Part I: Financial Information [Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) Key Tronic Corporation's unaudited condensed consolidated financial statements for the period ended March 29, 2025, are presented, covering Balance Sheets, Operations, and Cash Flows [Condensed Consolidated Financial Statements](index=4&type=section&id=Condensed%20Consolidated%20Financial%20Statements) The company reported a net loss of **$0.6 million** for Q3 and **$4.4 million** for the nine months ended March 29, 2025, with total assets decreasing to **$328.6 million** Condensed Consolidated Balance Sheet Data (in millions) | | March 29, 2025 | June 29, 2024 | | :--- | :--- | :--- | | **Total current assets** | $252.8 | $288.4 | | **Total assets** | $328.6 | $355.3 | | **Total current liabilities** | $92.8 | $104.2 | | **Total liabilities** | $209.0 | $231.4 | | **Total shareholders' equity** | $119.6 | $124.0 | Condensed Consolidated Statement of Operations Data (in millions) | | Three Months Ended Mar 29, 2025 | Nine Months Ended Mar 29, 2025 | | :--- | :--- | :--- | | **Net sales** | $112.0 | $357.4 | | **Gross profit** | $8.6 | $29.6 | | **Operating income (loss)** | $(0.5) | $2.9 | | **Net loss** | $(0.6) | $(4.4) | | **Net loss per share — Diluted** | $(0.06) | $(0.41) | Condensed Consolidated Statement of Cash Flows Data (in millions) | | Nine Months Ended Mar 29, 2025 | Nine Months Ended Mar 30, 2024 | | :--- | :--- | :--- | | **Cash provided by operating activities** | $10.1 | $6.1 | | **Cash used in investing activities** | $(3.0) | $(1.0) | | **Cash used in financing activities** | $(9.4) | $(3.4) | | **Net (decrease) increase in cash** | $(2.3) | $1.7 | [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Notes detail accounting policies, new credit facilities including a **$115 million** revolving facility, and a tax holiday in Vietnam, significantly reducing the tax rate - Liquidity is supported by **$10.1 million** cash from operations for the nine months ended March 29, 2025, and new credit facilities, including a **$115 million** asset-based revolving credit facility and a **$28 million** term loan secured on December 3, 2024[24](index=24&type=chunk)[25](index=25&type=chunk) - Revenue is primarily recognized 'over-time' using a cost-to-cost input method for customer-specific products with enforceable payment rights[30](index=30&type=chunk) Long-Term Debt Composition (in millions) | Debt Instrument | March 29, 2025 | | :--- | :--- | | Asset-based senior secured revolving credit facility | $79.5 | | Domestic term loan - Callodine | $27.3 | | Foreign line of credit | $4.0 | | Other term loans | $5.2 | | **Total debt** | **$115.9** | - The company benefits from a **0%** tax rate in Vietnam for four years starting fiscal 2021, followed by reduced rates[60](index=60&type=chunk) - On May 13, 2025, the company obtained waivers for non-compliance with financial covenants related to its Term Loan and Credit Agreement for the period ending March 29, 2025[49](index=49&type=chunk)[55](index=55&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=21&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses a **21.4%** YoY quarterly revenue decline to **$112.0 million**, improved gross margin to **7.7%**, and strategic production shifts to mitigate tariff risks and capture onshoring trends [Executive Summary](index=22&type=section&id=Executive%20Summary) Q3 FY2025 saw new program wins, a **21.4%** YoY revenue decline to **$112.0 million**, but gross margin improved to **7.7%** due to cost-cutting and strategic facility restructuring - New programs were won in telecommunications, pest control, energy storage, medical technology, and temperature-controlled shipping solutions[100](index=100&type=chunk) Q3 FY2025 vs Q3 FY2024 Performance | Metric | Q3 FY2025 | Q3 FY2024 | | :--- | :--- | :--- | | Net Sales | $112.0M | $142.4M | | Gross Margin | 7.7% | 5.7% | | Net Loss | $(0.6)M | $(2.2)M | | Diluted EPS | $(0.06) | $(0.21) | - The company is restructuring its Juarez facility for higher volume manufacturing and expanding Arkansas and Vietnam capacities to leverage onshoring and mitigate tariffs[106](index=106&type=chunk) [Results of Operations](index=24&type=section&id=RESULTS%20OF%20OPERATIONS) Q3 net sales decreased **21.4%** YoY to **$112.0 million** with gross margin improving to **7.7%**, while nine-month net sales fell **18.8%** to **$357.4 million** with gross margin at **8.3%** Comparison of Three Months Ended (in millions) | | Mar 29, 2025 | Mar 30, 2024 | Change | | :--- | :--- | :--- | :--- | | Net sales | $112.0 | $142.4 | $(30.5) | | Gross profit | $8.6 | $8.1 | $0.5 | | Gross Margin | 7.7% | 5.7% | +2.0 ppt | | Net loss | $(0.6) | $(2.2) | $1.6 | - The quarterly net sales decrease was primarily due to worldwide economic disruptions, global tariffs, and reduced customer demand[115](index=115&type=chunk) Comparison of Nine Months Ended (in millions) | | Mar 29, 2025 | Mar 30, 2024 | Change | | :--- | :--- | :--- | :--- | | Net sales | $357.4 | $440.4 | $(83.0) | | Gross profit | $29.6 | $30.7 | $(1.1) | | Gross Margin | 8.3% | 7.0% | +1.3 ppt | | Net loss | $(4.4) | $(0.8) | $(3.6) | - The nine-month net sales decrease was driven by economic disruptions, component shortages, and a **~$44 million** decrease in excess inventory and scrap sales due to program endings[128](index=128&type=chunk) [Capital Resources and Liquidity](index=28&type=section&id=CAPITAL%20RESOURCES%20AND%20LIQUIDITY) The company generated **$10.1 million** in operating cash flow for the nine months ended March 29, 2025, supported by new **$115 million** revolving credit and **$28 million** term loan facilities - Net cash provided by operating activities was **$10.1 million** for the nine months ended March 29, 2025, up from **$6.1 million** in the prior year period[140](index=140&type=chunk) - Operating cash flow increased primarily due to a **$19.6 million** decrease in accounts receivable and a **$5.8 million** decrease in inventory[141](index=141&type=chunk) - On December 3, 2024, the company secured a new **$115 million** asset-based revolving credit facility and a **$28 million** term loan, expected to provide sufficient liquidity for the next 12 months[147](index=147&type=chunk)[148](index=148&type=chunk) [Backlog](index=28&type=section&id=BACKLOG) Order backlog decreased to **$138.1 million** as of March 29, 2025, from **$275.8 million** a year prior, primarily due to softer demand for Mexico-based programs Order Backlog Comparison | Date | Backlog Amount | | :--- | :--- | | March 29, 2025 | $138.1 million | | March 30, 2024 | $275.8 million | - Backlog decreased due to softer demand for Mexico-based programs, partially offset by higher U.S. demand, with future increases expected from recent program wins[139](index=139&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=38&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company faces market risks from fluctuating interest rates on its SOFR-linked debt and foreign currency exchange rates from operations in Mexico, China, and Vietnam - Interest rate risk arises from the asset-based senior secured revolving credit facility, which fluctuates with SOFR rates[212](index=212&type=chunk) - Foreign currency exchange risk stems from operations in Mexico, China, and Vietnam, partially hedged by Mexican Peso forward contracts[214](index=214&type=chunk) - As of March 29, 2025, **$20.9 million** in foreign currency forward contracts were outstanding to manage Mexican Peso exposure[214](index=214&type=chunk) [Controls and Procedures](index=38&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were ineffective as of March 29, 2025, due to un-remediated material weaknesses in internal control over financial reporting - The CEO and CFO concluded that disclosure controls and procedures were not effective as of March 29, 2025[217](index=217&type=chunk) - Ineffectiveness stems from material weaknesses in internal control over financial reporting related to revenue recognition and new accounting standard adoption, as previously disclosed[196](index=196&type=chunk)[217](index=217&type=chunk) - Remediation efforts, including staff training and enhanced procedures, are underway, but material weaknesses are not yet fully resolved[219](index=219&type=chunk)[220](index=220&type=chunk) Part II: Other Information [Legal Proceedings](index=39&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in ordinary course legal proceedings, which management does not expect to have a material adverse effect on its financial position or results - The company is party to certain lawsuits or claims arising in the ordinary course of business[222](index=222&type=chunk) - Management does not expect these legal proceedings to materially adversely affect the company's financial condition or results[222](index=222&type=chunk) [Risk Factors](index=30&type=section&id=Item%201A.%20Risk%20Factors) This section details significant risks including customer and supplier dependency, foreign currency fluctuations, cyberattacks, debt covenant non-compliance, and material weaknesses in internal controls - **Business Risks:** The company faces risks from international operations, dependency on a small number of customers for sales, and reliance on limited critical component suppliers[152](index=152&type=chunk)[161](index=161&type=chunk)[165](index=165&type=chunk) - **Technology Risks:** The company is dependent on digital technologies and subject to cyberattacks, with a previously disclosed material incident in May 2024 and ongoing threats[184](index=184&type=chunk)[185](index=185&type=chunk) - **Financial Risks:** Restrictive debt covenants, past non-compliance, potential accelerated debt repayment, and interest rate risk on variable-rate debt pose significant financial risks[189](index=189&type=chunk)[190](index=190&type=chunk)[193](index=193&type=chunk) - **Control & Legal Risks:** Material weaknesses in internal control over financial reporting, if un-remediated, could lead to inaccurate reporting, delisting, regulatory action, and loss of investor confidence[196](index=196&type=chunk)[197](index=197&type=chunk)[198](index=198&type=chunk) - **Trade Policy Risks:** Majority of manufacturing outside the U.S. (China, Mexico) exposes the company to tariffs and U.S. trade policy changes, potentially increasing costs and reducing revenue[181](index=181&type=chunk)[182](index=182&type=chunk)[183](index=183&type=chunk) [Other Information](index=39&type=section&id=Item%205.%20Other%20Information) Recent events include a **10%** voluntary salary reduction for executive leadership and Board, and waivers obtained for non-compliance with debt covenants for the quarter ended March 29, 2025 - On May 12, 2025, executive leadership and the Board agreed to a voluntary **10%** temporary reduction in base salaries and cash retainers for cost reduction[226](index=226&type=chunk) - On May 13, 2025, the company amended its Term Loan and Credit Agreement to waive a default related to non-compliance with minimum earnings covenants for the period ending March 29, 2025[227](index=227&type=chunk)[228](index=228&type=chunk)

Core Viewpoint - Key Tronic Corporation is facing significant challenges in the third quarter of fiscal 2025, with a notable decline in revenues due to global tariff volatility and reduced customer demand, while simultaneously making strides in operational efficiency and securing new contracts for future growth [1][2][9][12]. Revenue & Earnings Overview - Total revenues for the third quarter of fiscal 2025 were reported at $112 million, a decrease of 21.3% from $142.4 million in the same quarter last year [2] - The gross margin improved to 7.7% from 5.7% year over year, attributed to cost-cutting measures and workforce reductions [2] - The company reported a net loss of $0.6 million or 6 cents per share, an improvement from a net loss of $2.2 million or 21 cents per share in the prior year [3] Operational Performance & Business Metrics - Operating cash flow for the first nine months of fiscal 2025 was $10.1 million, up from $6.1 million in the same period last year [4] - Inventory levels decreased by 14% or $16 million year over year, aligning with current revenue levels [4] - Total liabilities were reduced by 14% or $34.3 million compared to the same quarter last year [4] Capital Expenditure - Capital expenditure for the first nine months of fiscal 2025 was approximately $3 million, with expectations for the full year between $6 million and $8 million, primarily for capacity expansions in Arkansas and Vietnam [5] Management Commentary - Management highlighted that global tariff volatility, especially concerning components from China, has caused customer hesitancy [6] - The company is optimistic about long-term growth, focusing on operational streamlining and cost reductions [6] Business Wins - Key Tronic secured five significant contracts in the quarter, including a $12 million telecommunications program in Mexico and a $6 million pest-control device contract in Vietnam [7] - A $1 million design contract with potential production value up to $15 million emphasizes the importance of the company's design capabilities [7] Future Developments - A previously disclosed $60 million program is on track, with ramp-up expected to begin in the first quarter of fiscal 2026 [8] - The company plans to invest over $28 million in a new manufacturing and R&D facility in Arkansas, projected to create over 400 jobs [11] - Expansion plans in Vietnam aim to more than double the current manufacturing footprint, providing alternatives to Chinese manufacturing [11] Summary - Despite facing near-term challenges such as falling revenues and macroeconomic uncertainties, Key Tronic is strengthening its cost base, expanding its operational footprint, and diversifying its customer portfolio, which may lead to a return to profitability in the long term [12]

Key Tronic (KTCC) Q3 2025 Earnings Call May 06, 2025 05:00 PM ET Company Participants Anthony Voorhees - EVP of Administration, CFO & TreasurerBrett Larsen - President & CEOBill Dezellem - Founder, President & Chief Investment OfficerGeorge Melas-Kyriazi - PresidentSheldon Grodsky - President Operator Good day, and welcome to the Keytronic Q3 Fiscal Year twenty twenty five Investor Call. Today's conference is being recorded. After the presentation, we will begin the question and answer period. At this time, ...

Key Tronic (KTCC) Q3 2025 Earnings Call May 06, 2025 05:00 PM ET Speaker0 Good day, and welcome to the Keytronic Q3 Fiscal Year twenty twenty five Investor Call. Today's conference is being recorded. After the presentation, we will begin the question and answer period. At this time, I'd like to turn the call over to Tony Voorhees. Please go ahead. Speaker1 Good afternoon, everyone. I am Tony Voorhees, chief financial officer of Keytronix. I would like to thank everyone for joining us today for our investor ...

Core Viewpoint - Key Tronic Corporation reported a decline in revenue for the third quarter of fiscal year 2025, primarily due to global economic disruptions and tariff fluctuations, but remains optimistic about long-term growth and profitability [2][3][7]. Financial Performance - Total revenue for Q3 FY2025 was $112.0 million, down from $142.4 million in Q3 FY2024, with a year-to-date revenue of $357.4 million compared to $440.4 million in the same period last year [2][5]. - Gross margin improved to 7.7% in Q3 FY2025 from 5.7% in Q3 FY2024, while operating margin remained at (0.4)% for both periods [4]. - The net loss for Q3 FY2025 was $(0.6) million or $(0.06) per share, an improvement from a net loss of $(2.2) million or $(0.21) per share in Q3 FY2024 [5][6]. Strategic Initiatives - The company is expanding production capacity in Arkansas and Vietnam to mitigate tariff impacts and enhance operational flexibility [7]. - Cost reduction initiatives have been implemented, including headcount reductions, which have lowered the break-even revenue requirements [3][4]. Cash Flow and Operations - Key Tronic generated positive cash flow from operations of $10.1 million in the first nine months of FY2025, compared to $6.1 million in the same period of FY2024 [3]. - The company continues to win new programs across various sectors, including telecommunications and medical technology, positioning itself for future growth [7][8]. Business Outlook - Due to ongoing uncertainties regarding tariffs and economic conditions, Key Tronic will not provide revenue or earnings guidance for Q4 FY2025 [9].

[Q3 FY2025 Financial Performance and Corporate Strategy](index=1&type=section&id=Key%20Tronic%20Corporation%20Announces%20Results%20for%20the%20Third%20Quarter%20of%20Fiscal%20Year%202025) [Financial Highlights](index=1&type=section&id=Financial%20Highlights) Key Tronic's Q3 FY2025 revenue declined to $112.0 million, but net loss narrowed to $(0.6) million, gross margin improved, and operating cash flow remained positive Q3 & YTD FY2025 Key Financial Results | Metric | Q3 FY2025 ($ millions) | Q3 FY2024 ($ millions) | YTD FY2025 ($ millions) | YTD FY2024 ($ millions) | | :--- | :--- | :--- | :--- | :--- | | **Revenue** | $112.0M | $142.4M | $357.4M | $440.4M | | **Net Loss** | $(0.6)M | $(2.2)M | $(4.4)M | $(0.8)M | | **Net Loss per Share** | $(0.06) | $(0.21) | $(0.41) | $(0.07) | Q3 FY2025 vs Q3 FY2024 Margin Comparison | Margin | Q3 FY2025 (%) | Q3 FY2024 (%) | | :--- | :--- | :--- | | **Gross Margin** | 7.7% | 5.7% | | **Operating Margin** | (0.4)% | (0.4)% | - The year-over-year improvement in **gross margin** was driven by cost-cutting and headcount reductions in both international and domestic operations[5](index=5&type=chunk) - The company generated positive cash flow from operations, totaling **$10.1 million** for the first nine months of fiscal 2025, an increase from **$6.1 million** in the same period of fiscal 2024[4](index=4&type=chunk) [Operational and Strategic Developments](index=1&type=section&id=Operational%20and%20Strategic%20Developments) Key Tronic's operations were impacted by tariff disruptions, prompting cost reductions and new manufacturing expansions in Arkansas and Vietnam, expected by H1 FY2026, alongside securing new programs - Revenue was adversely impacted by worldwide economic disruptions and uncertainty from escalating and fluctuating global tariffs, leading to delays and reduced customer demand[3](index=3&type=chunk)[8](index=8&type=chunk) - The company is building new production capacity in Arkansas and Vietnam, expected to be operational in the **first half of fiscal 2026**, to help customers mitigate tariff impacts on goods from China[8](index=8&type=chunk)[9](index=9&type=chunk) - Strategic initiatives include streamlining operations and reducing headcount to lower the cost structure and enhance competitiveness[5](index=5&type=chunk)[9](index=9&type=chunk) - Key Tronic has won new programs in telecommunications, pest control, energy storage, medical technology, and temperature-controlled shipping solutions[9](index=9&type=chunk) [Business Outlook](index=2&type=section&id=Business%20Outlook) Key Tronic will not provide Q4 FY2025 financial guidance due to significant economic and political uncertainty, particularly concerning potential tariffs - The company will not provide financial guidance for Q4 FY2025 due to uncertainty related to potential tariffs[10](index=10&type=chunk) [Financial Statements](index=4&type=section&id=Financial%20Statements) [Consolidated Statements of Operations](index=4&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20OPERATIONS) In Q3 FY2025, net sales decreased to $112.0 million, resulting in an operating loss of $0.5 million and a net loss of $0.6 million, with similar trends for the nine-month period Consolidated Statements of Operations (In thousands) | | Three Months Ended (in thousands) | Nine Months Ended (in thousands) | | :--- | :--- | :--- | | | **Mar 29, 2025** | **Mar 30, 2024** | **Mar 29, 2025** | **Mar 30, 2024** | | **Net sales** | **$111,974** | **$142,427** | **$357,385** | **$440,386** | | Gross profit | $8,607 | $8,081 | $29,616 | $30,706 | | Operating income (loss) | $(459) | $(575) | $2,864 | $6,641 | | **Net Loss** | **$(604)** | **$(2,221)** | **$(4,394)** | **$(802)** | | Net loss per share — Diluted | $(0.06) | $(0.21) | $(0.41) | $(0.07) | [Consolidated Balance Sheets](index=5&type=section&id=CONSOLIDATED%20BALANCE%20SHEETS) As of March 29, 2025, Key Tronic's total assets decreased to $328.6 million, total liabilities to $209.0 million, and shareholders' equity slightly reduced to $119.6 million Consolidated Balance Sheet Highlights (In thousands) | | March 29, 2025 (in thousands) | June 29, 2024 (in thousands) | | :--- | :--- | :--- | | **Total current assets** | $252,816 | $288,399 | | **Total assets** | **$328,557** | **$355,343** | | **Total current liabilities** | $92,788 | $104,176 | | Long-term debt, net | $108,516 | $116,383 | | **Total liabilities** | **$208,962** | **$231,353** | | **Total shareholders' equity** | **$119,595** | **$123,990** | [Reconciliation of GAAP to Non-GAAP Measures](index=6&type=section&id=Reconciliation%20of%20GAAP%20to%20non-GAAP%20measures) Key Tronic provides non-GAAP financial measures for transparency, with Q3 FY2025 GAAP net loss of $(0.6) million adjusted to a non-GAAP net loss of $(0.6) million, or $(0.05) per share - The company uses non-GAAP financial measures, such as adjusted net loss and adjusted net loss per share, to supplement its GAAP financial statements and provide greater transparency on core operations[14](index=14&type=chunk) GAAP to Non-GAAP Reconciliation (In thousands) | | Three Months Ended (in thousands) | Nine Months Ended (in thousands) | | :--- | :--- | :--- | | | **Mar 29, 2025** | **Mar 30, 2024** | **Mar 29, 2025** | **Mar 30, 2024** | | **GAAP net loss** | **$(604)** | **$(2,221)** | **$(4,394)** | **$(802)** | | Stock-based compensation | $26 | $52 | $109 | $163 | | Write-off of unamortized loan fees | — | — | $1,012 | — | | **Adjusted net loss (Non-GAAP)** | **$(583)** | **$(2,179)** | **$(3,497)** | **$(1,016)** | | **Adjusted net loss per share (Non-GAAP)** | **$(0.05)** | **$(0.20)** | **$(0.32)** | **$(0.09)** |

Core Points - Key Tronic Corporation is expanding its clean-tech manufacturing operations in Springdale, Arkansas, with an investment exceeding $28 million and the creation of over 400 jobs in the next five years [1][2][5] - The new facility will increase Key Tronic's total U.S. production capacity by approximately 40% [3] - The expansion is part of a larger business park investment of over $100 million in the Springdale community [4] Company Overview - Key Tronic, founded in 1969, is a leading contract manufacturer providing design and manufacturing services from facilities in the U.S., Mexico, China, and Vietnam [6][7] - The company has been operating in Arkansas since 1985 and has a long history of manufacturing electronics in the state [7] Economic Impact - The expansion is expected to enhance the local economy by providing significant job opportunities and reinforcing Springdale's reputation as a destination for industry and innovation [5] - Local officials, including the Governor and the Mayor of Springdale, have expressed strong support for the expansion, highlighting the region's skilled workforce and business-friendly environment [2][5]

[Part I: Financial Information](index=4&type=section&id=Part%20I.%20FINANCIAL%20INFORMATION) [Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) Unaudited condensed consolidated financial statements for Key Tronic Corporation for the quarter ended December 28, 2024 Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 28, 2024 | Jun 29, 2024 | | :--- | :--- | :--- | | **Total Current Assets** | $261,136 | $288,399 | | **Total Assets** | **$327,829** | **$355,343** | | **Total Current Liabilities** | $93,770 | $104,176 | | Long-term debt, net | $106,020 | $116,383 | | **Total Liabilities** | **$208,342** | **$231,353** | | **Total Shareholders' Equity** | **$119,487** | **$123,990** | Condensed Consolidated Statement of Operations Highlights (in thousands, except per share) | Metric | Three Months Ended Dec 28, 2024 | Three Months Ended Dec 30, 2023 | Six Months Ended Dec 28, 2024 | Six Months Ended Dec 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | **Net Sales** | $113,853 | $147,847 | $245,411 | $297,959 | | **Gross Profit** | $7,706 | $11,763 | $21,009 | $22,625 | | **Operating Income (Loss)** | $(1,121) | $3,948 | $3,323 | $7,216 | | **Net Income (Loss)** | **$(4,914)** | **$1,084** | **$(3,790)** | **$1,419** | | **Diluted EPS** | **$(0.46)** | **$0.10** | **$(0.35)** | **$0.13** | Condensed Consolidated Statement of Cash Flow Highlights (Six Months Ended, in thousands) | Cash Flow Activity | Dec 28, 2024 | Dec 30, 2023 | | :--- | :--- | :--- | | **Cash provided by operating activities** | $11,537 | $9,080 | | **Cash used in investing activities** | $(821) | $(360) | | **Cash used in financing activities** | $(11,224) | $(9,370) | | **Net decrease in cash** | $(508) | $(650) | | **Cash and cash equivalents, end of period** | $4,244 | $2,953 | - On December 3, 2024, the company entered into a **new asset-based senior secured revolving credit facility of up to $115 million and a $28 million term loan**, both maturing in December 2029. These were used to pay off the prior credit facility[43](index=43&type=chunk)[45](index=45&type=chunk)[48](index=48&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=21&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q2 FY25 financial performance, highlighting revenue decline, debt refinancing, and operational restructuring - **Net sales for Q2 FY25 were $113.9 million, a 23.0% decrease** from $147.8 million in the prior-year period. The decline was attributed to component shortages, lower holiday production, and reduced customer demand, which collectively lowered revenue by about $15 million[104](index=104&type=chunk)[119](index=119&type=chunk)[120](index=120&type=chunk) - The company completed a **new asset-based revolving credit facility and term loan that extends debt maturity to December 3, 2029, and is expected to lower cash interest expense**[103](index=103&type=chunk) - The company is **restructuring its Juarez facility to focus on higher volume manufacturing** in response to rising Mexican wages and to improve competitiveness. This involves significant headcount reductions[110](index=110&type=chunk) - **Order backlog was approximately $162.5 million** on December 28, 2024, **down from $264.1 million** a year earlier, due to softening demand for Mexico-based programs. However, the company expects the backlog to increase due to recent program wins[143](index=143&type=chunk) [Results of Operations](index=24&type=section&id=Results%20of%20Operations) Net sales decreased 23.0% to $113.9 million for Q2 FY25, resulting in a $4.9 million net loss, due to shortages and demand Comparison of Three Months Ended (in thousands) | Metric | Dec 28, 2024 | Dec 30, 2023 | $ Change | | :--- | :--- | :--- | :--- | | **Net Sales** | $113,853 | $147,847 | $(33,994) | | **Gross Profit** | $7,706 | $11,763 | $(4,057) | | **Operating Income (Loss)** | $(1,121) | $3,948 | $(5,069) | | **Net (Loss) Income** | $(4,914) | $1,084 | $(5,998) | - **The decrease in Q2 gross margin to 6.8% from 8.0% YoY** was primarily due to lower net sales without a corresponding decrease in fixed manufacturing costs[121](index=121&type=chunk) - **Interest expense for Q2 FY25 increased to $3.9 million from $3.0 million YoY**, largely due to a **$1.0 million write-off** of unamortized loan fees related to the debt refinancing[126](index=126&type=chunk) [Capital Resources and Liquidity](index=27&type=section&id=Capital%20Resources%20and%20Liquidity) The company generated $11.5 million in operating cash flow, refinanced debt, and maintains sufficient liquidity - **Net cash provided by operating activities was $11.5 million** for the six months ended December 28, 2024, primarily driven by **decreases in inventory ($4.4M), accounts receivable ($19.4M), and contract assets ($2.4M)**, offset by a **decrease in accounts payable ($15.8M)**[144](index=144&type=chunk)[145](index=145&type=chunk) - The company entered into a **new $115 million asset-based senior secured revolving credit facility and a $28 million term loan** on December 3, 2024, both maturing on December 3, 2029[151](index=151&type=chunk) - **Management expects capital expenditures to be approximately $8-$10 million** for the fiscal year, funded by internal funds, the credit facility, and equipment term loans[149](index=149&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=37&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company faces market risks from fluctuating interest rates on secured debt and foreign currency exchange rates, partially hedged - The company is **subject to interest rate risk on its debt, including a $75.6 million outstanding balance** on its asset-based senior secured revolving credit facility, which has a variable rate tied to SOFR[215](index=215&type=chunk) - **The company faces foreign currency exchange risk from its operations in Mexico, China, and Vietnam. To mitigate this, it uses Mexican Peso forward contracts, with $29.0 million outstanding** as of December 28, 2024[75](index=75&type=chunk)[217](index=217&type=chunk) [Controls and Procedures](index=37&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls were ineffective due to material weaknesses, with remediation efforts underway - **The CEO and CFO concluded that the company's disclosure controls and procedures were not effective as of December 28, 2024, due to previously identified material weaknesses in internal control over financial reporting**[220](index=220&type=chunk) - **Remediation efforts are underway to address the material weaknesses. Steps include training on accounting for material price variances, enhancing closing process documentation, and hiring technical accounting finance staff**[222](index=222&type=chunk)[227](index=227&type=chunk) - **Despite the material weaknesses, management believes the financial statements in this report are fairly presented in all material respects in accordance with GAAP**[221](index=221&type=chunk) [Part II: Other Information](index=38&type=section&id=Part%20II.%20OTHER%20INFORMATION) [Risk Factors](index=29&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant business, operational, technology, capital, and control risks, including customer dependence, cyber incidents, and debt [Risks Related to Business and Strategy](index=29&type=section&id=RISKS%20RELATED%20TO%20OUR%20BUSINESS%20AND%20STRATEGY) Business risks include international operational instability, volatile customer demand, customer concentration, and limited suppliers - **Operations in Mexico, China, and Vietnam expose the company to risks including political instability, regulatory changes, trade barriers, and tariffs**[156](index=156&type=chunk)[159](index=159&type=chunk) - **The company's customer base is concentrated, and it does not typically have long-term volume purchase contracts**, making it vulnerable to the loss or reduction of orders from principal customers[164](index=164&type=chunk)[165](index=165&type=chunk) - **Dependence on a limited number of suppliers for critical components creates a risk of operational interruption** from component shortages or price increases, which could damage customer relationships[168](index=168&type=chunk)[169](index=169&type=chunk) [Technology Risks](index=33&type=section&id=TECHNOLOGY%20RISKS) The company faces significant technology risks, primarily from cybersecurity threats and IT system disruptions, including a Q4 FY2024 cyber incident - **The company is subject to cyberattacks and experienced a material incident in Q4 FY2024 involving unauthorized access and data exfiltration, which had a material impact on financial condition and results**[187](index=187&type=chunk)[188](index=188&type=chunk) - **The company relies heavily on its IT infrastructure for critical functions** like financial reporting and inventory management, which are susceptible to outages that could disrupt operations[189](index=189&type=chunk) [Risks Related to Capital and Financing](index=34&type=section&id=RISKS%20RELATED%20TO%20CAPITAL%20AND%20FINANCING) Capital and financing risks include restrictive debt covenants, potential for default, interest rate exposure, and credit risk - **The company's credit agreements contain restrictive covenants. It has a history of breaching covenants** under its prior facility and may not meet covenants in its new facility, which could result in default[191](index=191&type=chunk)[192](index=192&type=chunk) - **The company is exposed to interest rate risk** under its revolving line of credit and term loans, as it has not historically hedged this exposure[195](index=195&type=chunk) [Risks Related to Controls, Procedures, and Internal Investigation](index=35&type=section&id=RISKS%20RELATED%20TO%20OUR%20CONTROLS%20AND%20PROCEDURES%20AND%20THE%20INTERNAL%20INVESTIGATION) Risks include ineffective internal controls due to material weaknesses, potential for inaccurate reporting, and ongoing SEC cooperation - **The company identified material weaknesses in internal controls over financial reporting as of June 29, 2024**, leading to the conclusion that controls were not effective[199](index=199&type=chunk) - **Failure to remediate the material weaknesses in a timely manner increases the risk** of being unable to file periodic reports on time and could lead to stock delisting or regulatory action[200](index=200&type=chunk) - **The company continues to cooperate with the SEC regarding matters from a past internal investigation**, which could lead to significant legal expenses, penalties, or other remedies[203](index=203&type=chunk)[205](index=205&type=chunk) [Other Information](index=38&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in ordinary course legal proceedings not expected to be material, and no Rule 10b5-1 trading plans were adopted or terminated - **The company is involved in various legal proceedings in the ordinary course of business, which it does not expect to have a material adverse effect** on its financial condition or results of operations[225](index=225&type=chunk) - **During the fiscal quarter ended December 28, 2024, no directors or officers adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements**[227](index=227&type=chunk)

Core Viewpoint - Key Tronic Corporation's second-quarter fiscal 2025 results indicate a challenging operating environment, with significant revenue declines and losses, but management is implementing strategic measures to improve profitability and position the company for future growth [16]. Financial Performance Overview - Key Tronic reported a loss of 46 cents per share in Q2 fiscal 2025, compared to earnings of 10 cents per share in the same period last year [2]. - Total revenues for the quarter were $113.9 million, down 22.9% from $147.8 million in the prior-year quarter [2]. Factors Influencing Results - The revenue decline was attributed to component shortages, reduced production during the holiday season, and declining demand from certain customers, collectively lowering revenues by approximately $15 million from initial expectations [3][12]. - Inventory levels decreased by $23 million or 19% year over year, reflecting efforts to optimize inventory amid improved component availability [4]. Key Business Metrics - Gross margin fell to 6.8% from 8% year over year, while operating margin was -1% compared to 2.7% in Q2 fiscal 2024, primarily due to lower revenue levels and fixed cost absorption [4]. - Total operating expenses increased to $8.8 million from $7.8 million in the prior-year quarter, driven by higher research and development costs [5]. Cash & Debt Position - As of December 28, 2024, cash and cash equivalents were $4.2 million, down from $4.8 million as of June 29, 2024, reflecting lower operational cash flow amid declining revenues [7]. - Long-term debt decreased to $106 million from $116.4 million following the refinancing under a new $115-million asset-based financing agreement, which provides increased financial flexibility [8]. Strategic Initiatives & Outlook - Management is focusing on streamlining operations, reducing headcount, and aligning inventory levels with current demand, with optimism about improving profitability as these initiatives take effect [9]. - Key Tronic plans to expand production capacity in Arkansas and Vietnam to address growing customer demand and mitigate tariff risks, with significant capacity increases expected by mid-2025 [10][11]. - New contracts secured in aerospace systems and energy resiliency technologies are anticipated to generate annual revenues exceeding $60 million once fully ramped by late 2025 [13]. Other Developments - The company has opted not to issue revenue or earnings guidance for Q3 fiscal 2025 due to uncertainties related to newly announced tariffs and potential shifts in customer demand [14]. - The refinancing of long-term debt is expected to lower interest expenses and support growth initiatives [15].

Core Points - Key Tronic Corporation plans to expand production capacity in Arkansas and Vietnam to meet growing customer demand and mitigate the impact of tariffs on goods manufactured in China and Mexico [1][3] - The company has signed a new lease in Arkansas to increase its manufacturing footprint by June 2025 and plans to double its manufacturing capacity in Vietnam by September 2025 with significant capital investment [2][3] - The expansion reflects a trend towards nearshoring production away from China, providing customers with flexibility and high-quality, low-cost manufacturing options [3] Company Overview - Key Tronic is a leading design engineering and contract manufacturer, offering services from facilities in the United States, Mexico, China, and Vietnam [4] - The company provides full engineering services, materials management, assembly services, in-house testing, and worldwide distribution to some of the world's leading original equipment manufacturers [4]