Key Tronic(KTCC) - 2025 Q2 - Quarterly Report

Part I: Financial Information Financial Statements (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][45][48] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) 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][119][120] - 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] - 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] - 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] Results of Operations 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] - 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] Capital Resources and Liquidity 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][145] - 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] - 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] Quantitative and Qualitative Disclosures About Market Risk 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] - 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][217] Controls and Procedures 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] - 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][227] - Despite the material weaknesses, management believes the financial statements in this report are fairly presented in all material respects in accordance with GAAP[221] Part II: Other Information Risk Factors The company faces significant business, operational, technology, capital, and control risks, including customer dependence, cyber incidents, and debt Risks Related to Business and Strategy 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][159] - 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][165] - 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][169] Technology Risks 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][188] - 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] Risks Related to Capital and Financing 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][192] - 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] Risks Related to Controls, Procedures, and Internal Investigation 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] - 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] - 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][205] Other Information 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] - 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]