What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-09 compared with 2022-05-11 · 70 added, 121 removed, 322 unchanged (37% of the section changed)

16 unchanged sentences

Executive Summary

For the third quarter of fiscal year 2022, the Company reported total revenue of $138.4 million, up 2.8% from $134.6 million in the same period of fiscal year 2021.

While year-over-year sales have increased, customer demand has been even higher but production continues to be limited by global supply chain and transportation issues.

In the coming quarters, the Company expects to ramp a number of new programs, including the previously announced program with a leading power equipment company in its Mexico facility in the first part of the next fiscal year.

As new customer programs ramp the concentration of our top three customers’ net sales decreased to 34.4 percent of total sales in the third quarter of fiscal year 2022 from 37.9 percent in the same period of the prior fiscal year.

For the first quarter of fiscal year 2023, the Company reported total revenue of $137.3 million, up 3.4% from $132.8 million in the same period of fiscal year 2022.

During the first quarter of fiscal year 2023, the Company ramped up new programs from both longstanding and new customers.

While constraints in the global supply chain continued to limit production, the Company saw some gradual improvements with respect to lead times of certain key components.

As new customer programs ramp the concentration of our top three customers’ net sales decreased to 25.4 percent of total sales in the first quarter of fiscal year 2023 from 33.0 percent in the same period of the prior fiscal year.

We expect that concentration to our top three customers will continue to decrease during the fiscal year.

Net sales to our largest customers may vary significantly from quarter to quarter depending on the size and timing of customer program commencement, forecasts, delays, and design modifications.

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In addition, our capacity and core competencies for printed circuit board assemblies, precision molding, sheet metal fabrication, tool making, assembly, and engineering can be applied to a wide variety of products.

Gross profit as a percent of net sales was 8.3 percent for the third quarter of fiscal year 2022 as compared to 8.2 percent for the same quarter of the prior fiscal year.

The global supply chain and transportation issues continued to disrupt production, including a mandated COVID shutdown in the Company’s facilities in Shanghai, China, intermittent parts supply, factory downtime and overtime expenses.

Operating income as a percentage of net sales was 2.0 percent for the third quarter of fiscal year 2022 compared to 1.9 percent of operating income as a percentage of net sales for the third quarter of fiscal year 2021.

The increase in operating income as a percentage of net sales was primarily driven by the increase in gross profit as discussed above.

Net income for the third quarter of fiscal year 2022 was $1.0 million or $0.09 per diluted share, as compared to net income of $0.9 million or $0.08 per diluted share for the third quarter of fiscal year 2021.

Net income for the third quarter of fiscal 2022 was also impacted by legal costs related specifically to the Securities and Exchange Commission’s (the “SEC”) review of last year’s whistleblower complaint, which totaled approximately $0.06 per diluted share during the quarter and we expect legal costs to potentially continue at a similar pace in coming periods.

During the third quarter of fiscal year 2022, we won new programs involving outdoor recreation, RFID, industrial connectivity and electric mobility products.

While the global supply chain and COVID-19 crises continue to present uncertainty and multiple business challenges in the fourth quarter, we see the potential for significant growth in fiscal 2023 and beyond.

Moving into the fourth quarter of fiscal 2022, the war in Ukraine, China’s COVID lockdown and global logistics problems continue to drive the favorable trend of contract manufacturing returning to North America.

Gross profit as a percent of net sales was 7.6 percent for the first quarter of fiscal year 2023 as compared to 7.6 percent for the same quarter of the prior fiscal year.

During the first quarter of fiscal year 2023, the results were impacted by storm damage to the Company’s facilities in Arkansas, which reduced revenue and gross profit.

Key Tronic has received initial insurance proceeds to repair the plant and replace equipment, which should be completed by the second half of fiscal year 2023, and these initial coverage amounts, net of equipment book value loss, are included in reported gain on insurance claims during the quarter.

In addition, the global supply chain and transportation issues continued to disrupt production, along with increased costs associated to ramping new programs.

Operating income as a percentage of net sales was 2.4 percent for the first quarter of fiscal year 2023 compared to 1.6 percent of operating income as a percentage of net sales for the first quarter of fiscal year 2022.

The increase in operating income as a percentage of net sales was primarily driven by the reported gain on insurance claim during the quarter.

Net income for the first quarter of fiscal year 2023 was $1.2 million or $0.11 per diluted share, as compared to net income of $0.8 million or $0.07 per diluted share for the first quarter of fiscal year 2022.

Net income for the first quarter of fiscal year 2023 improved based on the increase in operating income generated by the gains on insurance claim of $0.9 million and increased revenue during the quarter when compared to the results to first quarter of fiscal 2022.

During the first quarter of fiscal year 2023, we won new programs involving audio, automation, electric vehicle, and power distribution equipment.

Moving into the second quarter of fiscal 2023, global logistics problems, the war in Europe, and China-US geopolitical tensions continue to drive OEM’s to examine their traditional outsourcing strategies.

We believe we are well positioned to benefit from this growing demand.

To protect the health of its employees, the Company has implemented the recommendations of WHO and the CDC including wearing of face masks and shields, workstation arrangements to provide social distancing, temperature monitoring, enhanced worksite disinfection, spacing in cafeterias and break areas, contact management and other precautions.

The Company is also in compliance with government regulations related to COVID-19.

We have experienced shortages in electronic components used in our products.

These shortages can result from strong demand for those components or from problems experienced by suppliers, such as shortages of raw materials.

We have also experienced, and expect to continue to experience, such shortages and shutdowns due to the effects of the COVID-19 pandemic.

We have also experienced, and expect to continue to experience, such shortages and shutdowns due to the effects of the recent pandemic.

These unanticipated component shortages have resulted and could continue to result in curtailed production or delays in production, which may prevent us from timely satisfying our performance obligations with our customers.

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We are carefully monitoring potential supply chain disruptions due to ongoing tightness in the overall component environment and are working to mitigate supply chain constraint risks.

We maintain a strong balance sheet with a current ratio of 2.1 and a debt to equity ratio of 0.9 as of April 2, 2022.

Total cash used in operating activities as defined on our cash flow statement was $11.6 million for the nine months ended April 2, 2022.

We maintain sufficient liquidity for our expected future operations and had $99.7 million in borrowings on our revolving credit facility and $15.8 million remained available at April 2, 2022.

We maintain a strong balance sheet with a current ratio of 2.1 and a debt to equity ratio of 0.9 as of October 1, 2022.

Total cash used in operating activities as defined on our cash flow statement was $5.8 million for the three months ended October 1, 2022.

We maintain sufficient liquidity for our expected future operations and had $105.4 million in borrowings on our revolving credit facility and $10.6 million remained available at October 1, 2022.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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• Revenue Recognition

• Inactive, Obsolete, and Surplus Inventory Reserve

• Inactive, Obsolete, and Surplus Inventory Valuation

• Allowance for Doubtful Accounts

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• Share-Based Compensation

• Impairment of Long-Lived Assets

• Derivatives and Hedging Activity

• Long-Term Incentive Compensation Accrual

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended April 2, 2022 with the Three Months Ended April 3, 2021

Comparison of the Three Months Ended October 1, 2022 with the Three Months Ended October 2, 2021

The financial information and discussion below should be read in conjunction with the Consolidated Financial Statements and Notes.

The following table sets forth certain information regarding the components of our condensed consolidated statements of income for the three months ended April 2, 2022 as compared to the three months ended April 3, 2021.

The following table sets forth certain information regarding the components of our condensed consolidated statements of income for the three months ended October 1, 2022 as compared to the three months ended October 2, 2021.

It is provided to assist in assessing differences in our overall performance (in thousands):

Three Months Ended

April 2, 2022 % of

net sales April 3, 2021 % of

net sales $ change % point

Net sales $ 138,391 100.0 % $ 134,600 100.0 % $ 3,791 — %

Cost of sales 126,883 91.7 % 123,504 91.8 % 3,379 (0.1) %

Gross profit 11,508 8.3 % 11,096 8.2 % 412 0.1 %

Research, development and engineering 2,526 1.8 % 2,655 2.0 % (129) (0.2) %

Selling, general and administrative 6,193 4.5 % 5,865 4.4 % 328 0.1 %

Total operating expenses 8,719 6.3 % 8,520 6.4 % 199 (0.1) %

Operating income 2,789 2.0 % 2,576 1.9 % 213 0.1 %

Interest expense, net 1,551 1.1 % 1,020 0.8 % 531 0.3 %

Income before income taxes 1,238 0.9 % 1,556 1.2 % (318) (0.3) %

Income tax provision 231 0.2 % 689 0.5 % (458) (0.3) %

Net income $ 1,007 0.7 % $ 867 0.6 % $ 140 0.1 %

Net sales of $138.4 million for the third quarter of fiscal year 2022 increased by 2.8 percent as compared to net sales of $134.6 million for the third quarter of fiscal year 2021.

The $3.8 million increase in net sales from the prior year period was primarily due to the successful ramp of new customer programs and increased demand from existing customers.

However, the Company’s revenue was constrained by tightening worldwide supply chain and transportation and logistics issues which delayed the arrival of key components, causing factory downtime and overtime expenses.

Gross profit as a percentage of net sales for the three months ended April 2, 2022 was 8.3 percent compared to 8.2 percent for the three months ended April 3, 2021.

This 0.1 percentage point increase was primarily a result of increased sales offset in part by supply chain constraints and continued but lessening expenses related to COVID-19.

The level of gross margin is impacted by facility utilization, product mix, timing, severity and steepness of new program ramps, pricing within the electronics industry and material costs, which can fluctuate significantly from quarter to quarter.

Included in gross profit are charges related to reductions in the carrying value of our inventory due to obsolescence.

We recorded a provision of approximately $155,000 and $12,000 for obsolete inventory during the three months ended April 2, 2022 and April 3, 2021, respectively.

We adjust the carrying value for estimated obsolescence as necessary in an amount equal to the difference between the cost of inventory and its net realizable value based on assumptions as to future demand and market conditions.

The provisions are established for inventory that we have determined customers are not contractually responsible for and for inventory that we believe customers will be unable to purchase.

Operating Expenses

Total research, development, and engineering (RD&E) expenses were $2.5 million during the three months ended April 2, 2022 and $2.7 million during the three months ended April 3, 2021, respectively.

The decrease in RD&E expenses relate to a decrease in engineering payroll expenses.

Total RD&E expenses as a percent of net sales were 1.8 percent during the three months ended April 2, 2022 and 2.0 percent during the three months ended April 3, 2021.

Total selling, general and administrative (SG&A) expenses were $6.2 million during the three months ended April 2, 2022 compared to $5.9 million for the three months ended April 3, 2021.

The increase in SG&A expenses relate to an increase in legal expenses related to the subject of the previously disclosed internal investigation and related matters, partially offset by a decrease in payroll related expenses.

Total SG&A expenses as a percentage of net sales were 4.5 percent for the three months ended April 2, 2022 and 4.4 percent for the three months ended April 3, 2021.

Interest expense was $1.6 million during the three months ended April 2, 2022 and $1.0 million during the three months ended April 3, 2021.

The increase in interest expense is primarily related to an increase in the average balance outstanding on our line of credit and increased interest rates.

The effective tax rate for the three months ended April 2, 2022 was 18.7 percent compared to 44.3 percent for the three months ended April 3, 2021.

The decrease was primarily due to the recording of a valuation allowance against Vietnam’s net operating loss deferred tax asset and a true up of federal research and development tax credits in the third quarter of fiscal year 2021.

For further information on taxes see Note 5 of the “Notes to Consolidated Financial Statements.”

Our judgments regarding deferred tax assets and liabilities may change due to changes in market conditions, changes in estimates, changes in tax laws or other factors.

If assumptions and estimates change in the future the deferred tax assets and liability will be adjusted accordingly and any increase or decrease will result in an additional deferred income tax expense or benefit in subsequent periods.

RESULTS OF OPERATIONS

Comparison of the Nine Months Ended April 2, 2022 with the Nine Months Ended April 3, 2021

The financial information and discussion below should be read in conjunction with the Consolidated Financial Statements and Notes.

The following table sets forth certain information regarding the components of our condensed consolidated statements of income for the nine months ended April 2, 2022 as compared to the nine months ended April 3, 2021.

It is provided to assist in assessing differences in our overall performance (in thousands):

Nine Months Ended

April 2, 2022 % of

net sales April 3, 2021 % of

October 1, 2022 % of

net sales October 2, 2021 % of

net sales $ change % point

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Selling, general and administrative 5,656 4.1 % 5,595 4.2 % 61 (0.1) %

Gain on insurance proceeds, net of losses (934) (0.7) % — — % (934) (0.7) %

Total operating expenses 7,018 5.1 % 8,044 6.0 % (1,026) (0.9) %

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Net income $ 1,152 0.8 % $ 815 0.6 % $ 337 0.2 %

Effective income tax rate 16.8 % 24.8 %

Net sales of $405.6 million for the nine months ended April 2, 2022 increased by 5.1 percent as compared to net sales of $386.1 million for the nine months ended April 3, 2021.

The $19.5 million increase in net sales from the prior year period was due to the successful ramp of new customer programs and increased demand from existing customers.

At the same time, the Company’s revenue was constrained by tightening worldwide supply chain and transportation and logistics issues which delayed the arrival of key components, causing factory downtime.

Gross profit as a percentage of net sales for the nine months ended April 2, 2022 was 7.8 percent compared to 8.2 percent for the nine months ended April 3, 2021.

This 0.4 percentage point decrease was primarily a result of supply chain constraints and continued but lessening expenses related to COVID-19.

Net sales of $137.3 million for the first quarter of fiscal year 2023 increased by 3.4 percent as compared to net sales of $132.8 million for the first quarter of fiscal year 2022.

The $4.5 million increase in net sales from the prior year period was primarily due to the successful ramp of new customer programs for new and legacy customers.

The Company’s revenue continued to be constrained by tightening worldwide supply chain and transportation and logistics issues, but these problems do show signs of gradually abating.

Gross profit as a percentage of net sales for the three months ended October 1, 2022 was 7.6 percent compared to 7.6 percent for the three months ended October 2, 2021.

Gross profits percentages were flat as a result of the loss of production related to storm damage in Arkansas and increasing costs associated to new program ramps offset by the efficiencies gained in additional revenue.

Included in gross profit are charges related to reductions in the carrying value of our inventory due to obsolescence.

We recorded a provision of approximately $520,000 and $458,000 for obsolete inventory during the nine months ended April 2, 2022 and nine months ended April 3, 2021, respectively.

We recorded a provision of approximately $175,000 and $138,000 for obsolete inventory during the three months ended October 1, 2022 and October 2, 2021, respectively.

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Operating Expenses

Total research, development, and engineering (RD&E) expenses were $7.5 million and $7.3 million during the nine months ended April 2, 2022 and nine months ended April 3, 2021, respectively.

The increase in RD&E expenses relate to an increase in engineering payroll expenses.

Total RD&E expenses as a percent of net sales were 1.8 percent during the nine months ended April 2, 2022 and 1.9 percent during the nine months ended April 3, 2021.

Total selling, general and administrative (SG&A) expenses were $17.4 million during the nine months ended April 2, 2022 compared to $16.3 million for the nine months ended April 2, 2022.

The increase in SG&A expenses relate to an increase in legal expenses related to the subject of the previously disclosed internal investigation and related matters.

Total SG&A expenses as a percentage of net sales were 4.3 percent during the nine months ended April 2, 2022 compared to 4.2 percent during the nine months ended April 3, 2021.

Interest expense was $3.6 million during the nine months ended April 2, 2022 compared to $2.5 million during the nine months ended April 3, 2021.

The increase in interest expense is primarily related to an increase in the average balance outstanding on our line of credit and increased interest rates.

The effective tax rate for the nine months ended April 2, 2022 was 16.8 percent compared to 24.8 percent for the same period in fiscal year 2021.

The effective tax rate decreased from the prior year primarily due to the recording of a valuation allowance against Vietnam’s net operating loss deferred tax asset and a true up of federal research and development tax credits in the third quarter of fiscal year 2021.

There were no significant changes to operating expenses during the presented quarters, other than the gain on insurance proceeds of $934,000 recorded in the first quarter of fiscal 2023.

Total research, development, and engineering (RD&E) expenses were $2.3 million during the three months ended October 1, 2022 and $2.4 million during the three months ended October 2, 2021, respectively.

Total RD&E expenses as a percent of net sales were 1.7 percent during the three months ended October 1, 2022 and 1.8 percent during the three months ended October 2, 2021.

Total selling, general and administrative (SG&A) expenses were $5.7 million during the three months ended October 1, 2022 compared to $5.6 million for the three months ended October 2, 2021.

Total SG&A expenses as a percentage of net sales were 4.1 percent for the three months ended October 1, 2022 and 4.2 percent for the three months ended October 2, 2021.

Interest expense was $1.9 million during the three months ended October 1, 2022 and $1.0 million during the three months ended October 2, 2021.

The increase in interest expense is primarily related to increased interest rates and an increase in the average balance outstanding on our line of credit.

The effective tax rate for the three months ended October 1, 2022 was 21.8 percent compared to 26.0 percent for the three months ended October 2, 2021.

The decrease was primarily due to increased federal research and development tax credits expected during the fiscal year 2023.

For further information on taxes see Note 5 of the “Notes to Consolidated Financial Statements.”

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Considering the ongoing economic impacts of the COVID-19 pandemic, management assessed the realizability of all deferred tax assets at April 2, 2022, and determined that it is more likely than not that the deferred tax assets will be realized, other than the Vietnam net operating loss carryover.

Due to the Tax Holiday and net operating loss utilization ordering rules, we expect our Vietnam net operating losses will be used against Tax Holiday qualified income subject to tax at a zero rate, resulting in no benefit for these net operating losses.

Therefore, we have established a valuation allowance against the full amount of the Vietnam net operating loss carryover at January 1, 2022.

For further information, see Note 5 of the “Notes to Consolidated Financial Statements.”

On April 2, 2022, we had an order backlog of approximately $384.1 million.

This compares with a backlog of approximately $236.6 million on April 3, 2021.

The increase in order backlog is related to increases in demand and increasing supply chain issues that have delayed production.

On October 1, 2022, we had an order backlog of approximately $380.0 million.

This compares with a backlog of approximately $320.9 million on October 2, 2021.

The increase in order backlog is related to increases in demand and continuing supply chain issues that have delayed production.

Order backlog consists of purchase orders received for products expected to be shipped within the next 12 months, although shipment dates are subject to change due to design modifications or changes in other customer requirements.

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Operating Cash Flow

Net cash used in operating activities for the nine months ended April 2, 2022 was $11.6 million, compared to $17.7 million during the same period of the prior fiscal year.

The $11.6 million of net cash used in operating activities for the nine months ended April 2, 2022 is primarily related to $2.4 million in net income for the period adjusted for $3.9 million of depreciation and amortization, a $27.6 million increase in accounts receivable, a $18.3 million increase in inventory, a $2.8 million decrease in accrued compensation and vacation, a $1.6 million increase in other assets, partially offset by a $32.4 million increase in accounts payable, a $1.9 million increase in other liabilities and a $1.3 million decrease in contract assets.

The $17.7 million of net cash used in operating activities for the nine months ended April 3, 2021 is primarily related to $4.2 million in net income for the period adjusted for $5.0 million of depreciation and amortization, a $26.9 million increase in accounts receivable, a $15.8 million increase in inventory, a $1.1 million decrease in accrued compensation and vacation partially offset by a $2.9 million increase in accounts payable, and a $4.3 million decrease in contract assets.

Net cash used in operating activities for the three months ended October 1, 2022 was $5.8 million, compared to $14.6 million during the same period of the prior fiscal year.

The $5.8 million of net cash used in operating activities for the three months ended October 1, 2022 is primarily related to $0.2 million in net income for the period adjusted for $2.4 million of depreciation and amortization, a $1.8 million increase in accounts receivable, a $13.5 million increase in inventory, a $2.8 million decrease in accrued compensation and vacation, a $3.6 million increase in other assets, partially offset by a $12.7 million increase in accounts payable, a $2.2 million increase in other liabilities and a $4.4 million decrease in contract assets.

The $14.6 million of net cash used in operating activities for the three months ended October 2, 2021 is primarily related to $0.8 million in net income for the period adjusted for $1.3 million of depreciation and amortization, a $16.2 million increase in accounts receivable, a $5.8 million increase in inventory, a $3.0 million decrease in accrued compensation and vacation partially offset by a $18.8 million increase in accounts payable, and a $1.1 million decrease in contract assets.

Accounts receivable fluctuates based on the timing of shipments, terms offered and collections that occurred during the quarter.

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Investing Cash Flow

Cash used in investing activities was $4.1 million during the nine months ended April 2, 2022 as compared to $9.7 million during the nine months ended April 3, 2021.

Our primary investing activity during the nine months ended April 2, 2022 and April 3, 2021, was purchasing equipment to support increased production levels for new programs.

Cash used in investing activities was $2.5 million during the three months ended October 1, 2022 as compared to $1.8 million during the three months ended October 2, 2021.

Our primary investing activity during the three months ended October 1, 2022 and October 2, 2021, was purchasing equipment to support increased production levels for new programs.

Leases are often utilized when potential technical obsolescence and funding requirement advantages outweigh the benefits of equipment ownership.

Total capital expenditures are expected to be $9.0 million during the fiscal year, a significant portion of which may be funded through finance leases.

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 provided by financing activities was $14.0 million during the nine months ended April 2, 2022 as compared to $28.1 million in the same period of the previous fiscal year.

Our primary financing activities during the nine months ended April 2, 2022 and nine months ended April 3, 2021, were borrowings and repayments under our revolving line of credit facility and term loans.

As of April 2, 2022, approximately $15.8 million was available under the asset-based revolving credit facility.

Cash provided by financing activities was $8.8 million during the three months ended October 1, 2022 as compared to $14.5 million in the same period of the previous fiscal year.

Our primary financing activities during the three months ended October 1, 2022 and three months ended October 2, 2021, were borrowings and repayments under our revolving line of credit facility and term loans.

As of October 1, 2022, approximately $10.6 million was available under the asset-based revolving credit facility.

Our cash requirements are affected by the level of current operations and new programs.

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The Company further notes projected cash from operations from increased demand from certain customers will be partially offset by an anticipated slowdown in collections from other customers and increasing inventory levels in efforts to mitigate supply chain constraint risks.

As of April 2, 2022, we had approximately $1.7 million of cash held by foreign subsidiaries.

As of October 1, 2022, we had approximately $2.1 million of cash held by foreign subsidiaries.

If cash is to be repatriated in the future from these foreign subsidiaries, the Company would be subject to certain withholding taxes in the foreign jurisdictions.

The total amount of tax payments required for the amount of foreign subsidiary cash on hand as of April 2, 2022 would approximate $43,000.

The total amount of tax payments required for the amount of foreign subsidiary cash on hand as of October 1, 2022 would approximate $12,000.

We have accrued withholding taxes for expected future repatriation of foreign earnings as discussed in Note 6 of the “Notes to Consolidated Financial Statements.”

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• 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;

• unexpected changes in regulatory requirements and laws, including those related to climate change;

• longer customer payment cycles and difficulty collecting accounts receivable;

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subject to trade wars and tariffs;

• our locations may be impacted by hurricanes, tornadoes, earthquakes, water shortages, tsunamis, floods, typhoons, fires, extreme weather conditions and other natural or man-made disasters;

• 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 COVID-19.

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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.

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 Quarterly Report on Form 10-Q, 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.

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Currency exchange rates fluctuate daily as a result of a number of factors, including changes in a country's political and economic policies.

Volatility in the currencies of our entities and the United States dollar could seriously harm our business, operating results and financial condition.

Volatility in the currencies of our entities and the United States dollar, as well as inflationary costs, could seriously harm our business, operating results and financial condition.

The primary impact of currency exchange fluctuations is on the cash, receivables, payables and expenses of our operating entities.

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In addition, we, along with our suppliers and customers, rely on various energy sources in our transportation activities.

While significant uncertainty currently exists about the future levels of energy prices, a significant increase is possible.

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.

increased transportation costs related to certain suppliers and customers could be passed along to us.

We may not be able to increase our product prices enough to offset these increased costs.

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therefore, unless we do so, significant changes in interest rates could adversely affect our results of operations.

For a summary of our debt obligations, see Note 4 Long-Term Debt of the “Notes to Consolidated Financial Statements.”

In addition, the U.K.’s Financial Conduct Authority, which regulates LIBOR, has formally announced that the publication of LIBOR is ending and confirmed that LIBOR-indexed rates will cease after June 30, 2023, with the remaining IBOR-indexed rates ceasing on December 31, 2021.

The Federal Reserve Board and the Federal Reserve Bank of New York identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for LIBOR for debt and derivative financial instruments.

Our credit facility and debt agreements contains provisions that contemplate alternative methods to determine the base rate applicable to our LIBOR-indexed debt to the extent LIBOR-indexed rates are not available.

However, if our loan agreement is not transitioned to SOFR and LIBOR-indexed rates are discontinued, or if the methods of calculating the rates change, interest rates on our current or future borrowings may be adversely affected.

While we currently expect LIBOR-indexed rates to be available until June 30, 2023, it is possible that they will become unavailable prior to that tim e.

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.

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.

Our stock price is volatile.

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As previously disclosed, 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.

While we have undertaken 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.

We also cannot assure you that additional significant deficiencies or material weaknesses in our internal control over financial reporting will not arise or be identified in the future.

We intend to continue our control remediation activities.

In doing so, we will continue to incur expenses and expend management time on compliance-related issues.

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.

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.

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.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis