What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-14 compared with 2024-02-08 · 162 added, 128 removed, 303 unchanged (49% of the section changed)

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Executive Summary

For the second quarter of fiscal year 2024, the Company reported total revenue of $145.4 million, up 17.5 percent from $123.7 million in the same period of fiscal year 2023.

The Revenue growth for the second quarter of fiscal year 2024 was driven by increased production at the Company’s US-based and Vietnam-based facilities, as well as by the sale of approximately $8.1 million of inventory from a discontinued program.

As new customer programs ramp the concentration of our top three customers’ net sales increased to 37.5 percent of total sales in the second quarter of fiscal year 2024 from 27.7 percent in the same period of the prior fiscal year.

For the third quarter of fiscal year 2024, the Company reported total revenue of $140.5 million, down 14.6 percent from $164.6 million in the same period of fiscal year 2023 .

The decrease in revenue for the third quarter of fiscal year 2024 is partially a result of Key Tronic’s facilities in Mississippi and Arkansas being offline for approximately two weeks due to severe winter weather events.

We estimate that this shutdown approximated $5 million in lost net sales.

Additionally, the results are also partially due to softer demand from Mexico-based programs as previously reported throughout fiscal year 2024.

The Company expects sales to Mexico-based production customers to recover in future quarters due to recently won programs, and total revenue for the nine-months ending March 30, 2024 was $433.7 million, up 1.9% from $425.5 million in the same period of fiscal year 2023.

This increase is due to the successful ramp of new customer programs, increased production at the Company’s U.S.-based and Vietnam-based facilities, and the sale of approximately $8.1 million of inventory from a discontinued program, and is constrained by the factors described for the third quarter decrease.

As new customer programs ramp, the concentration of our top three customers’ net sales decreased to 28.5 percent of total sales in the third quarter of fiscal year 2024 from 34.0 percent in the same period of the prior fiscal year.

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

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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 8.1 percent for the second quarter of fiscal year 2024 as compared to 7.2 percent for the same quarter of the prior fiscal year.

During the second quarter of fiscal year 2024, the results were favorably impacted by a temporary holiday closure of our Juarez production facility, partially offset by increased costs associated to ramping up new programs, sales of obsolete inventory and increased labor costs.

Operating income as a percentage of net sales was 2.7 percent for the second quarter of fiscal year 2024 compared to 2.9 percent of operating income as a percentage of net sales for the second quarter of fiscal year 2023.

The decrease in operating income as a percentage of net sales was primarily driven by the non recurring reported gain on insurance claim that occurred in the prior year quarter.

Net income for the second quarter of fiscal year 2024 was $1.1 million or $0.10 per diluted share, as compared to net income of $1.0 million or $0.09 per diluted share for the second quarter of fiscal year 2023.

The year-over-year increase in earnings was primarily a result of the $0.1 million income tax benefit.

During the second quarter of fiscal year 2024, we won new programs involving security equipment, aerospace and defense technology, and smart medication dosing devices, among various other programs.

Moving into the third quarter of fiscal year 2024, while we continue to see favorable trend of contract manufacturing returning to North America, the strength of the Mexican peso and continued wage increases in Mexican wages, particularly along the US-Mexico border, have reduced the competitive advantage of Mexico-based manufacturing compared to US-based manufacturing.

In response to this sustained trend, we are currently reducing our workforce in Mexico and will incur $1.0 million to $2.5 million of severance in the third quarter.

We currently expect the payback period for these severance costs to be less than six months, and our US and Vietnam facilities to contribute a growing portion of our revenue in coming periods.

Global logistics problems, the war in Europe, and China-US geopolitical tensions continue to drive OEMs to examine their traditional outsourcing strategies.

Gross profit as a percent of net sales was 5.8 percent for the third quarter of fiscal year 2024 as compared to 8.7 percent for the same quarter of the prior fiscal year.

Operating income/(loss) as a percentage of net sales similarly decreased over the same period from 3.1 percent to (0.4) percent.

During the third quarter of fiscal year 2024, our resu lts were adversely impacted by incurred severance costs of approximately $3.7 million, the severe winter weather events at the Mississippi and Arkansas facilities, and continued impacts of the strengthening of the Mexican Peso.

The net loss for the third quarter of fiscal year 2024 was $2.2 million or $0.21 per diluted share, as compared to net income of $2.0 million or $0.18 per diluted share for the third quarter of fiscal year 2023.

The year-over-ye ar decrease in earnings was a result of the factors discussed above, primarily the severance expenses associated with the workforce reduction in Mexico.

During the third quarter of fiscal year 2024, we won new programs involving energy management, consumer audio equipment, medical devices, and communication equipment, among various other programs.

Moving into the fourth quarter of fiscal year 2024, while we continue to see a favorable trend of contract manufacturing returning to North America, the strength of the Mexican peso and continued increases in Mexican wages, particularly along the US-Mexico border, have reduced the competitive advantage of Mexico-based manufacturing compared to U.S.-based manufacturin g.

In response to this sustained trend, the Company is restructuring its Juarez facility to focus on higher volume manufacturing, while lower volume products with higher service level requirements will migrate to our other sites, and the Company will begin to realize payroll expense reductions as a result of the severance charges incurred in the third quarter.

Additionally, global logistics problems, the war in Europe, and China-U.S.

geopolitical tensions continue to drive OEMs to examine their traditional outsourcing strategies.

We believe these customers increasingly realize they have become overly dependent on their China-based contract manufacturers not only for products, but also for design and logistics services.

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As a result, we see opportunities for continued growth.

In addition, the headwinds from the global supply chain continue to present uncertainty and multiple business challenges, but do show some signs of gradually abating, particularly with respect to the recent price stabilization for some commodity components.

In addition, the headwinds from the global supply chain continue to present uncertainty and multiple business challenges but do show some signs of gradually abating, particularly with respect to the recent price stabilization for some commodity componen ts.

At the same time, these price reductions are offset by increasing wages at our North American facilities.

In the third quarter of fiscal 2024, the Company sees the Peso weakening to the US dollar which may translate into improving conditions moving forward.

We maintain a strong balance sheet with a current ratio of 2.6 and a debt-to-equity ratio of 0.91 as of December 30, 2023.

Total cash provided by operating activities as defined on our cash flow statement was $9.1 million for the six months ended December 30, 2023.

We maintain sufficient liquidity for our expected future operations and had $105.6 million in borrowings on our revolving credit facility with $14.4 million remained available and 3.9 million in borrowings on our line of credit facility with $2.0 million remained available as of December 30, 2023.

In the fourth quarter of fiscal year 2024, the Company sees the Mexico Peso weakening relative to the U.S.

dollar which may translate into improving conditions moving forward.

We maintain a strong balance sheet with a current ratio of 2.8 and a debt-to-equity ratio of 0.98 as of March 30, 2024.

Total cash provided by operating activities as defined on our cash flow statement was $6.1 million for the nine months ended March 30, 2024.

We believe we maintain sufficient liquidity for our expected future operations and had $112.9 million in borrowings under our asset-based revolving credit facility with $7.1 million remaining available and MXN78.0 million in borrowings under our line of credit facility with MXN22.0 million ($1.3 million USD) remaining available as of March 30, 2024.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended December 30, 2023 with the Three Months Ended December 31, 2022

Comparison of the Three Months Ended March 30, 2024 with the Three Months Ended April 1, 2023

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 December 30, 2023 as compared to the three months ended December 31, 2022.

The following table sets forth certain information regarding the components of our condensed consolidated statements of operations for the three months ended March 30, 2024 as compared to the three months ended April 1, 2023.

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

Three Months Ended

December 30, 2023 % of

net sales December 31, 2022 % of

March 30, 2024 % of

net sales April 1, 2023 % of

net sales $ change % point

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Income tax provision (benefit) (1,154) (0.8) % 467 0.3 % (1,621) (1.1) %

Net income $ 1,084 0.7 % $ 967 0.8 % $ 117 (0.1) %

Net sales of $145.4 million for the second quarter of fiscal year 2024 increased by 17.5 percent as compared to net sales of $123.7 million for the second quarter of fiscal year 2023.

The $21.7 million increase in net sales from the prior year period was primarily due to the successful ramp of new customer programs and increased component sales for a large customer.

However, the Company’s revenue was constrained by tightening worldwide supply chain and transportation and logistics issues.

Gross profit as a percentage of net sales for the three months ended December 30, 2023 was 8.1 percent compared to 7.2 percent for the three months ended December 31, 2022.

Gross profits percentages was favorably impacted by a temporary holiday closure of our Juarez production facility, partially offset by increased costs associated to ramping up new programs, sales of obsolete inventory and increased labor costs.

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.

Net (loss) income $ (2,221) (1.6) % $ 1,976 1.2 % $ (4,197) (2.8) %

Net sales of $140.5 million for the third quarter of fiscal year 2024 decreased by 14.6 percent as compared to net sales of $164.6 million for the third quarter of fiscal year 2023.

The $24.0 million decrease in net sales from the prior year period was partially due to constraints from the unanticipated lost production capacity for approximately two weeks at the Company’s Mississippi and Arkansas facilities due to severe winter weather events.

We estimate that this shutdown approximated $5 million of lost net sales.

Additionally, the results are due to the softening of demand from Mexico based programs which caused decreases in backlog early in fiscal year 2024.

Gross profit as a percentage of net sales for the three months ended March 30, 2024 was 5.8 percent compared to 8.7 percent for the three months ended April 1, 2023.

These results were adversely impacted by incurred severance costs of approximately $3.7 million, the severe winter weather events at the Mississippi and Arkansas facilities, and continued impacts of the strengthening Mexican Peso.

The level of gross margin is additionally 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 did not record any impairment for obsolete inventory during the three months ended December 30, 2023.

Approximately $175,000 of an impairment for obsolete inventory was recorded during the three months ended December 31, 2022.

We recorded an impairment of approximately $78,000 and $100,000 for obsolete inventory during the three months ended March 30, 2024 and April 1, 2023, 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.

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There were no significant changes to operating expenses during the presented quarters.

Total research, development, and engineering (RD&E) expenses were $1.8 million during the three months ended December 30, 2023 and $2.3 million during the three months ended December 31, 2022, respectively.

Total RD&E expenses as a percent of net sales were 1.2 percent during the three months ended December 30, 2023 and 1.8 percent during the three months ended December 31, 2022.

Total selling, general and administrative (SG&A) expenses were $6.1 million during the three months ended December 30, 2023 compared to $5.7 million for the three months ended December 31, 2022.

Total SG&A expenses as a percentage of net sales were 4.2 percent for the three months ended December 30, 2023 and 4.6 percent for the three months ended December 31, 2022.

Interest expense was $3.0 million during the three months ended December 30, 2023 and $2.5 million during the three months ended December 31, 2022.

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 December 30, 2023 was (9.8) percent compared to 12.2 percent for the three months ended December 31, 2022.

The decrease was primarily due to federal research and development tax credits constituting a higher percentage of income before taxes and the impact of fluctuations in foreign exchange rates.

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

T otal research, development, and engineering (RD&E) expenses were $2.2 million during the three months ended March 30, 2024 and $2.6 million during the three months ended April 1, 2023, respectively.

Total RD&E expenses as a percent of net sales were 1.6 percent during the three months ended March 30, 2024 and 1.6 percent during the three months ended April 1, 2023.

Total selling, general and administrative (SG&A) expenses were $6.4 million during the three months ended March 30, 2024 compared to $7.0 million for the three months ended April 1, 2023.

Total SG&A expenses as a percentage of net sales were 4.6 percent for the three months ended March 30, 2024 and 4.2 percent for the three months ended April 1, 2023.

There were no significant changes to interest expenses in the presented quarters.

Interest expense was $2.8 million during the three months ended March 30, 2024 and $2.7 million during the three months ended April 1, 2023.

The effective tax rate for the three months ended March 30, 2024 was 34.2 percent compared to 19.1 percent for the three months ended April 1, 2023.

The increase was primarily due to federal research and development tax credits and permanent book-to-tax differences relative to the respective pretax income (or loss) amounts of each period.

The company has departed from the annual effective tax rate method for determining interim income tax expense.

The existence of significant permanent book-to-tax differences in several jurisdictions, the impact of the tax holiday in Vietnam, and significant tax benefits related to federal research and development tax credits resulted in an inability to reliably estimate the annual effective tax rate applicable to projected full-year worldwide consolidated pre-tax income.

Accordingly, the company determined income tax expense for the quarter ended March 30, 2024, and the nine months ended March 30, 2024, based on actual year-to-date results.

For further information on taxes see Note 5 - “Income Taxes” 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.

Comparison of the Six Months Ended December 30, 2023 with the Six Months Ended December 31, 2022

Comparison of the Nine Months Ended March 30, 2024 with the Nine Months Ended April 1, 2023

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 six months ended December 30, 2023 as compared to the six months ended December 31, 2022.

The following table sets forth certain information regarding the components of our condensed consolidated statements of operations for the nine months ended March 30, 2024 as compared to the nine months ended April 1, 2023.

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

Six Months Ended

December 30, 2023 % of

net sales December 31, 2022 % of

Nine Months Ended

March 30, 2024 % of

net sales April 1, 2023 % of

net sales $ change % point

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Interest expense, net 8,772 2.0 % 7,081 1.7 % 1,691 0.3 %

Income before income taxes 1,244 0.4 % 2,575 1.0 % (1,331) (0.6) %

Income (loss) before income taxes (2,131) (0.5) % 5,018 1.2 % (7,149) (1.7) %

Income tax provision (1,329) (0.3) % 924 0.2 % (2,253) (0.5) %

Net income $ 1,419 0.5 % $ 2,119 0.8 % $ (700) (0.3) %

Net sales of $293.2 million for the six months ended December 30, 2023 increased by 12.3 percent as compared to net sales of $261.0 million for the six months ended December 31, 2022.

The $32.2 million increase in net sales from the prior year period was primarily due to the successful ramp of new customer programs and increased component sales for a large customer.

However, the Company’s revenue was constrained by tightening worldwide supply chain and transportation and logistics issues.

Gross profit as a percentage of net sales for the six months ended December 30, 2023 was 7.7 percent compared to 7.4 percent for the six months ended December 31, 2022.

This 0.3 percent increase was primarily a result of the temporary closure of our Juarez production facility, partially offset by increased costs associated to ramping up new programs, sales of obsolete inventory and increased labor costs.

Net (loss) income $ (802) (0.2) % $ 4,094 1.0 % $ (4,896) (1.2) %

Net sales of $433.7 million for the nine months ended March 30, 2024 increased by 1.9 percent as compared to net sales of $425.5 million for the nine months ended April 1, 2023.

The $8.2 million increase in net sales from the prior year period was primarily due to the successful ramp of new customer programs, increased production at the Company’s U.S.-based and Vietnam-based facilities, and the sale of approximately $8.1 million of inventory from a discontinued program.

However, the Company’s revenue was constrained by unanticipated lost production capacity for approximately two weeks at the Company’s Mississippi and Arkansas facilities due to severe winter weather events.

Gross profit as a percentage of net sales for the nine months ended March 30, 2024 was 7.1 percent compared to 7.9 percent for the nine months ended April 1, 2023.

This 0.8 percent decrease was primarily a result of the severance charges recorded during the third quarter partially offset by gains related to the temporary closure of our Juarez production facility in the second quarter.

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

We recorded an impairment of approximately $2,000 and $355,000 for obsolete inventory during the six months ended December 30, 2023 and December 31, 2022, respectively.

We recorded an impairment of approximate ly $80,000 a nd $455,000 f or obsolete inventory during the nine months ended March 30, 2024 and April 1, 2023, respectively.

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Operating Expenses

Total research, development, and engineering (RD&E) expenses were $4.0 million during the six months ended December 30, 2023 and $4.6 million during the six months ended December 31, 2022, respectively.

Total RD&E expenses as a percent of net sales were 1.4 percent during the six months ended December 30, 2023 and 1.8 percent during the six months ended December 31, 2022.

Total selling, general and administrative (SG&A) expenses were $11.8 million during the six months ended December 30, 2023 compared to $11.4 million for the six months ended December 31, 2022.

Total SG&A expenses as a percentage of net sales were 4.0 percent for the six months ended December 30, 2023 and 4.4 percent for the six months ended December 30, 2023.

Interest expense was $6.0 million during the six months ended December 30, 2023 and $4.4 million during the six months ended December 31, 2022.

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 six months ended December 30, 2023 was (14.1) percent compared to 17.7 percent for the six months ended December 31, 2022.

The decrease was primarily due to federal research and development tax credits constituting a higher percentage of income before taxes and the impact of fluctuations in foreign exchange rates.

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.

Total research, development, and engineering (RD&E) expenses were $6.2 million during the nine months ended March 30, 2024 and $7.2 million during the nine months ended April 1, 2023, respectively.

The decrease relates to salary expense during the year.

Total RD&E expenses as a percent of net sales were 1.4 percent during the nine months ended March 30, 2024 and 1.7 percent during the nine months ended April 1, 2023.

Total selling, general and administrative (SG&A) expenses were $18.3 million during the nine months ended March 30, 2024 compared to $18.4 million for the nine months ended April 1, 2023.

Total SG&A expenses as a percentage of net sales were 4.2 percent for the nine months ended March 30, 2024 and 4.3 percent for the nine months ended April 1, 2023.

Interest expense was $8.8 million during the nine months ended March 30, 2024 and $7.1 million during the nine months ended April 1, 2023.

T he 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 nine months ended March 30, 2024 was 62.4 percent compared to 18.4 percent for the nine months ended April 1, 2023.

The increase was primarily due to federal research and development tax credits and permanent book-to-tax differences relative to the respective pretax income (or loss) amounts of each period.

The company has departed from the annual effective tax rate method for determining interim income tax expense.

Accordingly, the company determined income tax expense for the quarter ended March 30, 2024, and the nine months ended March 30, 2024, based on actual year-to-date results.

For further information on taxes see Note 5 - “Income Taxes” 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 law s or other factors.

On December 30, 2023, we had an order backlog of approximately $264.1 million.

This compares with a backlog of approximately $404.0 million on December 31, 2022.

On March 30, 2024, we had an order backlog of approximately $275.8 million.

This compares with a backlog of approximately $380.6 million on April 1, 2023.

The decrease in order backlog is related to some softening on demand for a number of our Mexico-based programs, partially offset by an increase in demand for our U.S.

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Operating Cash Flow

Net cash provided by operating activities for the six months ended December 30, 2023 was $9.1 million.

Net cash used by operating activities was $10.0 million during the same period of the prior fiscal year.

The $9.1 million of net cash provided by operating activities for the six months ended December 30, 2023 is primarily related to $1.4 million in net income for the period adjusted for $5.5 million of depreciation and amortization, a $15.7 million decrease

in accounts receivable, a $13.8 million decrease in inventory, a $7.7 million decrease in accrued compensation and vacation, a $0.4 million decrease in other assets, partially offset by a $24.5 million decrease in accounts payable, a $0.5 million decrease in other liabilities and a $2.2 million decrease in contract assets.

The $10.0 million of net cash used in operating activities for the six months ended December 31, 2022 is primarily related to $2.1 million in net income for the period adjusted for $4.7 million of depreciation and amortization, a $1.6 million decrease in accounts receivable, a $16.4 million increase in inventory, a $4.0 million decrease in accrued compensation and vacation, a $0.7 million decrease in other assets, partially offset by a $19.3 million increase in accounts payable, and a $6.4 million increase in contract assets.

Net cash provided by operating activities for the nine months ended March 30, 2024 was $6.1 million.

Net cash used in operating activities was $17.1 million for the nine months ended April 1, 2023.

The $6.1 million of net cash provided by operating activities for the nine months ended March 30, 2024 is primarily related to $0.8 million in net loss for the period adjusted for $8.2 million of depreciation and amortization, a $14.9 million decrease in accounts receivable, a $22.7 million decrease in inventory, a $1.3 million decrease in contract assets partially offset by a $1.5 million increase in other assets, a $6.3 million decrease in accrued compensation and vacation, a $33.7 million decrease in accounts payable, and a $0.8 million decrease in other liabilities.

The $17.1 million of net cash used in operating activities for the nine months ended April 1, 2023 is primarily related to $4.1 million in net income for the period adjusted for $6.9 million of depreciation and amortization, a $10.7 million increase in accounts payable, a $1.0 million decrease in inventory, a $2.6 million decrease in other assets, partially offset by a 17.0 million decrease in other liabilities, a $1.2 million decrease in accrued compensation and vacation, a $16.1 million increase in accounts receivable, and a $7.9 million increase 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 $0.4 million during the six months ended December 30, 2023 as compared to $0.4 million during the six months ended December 31, 2022.

Our primary investing activity during the six months ended December 30, 2023 and December 31, 2022, was purchasing equipment to support increased production levels for new programs.

Cash used in investing activities was $1.0 million during the nine months ended March 30, 2024 as compared to $1.4 million during the nine months ended April 1, 2023.

Our primary investing activity during the nine months ended March 30, 2024 and April 1, 2023, 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 $5 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.

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 loans.

Financing Cash Flow

Cash used in financing activities was $9.4 million during the six months ended December 30, 2023 as compared to $9.5 million provided by financing activities in the same period of the previous fiscal year.

Our primary financing activities during the six months ended December 30, 2023 and six months ended December 31, 2022, were borrowings and repayments under our revolving line of credit facility and term loans.

As of December 30, 2023, approximately $14.4 million was available under the asset-based revolving credit facility and $2.0 million was available under asset-based line of credit facility.

Cash used in financing activities was $3.4 million during the nine months ended March 30, 2024 as compared to $16.8 million provided by financing activities in the same period of the previous fiscal year.

Our primary financing activities during the nine months ended March 30, 2024 and nine months ended April 1, 2023, were borrowings and repayments under our asset-based revolving line of credit facility with Bank of America (the “Loan Agreement”) and term loans.

As of March 30, 2024, the Company was not in compliance with the fixed charge coverage ratio under the Loan Agreement.

As a result the Company executed a fourth amendment to the Loan Agreement on May 7, 2024, effective as of March 29, 2024, to reduce the minimum requirement for the fixed charge coverage ratio from 1.25:1.00 to 1.00:1.00 as of March 30, 2024, and allow for the add back of severance expenses incurred during the quarter ended March 30, 2024, effectively waiving the Company’s default of the fixed charge coverage ratio for the quarter ended March 30, 2024.

The minimum requirement for the fixed charge coverage ratio will increase as follows:

1.05:1.00 on July 27, 2024, 1.15:1.00 on October 26, 2024, 1.20:1.00 on January 25, 2025, and 1.25:1.00 on and after March 29, 2025.

In addition, the amendment increased the interest rate by 100 basis points beginning on March 29, 2024, and moved forward the maturity date by one year to September 3, 2025.

As of March 30, 2024, approximately $7.1 million was available under the asset-based revolving credit facility and MXN22.0 million was available under our line of credit facility in Mexico.

See Note 4 - “Long-Term Debt” of the Notes to Consolidated Financial Statements for additional information.

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

We believe that projected cash from operations, funds available under the revolving credit facility and Banorte line of credit, and leasing capabilities will be sufficient to meet our working and fixed capital requirements for the foreseeable future.

We are in discussions with multiple financial institutions to either extend the borrowing capacity or maturity date on our Loan Agreement or to refinance the Loan Agreement in whole.

If we are unable to meet projected operating results or restructure or refinance our Loan Agreement, we may need to delay the purchase of raw materials or require our customers to fund inventory raw material costs ahead of production.

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 December 30, 2023, we had approximately $2.9 million of cash held by foreign subsidiaries.

Other options to increase our liquidity include factoring receivables or leveraging foreign owned assets for additional borrowing capacity.

We believe that projected cash from operations, funds available under the Loan Agreement and Banorte line of credit, and leasing capabilities will be sufficient to meet our working and fixed capital requirements for at least the next 12 months.

As of March 30, 2024, we had approximately $3.8 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 December 30, 2023 would approximate $59,000.

The total amount of tax payments required for the amount of foreign subsidiary cash on hand as of March 30, 2024 would approximate $35,000.

We have accrued withholding taxes for expected future repatriation of foreign earnings as discussed in Note 5 of the “Notes to Consolidated Financial Statements.”

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We have included a summary of our Contractual Obligations in our annual report on Form 10-K for the fiscal year ended July 1, 2023.

There have been no material changes in contractual obligations outside the ordinary course of business since July 1, 2023.

There have been no material changes in contractual obligations outside the ordinary course of business since July 1, 2023 except for the outstanding balance of the asset-based credit facility has moved from fiscal year 2027 to fiscal year 2026, which was $112.9 million as of March 30, 2024.

See Note 4 - “Long-Term Debt” of the Notes to Consolidated Financial Statements for additional information.

RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS

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• longer customer payment cycles and difficulty collecting accounts receivable;

• cash liquidity, the ability to acquire new debt capacity, and capital constraints;

• export duties, import controls and trade barriers (including quotas);

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• 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.

• our locations may also be impacted by future temporary closures and labor constraints as a result of local mandates for medical, climate, and unforeseen emergencies .

Our operations in certain foreign locations receive favorable income tax treatment in the form of tax credits or other incentives.

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Additionally, the financial strength of our customers and suppliers and their ability to obtain and rely on credit financing may affect their ability to fulfill their obligations to us and have an adverse effect on our financial results.

Adverse macroeconomic conditions as a result of COVID-19 have and may continue to affect our business.

Adverse macroeconomic conditions that were a result of COVID-19 have and may continue to affect our business.

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.

As the inflation rate continues to increase, the costs of labor and other expenses have and may continue to increase.

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

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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.

The majority of our sales come from a small number of customers, and a decline in sales to, or an inability to enforce contracts with, any of these customers could adversely affect our business.

At present, our customer base is concentrated and could become more or less concentrated.

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We, however, typically require that our customers contractually agree to buy back inventory purchased within specified lead times to build their products if not used.

The loss of one or more of our major customers, or the reduction, delay or cancellation of orders from such customers, due to economic conditions or other forces, could materially and adversely affect our business, operating results and financial condition.

The loss of one or more of our principal customers, or the reduction, delay or cancellation of orders from such customers, due to economic conditions or other forces, could materially and adversely affect our business, operating results and financial condition.

The contraction in demand from certain industries could impact our customer orders and have a negative impact on our operations over the foreseeable future.

Additionally, if one or more of our customers were to become insolvent or otherwise unable to pay for the manufacturing services provided by us, our operating results and financial condition would be adversely affected.

We rely on timely and regular payments from our customers, and the inability or failure of our principal customers to meet their obligations to us or their bankruptcy, insolvency or liquidation may adversely affect our business, financial condition and results of operations.

Financial difficulties experienced by one or more of our customers, could negatively affect our business by decreasing demand from such customers and through the potential inability of these companies to make full payment on amounts owed to us.

Customer bankruptcies also entail the risk of potential recovery by the bankruptcy estate of amounts previously paid to us that are deemed a preference under bankruptcy laws.

There can be no assurance that customers will not declare bankruptcy or suffer financial distress, in which case our future revenues, net income and cash flow could be reduced.

In addition, we structure our agreements with customers to mitigate our risks related to obsolete, aged, or unsold inventory.

However, enforcement of these contracts may result in material expense and delay in payment for inventory.

If any of our significant customers become unable or unwilling to purchase such inventory, our business may be materially harmed.

We depend on a limited number of suppliers for certain components that are critical to our manufacturing processes.

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In addition, our suppliers' facilities may also experience earthquakes, tsunamis and other natural disasters which may cause a shortage of components.

This can result in longer lead times and the inability to meet our customers request for flexible production and extended shipment dates.

This can result in longer lead times and the inability to meet our customers’ requests for flexible production and extended shipment dates.

If demand for components outpaces supply, capacity delays could affect future operations.

Delays in deliveries from suppliers or the inability to obtain sufficient quantities of components and raw materials have and may continue to cause delays or reductions in shipment of products to our customers which could adversely affect our operating results and damage customer relationships.

Key Tronic continues to work closely with its employees and key suppliers to ascertain delays attributable to the COVID-19 pandemic.

Delays in production and extended transit times of critical parts have and may continue to cause a shortage of components.

We operate in a highly competitive industry;

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In addition, competitors can copy our non-proprietary designs and processes after we have invested in development of products for customers, thereby enabling such competitors to offer lower prices on such products due to savings in development costs.

Fluctuations in foreign currency exchange rates could increase our operating costs.

Fluctuations in foreign currency exchange rates have increased, and could continue to increase, our operating costs.

We have manufacturing operations located in Mexico and China.

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As part of our hedging strategy, we currently use Mexican Peso forward contracts to hedge foreign currency fluctuations for a portion of our Mexican Peso denominated expenses.

We currently do not hedge expenses denominated in RMB.

Unexpected losses could occur from increases in the value of these currencies relative to the United States dollar.

We currently do not hedge expenses denominated in RMB and have occasionally also been unable to hedge expenses denominated in Mexican Peso.

Unexpected losses have occurred from increases in the value of these currencies relative to the United States dollar and further unexpected losses could occur, which could be material to our business, financial results or operations..

Global economic and political events, including as a result of COVID-19, significant currency exchange fluctuations can occur causing unexpected losses.

Future temporary closures of production facilities in Mexico could also cause significant changes in our ability to qualify for hedge accounting treatment of our forward contracts to hedge foreign currency fluctuations.

However, given the unprecedented nature of the pandemic the FASB staff believes that an entity may apply the exception in paragraph 815-30-40-4 for rare cases caused by extenuating circumstances that are related to the nature of the forecasted transaction and are outside the control or influence of an entity to delays in the timing of the forecasted transactions if those delays are related to the effects of the COVID-19 pandemic and are considered probable to still occur.

In addition, the FASB staff believes that it would be acceptable for an entity to determine that missed forecasts related to the effects of the COVID-19 pandemic need not be considered when determining whether it has exhibited a pattern of missing forecasts that would call into question its ability to accurately predict forecasted transactions and the propriety of using cash flow hedge accounting in the future for similar transactions.

Our success will continue to depend to a significant extent on our key personnel.

Our success will continue to depend to a significant extent on our key personnel and our ability to execute our management succession plans.

Our future success depends in large part on the continued service of our key technical, marketing and management personnel and on our ability to continue to attract and retain qualified production employees.

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The loss of key employees could have a material adverse effect on our business, operating results and financial condition.

In addition, we must successfully manage transition issues that may result from the departure or retirement of members of our leadership team.

For example, our Chief Executive Officer will retire at the end of fiscal year 2024 and will be succeeded by our current Chief Financial Officer.

Any significant leadership change or senior management transition involves inherent risks and any failure to ensure a smooth transition could hinder our strategic planning, business execution, and future performance.

We cannot provide assurances that any current or future changes of management personnel will not cause disruption to operations or customer relationships or a decline in our operating results

Start-up costs and inefficiencies related to new or transferred programs can adversely affect our operating results and such costs may not be recoverable if such new programs or transferred programs are canceled or don’t meet expected sales volumes.

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Customers can require sudden increases and decreases in production which can put added stress on resources and reduce margins.

Sudden decreases in production can lead to excess inventory on hand which may or may not be reimbursed by our customers even when under contract.

Sudden decreases in

production can lead to excess inventory on hand which may or may not be reimbursed by our customers even when under contract.

Continued growth could further lead to capacity constraints.

We may need to transfer production to other facilities, acquire new facilities, or outsource production which could negatively impact gross margin.

The Company has been able to manage the arrival of components in an effort to control inventory levels of customers that have seen sharp decreases in demand, as a result of COVID-19.

Compliance or the failure to comply with current and future environmental and health laws or regulations could cause us significant expense.

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If we do not manage our growth effectively, our profitability could decline.

Our business is experiencing growth which can place considerable additional demands upon our management team and our operational, financial and management information systems.

When our business is experiencing growth, such growth can place considerable additional demands upon our management team and our operational, financial and management information systems.

Our ability to manage growth effectively requires us to continue to implement and improve these systems;

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We are increasingly dependent on digital technologies and services to conduct our operations.

We use these technologies for internal purposes, including data storage, processing and transmissions, as well as in our interactions with vendors and customers.

We use these technologies for internal purposes, including data storage, processing and transmissions, as well as in our interactions with vendors and

Digital technologies and services are subject to the risk of cybersecurity incidents and some incidents can remain undetected for a period of time.

We routinely monitor our systems for cyber threats and have processes in place to detect and remediate vulnerabilities.

We routinely monitor our systems for cyber threats and believe we have sufficient processes in place to detect and remediate vulnerabilities.

Nevertheless, we have experienced attempted security breaches, such as phishing emails and other targeted attacks.

We expect that our operations will continue to be subject to cyber threats, and any future cybersecurity incident could significantly disrupt our operations.

For example, as previously disclosed in our Form 8-K filed with the SEC on May 10, 2024, we became aware of unauthorized access to our IT systems (the “Previously Disclosed Cyber Incident”).

We expect that our operations will continue to be subject to cyber threats, and any cybersecurity incident could significantly disrupt our operations.

Cybersecurity incidents could also result in the misappropriation of proprietary or confidential information of the Company or that of its customers, employees, vendors or customers.

We expect to incur costs in the future to mitigate against cybersecurity incidents as threats are expected to continue to become more persistent and sophisticated.

If our systems for protecting against cybersecurity incidents prove not to be sufficient, we could be adversely affected by, among other things, loss of or damage to intellectual property, proprietary or confidential information, or employee, vendor or customer data;

We have incurred, and expect continued incurrence of, costs to mitigate against the Previously Disclosed Cyber Incident as our investigation is ongoing and other cybersecurity incidents as threats are expected to continue to become more persistent and sophisticated.

If our systems for protecting against cybersecurity incidents, including the Previously Disclosed Cyber Incident, prove not to be sufficient, we could be adversely affected by, among other things, loss of or damage to intellectual property, proprietary or confidential information, or employee, vendor or customer data;

interruption of our business operations;

and increased costs to prevent, respond to or mitigate cybersecurity incidents.

These risks could harm our reputation and our relationships with employees, vendors and customers and may result in claims or enforcement actions and investigations against us.

In addition, our investigation of the Previously Disclosed Cyber Incident is ongoing, and we may discover other impacts or new events related to this incident that could affect the Company, including our business operations, financial condition or results of operations.

Any of these risks could harm our reputation and our relationships with employees, vendors and customers and may result in claims or enforcement actions and investigations against us.

Disruptions to our information systems, including losses of data or outages, could adversely affect our operations.

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RISKS RELATED TO CAPITAL AND FINANCING

Cash and cash equivalents are exposed to concentrations of credit risk.

We place our cash with high credit quality institutions.

At times, such balances may be in excess of the federal depository insurance limit or may be on deposit at institutions which are not covered by insurance.

If such institutions were to become insolvent during which time it held our cash and cash equivalents in excess of the insurance limit, it could be necessary to obtain other credit financing to operate our facilities.

Our ability to secure and maintain sufficient credit arrangements is key to our continued operations.

There is no assurance that we will be able to retain or renew our credit agreements in the future.

In the event the business grows rapidly or there is uncertainty in the macroeconomic climate, additional financing resources could be necessary in the current or future fiscal years.

There is no assurance that we will be able to retain or renew our credit agreements in the future on terms acceptable to us, or at all.

In addition, we have restrictive covenants with our financial institutions which could impact how we manage our business.

We have not always met these covenants in the past and have had to obtain waivers and amend our credit agreements, including for fiscal quarter ended March 30, 2024, to adjust these covenants.

The amendment for fiscal quarter ended March 30, 2024 resulted in an increase in interest rates and shortened the maturity date to September 3, 2025.

We may not meet these covenants in the future and may not be able to obtain waivers or amendments from the relevant lenders on terms acceptable to us, or at all.

In addition, if we cannot meet our financial covenants, our borrowings could become immediately payable which could have a material adverse impact on our financial statements.

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

In addition, the event our business grows rapidly or there is uncertainty in the macroeconomic climate, additional financing resources could be necessary in the current or future fiscal years.

There is no assurance that we will be able to obtain equity or debt financing at acceptable terms, or at all, in the future.

In addition, we have restrictive covenants with our financial institution which could impact how we manage our business.

If we cannot meet our financial covenants, our borrowings could become immediately payable which could have a material adverse impact on our financial statements.

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

An adverse change in the interest rates for our borrowings could adversely affect our financial condition.

We are exposed to interest rate risk under our revolving line of credit and term loan.

Adverse changes in the interest rates for our borrowings could adversely affect our financial condition.

We are exposed to interest rate risk under our revolving line of credit and term loans.

We have not historically hedged the interest rate on our credit facility;

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 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.

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

Cash and cash equivalents are exposed to concentrations of credit risk.

We place our cash with high credit quality institutions.

At times, such balances may be in excess of the federal depository insurance limit or may be on deposit at institutions which are not covered by insurance.

Our stock price is volatile.

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RISKS RELATED TO OUR CONTROLS AND PROCEDURES AND THE INTERNAL INVESTIGATION

If we fail to properly remediate any future deficiencies or material weaknesses or to maintain proper and effective internal controls, our business and financial condition could be materially adversely impacted.

If 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 and incur the additional costs and expenses associated therewith.

If we fail to maintain proper and effective internal controls, our business and financial condition could be materially adversely impacted.

We have previously identified a material weakness in our internal control over financial reporting, and undertook remediation efforts to address the identified deficiencies and concluded that the material weakness was remediated as of July 3, 2021.

If other 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 and incur the additional costs and expenses associated therewith.

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.

As of July 2, 2023, we are a non-accelerated filer under the Exchange Act and are not required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act).

Therefore, our internal controls over financial reporting will not receive the level of review provided by the process relating to the auditor attestation included in annual reports of issuers that are subject to the auditor attestation requirements.

If we are unable to provide reliable and timely financial reports in the future, our business and reputation may be further harmed.

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We have incurred, and may continue to incur, significant expenses related to legal, accounting and other professional services in connection with matters relating to or arising from the subject of the Audit Committee’s internal investigation.

As a result of the internal investigation, we have taken and continue to take a number of steps in order to remediate identified deficiencies in our internal control over financial reporting and attempt to reduce the risk of future recurrence.

The validation of the efficacy of these remedial steps have resulted in us incurring additional near term expenses, and to the extent these steps are not successful, we may incur significant additional time and expense.

We have taken steps in order to remediate identified deficiencies in our internal control over financial reporting and attempt to reduce the risk of future recurrence.

To the extent these steps were not successful, we may incur significant additional time and expense.

In addition, we are cooperating with the SEC regarding matters related to the internal investigation.

The completion of the internal investigation will not automatically resolve the SEC’s inquiries.

The completion of the internal investigation did not automatically resolve the SEC’s inquiries.

If the SEC or any other regulator were to commence legal action against us, we could be required to pay significant additional legal fees, as well as penalties and become subject to injunctions, cease and desist orders or other remedies.

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As a result of any legal proceedings and any related indemnification requirements to our officers and directors, we could be required to pay additional legal fees and/or monetary damages that may be in excess of our insurance coverage or may have additional penalties or other remedies imposed against us or our officers and directors.

All of these expenses, the delay in timely filing our periodic reports and the diversion of the attention of management and other personnel that has occurred and is expected to continue, could adversely affect our business, financial condition, results of operations and cash flows.

All of these expenses and the diversion of the attention of management and other personnel that has occurred and is expected to continue, could adversely affect our business, financial condition, results of operations and cash flows.

Due to inherent limitations, there can be no assurance that our system of disclosure and internal controls and procedures will be successful in preventing all errors, theft and fraud, or in informing management of all material information in a timely manner.

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Changes in securities laws and regulations will increase our costs and risk of noncompliance.

We are subject to additional requirements contained in the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) and more recently the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).

We are subject to additional requirements contained in the U.S.

federal securities laws, including the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).

The Sarbanes-Oxley and Dodd-Frank Acts required or will require changes in some of our corporate governance, securities disclosure and compliance practices.

In response to the requirements of the Sarbanes-Oxley and Dodd-Frank Acts, the SEC and NASDAQ promulgated new rules and additional rulemaking is expected in the future.

The SEC and NASDAQ Global Market have promulgated new rules and additional rulemaking is expected in the future.

Compliance with these new rules and future rules has increased and may increase further our legal, financial and accounting costs as well as a potential risk of noncompliance.

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Our consolidated financial statements are prepared in conformity with accounting standards generally accepted in the United States, or U.S.

These principles are subject to amendments made primarily by the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC).

These principles are subject to amendments made primarily by the Financial Accounting Standards Board (FASB) and the SEC.

A change in those policies can have a significant effect on our reported results and may affect our reporting of transactions which are completed before a change is announced.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis