Key Tronic(US:KTCC)2025-11-07 20:33Financial Performance - Key Tronic reported net sales of $98.8 million for Q1 fiscal 2026, a decrease of 24.9% from $131.6 million in Q1 fiscal 2025[104]. - The decline in net sales was primarily due to a reduction in demand of approximately $23 million from two longstanding customers and $7 million from delays in new program launches[118]. - Gross margin improved to 8.4% in Q1 fiscal 2026 from 6.2% in the previous quarter, but decreased from 10.1% in the same period of fiscal 2025[105]. - The company experienced a net loss of $2.3 million or $(0.21) per diluted share in Q1 fiscal 2026, compared to net income of $1.1 million or $0.10 per diluted share in Q1 fiscal 2025[108]. - For the three months ended September 27, 2025, the GAAP net loss was $2.255 million compared to a net income of $1.124 million for the same period in 2024[127]. - Adjusted net loss for the same period was $1.109 million, with an adjusted net loss per share of $0.10, down from an adjusted net income of $2.799 million and $0.26 per share in the prior year[127]. Cash Flow and Capital Expenditures - Total cash provided by operating activities was $7.6 million for the three months ended September 27, 2025[110]. - Net cash provided by operating activities was $7.6 million for the three months ended September 27, 2025, compared to $9.9 million for the same period in 2024[129]. - Cash used in investing activities increased to $3.2 million in the latest quarter from $0.4 million in the prior year, primarily for purchasing equipment[133]. - Cash used in financing activities was $4.7 million for the three months ended September 27, 2025, a decrease from $7.8 million in the same period of the previous year[135]. - The company expects capital expenditures to be approximately $8-$10 million for the fiscal year, with funding from internal resources and credit facilities[134]. - The company anticipates that projected cash from operations and available funds will be sufficient to meet working and fixed capital requirements for at least the next 12 months[137]. Customer and Market Dynamics - The concentration of net sales from the top three customers decreased to 30.4% in Q1 fiscal 2026 from 37.5% in the same period of the prior fiscal year[106]. - The order backlog decreased to approximately $139.9 million as of September 27, 2025, down from $210.8 million a year earlier, attributed to softening demand[128]. - Key Tronic anticipates that a new consigned materials program could grow to potentially exceed $20 million in annual revenue during fiscal 2026[118]. Operational Challenges - The company is restructuring its Juarez facility to focus on higher volume manufacturing, with significant headcount reductions already implemented[109]. - The company experienced financial impacts in Q1 of fiscal 2026 due to inventory and receivable write-offs linked to a customer bankruptcy[155]. - The company relies on a limited number of suppliers for critical components, and supply shortages have been observed in certain electronic components, potentially affecting operations[157]. - Changes in customer production timing and demand schedules complicate production scheduling and resource allocation, potentially leading to excess inventory[166]. Regulatory and Compliance Issues - The effective income tax rate increased to 32.9% for Q1 fiscal 2026 from 4.8% in Q1 fiscal 2025, primarily due to federal research and development tax credits[124]. - The company is subject to various environmental regulations, and non-compliance could lead to significant expenses and operational disruptions[168]. - The company has restrictive covenants with financial institutions, including minimum earnings requirements, which have not always been met, potentially leading to unfavorable amendments to credit arrangements[180]. - The company is subject to increased legal, financial, and accounting costs due to compliance with the Sarbanes-Oxley Act and the Dodd-Frank Act, which may impact its results of operations[199]. Financial Risks - The company is exposed to interest rate risk, particularly under its revolving line of credit and term loans, which could adversely affect its financial condition if significant changes occur[184]. - Fluctuations in foreign currency exchange rates, particularly involving the Mexican Peso, Chinese RMB, and Vietnamese Dong, could significantly impact operating costs and financial results[160]. - Increased energy prices, particularly petroleum-based components, could raise raw material and transportation costs, impacting profitability[173]. - The company has identified material weaknesses in its internal controls over financial reporting, which could impact its ability to report financial results accurately and timely[188]. - The company completed a remediation plan to address identified material weaknesses, but there is no assurance that similar issues will not arise in the future[189]. Cybersecurity and Legal Matters - The company has faced cybersecurity incidents, including unauthorized access to IT systems, which materially affected financial condition and operations in Q4 of fiscal year 2024[175]. - The company incurred significant expenses related to legal, accounting, and other professional services due to an internal investigation into accounting irregularities, which could continue to affect its financial condition[193]. Debt and Financing - The company has outstanding borrowings of $64.5 million under its asset-based senior secured revolving credit facility, $3.33 million under its asset-based secured line of credit facility, and $9.6 million on its equipment financing facilities as of September 27, 2025[204]. - The company has entered into a Credit Facility of up to $115 million, maturing on December 3, 2029, to support its financing needs[136]. - The company may face complications with acquisitions that could require additional equity or debt financing, potentially affecting its credit ratings[202]. Stock Performance - The company's stock price has been volatile, subject to fluctuations due to various factors, including its thinly traded nature and variations in quarterly operating results[186].