Key Tronic(US:KTCC)2025-05-13 19:43Part I: Financial Information Financial Statements (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 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 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, 20242425 - Revenue is primarily recognized 'over-time' using a cost-to-cost input method for customer-specific products with enforceable payment rights30 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 rates60 - 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, 20254955 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) 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 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 solutions100 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 tariffs106 Results of Operations 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 demand115 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 endings128 Capital Resources and Liquidity 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 period140 - Operating cash flow increased primarily due to a $19.6 million decrease in accounts receivable and a $5.8 million decrease in inventory141 - 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 months147148 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 wins139 Quantitative and Qualitative Disclosures About Market Risk 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 rates212 - Foreign currency exchange risk stems from operations in Mexico, China, and Vietnam, partially hedged by Mexican Peso forward contracts214 - As of March 29, 2025, $20.9 million in foreign currency forward contracts were outstanding to manage Mexican Peso exposure214 Controls and Procedures 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, 2025217 - Ineffectiveness stems from material weaknesses in internal control over financial reporting related to revenue recognition and new accounting standard adoption, as previously disclosed196217 - Remediation efforts, including staff training and enhanced procedures, are underway, but material weaknesses are not yet fully resolved219220 Part II: Other Information Legal Proceedings 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 business222 - Management does not expect these legal proceedings to materially adversely affect the company's financial condition or results222 Risk Factors 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 suppliers152161165 - Technology Risks: The company is dependent on digital technologies and subject to cyberattacks, with a previously disclosed material incident in May 2024 and ongoing threats184185 - Financial Risks: Restrictive debt covenants, past non-compliance, potential accelerated debt repayment, and interest rate risk on variable-rate debt pose significant financial risks189190193 - 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 confidence196197198 - 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 revenue181182183 Other Information 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 reduction226 - 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, 2025227228