUGH – Executive Vice President of Engineering Mr. Orebaugh, age 53, has been Executive Vice President of Engineering since September 2021. Previously he served as Vice President of Engineering since April 2017. Prior to this, Mr. Orebaugh served as Director of Engineering since May 2013. From April 2010 to May 2013, he served as Manager of Engineering.
Prior to that, he served as Program Manager from March 2002 to May 2006 and Associate Program Manager from August 2000 to March 2002. Mr. Mackleit has also held several other positions with Key Tronic Corporation. Mr. Mackleit has an AA in Business from Spokane Falls Community College and a BA in Business/Marketing from Eastern Washington University.
Mr. Mackleit has also held several other positions with Key Tronic Corporation. Mr. Mackleit has an AA in Business from Spokane Falls Community College and a BA in Business/Marketing from Eastern Washington University. He also holds a MBA from Gonzaga University. DAVID H. KNAGGS – Executive Vice President of Quality, Regulatory Affairs, and Information Systems Mr.
He was Vice President of Quality since October 2016. Before joining Key Tronic, Mr. Knaggs worked at Telect, Inc. from 2008 to 2016 as their Director of Engineering. Prior to that, he worked at Isothermal Systems Research as Lead Systems Engineer from 2003 to 2008.
Knaggs worked at Telect, Inc. from 2008 to 2016 as their Director of Engineering. Prior to that, he worked at Isothermal Systems Research as Lead Systems Engineer from 2003 to 2008. He has a Bachelor of Science degree in Mechanical Engineering with a minor in mathematics from the University of Washington. CHAD T.
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Gates, age 63, has been President and Chief Executive officer of the Company since April 2009. Previously, he was Executive Vice President and General Manager from August 2002 to April 2009.
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VOORHEES - Executive Vice President of Administration, Chief Financial Officer, and Treasurer Mr. Voorhees, age 50, has served as Executive Vice President of Administration, Chief Financial Officer, and Treasurer since July 2024.
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He served as Executive Vice President of Marketing, Engineering and Sales from July 1997 to August 2002 and served as Vice President and General Manager of New Business Development from October 1995 to July 1997. He joined the Company as Vice President of Engineering in October of 1994.
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Previously, he was Vice President of Finance and Controller from November 2021 to June 2024, Senior Manager of Corporate Finance from July 2015, and Manager of Financial Reporting since April 2010. Prior to joining Key Tronic, Mr. Voorhees worked at Coldwater Creek from August 2007 to March 2010 as a Senior Financial Reporting Accountant.
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From 1982 to 1991 he held various engineering and management positions within the Microswitch Division of Honeywell, Inc., in Freeport, Illinois, and from 1991 to October 1994 he served as Director of Operations, Electronics for Microswitch. Mr. Gates has a Bachelor of Science Degree in Mechanical Engineering and a Master’s in Business Administration from the University of Illinois, Urbana.
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Prior to that, he worked at Moss Adams, LLP as a Senior Assurance Associate from November 2004 to August 2007. Between September 2001 and August 2004, Mr. Voorhees held senior level accounting positions at Boise State University and Idaho State Department of Agriculture. Mr.
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Voorhees has a bachelor degree in Accounting from the University of Idaho and is a Certified Public Accountant. PHILIP S. HOCHBERG – Executive Vice President of Customer Relations and Integration Mr. Hochberg, age 62, has been Executive Vice President of Customer Relations and Integration since July 2012. Prior to this, Mr.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeThese risks and uncertainties include but are not limited to, the risk factors described below, in Item 7A: “Quantitative and Qualitative Disclosures about Market Risk” and elsewhere in this Annual Report on Form 10-K. 8 RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS The following risks and uncertainties could affect our actual results and could cause results to differ materially from past results or those contemplated by our forward-looking statements.
Biggest changeItem 1A. RISK FACTORS There are risks and uncertainties that could affect our business. These risks and uncertainties include but are not limited to, the risk factors described below, in Item 7A: “Quantitative and Qualitative Disclosures about Market Risk” and elsewhere in this Annual Report on Form 10-K.
While significant uncertainty currently exists about the future of energy prices, a significant increase, such as the increased fuel prices experienced in fiscal year 2022, is possible. Increased energy prices could cause an increase to our raw material and transportation costs. In addition, increased transportation costs related to certain suppliers and customers could be passed along to us.
While significant uncertainty currently exists about the future levels of energy prices, a significant increase, such as the increased fuel prices experienced in fiscal year 2022, is possible. Increased energy prices could cause an increase to our raw material costs and transportation costs. In addition, increased transportation costs related to certain suppliers and customers could be passed along to us.
These risks could harm our reputation and our relationships with employees, vendors and customers and may result in claims or enforcement actions and investigations against us. Disruptions to our information systems, including losses of data or outages, could adversely affect our operations. We rely on information technology networks and systems to process, transmit and store electronic information.
Any of these risks could harm our reputation and our relationships with employees, vendors and customers and may result in claims or enforcement actions and investigations against us. Disruptions to our information systems, including losses of data or outages, could adversely affect our operations. We rely on information technology networks and systems to process, transmit and store electronic information.
We may not be able to increase our product prices enough to offset these increased costs. In addition, any increase in our product prices may reduce our future customer orders and profitability. TECHNOLOGY RISKS Our operations are subject to cyberattacks that could have a material adverse effect on our business.
We may not be able to increase our product prices enough to offset these increased costs. In addition, any increase in our product prices may reduce our future customer orders and profitability. TECHNOLOGY RISKS Our operations are subject to cyberattacks that have had and could have a material adverse effect on our business.
Our ability to manage growth effectively requires us to continue to implement and improve these systems; avoid cost overruns; maintain customer, supplier and other favorable business relationships during possible transition periods; continue to develop the management skills of our managers and supervisors; and continue to train, motivate and manage our employees.
Our ability to manage growth effectively requires us to continue to implement and improve these systems; avoid cost overruns; maintain customer, supplier and other favorable 12 business relationships during possible transition periods; continue to develop the management skills of our managers and supervisors; and continue to train, motivate and manage our employees.
Defects in the products we manufacture or design, whether caused by a design, manufacturing or component failure or error, or deficiencies in our manufacturing processes, may result in delayed shipments to customers or reduced or canceled customer orders. If these defects or deficiencies are significant, our reputation may also be damaged.
Defects in the products we manufacture or design, whether caused by a design, manufacturing or component failure or error, or deficiencies in our manufacturing processes, may result in delayed shipments to customers or reduced or canceled customer orders. If these defects or deficiencies are significant, our business reputation may also be damaged.
To the extent we have excess cash in foreign locations that could be used in, or is needed by, our operations in the United States, we may incur significant penalties and/or taxes to repatriate these funds. We may experience fluctuations in quarterly results of operations.
To the extent we have excess cash in foreign locations that could be used in, or is needed by, our operations in the United States, we may incur significant penalties and/or taxes to repatriate these funds. 9 We may experience fluctuations in quarterly results of operations.
If we sustain a significant claim or loss which is not covered by insurance, our net income could be negatively impacted. 15 We may encounter complications with acquisitions, which could potentially harm our business.
If we sustain a significant claim or loss which is not covered by insurance, our net income could be negatively impacted. We may encounter complications with acquisitions, which could potentially harm our business.
A change in those policies can have a significant effect on our reported results and may affect our reporting of transactions which are completed before a change is announced.
A change in those policies can have a significant effect on our reported results and may affect our 16 reporting of transactions which are completed before a change is announced.
The loss of one or more of our major customers, or the reduction, delay or cancellation of orders from such customers, due to economic conditions or other forces, could materially and adversely affect our business, operating results and financial condition.
The loss of one or more of our principal customers, or the reduction, delay or cancellation of orders from such customers, due to economic conditions or other forces, could materially and adversely affect our business, operating results and financial condition.
We routinely monitor our systems for cyber threats and have processes in place to detect and remediate vulnerabilities. Nevertheless, we have experienced attempted security breaches, such as phishing emails and other targeted attacks.
We routinely monitor our systems for cyber threats and believe we have sufficient processes in place to detect and remediate vulnerabilities. Nevertheless, we have experienced attempted security breaches, such as phishing emails and other targeted attacks.
Additionally, the financial strength of our customers and suppliers and their ability to obtain and rely on credit financing may affect their ability to fulfill their obligations to us and have an adverse effect on our financial results. Adverse macroeconomic conditions as a result of COVID-19 have and may continue to affect our business.
Additionally, the financial strength of our customers and suppliers and their ability to obtain and rely on credit financing may affect their ability to fulfill their obligations to us and have an adverse effect on our financial results. Adverse macroeconomic conditions, such as those that were a result of COVID-19 have and may continue to affect our business.
If we do not manage our growth effectively, our profitability could decline. Our business is experiencing growth which can place considerable additional demands upon our management team and our operational, financial and management information systems.
If we do not manage our growth effectively, our profitability could decline. When our business is experiencing growth, such growth can place considerable additional demands upon our management team and our operational, financial and management information systems.
This can result in longer lead times and the inability to meet our customers request for flexible production and extended shipment dates. If demand for components outpaces supply, capacity delays could affect future operations.
This can result in longer lead times and the inability to meet our customers' requests for flexible production and extended shipment dates. If demand for components outpaces supply, capacity delays could affect future operations.
The completion of the internal investigation will not automatically resolve the SEC’s inquiries. If the SEC or any other regulator were to commence legal action against us, we could be required to pay significant penalties and become subject to injunctions, cease and desist orders or other remedies.
The completion of the internal investigation in fiscal year 2022 did not automatically resolve the SEC’s inquiries. If the SEC or any other regulator were to commence legal action against us, we could be required to pay significant penalties and become subject to injunctions, cease and desist orders or other remedies.
These operations may be subject to a number of risks, including: • difficulties in staffing, turnover and managing onshore and offshore operations; • political and economic instability (including acts of terrorism, pandemics, civil unrest, forms of violence and outbreaks of war), which could impact our ability to ship, manufacture, and/or receive product; • unexpected changes in regulatory requirements and laws, including those related to climate change; • longer customer payment cycles and difficulty collecting accounts receivable; • export duties, import controls and trade barriers (including quotas); • governmental restrictions on the transfer of funds; • burdens of complying with a wide variety of foreign laws and labor practices; subject to trade wars and tariffs; • our locations are subject to physical and operational risks from natural disasters, severe weather events, and climate change; and • our locations may also be impacted by future temporary closures and labor constraints as a result of COVID-19.
These operations may be subject to a number of risks, including: • difficulties in staffing, turnover and managing onshore and offshore operations; • political and economic instability (including acts of terrorism, pandemics, civil unrest, forms of violence and outbreaks of war), which could impact our ability to ship, manufacture, and/or receive product; • unexpected changes in regulatory requirements and laws, including those related to climate change; • longer customer payment cycles and difficulty collecting accounts receivable; • cash liquidity, the ability to acquire new debt capacity, and capital constraints; • export duties, import controls and trade barriers (including quotas); • governmental restrictions on the transfer of funds; • burdens of complying with a wide variety of foreign laws and labor practices; subject to trade wars and tariffs; • our locations are subject to physical and operational risks from natural disasters, severe weather events, and climate change • our locations may also be impacted by future temporary closures and labor constraints as a result of local mandates for medical, climate, and unforeseen emergencies; and • our locations may be impacted by future temporary closure related to cyberattacks.
We are exposed to interest rate risk under our revolving line of credit and term loan. We have not historically hedged the interest rate on our credit facility; therefore, unless we do so, significant changes in interest rates could adversely affect our results of operations.
Adverse changes in the interest rates of our borrowings could adversely affect our financial condition. We are exposed to interest rate risk under our revolving line of credit and term loans. We have not historically hedged the interest rate on our credit facility; therefore, unless we do so, significant changes in interest rates could adversely affect our results of operations.
We are dependent on many suppliers, including sole source suppliers, to provide key components and raw materials used in manufacturing customers’ products. We have seen supply shortages in certain electronic components. In addition, our suppliers' facilities may also experience earthquakes, tsunamis and other natural disasters which may cause a shortage of components.
We are dependent on many suppliers, including sole source suppliers, to provide key components and raw materials used in manufacturing customers’ products. We have seen supply shortages in certain electronic components. In addition, our suppliers' facilities may also experience closures or limited production due to natural disasters or other reasons, which may cause a shortage of components.
Our success will continue to depend to a significant extent on our key personnel. Our future success depends in large part on the continued service of our key technical, marketing and management personnel and on our ability to continue to attract and retain qualified production employees.
Our future success depends in large part on the continued service of our key technical, marketing and management personnel and on our ability to continue to attract and retain qualified production employees.
A significant portion of our operations are denominated in the Mexican peso and the Chinese currency, the renminbi ("RMB"). Currency exchange rates fluctuate daily as a result of a number of factors, including changes in a country's political and economic policies.
We have manufacturing operations located in Mexico and China. A significant portion of our operations are denominated in the Mexican Peso and the Chinese currency, the renminbi ("RMB"). Currency exchange rates fluctuate daily as a result of a number of factors, including changes in a country's political and economic policies.
In addition, competitors can copy our non-proprietary designs and processes after we have invested in development of products for customers, thereby enabling such competitors to offer lower prices on such products due to savings in development costs. 10 Fluctuations in foreign currency exchange rates could increase our operating costs. We have manufacturing operations located in Mexico and China.
In addition, competitors can copy our non-proprietary designs and processes after we have invested in development of products for customers, thereby enabling such competitors to offer lower prices on such products due to savings in development costs. Fluctuations in foreign currency exchange rates have increased and could continue to increase our operating costs.
If our systems for protecting against cybersecurity incidents prove to be insufficient, we could be adversely affected by, among other things, loss of or damage to intellectual property, proprietary or confidential information, or employee, vendor or customer data; interruption of our business operations; and increased costs to prevent, respond to or mitigate cybersecurity incidents.
If our systems for protecting against cybersecurity incidents, including the Previously Disclosed Cyber Incident, prove not to be sufficient, we could be adversely affected by, among other things, loss of or damage to intellectual property, proprietary or confidential information, or employee, vendor or customer data; interruption of our business operations; and increased costs to prevent, respond to or mitigate cybersecurity incidents.
These fluctuations may be due to factors specific to us such as our stock's thinly traded nature, variations in quarterly operating results, changes in earnings estimates, or to factors relating to the contract manufacturing industry or to the securities markets in general, which, in recent years, have experienced significant price fluctuations.
These fluctuations may be due to factors specific to us such as our stock's thinly traded nature, variations in quarterly operating results, changes in earnings estimates, matters arising from the subject matter of the Audit Committee's internal investigation, or to factors relating to the contract manufacturing industry or to the securities markets in general, which, in recent years, have experienced significant price fluctuations.
The conditions affect the Company’s ability to predict and plan for future supply chain disruptions, fluctuations in customer demand and costs, and the ability to operate as there is uncertainty over future temporary closures. Inflation has also risen globally to historically high levels. If the inflation rate continues to increase, the costs of labor and other expenses could also increase.
The conditions affect the Company’s ability to predict and plan for future supply chain disruptions, fluctuations in customer demand and costs, and the ability to operate as there is uncertainty over future temporary closures. Inflation has also risen globally to historically high levels.
These factors also affect our ability to efficiently use labor and equipment. We are currently managing a number of new programs. Consequently, our exposure to these factors has increased. In addition, if any of these new programs or new customer relationships were terminated, our operating results could be harmed, particularly in the short term.
These factors also affect our ability to efficiently use labor and equipment. We continuously manage a number of new programs. Consequently, our exposure to these factors is consistently elevated. In addition, if any of these new programs or new customer relationships were terminated, our operating results could be harmed, particularly in the short term.
If such institutions were to become insolvent during which time it held our cash and cash equivalents in excess of the insurance limit, it could be necessary to obtain other credit financing to operate our facilities. Our ability to secure and maintain sufficient credit arrangements is key to our continued operations.
If such institutions were to become insolvent during which time it held our cash and cash equivalents in excess of the insurance limit, it could be necessary to obtain other credit financing to operate our facilities. Our stock price is volatile.
Due to the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. LEGAL AND ACCOUNTING RISKS We are involved in various legal proceedings.
Due to the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
Restated financial statements and failures in internal controls may also cause us to fail to meet additional reporting obligations, negatively affect investor confidence in our management and the accuracy of our financial statements and disclosures, or result in adverse publicity and concerns from investors, any of which could have a negative effect on the price of our common stock, subject us to regulatory investigations and penalties or stockholder litigation, and materially adversely impact our business, financial condition, results of operations and cash flows.
Further and continued determinations that there are deficiencies in the effectiveness of the Company’s internal control over financial reporting could result in another restatement of our consolidated financial statements, cause us to fail to meet our reporting obligations, reduce our ability to obtain financing, negatively affect investor confidence in our management and the accuracy of our financial statements and disclosures, or result in adverse publicity and concerns from investors, any of which could have a negative effect on the price of our common stock, subject us to regulatory investigations and penalties or stockholder litigation, and materially adversely impact our business, financial condition, results of operations and cash flows.
We expect to incur costs in the future to mitigate against cybersecurity incidents as threats are expected to continue and to become more persistent and sophisticated.
We have incurred and expect to continue to incur costs to mitigate against the Previously Disclosed Cyber Incident and other cybersecurity incidents as threats are expected to continue to become more persistent and sophisticated.
The majority of our sales come from a small number of customers and a decline in sales to any of these customers could adversely affect our business. At present, our customer base is concentrated and could become more or less concentrated. There can be no assurance that our principal customers will continue to purchase products from us at current levels.
At present, our customer base is concentrated and could become more or less concentrated. There can be no assurance that our principal customers will continue to purchase products from us at current levels.
Matters relating to or arising from the subject of the Audit Committee’s internal investigation, including expenses and diversion of personnel and resources, regulatory investigations, and proceedings and litigation matters, could have an adverse effect on our business, results of operations and financial condition.
Matters relating to or arising from the subject of the Audit Committee’s internal investigation, including expenses and diversion of personnel and resources, regulatory investigations, and proceedings and litigation matters, could have an adverse effect on our business, results of operations and financial condition. 15 We have incurred, and may continue to incur, significant expenses related to legal, accounting and other professional services in connection with matters relating to or arising from the subject of the Audit Committee’s internal investigation in fiscal year 2022.
There is no assurance that we will be able to retain or renew our credit agreements in the future. In the event the business grows rapidly or there is uncertainty in the macroeconomic climate, additional financing resources could be necessary.
Additionally, in the event that our business grows rapidly or there is uncertainty in the macroeconomic climate, additional financing resources could be necessary in the current or future fiscal years. There is no assurance that we will be able to obtain equity or debt financing at acceptable terms, or at all, in the future.
Adverse economic conditions and uncertainty in the global economy such as unstable global financial and credit markets, inflation, and recession can negatively impact our business. Unfavorable economic conditions could affect the demand for our customers’ products by triggering a reduction in orders as well as a decline in forecasts which could adversely affect our sales in future periods.
Unfavorable economic conditions could affect the demand for our customers’ products by triggering a reduction in orders as well as a decline in forecasts which could adversely affect our sales in future periods.
Start-up costs and inefficiencies related to new or transferred programs can adversely affect our operating results and such costs may not be recoverable if such new programs or transferred programs are canceled or don’t meet expected sales volumes.
We cannot provide assurances that any changes of management personnel will not cause disruption to operations or customer relationships or a decline in our operating results. 11 Start-up costs and inefficiencies related to new or transferred programs can adversely affect our operating results and such costs may not be recoverable if such new programs or transferred programs are canceled or don’t meet expected sales volumes.
All of these expenses, and the diversion of the attention of management and other personnel that has occurred and is expected to continue, could adversely affect our business, financial condition, results of operations and cash flows. 14 Due to inherent limitations, there can be no assurance that our system of disclosure and internal controls and procedures will be successful in preventing all errors, theft and fraud, or in informing management of all material information in a timely manner.
Due to inherent limitations, there can be no assurance that our system of disclosure and internal controls and procedures will be successful in preventing all errors, theft and fraud, or in informing management of all material information in a timely manner.
When used herein, the words “expects,” “believes,” “anticipates” and other similar expressions are intended to identify forward-looking statements. RISKS RELATED TO OUR BUSINESS AND STRATEGY Our operations may be subject to certain risks. We manufacture product in facilities located in Mexico, China, Vietnam and the United States.
RISKS RELATED TO OUR BUSINESS AND STRATEGY Our operations may be subject to certain risks. We manufacture product in facilities located in Mexico, China, Vietnam and the United States.
Moreover, because of the inherent limitations of any control system, material misstatements due to error or fraud may not be prevented or detected on a timely basis, or at all. If we are unable to provide reliable and timely financial reports in the future, our business and reputation may be further harmed.
Moreover, as discussed in the following risk factor, because of the inherent limitations of any control system, material misstatements due to error or fraud may not be prevented or detected on a timely basis, or at all.
There can be no assurance that our customers will be successful in identifying, developing and marketing products that respond to technological change, emerging industry standards or evolving customer requirements. RISKS RELATED TO CAPITAL AND FINANCING Cash and cash equivalents are exposed to concentrations of credit risk. We place our cash with high credit quality institutions.
There can be no assurance that our customers will be successful in identifying, developing and marketing products that respond to technological change, emerging industry standards or evolving customer requirements. 13 RISKS RELATED TO CAPITAL AND FINANCING Our failure to comply with the covenants in our credit arrangements could materially and adversely affect our financial condition.
Significant estimates and assumptions include the allowance for doubtful receivables, provision for obsolete and non-saleable inventory, stock-based compensation, the valuation allowance on deferred tax assets, impairment of long-lived assets, long-term incentive compensation accrual, the provision for warranty costs, and the impact of hedging activities. Due to the COVID-19 pandemic, we have seen extreme shifts in demand from our customer base.
Significant estimates and assumptions include the allowance for credit losses, provision for inactive, obsolete, and surplus inventory, stock-based compensation, the valuation allowance on deferred tax assets, impairment of long-lived assets, long-term incentive compensation accrual, the provision for warranty costs, and the impact of hedging activities.
As part of our hedging strategy, we currently use Mexican peso forward contracts to hedge foreign currency fluctuations for a portion of our Mexican peso denominated expenses. We currently do not hedge expenses denominated in RMB. Unexpected losses could occur from increases in the value of these currencies relative to the United States dollar.
As part of our hedging strategy, we currently use Mexican Peso forward contracts to hedge future foreign currency fluctuations for a portion of our Mexican Peso denominated expenses. We currently do not hedge expenses denominated in RMB and have occasionally also been unable to hedge expenses denominated in Mexican Peso.
Absent significant changes in related rules, which we cannot assure, we anticipate some level of increased costs related to these new regulations to continue indefinitely.
Compliance with these new rules and future rules has increased and may increase further our legal, financial and accounting costs as well as a potential risk of noncompliance. Absent significant changes in related rules, which we cannot assure, we anticipate some level of increased costs related to these new regulations to continue indefinitely.
Changes in securities laws and regulations will increase our costs and risk of noncompliance. We are subject to additional requirements contained in the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) and more recently the Dodd-Frank Act. The Sarbanes-Oxley and Dodd-Frank Acts required or will require changes in some of our corporate governance, securities disclosure and compliance practices.
Changes in securities laws and regulations will increase our costs and risk of noncompliance. We are subject to additional requirements contained in the U.S. federal securities laws, including the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).
As a result of COVID-19, significant currency exchange fluctuations can occur causing unexpected losses. Future temporary closures of production facilities in Mexico could also cause significant changes in our ability to qualify for hedge accounting treatment of our forward contracts to hedge foreign currency fluctuations.
Future temporary closures of production facilities in Mexico could also cause significant changes in our ability to qualify for hedge accounting treatment of our forward contracts to hedge foreign currency fluctuations. Our success will continue to depend to a significant extent on our key personnel and our ability to execute our management succession plans.
The possibility of future temporary closures and labor constraints, as well as the inability to predict customer demand, costs, and future supply chain disruptions during the rapidly changing COVID-19 environment can materially impact operating results. 9 We are exposed to general economic conditions, which could have a material adverse impact on our business, operating results and financial condition.
Due to the COVID-19 pandemic, we have seen extreme shifts in demand from our customer base. The possibility of future temporary closures and labor constraints, as well as the inability to predict customer demand, costs, and future supply chain disruptions during pandemics can materially impact operating results.
We expect that our operations will continue to be subject to cyber threats, and any future cybersecurity incident could significantly disrupt our operations. 12 Cybersecurity incidents could also result in the misappropriation of proprietary or confidential information of the Company or that of its customers, employees, vendors or suppliers.
We expect that our operations will continue to be subject to cyber threats, and any future cybersecurity incident could significantly disrupt our operations.
We are subject to a variety of domestic and foreign environmental regulations relating to the use, storage, and disposal of materials used in our manufacturing processes. In addition, increasing governmental focus on climate change may result in new environmental regulations that may negatively affect us, our vendors or our customers.
In addition, increasing governmental focus on climate change may result in new environmental regulations that may negatively affect us, our vendors or our customers.
The validation of the efficacy of these remedial steps will result in us incurring additional near term expenses, and to the extent these steps are not successful, we may incur significant additional time and expense. In addition, we are cooperating with the Securities and Exchange Commission (the “SEC”) regarding matters related to the internal investigation.
To the extent these steps taken to remediate identified deficiencies in our internal controls over financial reporting were not successful, we may incur significant additional time and expense. In addition, we continue to cooperate with the Securities and Exchange Commission (the “SEC”) regarding matters related to the internal investigation.
These fluctuations often have been unrelated to the operating performance of the specific companies whose stocks are traded. In addition, holders of our common stock will suffer immediate dilution to the extent outstanding equity awards are exercised to purchase common stock.
These fluctuations often have been unrelated to the operating performance of the specific companies whose stocks are traded.
We may not be able to increase our product prices enough to offset these increased costs. In addition, any increase in our product prices may reduce our future customer orders and profitability. Inflation may further exacerbate other risk factors discussed in this Annual Report on Form 10-K, including disruptions to international operations.
As the inflation rate continues to increase, the costs of labor and other expenses have and may continue to increase. We may not be able to increase our product prices enough to offset these increased costs. In addition, any increase in our product prices may reduce our future customer orders and profitability.
If we fail to properly remediate any future deficiencies or material weaknesses or to maintain proper and effective internal controls, our business and financial condition could be materially adversely impacted.
Any of these risks could have a material adverse impact on our business and financial condition. If we fail to maintain proper and effective internal controls, our business and financial condition could be materially adversely impacted. We cannot assure you that we will not discover additional deficiencies in our internal control over financial reporting.
The contraction in demand from certain industries could impact our customer orders and have a negative impact on our operations over the foreseeable future. Additionally, if one or more of our customers were to become insolvent or otherwise unable to pay for the manufacturing services provided by us, our operating results and financial condition would be adversely affected.
The contraction in demand from certain industries could impact our customer orders and have a negative impact on our operations over the foreseeable future. Our inability to enforce contracts with, or the bankruptcy or insolvency of, any of our principal customers could adversely affect our business.
RISKS RELATED TO OUR CONTROLS AND PROCEDURES AND THE INTERNAL INVESTIGATION We identified a material weakness in our internal control over financial reporting and concluded that our disclosure controls and procedures were not effective as of December 26, 2020 and April 3, 2021.
As a result of these material weaknesses, our management concluded that our internal control over financial reporting and disclosure controls and procedures were not effective as of June 29, 2024. We are engaged in developing and implementing a remediation plan, as described in Item 9A.
In response to the requirements of the Sarbanes-Oxley and Dodd-Frank Acts, the SEC and NASDAQ promulgated new rules and additional rulemaking is expected in the future. Compliance with these new rules and future rules has increased and may increase further our legal, financial and accounting costs as well as a potential risk of noncompliance.
The Sarbanes-Oxley and Dodd-Frank Acts required or will require changes in some of our corporate governance, securities disclosure and compliance practices. The SEC and NASDAQ Global Market have promulgated new rules and additional rulemaking is expected in the future.
The Company has been able to manage the arrival of components in an effort to control inventory levels of customers that have seen sharp decreases in demand as a result of COVID-19. 11 Compliance or the failure to comply with current and future environmental and health laws or regulations could cause us significant expense.
Compliance or the failure to comply with current and future environmental and health laws or regulations could cause us significant expense. We are subject to a variety of domestic and foreign environmental regulations relating to the use, storage, and disposal of materials used in our manufacturing processes.
Removed
Item 1A. RISK FACTORS There are risks and uncertainties that could affect our business.
Added
RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS The following risks and uncertainties could affect our actual results and could cause results to differ materially from past results or those contemplated by our forward-looking statements. When used herein, the words “expects,” “believes,” “anticipates” and other similar expressions are intended to identify forward-looking statements.
Removed
Key Tronic continues to work closely with its employees and key suppliers to ascertain delays attributable to the COVID-19 pandemic. Delays in production and extended transit times of critical parts have and may continue to cause a shortage of components.
Added
We are exposed to general economic conditions, which could have a material adverse impact on our business, operating results and financial condition. Adverse economic conditions and uncertainty in the global economy such as unstable global financial and credit markets, inflation, and recession can negatively impact our business.
Removed
However, given the unprecedented nature of the pandemic the FASB staff believes that an entity may apply the exception in paragraph 815-30-40-4 for rare cases caused by extenuating circumstances that are related to the nature of the forecasted transaction and are outside the control or influence of an entity to delays in the timing of the forecasted transactions if those delays are related to the effects of the COVID-19 pandemic and are considered probable to still occur.
Added
Inflation may further exacerbate other risk factors discussed in this Annual Report on Form 10-K, including disruptions to international operations. The majority of our sales come from a small number of customers, and a decline in sales to any of these customers could adversely affect our business.
Removed
In addition, the FASB staff believes that it would be acceptable for an entity to determine that missed forecasts related to the effects of the COVID-19 pandemic need not be considered when determining whether it has exhibited a pattern of missing forecasts that would call into question its ability to accurately predict forecasted transactions and the propriety of using cash flow hedge accounting in the future for similar transactions.
Added
We rely on timely and regular payments from our customers, and the inability or failure of our principal customers to meet their obligations to us or their bankruptcy, insolvency or liquidation may adversely affect our business, financial condition and results of operations.
Removed
There is no assurance that we will be able to obtain equity or debt financing at acceptable terms, or at all in the future. In addition, we have restrictive covenants with our financial institution which could impact how we manage our business.
Added
Financial difficulties experienced by one or more of our customers could negatively affect our business by 10 decreasing demand from such customers and through the potential inability of these companies to make full payment on amounts owed to us.
Removed
If we cannot meet our financial covenants, our borrowings could become immediately payable which could have a material adverse impact on our financial statements. For a summary of our banking arrangements, see Footnote “Long-Term Debt” of the “Notes to Consolidated Financial Statements.” An adverse change in the interest rates for our borrowings could adversely affect our financial condition.
Added
Customer bankruptcies also entail the risk of potential recovery by the bankruptcy estate of amounts previously paid to us that are deemed a preference under bankruptcy laws. There can be no assurance that customers will not declare bankruptcy or suffer financial distress, in which case our future revenues, net income and cash flow could be reduced.
Removed
For a summary of our debt obligations, see Footnote “Long-Term Debt” of the “Notes to Consolidated Financial Statements.” In addition, the U.K.’s Financial Conduct Authority, which regulates LIBOR, has confirmed that LIBOR-indexed rates will cease after June 30, 2023, with the remaining IBOR-indexed rates ceasing on December 31, 2021.
Added
In addition, we structure our agreements with customers to mitigate our risks related to obsolete, aged, or unsold inventory. However, enforcement of these contracts may result in material expense and delay in payment for inventory. If any of our significant customers become unable or unwilling to purchase such inventory, our business may be materially harmed.
Removed
The Federal Reserve Board and the Federal Reserve Bank of New York identified Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for LIBOR for debt and derivative financial instruments. 13 Our stock price is volatile.
Added
Losses have occurred from increases in the value of these currencies relative to the United States dollar and further losses could occur, which could be material to our business, financial results or operations. Global economic and political events or significant currency exchange fluctuations, can occur, and cause further unexpected losses.
Removed
As described in Item 9a, “Controls and Procedures,” of this Annual Report on Form 10-K, in fiscal year 2022, we concluded that our disclosure controls and procedures were not effective as of December 26, 2020 and April 3, 2021, due to the existence of a material weakness in our internal control over financial reporting.
Added
In addition, we must successfully manage transition issues that may result from the departure or retirement of members of our leadership team. For example, our Chief Executive Officer retired at the end of fiscal year 2024 and is succeeded by our former Chief Financial Officer.
Removed
While we undertook remediation efforts to address the identified deficiencies and have concluded that the material weakness was remediated as of July 3, 2021, we cannot provide assurance that we will be able to conclude that our controls will be effective in the future.
Added
Any significant leadership change or senior management transition involves inherent risks and any failure to ensure a smooth transition could hinder our strategic planning, business execution, and future performance.
Removed
We also cannot guarantee that additional significant deficiencies or material weaknesses in our internal control over financial reporting will not arise or be identified in the future.
Added
For example, as previously disclosed in our Form 8-K filed with the SEC on May 10, 2024, as amended, we became aware of unauthorized access to our IT systems that resulted in a material impact on our financial condition and results of operations during the fourth quarter ending June 29, 2024 (the "Previously Disclosed Cyber Incident").
Removed
If additional deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results and incur the additional costs and expenses associated therewith.
Added
The threat actor in the Previously Disclosed Cyber Incident exfiltrated certain personally identifiable information, and future cybersecurity incidents could also result in the misappropriation of proprietary or confidential information of the Company or that of its customers, employees, vendors or suppliers.
Removed
We have incurred, and may continue to incur, significant expenses related to legal, accounting and other professional services in connection with matters relating to or arising from the subject of the Audit Committee’s internal investigation.
Added
In addition, our investigation of the Previously Disclosed Cyber Incident is ongoing, and we may discover other impacts or new events related to this incident that could affect the Company, including our business, financial condition or results of operations.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeIn addition, in Juarez, Mexico one of our buildings includes adjacent vacant land that could be developed into additional manufacturing and warehouse space. 16 All our facilities are ISO certified to ISO 9001:2015 standard and to Customs Trade Partnership against Terrorism (CTPAT). • The Spokane, Washington facility is registered to IATF 16949 automotive standard, ISO 13485:2016 medical devices, ISO 14001:2015 environmental standard, and ISO 45001 Occupational Health and Safety Management System. • The Juarez, Mexico facility is registered to IATF 16949 automotive standard, ISO 13485:2016 medical devices, ISO 14001:2015 environmental standard, ISO 45001 Occupational Health and Safety Management System, and has a certified ANSI/ESD S20.20 Electrostatic Discharge Program. • The Da Nang, Vietnam facility is additionally registered to IATF 16949 automotive standard. • The Shanghai, China facility is additionally registered to IATF 16949 automotive standard, ISO 14001:2015 environmental standard, and has a certified ANSI/ESD S20.20 Electrostatic Discharge Program. • The Oakdale, Minnesota facility is additionally registered to ISO 13485:2016 medical devices standard, AS9100D aviation, space and defense standard, has a certified ANSI/ESD S20.20 Electrostatic Discharge Control Program, and is NADCAP certified. • The Fayetteville, Arkansas facility is additionally registered to AS9100D aviation, space and defense standard and have a certified ANSI/ESD S20.20 Electrostatic Discharge Control Program. • The Corinth, Mississippi facility is additionally registered to ISO 14001:2015 and ISO/IEC 80079-34 explosive atmospheres. • The Oakdale, Minnesota; Corinth, Mississippi; Fayetteville, Arkansas and Spokane, Washington facilities are all registered with the U.S.
Biggest changeAll our facilities are ISO certified to ISO 9001:2015 standard and to Customs Trade Partnership against Terrorism (CTPAT). • The Spokane, Washington facility is registered to IATF 16949 automotive standard, ISO 13485:2016 medical devices, ISO 14001:2015 environmental standard, and ISO 45001 Occupational Health and Safety Management System. • The Juarez, Mexico facility is registered to IATF 16949 automotive standard, ISO 13485:2016 medical devices, ISO 14001:2015 environmental standard, ISO 45001 Occupational Health and Safety Management System, and has a certified ANSI/ESD S20.20 Electrostatic Discharge Program. • The Da Nang, Vietnam facility is additionally registered to IATF 16949 automotive standard. • The Shanghai, China facility is additionally registered to ISO 45001 Occupational Health and has a certified ANSI/ESD S20.20 Electrostatic Discharge Control Program. • The Oakdale, Minnesota facility is additionally registered to ISO 13485:2016 medical devices standard, AS9100D aviation, space and defense standard, and has a certified ANSI/ESD S20.20 Electrostatic Discharge Control Program. • The Fayetteville, Arkansas facility is additionally registered to AS9100D aviation, space and defense standard and has a certified ANSI/ESD S20.20 Electrostatic Discharge Control Program. • The Corinth, Mississippi facility is additionally registered to ISO 14001:2015 and ISO/IEC 80079-34 explosive atmospheres. 19 • The Oakdale, Minnesota; and Spokane, Washington facilities are registered with the U.S.
Type of Interest (Leased/Owned) Description of Use Corinth, Mississippi 350,000 Leased Manufacturing and warehouse El Paso, Texas 80,000 Leased Shipping and warehouse Fayetteville, Arkansas 105,000 Leased Manufacturing and warehouse Oakdale, Minnesota 103,000 Leased Manufacturing and warehouse Spokane Valley, Washington 95,000 Leased Sales, research, administration and manufacturing Spokane Valley, Washington 36,000 Leased Manufacturing Total USA 769,000 Juarez, Mexico 193,000 Leased Warehouse Juarez, Mexico 174,000 Owned Manufacturing and warehouse Juarez, Mexico 115,000 Owned Manufacturing and warehouse Juarez, Mexico 103,000 Owned Manufacturing and warehouse Juarez, Mexico 72,000 Leased Manufacturing and warehouse Juarez, Mexico 66,000 Owned Manufacturing and warehouse Juarez, Mexico 60,000 Owned Manufacturing and warehouse Juarez, Mexico 116,000 Leased Manufacturing and warehouse Juarez, Mexico 159,000 Leased Manufacturing and warehouse Total Mexico 1,058,000 Shanghai, China 103,000 Leased Manufacturing and warehouse Total China 103,000 Da Nang, Vietnam 133,000 Leased Manufacturing and warehouse Total Vietnam 133,000 Grand Total 2,063,000 The geographic diversity of these locations allows us to offer services near certain of our customers and major electronics markets with the additional benefit of reduced labor costs.
Type of Interest (Leased/Owned) Description of Use Corinth, Mississippi 350,000 Leased Manufacturing and warehouse El Paso, Texas 80,000 Leased Shipping and warehouse Fayetteville, Arkansas 105,000 Leased Manufacturing and warehouse Oakdale, Minnesota 103,000 Leased Manufacturing and warehouse Spokane Valley, Washington 95,000 Leased Sales, research, administration and manufacturing Spokane Valley, Washington 36,000 Leased Manufacturing Total USA 769,000 Juarez, Mexico 193,000 Leased Warehouse Juarez, Mexico 174,000 Owned Manufacturing and warehouse Juarez, Mexico 115,000 Owned Manufacturing and warehouse Juarez, Mexico 103,000 Owned Manufacturing and warehouse Juarez, Mexico 72,000 Leased Manufacturing and warehouse Juarez, Mexico 66,000 Owned Manufacturing and warehouse Juarez, Mexico 60,000 Owned Manufacturing and warehouse Juarez, Mexico 116,000 Leased Manufacturing and warehouse Total Mexico 899,000 Shanghai, China 103,000 Leased Manufacturing and warehouse Total China 103,000 Da Nang, Vietnam 133,000 Leased Manufacturing and warehouse Total Vietnam 133,000 Grand Total 1,904,000 The geographic diversity of these locations allows us to offer services near certain of our customers and major electronics markets with the additional benefit of reduced labor costs.
We consider the productive capacity of our current facilities sufficient to carry on our current business.
We consider the productive capacity of our current facilities sufficient to carry on our current business. In addition, in Juarez, Mexico one of our buildings includes adjacent vacant land that could be developed into additional manufacturing and warehouse space.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeFor further details on claims, see Footnote “Commitments and Contingencies” of the “Notes to Consolidated Financial Statements.” Item 4. MINE SAFETY DISCLOSURES Not Applicable PART II
Biggest changeFor further details on claims, see Note 8. Commitments and Contingencies in the Notes to Consolidated Financial Statements. Item 4. MINE SAFETY DISCLOSURES Not Applicable PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeMARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock is traded on the NASDAQ Global Market, formerly the NASDAQ National Market System under the symbol “KTCC.” Quarterly high and low sales prices for our common stock for fiscal years 2022 and 2021 were as follows: 2022 2021 High Low High Low First Quarter $ 7.48 $ 6.45 $ 10.22 $ 5.04 Second Quarter 6.73 5.95 10.48 7.05 Third Quarter 6.55 5.26 9.48 6.75 Fourth Quarter 5.74 4.27 8.35 6.35 High and low stock prices are based on the daily sales prices reported by the NASDAQ Stock Market.
Biggest changeMARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock is traded on the NASDAQ Global Market under the symbol “KTCC.” Quarterly high and low sales prices for our common stock for fiscal year 2024 and fiscal year 2023 were as follows: 2024 2023 High Low High Low First Quarter $ 6.24 $ 4.32 $ 5.50 $ 4.00 Second Quarter $ 4.50 $ 3.72 $ 5.18 $ 4.03 Third Quarter $ 5.14 $ 4.04 $ 7.50 $ 4.33 Fourth Quarter $ 4.85 $ 3.69 $ 7.53 $ 5.18 High and low stock prices are based on the daily sales prices reported by the NASDAQ Stock Market.
These quotations represent prices between dealers without adjustment for markups, markdowns, and commissions, and may not represent actual transactions. Holders and Dividends As of July 2, 2022, we had 582 shareholders of common stock on record.
These quotations represent prices between dealers without adjustment for markups, markdowns, and commissions, and may not represent actual transactions. Holders and Dividends As of June 29, 2024, we had 561 shareholders of common stock on record.
As a result of our credit agreements, we are restricted from declaring or paying dividends in cash or stock without Bank of America’s prior written consent.
As a result of our credit agreements, we are restricted from declaring or paying dividends in cash or stock without Bank of America’s prior written consent. We have not paid a cash dividend and do not anticipate payment of dividends in the foreseeable future.
Removed
We have not paid a cash dividend and do not anticipate payment of dividends in the foreseeable future. 17 Equity Compensation Plan Information Information concerning securities authorized for issuance under our equity compensation plans is set forth in Part III, Item 12 of this Annual Report on Form 10-K, under the caption “Equity Compensation Plan Information,” and that information is incorporated herein by reference.
Added
Performance Graph We are a smaller reporting company as defined in Item 10(f)(1) of Regulation S-K and therefore are not required to provide the performance graph required in paragraph (e) of Item 201 of Regulation S-K. 20 Item 6: [RESERVED]
Removed
Performance Graph Set forth below is a line graph comparing the cumulative total shareholder return on our common stock with the cumulative total return of the NASDAQ Stock Market (U.S. & Foreign) Index and the NASDAQ Electronic Components Index in fiscal 2022. 6/30/2017 6/30/2018 6/29/2019 6/27/2020 7/3/2021 7/2/2022 Key Tronic Corporation 100.00 106.91 70.24 74.19 92.38 60.23 NASDAQ Composite 100.00 123.60 133.22 169.11 245.60 188.07 NASDAQ Electronic Components 100.00 130.95 128.24 174.60 286.71 221.70 18 Item 6: [RESERVED]

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeFiscal Year Ended July 2, 2022 % of net sales July 3, 2021 % of net sales $ change % point change Net sales $ 531,815 100.0% $ 518,698 100.0% $ 13,117 — Cost of sales 488,601 91.9 476,659 91.9 11,942 — Gross profit 43,214 8.1 42,039 8.1 1,175 — Operating expenses: Research, development and engineering 9,821 1.8 9,790 1.9 31 (0.1) Selling, general and administrative 24,598 4.6 22,723 4.4 1,875 0.2 Total operating expenses 34,419 6.4 32,513 6.3 1,906 0.1 Operating income 8,795 1.7 9,526 1.8 (731) (0.1) Interest expense, net 5,104 1.0 3,613 0.7 1,491 0.3 Income before income taxes 3,691 0.7 5,913 1.1 (2,222) (0.4) Income tax provision 314 0.1 1,572 0.3 (1,258) (0.2) Net income $ 3,377 0.6% $ 4,341 0.8% $ (964) (0.2) Effective income tax rate 8.5 % 26.6 % Net Sales The increase in net sales of $13.1 million from prior year period was primarily driven by an increase in new program wins and demand for current programs.
Biggest changeFiscal Year Ended (in thousands) July 1, 2023 % of net sales July 2, 2022 % of net sales $ change % point change (Restated) (Restated) Net sales $ 605,315 100.0% $ 544,177 100.0% $ 61,138 — Cost of sales 557,843 92.2 500,963 92.1 56,880 0.1 Gross profit 47,472 7.8 43,214 7.9 4,258 (0.1) Operating expenses: Research, development and engineering 9,735 1.6 9,821 1.8 (86) (0.2) Selling, general and administrative 25,715 4.2 24,598 4.5 1,117 (0.3) Gain on insurance proceeds, net of losses (4,301) (0.7) — — (4,301) (0.7) Total operating expenses 31,149 5.1 34,419 6.3 (3,270) (1.2) Operating income 16,323 2.7 8,795 1.6 7,528 1.1 Interest expense, net 10,023 1.7 5,104 0.9 4,919 0.8 Income before income taxes 6,300 1.0 3,691 0.7 2,609 0.3 Income tax provision 1,143 0.2 314 0.1 829 0.1 Net income $ 5,157 0.8% $ 3,377 0.6% $ 1,780 0.2 Effective income tax rate 18.1 % 8.5 % 25 Net Sales The increase in net sales of $61.1 million from the prior fiscal year was primarily due to the successful ramp of new customer programs and increased demand from existing customers.
Accounts receivable fluctuates based on the timing of shipments, terms offered and collections. We purchase inventory based on customer forecasts and orders, and when those forecasts and orders change, the amount of inventory may also fluctuate. Accounts payable fluctuates with changes in inventory levels, volume of inventory purchases, negotiated supplier terms, and taking advantage of early pay discounts.
Accounts receivable fluctuates based on the timing of shipments, terms offered, and collections. We purchase inventory based on customer forecasts and orders. When those forecasts and orders change, the amount of inventory may also fluctuate. Accounts payable fluctuates with changes in inventory levels, volume of inventory purchases, negotiated supplier terms, and taking advantage of early pay discounts.
These and other factors can cause variations in operating results. There can be no assurance that gross margins will not decrease in future periods. Research, Development and Engineering Research, development and engineering expenses (RD&E) consists principally of employee related costs, third party development costs, program materials, depreciation and allocated information technology and facilities costs.
These and other factors can cause variations in operating results. There can be no assurance that gross margins will not decrease in future periods. Research, Development and Engineering Research, development and engineering expenses (RD&E) consist principally of employee related costs, third-party development costs, program materials, depreciation, and allocated information technology and facilities costs.
This subsidiary is primarily used to support our U.S. operations. • Key Tronic Computer Peripherals (Shanghai) Co., Ltd. leases one facility with SMT, assembly, global purchasing and warehouse capabilities in Shanghai, China, which began operations in 1999. Its primary function is to provide contract manufacturing services. • Key Tronic Vietnam leases one facility in Da Nang, Vietnam.
This subsidiary primarily supports our U.S. operations. • Key Tronic Computer Peripherals (Shanghai) Co., Ltd. leases one facility with SMT, assembly, global purchasing, and warehouse capabilities in Shanghai, China, which began operations in 1999. Its primary function is to provide contract manufacturing services. • Key Tronic Vietnam leases one facility in Da Nang, Vietnam.
The locations of active foreign subsidiaries are as follows: • Key Tronic Juarez, SA de CV owns five facilities and leases four facilities in Juarez, Mexico. These facilities include an SMT facility, an assembly and molding facility, a sheet metal fabrication facility, and assembly and warehouse facilities.
The locations of our active foreign subsidiaries are as follows: • Key Tronic Juarez, SA de CV owns five facilities and leases three facilities in Juarez, Mexico. These facilities include an SMT facility, an assembly and molding facility, a sheet metal fabrication facility, and assembly and warehouse facilities.
This facility includes SMT, assembly, and warehouse capabilities. Its primary function is to provide contract manufacturing services for export. Foreign sales (based on shipping instructions) from our worldwide operations, including domestic exports, were $93.8 million and $146.5 million in fiscal years 2022 and 2021, respectively.
This facility includes SMT, assembly, and warehouse capabilities. Its primary function is to provide contract manufacturing services for export. Foreign sales (based on shipping instructions) from our worldwide operations, including domestic exports, were $86.5 million and $93.8 million in fiscal years 2023 and 2022, respectively.
RESULTS OF OPERATIONS Comparison of the Fiscal Year Ended July 2, 2022 with the Fiscal Year Ended July 3, 2021 The following table sets forth for the periods indicated certain items of the consolidated statements of income expressed as a percentage of net sales.
RESULTS OF OPERATIONS Comparison of the Fiscal Year Ended July 1, 2023 with the Fiscal Year Ended July 2, 2022 The following table sets forth for the periods indicated certain items of the consolidated statements of income expressed as a percentage of net sales.
For further information on taxes please review Footnote “Income Taxes” of the “Notes to Consolidated Financial Statements.” 21 International Subsidiaries We offer customers a complete global manufacturing solution. Our facilities provide our customers the opportunity to have their products manufactured in the facility that best serves specific cost, product manufacturing and distribution needs.
For further information on taxes, please review Footnote "Income Taxes” of the “Notes to Consolidated Financial Statements”. International Subsidiaries We offer customers a complete global manufacturing solution. Our facilities provide our customers the opportunity to have their products manufactured in the facility that best serves specific cost, product manufacturing, and distribution needs.
The $15.1 million of net cash used in operating activities during fiscal year 2021 was primarily related to $4.3 million of net income adjusted for $6.9 million of depreciation and amortization, $24.3 million increase in accounts receivable, a $23.1 million increase in inventory, a $1.0 million increase in contract assets, a $2.3 million decrease in other assets, partially offset by a $12.6 million increase in accounts payable, a $5.6 million increase in other liabilities, and a $1.0 million increase in accrued compensation and vacation.
The $11.3 million of net cash used in operating activities during fiscal year 2023 was primarily related to $5.2 million of net income adjusted for $9.5 million of depreciation and amortization, $14.8 million increase in accounts receivable, a $16.0 27 million decrease in other liabilities, a $5.5 million decrease in accounts payable, a $8.0 million increase in contract assets partially offset by a $17.4 million decrease in inventory, and a $1.5 million increase in accrued compensation and vacation.
We also write down inventory values related to specific customers covered by lead-time assurance agreements when those customers are experiencing financial difficulties or reimbursement is not reasonably assured. Allowance for Doubtful Accounts We value our accounts receivable net of an allowance for doubtful accounts. As of July 2, 2022, the allowance for doubtful accounts was approximately $12,000.
We also write down inventory values related to specific customers covered by lead-time assurance agreements when those customers are experiencing financial difficulties or reimbursement is not reasonably assured. Allowance for Credit Losses We value our accounts receivable net of an allowance for credit losses. As of June 29, 2024, the allowance for credit losses was approximately $2.9 million.
The income tax expense recognized during both fiscal years 2022 and 2021 was primarily a function of U.S. and foreign taxes recognized at statutory rates, the net benefit associated with federal research and development tax credits, the benefit of carrying back the fiscal year 2021 net operating tax losses to years with higher federal tax rates in fiscal year 2022, the non-cash tax impact of expired stock appreciation rights in fiscal year 2021, and the recognition of previously unrecognized tax benefits for federal research and development tax credits in fiscal year 2020.
The income tax expense recognized during both fiscal years 2023 and 2022 was primarily a function of U.S. and foreign taxes recognized at statutory rates, the net benefit associated with federal research and development tax credits, the impact of foreign exchange gains in fiscal year 2023, and the net benefit of carrying back the fiscal year 2021 net operating tax losses to years with higher federal tax rates in fiscal year 2022.
The following table shows the revenue by industry sectors as a percentage of revenue for fiscal years 2022 and 2021: Fiscal Year Ended July 2, 2022 July 3, 2021 Consumer 48 51 Industrial 41 38 Communication 7 5 Gaming 1 3 Transportation 1 1 Printers 1 1 Computer and Peripheral 1 1 Total 100% 100% We provide services to customers in a number of industries and produce a variety of products for our customers in each industry.
The following table shows the revenue by industry sectors as a percentage of revenue for fiscal years 2023 and 2022: Fiscal Year Ended July 1, 2023 July 2, 2022 Consumer 44 50 Industrial 42 42 Communication 9 8 Medical 3 — Gaming 1 1 Transportation 1 — Printers — 1 Computer and Peripheral — 1 Total 56% 53% We provide services to customers in a number of industries and produce a variety of products for our customers in each industry.
Gross profit as a percent of net sales was 8.1 percent in both fiscal year 2022 and 2021. The level of gross margin is impacted by product mix, timing of the startup of new programs, facility utilization, and pricing within the electronics industry and material costs, which can fluctuate significantly from quarter to quarter and year to year.
The level of gross margin is impacted by product mix, timing of the startup of new programs, facility utilization, and pricing within the electronics industry and material costs, which can fluctuate significantly from quarter-to-quarter and year-to-year. Operating income as a percentage of net sales for fiscal year 2024 was 1.2 percent compared to 2.7 percent for fiscal year 2023.
Selling, General and Administrative Selling, general and administrative expenses (SG&A) consist principally of salaries and benefits, advertising and marketing programs, sales commissions, travel expenses, provision for doubtful accounts, facilities costs, and professional services. Total SG&A expenses were $24.6 million and $22.7 million in fiscal years 2022 and 2021, respectively.
Selling, General and Administrative Selling, general, and administrative expenses (SG&A) consist principally of salaries and benefits, advertising and marketing programs, sales commissions, travel expenses, provision for credit losses, facilities costs, and professional services. Total SG&A expenses were $25.2 million and $25.7 million in fiscal years 2024 and 2023, respectively.
Capital expenditures and periodic lease payments are expected to be financed with internally generated funds as well as our revolving line of credit facility and equipment term loan . Financing Cash Flow Cash flows provided by financing activities were $11.2 million, $28.6 million, and $34.5 million in fiscal years 2022, 2021, and 2020.
Capital expenditures and periodic lease payments are expected to be financed with internally generated funds as well as our revolving line of credit facility and equipment term loan . Financing Cash Flow Cash flows used in financing activities were $10.5 million in fiscal year 2024 and cash flows provided by financing activities were $17.7 million in fiscal year 2023.
Interest Expense We had net interest expense of $5.1 million and $3.6 million in fiscal years 2022 and 2021, respectively. The increase in interest expense is primarily related to an increase in the average balance outstanding on our line of credit, increased interest rates and financing leases.
The increase in interest expense is primarily related to increased interest rates, an increase in the average balance outstanding on our line of credit, and financing leases. Income Tax Provision We had an income tax expense of approximately $1.1 million during fiscal year 2023 and an income tax expense of approximately $0.3 million during fiscal year 2022.
Total RD&E expenses were $9.8 million in both fiscal years 2022 and 2021. Total RD&E expenses as a percent of net sales was 1.8 percent in fiscal year 2022 and 1.9 percent in fiscal year 2021.
Total RD&E expenses were $8.3 million and $9.7 million in fiscal years 2024 and 2023, respectively. Total RD&E expenses as a percent of net sales was 1.5 percent in fiscal year 2024 and 1.6 percent in fiscal year 2023.
As of July 2, 2022, we had open purchase order commitments for materials and other supplies. Actual needs under these blanket purchase orders fluctuate with our manufacturing levels and as such cannot be broken out between fiscal years.
We have certain contractual obligations that extend beyond fiscal year 2024 under lease obligations and debt arrangements. As of June 29, 2024, we had open purchase order commitments for materials and other supplies. Actual needs under these blanket purchase orders fluctuate with our manufacturing levels and as such cannot be broken out between fiscal years.
The $31.0 million of net cash used in operating activities during fiscal year 2020 was primarily related to $4.8 million of net income adjusted for $5.6 million of depreciation and amortization, $28.3 million increase in accounts receivable, a $14.7 million increase in inventory, a $7.7 million increase in other assets, a $1.6 million increase in contract assets, partially offset by a $6.6 million increase in accounts payable and a $3.7 million increase in accrued compensation and vacation.
The $13.8 million of net cash provided by operating activities during fiscal year 2024 is primarily related to $2.8 million of net loss adjusted for $11.0 million of depreciation and amortization, $15.8 million decrease in accounts receivable, a $32.5 million decrease in inventory, an $8.7 million decrease in contract assets partially offset by a $36.5 million decrease in accounts payable, a $2.9 million decrease in accrued compensation and vacation, $0.6 million increase in other assets and a $8.1 million decrease in other liabilities.
Our mission is to provide our customers with superior manufacturing and engineering services at the lowest total cost for the highest quality products, and create long-term mutually beneficial business relationships by employing our “Trust, Commitment, Results” philosophy.
Our mission is to provide our customers with superior manufacturing and engineering services at the lowest total cost for the highest quality products, and create long-term mutually beneficial business relationships by employing our “Trust, Commitment, Results” philosophy. Executive Summary During the fourth quarter of fiscal year 2024, we won new programs involving medical devices, sheet metal fabrication, and consumer products.
Footnote “Significant Accounting Policies” of the “Notes to Consolidated Financial Statements” describes the significant accounting policies used in the preparation of our consolidated financial statements. Management believes the most complex and sensitive judgments, because of their significance to our consolidated financial statements, result primarily from the need to make estimates about effects of matters that are inherently uncertain.
Management believes the most complex and sensitive judgments, because of their significance to our consolidated financial statements, result primarily from the need to make estimates about effects of matters that are inherently uncertain. The most significant areas involving management judgments are described below. Actual results in these areas could differ from management’s estimates.
The write down is calculated based upon the demand for the products that we produce to value this related inventory at net realizable value. Demand is determined by expected sales, customer purchase orders, or customer forecasts. If expected sales do not materialize, excess inventory would be the result and a write down of that inventory against earnings would occur.
We write down inventories that we deem inactive, obsolete, or surplus to net realizable value. The write down is calculated based upon the demand for the products that we produce to value this related inventory at net realizable value. Demand is determined by expected sales, customer purchase orders, or customer forecasts.
Total SG&A expenses as a percent of net sales were 4.6 percent and 4.4 percent in fiscal years 2022 and 2021, respectively. This 0.2 percentage point increase in SG&A as a percentage of net sales is primarily related to an increase in legal expenses related specifically to the SEC’s review of last year’s whistleblower complaint.
This 0.3 percentage point decrease in SG&A as a percentage of net sales is primarily related to an increase in legal expenses related specifically to the SEC’s review of the whistleblower complaint in fiscal year 2021. Interest Expense We had net interest expense of $10.0 million and $5.1 million in fiscal years 2023 and 2022, respectively.
Income Tax Provision We had an income tax expense of approximately $0.3 million during fiscal year 2022 and an income tax expense of approximately $1.6 million during fiscal year 2021.
Income Tax Provision We had an income tax benefit of approximately $2.4 million during fiscal year 2024 and an income tax expense of approximately $1.1 million during fiscal year 2023.
Revenue from engineering services is recognized over time as the services are performed. Inactive, Obsolete, and Surplus Inventory Valuation Inventories are stated at the lower of cost or net realizable value. Inventory valuation is determined using the first-in, first-out (FIFO) method. We write down inventories that we deem inactive, obsolete or surplus to net realizable value.
Revenue from scrap and excess inventory sales is recognized at the point-in-time of scrap at the customers direction, or, if applicable, shipment of the material to the customer. Inactive, Obsolete, and Surplus Inventory Valuation Inventories are stated at the lower of cost or net realizable value. Inventory valuation is determined using the first-in, first-out (FIFO) method.
Key Tronic does not target any particular industry, but rather seeks to find programs that strategically fit our vertical manufacturing capabilities.
Key Tronic does not target any particular industry, but rather seeks to find programs that strategically fit our vertical manufacturing capabilities. As a result, we expect to continue to see a change in the industry concentrations of our revenue over time.
This input method is based on the ratio of costs incurred to date as compared to the total estimated costs at completion of the performance obligation.
As a result, revenue is recognized under these contracts 'over-time' based on the input cost-to-cost method as it better depicts the transfer of control. This input method is based on the ratio of costs incurred to date as compared to the total estimated costs at completion of the performance obligation.
Our primary use of cash in investing activities during fiscal years 2022, 2021 and 2020, was purchasing equipment to support increased production levels for new programs. During fiscal year 2022, cash flows used in investing activities also included prepayments on finance lease obligations.
Investing Cash Flow Cash flows used in investing activities were $2.1 million for fiscal year 2024. Cash flows used in investing activities were $4.5 million in fiscal year 2023. Our primary use of cash in investing activities during fiscal years 2024 and 2023 was purchasing equipment to support increased production levels for new programs.
We continue to make investments in all of our operating facilities to give us the production capacity, capabilities and logistical advantages to continue to win new business. The following information should be read in conjunction with the consolidated financial statements included herein and with Part II Item 1A, Risk Factors included as part of this filing.
The following information should be read in conjunction with the consolidated financial statements included herein and with Part II Item 1A, Risk Factors included as part of this filing.
In the case where we have purchased material based upon a customer’s forecast or purchase orders, we are usually covered by lead-time assurance agreements or purchase orders with each customer. These contracts state that the financial liability for material purchased within agreed upon lead-time and based upon the customer’s forecasts, lies with the customer.
These contracts state that the financial liability for material purchased within agreed upon lead-time and based upon the customer’s forecasts, lies with the customer.
We provide warranties on certain products we sell and estimate warranty costs based on historical experience and anticipated product returns. Warranty expense is related to workmanship claims on keyboards and other products. The amounts charged to expense are determined based on an estimate of warranty exposure.
The amounts charged to expense for these inventories were approximately $427,000 and $950,000 in fiscal years 2023 and 2022, respectively. We provide warranties on certain products we sell and estimate warranty costs based on historical experience and anticipated product returns. Warranty expense is related to workmanship claims.
The net warranty expense was approximately $446,000 and $145,000 in fiscal years 2022 and 2021, respectively. Gross Profit Gross profit as a percentage of net sales was 8.1 percent in both fiscal years 2022, and 2021.
The amounts charged to expense are determined based on an estimate of warranty exposure. The net warranty expense was approximately $313,000 and $446,000 in fiscal years 2023 and 2022, respectively. Gross Profit Gross profit as a percentage of net sales was 7.8 percent in fiscal year 2023 and 7.9 percent in fiscal year 2022.
During fiscal year 2020, our primary source of cash provided by investing activities came from receipts of the deferred purchase price on factored receivables. 22 Leases are often utilized when potential technical obsolescence and funding requirement advantages outweigh the benefits of equipment ownership.
During fiscal year 2024, the source of cash provided by investing activities came from insurance claims paid for replacing equipment and facility repairs in our Arkansas facility related to a lightning strike and water damage. Leases are often utilized when potential technical obsolescence and funding requirement advantages outweigh the benefits of equipment ownership.
The Company is first required to evaluate whether its contracts meet the criteria for 'over-time' or 'point-in-time' recognition. The Company has determined that for the majority of its contracts the Company is manufacturing products for which there is no alternative use due to the unique nature of the customer-specific product, IP and other contract restrictions.
The Company has determined that for the majority of its contracts the Company is manufacturing products for which there is no alternative use due to the unique nature of the customer-specific product, IP and other contract restrictions. Further, the Company has an enforceable right to payment including a reasonable profit for performance completed to date with respect to these contracts.
Our primary financing activities during fiscal year 2022, were proceeds from capital equipment finance leases and borrowings and repayments under our revolving line of credit facility; partially offset by repayments on our term loans and principal payments on finance leases.
Our primary financing activities during both fiscal year 2024 and fiscal year 2023 were borrowings and repayments under our revolving line of credit facility as well as repayments on our term loans and principal payments on finance leases. In fiscal year 2024, there was a significantly higher percentage of repayments against the borrowings on the revolving line of credit.
Certain income and expenses are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. The deferred income taxes are classified as long-term assets or liabilities.
We do not record foreign withholding taxes on undistributed earnings of international subsidiaries that are deemed to be permanently reinvested. Certain income and expenses are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes.
The most significant areas involving management judgments include deferred income tax assets and liabilities, uncertain tax positions, and research and development tax credits. Our estimates of the realization of the deferred tax assets related to our tax credits are based upon our estimates of future taxable income which may change.
The deferred income taxes are classified as long-term assets or liabilities. The most significant areas involving management judgments include deferred income tax assets and liabilities, uncertain tax positions, and research and development tax credits.
A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations. A contract can be written, oral, or implied. The Company generally enters into manufacturing service agreements (“MSA”) with its customers that outlines the terms of the business relationship between the customer and the Company.
Revenue The Company specializes in services ranging from product manufacturing to engineering and tooling services. The first step in its process for revenue recognition is to identify the contract with a customer. A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations. A contract can be written, oral, or implied.
However, if any of our customers were to develop unexpected and immediate financial problems that would prevent payment of open invoices, we could incur additional and possibly material expenses that would negatively impact earnings. 24 Accrued Warranty An accrual is made for expected warranty costs, with the related expense recognized in cost of goods sold.
However, if any of our customers were to develop unexpected and immediate financial problems that would prevent payment of open invoices, we could incur additional and possibly material expenses that would negatively impact earnings. Income Taxes Income tax expense includes U.S. and international income taxes and a provisional estimate for U.S. taxes on undistributed earnings of foreign subsidiaries.
In these instances, as well as when we have an MSA in place, we receive customer purchase orders for specific quantities and timing of products. As a result, the Company considers its contract with a customer to be the combination of the MSA and the purchase order. The transaction price is fixed and set forth in each purchase order.
The Company will also bid on a program-by-program basis for customers in which an executed MSA may not be in place. In these instances, as well as when we have an MSA in place, we receive customer purchase orders for specific quantities and timing of products.
See additional discussion in Footnote “Income Taxes” of the “Notes to Consolidated Financial Statements.” The total amount of foreign withholding taxes required to be paid for the amount of foreign subsidiary cash on hand as of July 2, 2022, would approximate $8,000. The Company also has approximately $28.9 million of foreign earnings that have not been repatriated to the U.S.
The total amount of tax payments required for the amount of foreign subsidiary cash on hand as of June 29, 2024 would approximate $15,893. 28 The Company also has approximately $38.5 million of foreign earnings that have not been repatriated to the U.S. of that amount, the Company estimates that $8.0 million is to be repatriated in the future, requiring foreign withholding taxes of $0.8 million that is currently accrued in our deferred tax liabilities.
Such accounts are identified using publicly available information in conjunction with evaluations of current payment activity.
The estimates used are based on specific identification of potentially uncollectible accounts as well as a general calculation based on the company's collection history. Such accounts are identified using publicly available information in conjunction with evaluations of current payment activity.
It’s customers include some of the world’s leading original equipment manufacturers. Our combined capabilities and vertical integration are proving to be a desirable offering to our expanded customer base. Our international production capability provides our customers with benefits of improved supply-chain management, reduced inventories, lower transportation costs, and reduced product fulfillment time.
The Company provides its customers full engineering services, materials management, worldwide manufacturing facilities, assembly services, in-house testing, and worldwide distribution. Its customers include some of the world’s leading original equipment manufacturers. Our combined capabilities and vertical integration are proving to be a desirable offering to our expanded customer base.
In the Company's normal course of business, there are no variable pricing components, or material amounts refunded to customers in the form of refunds or rebates. The Company assesses whether control of the product or services promised under the contract is transferred to the customer at a point in time (shipment) or over time (as we manufacture the product).
As a result, the Company considers its contract with a customer to be the combination of the MSA and the purchase order. The transaction price is fixed and set forth in each purchase order. In the Company's normal course of business, there are no variable pricing components, or material amounts refunded to customers in the form of refunds or rebates.
For a summary of our lease obligations as of July 2, 2022, please refer to Footnote “Leases” of the “Notes to Consolidated Financial Statements.” For a summary of our long-term debt obligations as of July 2, 2022, please refer to Footnote “Long-Term Debt” of the “Notes to Consolidated Financial Statements.” 23 Critical Accounting Policies and Estimates Preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses.
Critical Accounting Policies and Estimates Preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses. Note 1 “Significant Accounting Policies” of the “Notes to Consolidated Financial Statements” describes the significant accounting policies used in the preparation of our consolidated financial statements.
We also consider our customers' ability to pay for inventory whether or not there is a lead-time assurance agreement for a specific program. The amounts charged to expense for these inventories were approximately $950,000 and $753,000 in fiscal years 2022 and 2021, respectively.
We record our inventories at net realizable value based on specific identification of inventory against current demand and recent usage. We also consider our customers' ability to pay for inventory whether or not there is a lead-time assurance agreement for a specific program.
Products and manufacturing services provided by our subsidiary operations are often shipped to customers directly by the parent company.
Foreign sales (based on shipping instructions) from our worldwide operations, including domestic exports, were $127.6 million and $86.5 million in fiscal years 2024 and 2023, respectively. Products and manufacturing services provided by our subsidiary operations are often shipped to customers directly by the parent company.
This includes matters such as warranty, indemnification, transfer of title and risk of loss, liability for excess and obsolete inventory, pricing, payment terms, etc. The Company will also bid on a program-by-program basis for customers in which an executed MSA may not be in place.
The Company generally enters into manufacturing service agreements (“MSA”) with its customers that outlines the terms of the business relationship between the customer and the Company. This includes matters such as warranty, indemnification, transfer of title and risk of loss, liability for excess and obsolete inventory, pricing, payment terms, etc.
We believe that projected cash from operations, funds available under the asset-based revolving credit facility and fixed asset financing will be sufficient to meet our working and fixed capital requirements for the foreseeable future. As of July 2, 2022, we had approximately $1.7 million of cash held by foreign subsidiaries.
We believe that projected cash from operations, funds available under the revolving credit facility and potential additional debt capacity will be sufficient to meet our working and fixed capital requirements for at least twelve months beyond issuance of our financial statements, and our current asset-based senior secured revolving credit facility does not mature until December 3, 2025.
New and Future Accounting Pronouncements See Footnote “Significant Accounting Policies” of the “Notes to Consolidated Financial Statements.” 25
Our estimates of the realization of the deferred tax assets related to our tax credits are based upon our estimates of future taxable income which may change. New and Future Accounting Pronouncements See Note 1 “Significant Accounting Policies” of the “Notes to Consolidated Financial Statements.” 30
As of July 3, 2021, the allowance for doubtful accounts was approximately $275,000. This allowance is based on estimates of the portion of accounts receivable that may not be collected in the future. The estimates used are based primarily on specific identification of potentially uncollectible accounts.
As of July 1, 2023, the allowance for credit losses was approximately $23,000. The increase during fiscal year 2024 relates to the adoption of ASC 326, which was adopted on a modified retrospective basis. This allowance is based on estimates of the portion of accounts receivable that may not be collected in the future.
As we continue to diversify our customer base and win new customers, we expect to continue to see a change in the industry concentrations of our revenue. 20 Sales to foreign locations represented 17.6 percent and 28.2 percent of our total net sales in fiscal years 2022 and 2021, respectively.
Sales to foreign locations represented 14.3 percent and 17.2 percent of our total net sales in fiscal years 2023 and 2022, respectively. Cost of Sales Total cost of sales as a percentage of net sales was 92.2 percent in fiscal year 2023 and 92.1 percent in fiscal year 2022.
Cost of Sales Total cost of sales as a percentage of net sales was 91.9 percent in both fiscal years 2022 and 2021. We record our inventories at net realizable value based on specific identification of inventory against current demand and recent usage.
We record our inventories at net realizable value based on specific identification of inventory against current demand and recent usage. We also consider our customers' ability to pay for inventory whether or not there is a lead-time assurance agreement for a specific program.
Of that amount, the Company estimates that $7.1 million is to be repatriated in the future, requiring foreign withholding taxes of $0.7 million that is currently accrued in our deferred tax liabilities. The remaining $21.8 million is considered to be permanently reinvested in Mexico, China and Vietnam.
The remaining $30.5 million is considered to be permanently reinvested in Mexico, China and Vietnam. If these amounts were required to be repatriated, we estimate it would create an additional $0.8 million in foreign withholding taxes payable.
Item 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Key Tronic is a leading contract manufacturer offering value-added design and manufacturing services from its facilities in the United States, Mexico, China and Vietnam. We provide full engineering services, materials management, worldwide manufacturing facilities, assembly services, in-house testing, worldwide distribution and unparalleled customer service.
For additional information regarding these interim periods, see Note 15 – “Restatement and Revision of Interim Financial Information” of the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K. Overview Key Tronic is a leading contract manufacturer offering value-added design and manufacturing services from its facilities in the United States, Mexico, China, and Vietnam.
Moving into fiscal 2023, the global supply chain and COVID-19 crises continue to present uncertainty and multiple business challenges. At the same time, global logistics problems and heightened assurance of supply concerns continue to drive the favorable trend of contract manufacturing returning to North America.
For the first quarter of fiscal year 2025, we believe global logistics problems, China-US political tensions and continued supply-chain concerns will continue to drive the favorable trend of contract manufacturing returning to North America, as well as to our expanding Vietnam facilities.
If these amounts were required to be repatriated, we estimate it would create an additional $0.7 million in foreign withholding taxes payable. Contractual Obligations In the normal course of business, we enter into contracts which obligate us to make payments in the future. We have certain contractual obligations that extend beyond fiscal year 2023 under lease obligations and debt arrangements.
We have accrued withholding taxes for expected future repatriation of foreign earnings as discussed in Note 5 “Income Taxes” of the “Notes to Consolidated Financial Statements”. Off-Balance Sheet Arrangements and Contractual Obligations In the normal course of business, we enter into contracts which obligate us to make payments in the future.
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Executive Summary During the fourth quarter of fiscal year 2022, we won new programs involving audio products, GPS devices, utility meters, personal safety devices, and innovative internet solutions. We reported net sales of $531.8 million for fiscal year 2022, the highest annual revenue in the Company’s history, and up 3% from $518.7 million for fiscal year 2021.
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Item 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Restatement This Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatement of the Company’s previously issued consolidated financial statements as of and for the years ended July 1, 2023 and July 2, 2022.
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While demand has remained strong from both new and existing customers, revenue for the fourth quarter and for the full year of fiscal year 2022 continued to be constrained by issues related to the supply chain, transportation and logistics and the worldwide pandemic.
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The restatement was due to errors in recording cost recovery related to material price variances in certain of the Company’s facilities. These errors led to an understatement of both revenue and cost of goods sold during the impacted periods.
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During the fourth quarter of fiscal year 2022, the results were impacted by intermittent parts supply and factory downtime. The Company’s facilities in Shanghai, China were closed for most of the fourth quarter due to a government mandated COVID-19 shutdown. While the reopening of the Company’s China facility took longer than anticipated, operations have since resumed.
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For additional information, see Note 14 - "Restatement of Previously Issued Financial Statements" in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
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For the first quarter of fiscal year 2023, the Company expects to report revenue in the range of $125 million to $135 million. Despite growing customer demand and backlog, we expect that the ongoing disruptions from the global supply chain and COVID-19 issues will continue to significantly limit production and adversely impact operating efficiencies, particularly for our China-based facilities.
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The Company’s previously issued unaudited interim consolidated statements of operations for the quarters ended March 30, 2024, December 30, 2023, September 30, 2023, April 1, 2023, December 31, 2022, October 1, 2022, April 2, 2022, January 1, 2022, and October 2, 2021 have also been restated due to these errors, and the Company's previously issued unaudited interim balance sheets as of March 30, 2024, December 30, 2023, September 30, 2023 have been revised due to errors related to the adoption of ASU 326.
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We have continued to diversify our customer base by adding additional programs and customers.
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Our domestic and international production capability provides our customers with benefits of improved supply-chain management, reduced inventories, lower transportation costs, and reduced product fulfillment time. We continue to make investments in all of our operating facilities to give us the production capacity, capabilities and logistical advantages to continue to win new business.
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Our current customer relationships involve a variety of products, including consumer electronics, electronic storage devices, plastics, household products, gaming devices, specialty printers, telecommunications, industrial equipment, military supplies, computer accessories, medical, educational, irrigation, automotive, transportation management, robotics, RFID, power supply, off-road vehicle equipment, fitness equipment, HVAC controls, consumer products, home building products, material handling systems, lighting equipment, consumer security products, smart security, architectural LED lighting, power meters and smart grid, wireless power solutions, sanitizer dispensing, automotive controllers, oil and gas drilling, power equipment and wireless security.
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We reported net sales of $566.9 million for fiscal year 2024, down 6.3 percent from $605.3 million for fiscal year 2023. The decrease in fiscal year 2024 was driven by softer demand from Mexico-based programs, and production stoppages due to a cybersecurity incident that occurred in the fourth quarter, as previously reported.
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Operating income as a percentage of net sales for fiscal year 2022 was 1.7 percent compared to 1.8 percent for fiscal year 2021. The decrease in operating income as a percentage of net sales was primarily driven by the increase in legal expenses related specifically to the SEC’s review of last year’s whistleblower complaint.
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Moving into fiscal year 2025, we expect revenue and earnings to rebound as production has resumed across our facilities.
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Net income for fiscal year 2022 was $3.4 million or $0.31 per share, as compared to $4.3 million or $0.39 per share for fiscal year 2021.
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Additionally, the Company is beginning to realize operational efficiencies as a result of headcount reductions announced in the third quarter of fiscal year 2024, coupled with a favorable weakening of the Mexican Peso to the US dollar of approximately 10% beginning in June. We continue to win new programs and reduce inventories to be more aligned with current revenue levels.
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Earnings for fiscal 2022 continued to be adversely impacted by supply chain and transportation and logistics issues, legal and other professional service expenses related specifically to the SEC’s review of last year’s whistleblower complaint, and increased interest expense. 19 We maintained a strong balance sheet with a current ratio of 2.1 and a debt to equity ratio of 0.86.
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We continue to see improvement across the metrics associated with business development, including a significant increase in the number of active quotes with prospective customers. We aim to diversify our customer base by adding additional programs and customers.
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Total cash used in operating activities as defined on our cash flow statement was $4.9 million during fiscal year 2022. We maintained sufficient liquidity for our expected future operations. We believe cash flow from operations, our borrowing capacity, and equipment financing should provide adequate capital for planned growth over the long term.
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Our current customer relationships involve a variety of products including sheet metal fabrication, medical devices and components, water purification products, consumer security products, aerospace and defense products, recreational and outdoor equipment, and plastics. Gross profit as a percentage of net sales was 7.0 percent in fiscal year 2024, down from 7.8 percent in 2023.
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However, partially offsetting the increase in revenue during fiscal year 2022, the Company’s revenue was constrained by the global supply chain and transportation issues that continued to limit production throughout the year and to a lesser extent the Chinese government mandated COVID-19 shutdown of our Shanghai, China facilities for most of the fourth quarter.
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During fiscal year 2024, our gross margin was also adversely impacted by a cybersecurity incident late in the year, and continued increases in 21 Mexican wages as well as the strengthening of the Mexican Peso relative to the US Dollar.
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RESULTS OF OPERATIONS Comparison of the Fiscal Year Ended July 3, 2021 with the Fiscal Year Ended June 27, 2020 To review the results of operations comparison of the fiscal year ended July 3, 2021 with the fiscal year ended June 27, 2020, please refer to our Annual Report on Form 10-K filed September 16, 2021 with the Securities and Exchange Commission or follow the link below. https://www.sec.gov/ix?doc=/Archives/edgar/data/719733/000071973321000106/ktcc-20210703.htm Capital Resources and Liquidity Operating Cash Flow Net cash used in operating activities for fiscal year 2022 was $4.9 million compared to $15.1 million and $31.0 million in fiscal years 2021 and 2020, respectively.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeAs a result, transactions occur in currencies other than the U.S. dollar. Exchange rate fluctuations among other currencies used by us would directly or indirectly affect our financial results. We use Mexican peso forward contracts to hedge foreign currency fluctuations for a portion of our Mexican peso denominated expenses.
Biggest changeForeign Currency Exchange Risk A significant portion of our operations are in foreign locations. As a result, transactions occur in currencies other than the U.S. dollar. Exchange rate fluctuations among other currencies used by us would directly or indirectly affect our financial results.
Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk We are subject to the risk of fluctuating interest rates in the normal course of business. Our major market risk relates to our secured debt. Our asset-based senior secured revolving credit facility, and equipment financing facility are secured by substantially all of our assets.
Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk We are subject to the risk of fluctuating interest rates in the normal course of business. Our major market risk relates to our secured debt. Our asset-based senior secured revolving credit facility, line of credit facility, and equipment financing facility are secured by substantially all of our assets.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources and Liquidity”in this Annual Report on Form 10-K and the Footnote “Long-Term Debt” of the “Notes to Consolidated Financial Statements” for additional information regarding our revolving credit facility and term loans. Foreign Currency Exchange Risk A significant portion of our operations are in foreign locations.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources and Liquidity” in this Annual Report on Form 10-K and Note 4 “Long-Term Debt” of the “Notes to Consolidated Financial Statements” for additional information regarding our revolving credit facility and term loans.
The interest rates applicable to our asset-based senior secured revolving credit facility fluctuate with SOFR rates. There was outstanding $95.1 million in borrowings under our asset-based senior secured revolving credit facility and $7.9 million outstanding on our equipment financing facilities as of July 2, 2022.
There was outstanding $107.1 million in borrowings under our asset-based senior secured revolving credit facility, MXN99 million ($5.4 million USD) outstanding in borrowing under our line of credit, and $8.0 million outstanding on our equipment financing facilities as of June 29, 2024.
There were no foreign currency forward contracts outstanding as of July 2, 2022. For additional information regarding our derivative instruments, please refer to Footnote “Derivative Financial Instruments” of the “Notes to Consolidated Financial Statements.” 26
See Note 9 - “Derivative Financial Instruments” to the Notes to Consolidated Financial Statements for additional information regarding our derivative instruments. 31
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The interest rates applicable to our asset-based senior secured revolving credit facility fluctuate with SOFR rates. The interest rates applicable to our asset-based secured line of credit facility fluctuate with Iterbancaria de Equilibrio Interest Rate.
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From time to time, we use Mexican Peso forward contracts to hedge foreign currency fluctuations for a portion of our Mexican Peso denominated expenses. There was $12.5 million of foreign currency forward contracts outstanding as of June 29, 2024.

Other KTCC 10-K year-over-year comparisons