Key Tronic Corporation — Form 10-Q Summary
Reporting period: The filing covers the third quarter and first nine months of fiscal 2024, ended March 30, 2024, with comparisons to periods ended April 1, 2023. This differs from the request metadata identifying 2022 Q3. Key Tronic is a contract manufacturer with operations in the United States, Mexico, China, and Vietnam.
Financial performance
| Metric | Q3 FY2024 | Q3 FY2023 | Nine months FY2024 | Nine months FY2023 |
|---|---|---|---|---|
| Net sales | $140.5 million | $164.6 million | $433.7 million | $425.5 million |
| Gross profit / margin | $8.1 million / 5.8% | $14.3 million / 8.7% | $30.7 million / 7.1% | $33.6 million / 7.9% |
| Operating income (loss) | $(0.6) million | $5.1 million | $6.6 million | $12.1 million |
| Net income (loss) | $(2.2) million | $2.0 million | $(0.8) million | $4.1 million |
| Diluted EPS | $(0.21) | $0.18 | $(0.07) | $0.38 |
| Net interest expense | $2.8 million | $2.7 million | $8.8 million | $7.1 million |
For the first nine months, operating cash flow was $6.1 million, versus cash used of $17.1 million a year earlier. The company ended March 30 with $5.3 million in cash. Cash flows benefited from lower receivables, inventory, and contract assets, partly offset by a $33.7 million decline in accounts payable.
At March 30, current assets were $306.9 million and current liabilities $109.4 million; management reported working capital of $197.5 million and a current ratio of 2.8. Debt was substantial: the company reported $125.3 million of long-term debt, net of issuance costs. Bank of America revolving borrowings were $112.9 million, with $7.1 million available; the Banorte facility had MXN78 million drawn and MXN22 million available. Management reported a debt-to-equity ratio of 0.98.
Changes and drivers
- Q3 sales fell 14.6% year over year. Management attributed the decline partly to roughly $5 million of estimated lost sales from two weeks of severe winter-weather disruption at Mississippi and Arkansas facilities, and softer demand from Mexico-based programs.
- Q3 profitability deteriorated, with a gross-margin decline of 2.9 percentage points and a swing to operating and net losses. Management cited approximately $3.7 million of severance costs, weather-related disruption, and the stronger Mexican peso.
- Nine-month sales rose 1.9%, supported by new-program ramps, increased U.S. and Vietnam production, and approximately $8.1 million of sales from inventory associated with a discontinued program. Despite higher sales, gross margin, operating income, and net income declined.
- Nine-month interest expense rose $1.7 million, primarily because of higher rates and a higher average revolving-credit balance. Backlog was $275.8 million, down from $380.6 million a year earlier; the filing cautions that backlog is not a reliable measure of future sales.
Outlook, liquidity, and risks
Management expected fourth-quarter fiscal 2024 revenue to remain flat and anticipated cash generation as backlog is produced and shipped and working-capital needs decline. It cited new programs and a broader trend toward North American production as opportunities, while noting Mexican peso strength and wage increases have reduced Mexico’s cost advantage. The company is restructuring its Juarez facility, shifting its focus toward higher-volume manufacturing and moving some lower-volume work to other sites. Fiscal-year capital expenditures were expected to total approximately $5 million.
The company was out of compliance with its fixed-charge coverage covenant at March 30. A May 7, 2024 amendment, effective March 29, reduced the minimum ratio to 1.00:1.00 for the quarter and allowed severance add-backs, waiving the quarter’s default. Required ratios step up to 1.25:1.00 by March 2025. The amendment also raised the interest rate by 100 basis points beginning March 29 and shortened the Bank of America facility’s maturity to September 3, 2025. The company said it was discussing an extension or refinancing with multiple financial institutions and believed liquidity sources would cover at least the next 12 months; it warned that failure to meet projections or refinance could require delaying raw-material purchases or seeking customer funding for inventory.
On May 6, 2024, the company detected unauthorized access to portions of its IT systems. The incident disrupted access to some business applications, including systems supporting operations and reporting. The investigation was ongoing, and the full scope and impact were not yet known; management said it believed the activity had been contained and did not then expect a material financial impact. Other material risks include customer demand and concentration, supplier and supply-chain constraints, foreign-exchange and interest-rate exposure, covenant compliance and refinancing, and execution of new programs. Management also noted the CEO’s planned retirement at fiscal year-end and succession by the current CFO.
Most important facts for investors to verify
- Whether fourth-quarter sales and operating cash generation meet management’s expectations, given the lower backlog and uneven customer demand.
- Progress on refinancing or extending the credit facility before its September 2025 maturity, available borrowing capacity, interest costs, and compliance with rising covenant thresholds.
- The extent of the cyber incident, duration of system disruption, remediation costs, and any effects on reporting, operations, customers, or financial results.
- Whether restructuring and severance lead to sustainable cost savings, and whether new program ramps offset wage, currency, utilization, and supply-chain pressures.
- How much of nine-month sales growth depended on the discontinued-program inventory sale and whether customer concentration and backlog trends improve.