ktcc-20240330

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________________________

FORM 10-Q

____________________________________________________________

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 30, 2024

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE PERIOD FROM TO .

Commission File Number 0-11559

____________________________________________________________

KEY TRONIC CORPORATION

(Exact name of registrant as specified in its charter)

____________________________________________________________


Washington			91-0849125
(State of Incorporation)			(I.R.S. Employer Identification No.)

N. 4424 Sullivan Road

Spokane Valley, Washington 99216

(Address of principal executive offices)

(509) 928-8000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address, and former fiscal year, if changed since last report)

____________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, no par value	KTCC	NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements during the past 90 days. Yes ☒ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated Filer

☐

Accelerated Filer

☐

Non-accelerated Filer

☒

Smaller reporting company

☒

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 10, 2024, 10,761,871 shares of common stock, no par value (the only class of common stock), were outstanding.

KEY TRONIC CORPORATION

Index


		Page No.

PART I.	FINANCIAL INFORMATION:

Item 1.	Financial Statements (Unaudited):	4

	Condensed Consolidated Balance Sheets	4

	Condensed Consolidated Statements of Operations	5

	Condensed Consolidated Statements of Comprehensive Income (Loss)	6

	Condensed Consolidated Statements of Cash Flows	7

	Condensed Consolidated Statements of Shareholders’ Equity	8

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35

Item 4.	Controls and Procedures	35

PART II.	OTHER INFORMATION:

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds*

Item 3.	Defaults upon Senior Securities*

Item 4.	Mine Safety Disclosures*

Item 5.	Other Information	36

Item 6.	Exhibits	36

Signatures		37

* Items are not applicable

“We,” “us,” “our,” “Company,” and “Key Tronic,” unless the context otherwise requires, means Key Tronic Corporation and its subsidiaries.

PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)


	March 30, 2024		July 1, 2023
ASSETS
Current assets:
Cash and cash equivalents	$	5,255	$	3,603
Trade receivables, net of allowance for doubtful accounts of $85 and $23	135,642		150,600
Contract assets	28,619		29,925
Inventories	115,115		137,911
Other	22,224		27,510
Total current assets	306,855		349,549
Property, plant and equipment, net	29,046		28,870
Operating lease right-of-use assets, net	16,790		16,202
Other assets:
Deferred income tax asset	14,577		12,254
Other	6,109		11,397
Total other assets	20,686		23,651
Total assets	$	373,377	$	418,272
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	82,198	$	115,899
Accrued compensation and vacation	7,071		13,351
Current portion of debt, net	5,928		7,849
Other	14,206		14,867
Total current liabilities	109,403		151,966
Long-term liabilities:
Term loans	5,681		6,726
Revolving loan	116,512		114,805
Operating lease liabilities	11,351		10,317
Deferred income tax liability	19		274
Other long-term obligations	336		3,567
Total long-term liabilities	133,899		135,689
Total liabilities	243,302		287,655
Commitments and contingencies (Note 8)
Shareholders’ equity:
Common stock, no par value—shares authorized 25,000; issued and outstanding 10,762 and 10,762 shares, respectively	47,891		47,728
Retained earnings	82,184		82,986
Accumulated other comprehensive (loss)	—		(97)
Total shareholders’ equity	130,075		130,617
Total liabilities and shareholders’ equity	$	373,377	$	418,272

See accompanying notes to consolidated financial statements.

KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share amounts)


	Three Months Ended				Nine Months Ended
	March 30, 2024		April 1, 2023		March 30, 2024		April 1, 2023
Net sales	$	140,527	$	164,553	$	433,707	$	425,524
Cost of sales	132,446		150,277		403,001		391,950
Gross profit	8,081		14,276		30,706		33,574
Research, development and engineering expenses	2,234		2,580		6,233		7,162
Selling, general and administrative expenses	6,422		6,961		18,263		18,353
Gain on insurance proceeds, net of losses	—		(396)		(431)		(4,040)
Total operating expenses	8,656		9,145		24,065		21,475
Operating income (loss)	(575)		5,131		6,641		12,099
Interest expense, net	2,800		2,688		8,772		7,081
Income (loss) before income taxes	(3,375)		2,443		(2,131)		5,018
Income tax provision (benefit)	(1,154)		467		(1,329)		924
Net income (loss)	$	(2,221)	$	1,976	$	(802)	$	4,094
Net income (loss) per share — Basic	$	(0.21)	$	0.18	$	(0.07)	$	0.38
Weighted average shares outstanding — Basic	10,762		10,762		10,762		10,762
Net income (loss) per share — Diluted	$	(0.21)	$	0.18	$	(0.07)	$	0.38
Weighted average shares outstanding — Diluted	10,762		10,865		10,762		10,892

See accompanying notes to consolidated financial statements.

KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)


	Three Months Ended				Nine Months Ended
	March 30, 2024		April 1, 2023		March 30, 2024		April 1, 2023
Comprehensive income (loss):
Net income (loss)	$	(2,221)	$	1,976	$	(802)	$	4,094
Other comprehensive income (loss):
Unrealized gain (loss) on hedging instruments, net of tax	(191)		58		97		270
Comprehensive income (loss)	$	(2,412)	$	2,034	$	(705)	$	4,364

Other comprehensive income (loss) for the three months ended March 30, 2024 and April 1, 2023, is reflected net of tax expense (benefit) of approximately $(0.1) million and $0.0 million, respectively. Other comprehensive income (loss) for the nine months ended March 30, 2024 and April 1, 2023, is reflected net of tax expense (benefit) of approximately $0.0 million and $0.0 million, respectively.

See accompanying notes to consolidated financial statements.

KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited, in thousands)


	Nine Months Ended
	March 30, 2024		April 1, 2023
Operating activities:
Net income (loss)	$	(802)	$	4,094
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
Depreciation and amortization	8,247		6,857
Amortization of interest rate swap	97		270
Amortization of deferred loan costs	221		85
Noncash lease expense	4,289		4,413
Inventory write-down to net realizable value	80		455
Provision for warranty	129		280
Provision for doubtful accounts	49		32
Gain on disposal of assets	(32)		(124)
Gain on insurance proceeds, net of losses	(431)		(4,040)
Share-based compensation expense	163		178
Deferred income taxes	(2,578)		(1,635)
Changes in operating assets and liabilities:
Trade receivables	14,909		(16,083)
Contract assets	1,306		(7,925)
Inventories	22,716		971
Other assets	(1,500)		2,567
Accounts payable	(33,701)		10,657
Accrued compensation and vacation	(6,281)		(1,190)
Other liabilities	(800)		(16,961)
Cash provided by (used in) operating activities	6,081		(17,099)
Investing activities:
Purchase of property and equipment	(3,398)		(4,867)

Proceeds from insurance	2,365		3,500
Cash used in investing activities	(1,033)		(1,367)
Financing activities:
Payment of financing costs	(706)		—
Proceeds from issuance of long term debt	1,161		—
Repayments of long term debt	(2,214)		(1,721)
Borrowings under revolving credit agreement	403,034		447,718
Repayments of revolving credit agreement	(400,840)		(426,126)
Principal payments on finance leases	(3,831)		(3,075)
Cash (used in) provided by financing activities	(3,396)		16,796
Net increase (decrease) in cash and cash equivalents	1,652		(1,670)
Cash and cash equivalents, beginning of period	3,603		1,707
Cash and cash equivalents, end of period	$	5,255	$	37


Supplemental cash flow information:
Interest payments	$	8,841	$	7,127
Income tax payments, net of refunds	$	1,899	$	817
Recognition of operating lease liabilities and right-of-use assets	$	3,621	$	5,152
Recognition of financing lease liabilities and right-of-use assets	$	—	$	4,404

See accompanying notes to consolidated financial statements.

KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited, in thousands)


	Three Months Ended				Nine Months Ended
	March 30, 2024		April 1, 2023		March 30, 2024		April 1, 2023
Total shareholders’ equity, beginning balances	$	132,435	$	127,311	$	130,617	$	124,878

Common stock (shares):
Beginning balances	10,762		10,762		10,762		10,762
Exercise of stock appreciation rights	—		—		—		—
Ending balances	10,762		10,762		10,762		10,762

Common stock:
Beginning balances	$	47,839	$	47,576	$	47,728	$	47,474
Share-based compensation	52		76		163		178
Exercise of stock appreciation rights	—		—		—		—
Ending balances	47,891		47,652		47,891		47,652

Retained Earnings:
Beginning balances	$	84,405	$	79,948	$	82,986	$	77,830
Net income (loss)	(2,221)		1,976		(802)		4,094
Ending balances	82,184		81,924		82,184		81,924

Accumulated other comprehensive income (loss):
Beginning balances	$	191	$	(213)	$	(97)	$	(425)
Unrealized gain (loss) on hedging instruments, net	(191)		58		97		270
Ending balances	—		(155)		—		(155)
Total shareholders’ equity, ending balances	$	130,075	$	129,421	$	130,075	$	129,421

See accompanying notes to consolidated financial statements.

KEY TRONIC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.Basis of Presentation

The consolidated financial statements included herein have been prepared by Key Tronic Corporation and subsidiaries (the Company) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted. The year-end condensed consolidated balance sheet information was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The financial statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 1, 2023.

The Company’s reporting period is a 52/53 week fiscal year ending on the Saturday closest to June 30. The three month and nine month periods ended March 30, 2024 and April 1, 2023, were both 13 week and 39 week periods, respectively. Fiscal year 2024 will end on June 29, 2024, which is a 52 week year. Fiscal year 2023 which ended on July 1, 2023, was also a 52 week year.

Management’s Assessment of Liquidity

Historically, due to the timing between the procurement of raw materials, production cycle and payment from our customers, we have financed operations and met our capital expenditure requirements primarily through cash flows provided by operations and borrowings under our credit facilities. We generated an operating loss and net loss of $(0.6) million and $(2.2) million, respectively, during the 3-month period ended March 30, 2024, and have positive working capital of $197.5 million as of March 30, 2024. Based on current projections, we anticipate generating cash from operations as revenue is expected to remain flat during the fourth quarter of fiscal year 2024 and decreasing working capital requirements as existing backlog is manufactured and shipped.

As of March 30, 2024, approximately $7.1 million was available under the asset-based revolving credit facility with Bank of America, an additional MXN22.0 million ($1.3 million USD) was available under the line of credit with Banorte Financial Group, and $5.3 million of cash was on hand. We are also in discussions with multiple financial institutions to either extend the borrowing capacity or maturity date on our asset-based revolving credit facility or to refinance the credit facility in whole. If we are unable to meet projected operating results or restructure or refinance our asset-based revolving credit facility, we may need to delay the purchase of raw materials or require our customers to fund inventory raw material costs ahead of production. 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 our asset-based revolving credit facility and additional financing options will be sufficient to meet our working and fixed capital requirements for at least the next 12 months.

2.Significant Accounting Policies

Reclassifications

Certain prior period reclassifications were made to conform with the current period presentation. These reclassifications had no effect on reported income, comprehensive income, cash flows, total assets, or shareholders' equity as previously reported.

Earnings Per Common Share

Basic earnings per common share (EPS) is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income (loss) by the combination of other potentially dilutive weighted average common shares and the weighted average number of common shares outstanding during the period using the treasury stock method. The computation assumes the proceeds from the exercise of equity awards were used to repurchase common shares at the average market price during the period. The computation of diluted EPS does not assume conversion, exercise, or contingent issuance of common stock equivalent shares that would have an anti-dilutive effect on EPS.

Derivative Instruments and Hedging Activities

The Company has entered into foreign currency forward contracts which are accounted for as cash flow hedges in accordance with ASC 815, Derivatives and Hedging. The effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (AOCI) and is reclassified into earnings in the same period in which the underlying hedged transaction affects earnings. The derivative’s effectiveness represents the change in fair value of the hedge that offsets the change in fair value of the hedged item.

The Company uses derivatives to manage the variability of foreign currency fluctuations of expenses in our Mexico facilities. The foreign currency forward contracts have terms that are matched to the underlying transactions being hedged. As a result, these transactions fully offset the hedged risk and no ineffectiveness has been recorded.

The Company’s foreign currency forward contracts potentially expose the Company to credit risk to the extent the counterparty may be unable to meet the terms of the agreement. The Company minimizes such risk by utilizing a counterparty with a strong credit rating. The Company’s counterparty to the foreign currency forward contracts is a major banking institution. This institution does not require collateral for the contracts, and the Company believes that the risk of the counterparty failing to meet their contractual obligations is remote. The Company does not enter into derivative instruments for trading or speculative purposes.

Income Taxes

The tax expense for the quarter ended March 30, 2024, and the nine months ended March 30, 2024, has been computed based on actual year-to-date results, a departure from the estimated annual effective tax rate (ETR) method applied to the quarter ended April 1, 2023, and prior quarters in fiscal year 2024. We departed from the ETR method for determining interim income tax expense because the 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 pretax income. In prior quarters, including the comparable quarter ended April 1, 2023, we had computed our interim income tax provision through the use of an ETR applied to year-to-date operating results and specific events that are discretely recognized as they occur. In determining the estimated annual ETR, we analyze various factors, including projections of our annual earnings, taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, our ability to use tax credits and available tax planning alternatives. Discrete items, including the effect of changes in tax laws, tax rates, and certain circumstances with respect to valuation allowances or other unusual or non-recurring tax adjustments, are reflected in the period in which they occur as an addition to, or reduction from, the income tax provision, rather than included in the estimated annual ETR.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as tax credit and net operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities for a change in tax rates is recognized in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized.

We utilize a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments based on new assessments and changes in estimates and which may not accurately forecast actual outcomes. Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense. The tax years 2003 through the present remain open to examination by the major U.S. taxing jurisdictions to which we are subject. Refer to Note 5 for further discussions.

Recently Issued Accounting Standards

On December 14, 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU requires entities to disclose more detailed information relating to their reconciliation of statutory tax rate to effective tax rate, income taxes paid by jurisdiction, pretax income (or loss) from continuing operations, and income tax expense (or benefit). The ASU applies to the Company’s annual reporting period beginning in fiscal year 2026. The Company does not anticipate early adoption of the new disclosure standards.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07), which requires public entities to disclose information about their reportable segments' oversight and significant expenses on an interim and annual basis. The ASU is effective for the annual reporting period beginning in

fiscal year 2025 and for interim periods beginning in fiscal year 2026. Early adoption is permitted. The Company is currently evaluating the guidance and its impact to the financial statements.

In September 2022, the FASB issued ASU No. 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50). This standard requires disclosure of the key terms of outstanding supplier finance programs and a roll forward of the related obligations. The new standard does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations. The ASU became effective for the Company July 2, 2023, except for the roll forward requirement, which becomes effective June 30, 2024. This ASU, except for the roll forward requirement, was adopted retrospectively as of July 2, 2023 and did not have a material impact on our consolidated financial statements.

In October 2021, the FASB issued ASU 2021-08 amending Business Combination: (Topic 805), which was necessary due to 2014-09, Revenue from Contracts with Customers (Topic 606). The FASB issued this ASU to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to (1) recognition of an acquired contract liability and (2) payment terms and their effect on subsequent revenue recognized by the acquirer. The Company adopted these amendments as of the effective date of July 2, 2023. These amendments are to be applied prospectively to business combinations occurring on or after the effective date of the amendments. The Company plans to apply the practical expedients as needed for any future acquisitions. The practical expedients cover contracts that were modified prior to acquisition date as well as determining which date an acquirer would have to determine the standalone selling price of each performance obligation in an acquired contract. This ASU did not have a material impact on our consolidated financial statements.

In March of 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments, which clarifies specific issues raised by stakeholders. Specifically, the ASU clarifies the following: 1) that all entities are required to provide the fair value option disclosures in ASC 825, Financial Instruments 2) clarifies that the portfolio exception in ASC 820, Fair Value Measurement, applies to nonfinancial items accounted for as derivatives under ASC 815, Derivatives and Hedging; 3) clarifies that for purposes of measuring expected credit losses on a net investment in a lease in accordance with ASC 326, Financial Instruments - Credit Losses, the lease term determined in accordance with ASC 842, Leases, should be used as the contractual term; 4) clarifies that when an entity regains control of financial assets sold, it should recognize an allowance for credit losses in accordance with ASC 326; and 5) aligns the disclosure requirements for debt securities in ASC 320, Investments - Debt Securities, with the corresponding requirements for depository and lending institutions in ASC 942, Financial Services - Depository and Lending. The amendments in the ASU have various effective dates and transition requirements which are dependent on timing of adoption of ASU 2016-13. The Company adopted this amendment as of the effective date of July 2, 2023. This ASU did not have a material impact on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and also issued subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04 and ASU 2019-05, which replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. The guidance is effective for the Company beginning in the first quarter of fiscal year 2024. The Company adopted this amendment as of the effective date of July 2, 2023. This ASU did not have a material impact on our consolidated financial statements.

3.Inventories

Inventories as of March 30, 2024 are $115.1 million compared to $137.9 million as of July 1, 2023. Substantially all of the Company’s inventory balances are raw materials.

4.Long-Term Debt

On August 14, 2020, the Company entered into a loan agreement with Bank of America (“Loan Agreement”). The Loan Agreement replaced the Company’s prior amended and restated credit agreement, as amended, with Wells Fargo Bank. The Loan Agreement provides for an asset-based senior secured revolving credit facility with an original availability of up to $93 million.

On September 3, 2021, the Company entered into an amendment to the Loan Agreement, which increased the availability under the credit facility to $120 million, subject to the Company’s borrowing base, and set the maturity date to September 3, 2026. On August 26, 2022, the Company entered into a third amendment to the Loan Agreement, which removed the cash flow leverage ratio covenant and increased the interest rate by 25 basis points. On May 7, 2024, the Company executed a fourth amendment to the Loan Agreement, effective as of March 29, 2024, which amendment modified debt covenant provisions 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. 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, the Company had an outstanding balance under the asset-based revolving credit facility of $112.9 million, $0.3 million in outstanding letters of credit and $7.1 million available for future borrowings.

As of July 1, 2023, the Company had an outstanding balance under the asset-based credit facility of $115.4 million, $0.3 million in outstanding letters of credit and $4.6 million available for future borrowings.

Generally, the interest rate applicable to loans under the Bank of America loan agreement will be, at the Company’s option: (i) the base rate which is the highest of (a) the Prime Rate for such day, (b) the Federal Funds Rate for such day plus 0.50%, and (c) Term SOFR for a one month interest period as of such day, plus 1.00% (provided that in no event shall the base rate be less than zero), plus the applicable interest margin for base rate loans; or (ii) SOFR rate for an applicable interest period, plus the applicable interest margin for SOFR rate loans. Depending on average daily excess borrowing availability over applicable periods under the Credit Facility, applicable interest margins on: (x) base rate loans will be 2.50%-3.00%; and (y) SOFR rate loans will be 3.50%-4.00%, resetting on a quarterly basis. If there is an event of default under the Loan Agreement, all loans and other obligations will bear interest at a rate of an additional 2.00% on the otherwise applicable interest rates. In addition to interest charges, the Company is required to pay a fee of 0.25% per annum on the unused portion of the Credit Facility, monthly in arrears.

As of March 30, 2024, the interest rate on the asset-based revolving credit facility with Bank of America was 8.44%.

On December 11, 2023, the Company entered into a loan agreement in Mexican peso with Banorte Financial Group. The agreement provides for a three-year secured line of credit up to MXN100 million, subject to the Company’s borrowing base, maturing on December 11, 2026. The credit facility bears interest at Itercambaria de Equilibrio Interest Rate plus 2.75%, and as of March 30, 2024, was 14.25%. As of March 30, 2024, the Company had an outstanding balance under the revolving credit facility of MXN78 million and MXN22 million available for future borrowings.

On September 19, 2023, the Company entered into a $1.1 million equipment financing agreement with Ameris Bank dba Balboa Capital ("Balboa Capital"). Combining with other equipment financing agreements entered in the third quarter of fiscal year 2023, a total of $5.5 million relates to the Company’s existing manufacturing equipment that bears an interest rate range of 6% - 8% and matures in the first quarter of fiscal 2030. Under these loan agreements, equal monthly payments of $94,000 commenced in the third quarter of fiscal year 2024 and will continue through the maturity of the equipment financing facility in the first quarter of fiscal 2030. The Company had an outstanding balance $4.7 million as of March 30, 2024.

On November 24, 2020, the Company entered into a $6.0 million equipment financing facility related to the Company’s existing manufacturing equipment that bears interest at 5.52% and matures on April 24, 2026. Under this loan agreement, equal monthly payments of $100,000 commenced on May 24, 2021 and will continue through the maturity of the equipment financing facility on April 24, 2026. As of March 30, 2024, the Company had an outstanding balance of $2.5 million. As of July 1, 2023, the Company had an outstanding balance of $3.4 million.

On August 14, 2020, the Company entered into a $5.0 million equipment financing facility with Bank of America relating to the Company’s existing U.S. manufacturing equipment that bears interest at 4.85% and matures on August 14, 2025. Under this loan agreement, equal monthly payments of approximately $94,000 commenced on September 14, 2020 and will continue through the maturity of the equipment financing facility on August 14, 2025. As of March 30, 2024, the Company had an outstanding balance of $1.5 million. As of July 1, 2023, the Company had an outstanding balance of $2.3 million.

Debt maturities as of March 30, 2024 for the next five years and thereafter are as follows (in thousands):


Fiscal Years Ending	Amount
2024 (1)	$	763
2025	3,123
2026	114,945
2027	5,680
2028	1,032
2029 - Thereafter	816
Total debt	$	126,359
Unamortized debt issuance costs	(1,071)
Long-term debt, net of debt issuance costs	$	125,288

(1) Represents scheduled payments for the remaining three-month period ending June 29, 2024.

The Company must comply with certain financial covenants, including a fixed charge coverage ratio. As of March 30, 2024, the Company was in compliance with all financial covenants except for the fixed charge coverage ratio under the Loan Agreement. As noted above, 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, effectively waiving the Company’s default of the fixed charge coverage ratio for the quarter ended March 30, 2024.

5.Income Taxes

The Company expects to repatriate a portion of its foreign earnings based on increased net sales growth driving additional capital requirements domestically, cash requirements for potential acquisitions and to implement certain tax strategies. The Company currently expects to repatriate approximately $8.1 million of foreign earnings in the future. All other unremitted foreign earnings are expected to remain permanently reinvested for planned fixed assets purchases and improvements in foreign locations.

Repatriations of cash will generally be tax-free in the U.S. However, withholding taxes in China may still apply to any such future repatriations. Management has not changed its indefinite investment assertions with regard to the portion of accumulated earnings and profits in China that may be repatriated in the future. Accordingly, management estimates that future repatriations of cash from China may result in approximately $0.8 million of withholding tax. We do not anticipate there would be any offsetting foreign tax credits in the U.S. and as such, this potential liability is a direct cost associated with actual repatriations. Withholding taxes would not apply to future repatriations from Mexico or Vietnam.

The Company has available approximately $9.8 million of gross federal research and development tax credits as of March 30, 2024. ASC 740 requires the Company to recognize in its financial statements uncertainties in tax positions taken that may not be sustained upon examination by the taxing authorities. Accordingly, as of March 30, 2024, the Company has recorded $3.1 million of unrecognized tax benefits associated with these federal tax credits, resulting in a net deferred tax benefit of approximately $6.7 million.

The Company evaluated tax law changes and regulatory guidance issued through the prior fiscal year. Such changes and regulations include guidance relating to foreign tax credits and consolidated NOL carryback claims. The Company evaluated the ongoing impact of these law and regulatory changes, and determined that they did not have a material impact on its provision for income taxes. On August 16, 2022, the Inflation Reduction Act of 2022 was signed into law. The Inflation Reduction Act of 2022 includes a new book minimum tax on certain large corporations and an excise tax on corporate stock buybacks, among other provisions. The Company has evaluated the impacts of this Act, and at this time the Company does not believe they will have a material impact on our consolidated financial position, results of operations, or cash flows.

On January 27, 2021, the Company received official notice from the Vietnamese tax authorities, confirming tax benefits awarded (the “tax holiday”) related to the Company’s principal product line in Vietnam. The tax rate related to this product line will be zero percent for four years beginning with fiscal year 2021, then five percent for nine years, then ten percent for one year (as opposed to the normal twenty percent each year).

6.Earnings Per Share

The following table presents a reconciliation of the denominator in the basic and diluted EPS calculation and the number of antidilutive common share awards that were not included in the diluted earnings per share calculation. These antidilutive securities occur when equity awards outstanding have an option price greater than the average market price for the period.


	Three Months Ended
	(in thousands, except share and per share information)
	March 30, 2024		April 1, 2023
Net income (loss)	$	(2,221)	$	1,976
Weighted average shares outstanding—basic	10,762		10,762
Effect of dilutive common stock awards	—		103
Weighted average shares outstanding—diluted	10,762		10,865
Net income (loss) per share—basic	$	(0.21)	$	0.18
Net income (loss) per share—diluted	$	(0.21)	$	0.18
Antidilutive SARs not included in diluted earnings per share	525		376


	Nine Months Ended
	(in thousands, except per share information)
	March 30, 2024		April 1, 2023
Net income	$	(802)	$	4,094
Weighted average shares outstanding—basic	10,762		10,762
Effect of dilutive common stock awards	—		130
Weighted average shares outstanding—diluted	10,762		10,892
Net income per share—basic	$	(0.07)	$	0.38
Net income per share—diluted	$	(0.07)	$	0.38
Antidilutive SARs not included in diluted earnings per share	652		516

7. Share-based Compensation

The Company’s incentive plan provides for equity and liability awards to employees and non-employee directors in the form of stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, stock awards, stock units, performance shares, performance units, and other stock-based or cash-based awards. Compensation cost is recognized on a straight-line basis over the requisite employee service period, which is generally the vesting period, and is recorded as employee compensation expense in cost of goods sold, research, development and engineering, and selling, general and administrative expenses. Share-based compensation is recognized only for those awards that are expected to vest, with forfeitures estimated at the date of grant based on historical experience and future expectations.

In addition to service conditions, SARs contain a performance condition. The additional performance condition is based upon the achievement of Return on Invested Capital (ROIC) goals relative to a peer group. All awards with performance conditions are evaluated quarterly to determine the likelihood that performance metrics will be achieved during the performance period. These awards are charged to compensation expense over the requisite service period based on the number of shares expected to vest. The SARs cliff vest after a three-year period from date of grant and expire five years from date of grant.

The grant date fair value for the awards granted below were estimated using the Black-Scholes option valuation method:


	July 29, 2022
SARs Granted	145,000
Strike Price	$	5.10
Fair Value	$	2.09

Total share-based compensation expense recognized during the three months ended March 30, 2024 and April 1, 2023 was approximately $52,000 and $76,000, respectively. Total share-based compensation expense recognized during the nine months ended March 30, 2024 and April 1, 2023 was approximately $164,000 and $178,000, respectively.

As of March 30, 2024, total unrecognized compensation expense related to unvested share-based compensation arrangements was approximately $0.2 million. This expense is expected to be recognized over a weighted average period of 1.08 years. No SARs were exercised during the three or nine months ended March 30, 2024 or April 1, 2023.

8.Commitments and Contingencies

Litigation and Other Matters

The Company is party to certain lawsuits or claims in the ordinary course of business. The Company does not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on the financial position, results of operations or cash flow of the Company.

On May 6, 2024, we detected unauthorized third party access to portions of our information technology (“IT”) systems. Upon detection of this outside threat, we activated our cyber incident procedure to investigate, contain, and remediate the incident, including beginning an investigation with external cybersecurity experts and notifying law enforcement. The incident has caused disruptions, and limitation of access, to portions of the Company’s business applications supporting aspects of the Company’s operations and corporate functions, including financial and operating reporting systems. As the investigation of the incident is ongoing, the full scope, nature and impact of the incident are not yet known, but based on the information reviewed to date, we believe the unauthorized activity has been contained and is working diligently to bring the impacted portions of out IT systems back online. While we do not believe the incident is reasonably likely to have a material impact on our financial condition or results of operations, we continue to investigate the incident.

Warranties

The Company provides warranties on certain product sales. Allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires the Company to make estimates of product return rates and expected costs to repair or to replace the products under warranty. If actual return rates and/or repair and replacement costs differ significantly from management’s estimates, adjustments to recognize additional cost of sales may be required in future periods. The Company’s warranty reserve was approximately $96,000 as of March 30, 2024 and $29,000 as of July 1, 2023.

Gain from Insurance Recoveries, Net of Losses

Gain from insurance recoveries, net of losses, relate to losses incurred from storm damage to the Company’s Arkansas facility on July 29, 2022, as the result of a lightning strike. During the nine months ended March 30, 2024, the Company recorded a gain from insurance recoveries, net of losses, of $0.4 million. The Company did not record a gain during the three months ended March 30, 2024.

9.Derivative Financial Instruments

As of March 30, 2024, the Company did not have any outstanding foreign currency forward contracts. For the three months ended March 30, 2024, the Company did not enter into foreign currency forward contracts and settled $3.4 million of contracts. During the same period of the previous year, the Company did not enter or settle any foreign currency forward contracts.

For the nine months ended March 30, 2024, the Company entered into $6.5 million of foreign currency forward contracts and settled $6.5 million of contracts. During the same period of the previous year, the Company did not enter into or settle any foreign currency forward contracts.

On November 6, 2019, the Company entered into an interest rate swap contract with an effective date of November 6, 2019 and a termination date of September 30, 2022, related to the borrowings outstanding under the term loan with Wells Fargo Bank. This interest rate swap contract was terminated on August 14, 2020 when the Company entered into the Loan Agreement with Bank of America. On the date of termination this interest rate swap was in a liability position of $148,400, which has been amortized to interest expense over the original term of the swap.

On November 6, 2019, the Company entered into an interest rate swap contract with an effective date of November 6, 2019 and a termination date of November 1, 2023, related to the borrowings outstanding under the line of credit with Wells Fargo Bank. This interest rate swap contract was terminated on August 14, 2020 when the Company entered into the Loan Agreement with Bank of America. On the date of termination this interest rate swap was in a liability position of $776,500, which has been amortized to interest expense over the original term of the swap.

The following tables summarize the gain (loss) on derivative instruments, net of tax, on the Consolidated Statements of Operations for the three months ended March 30, 2024 and April 1, 2023, respectively (in thousands):


Derivatives Designated as Hedging Instruments	Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	AOCI Balance as of December 31, 2023		Effective Portion Recorded In AOCI		Effective Portion Reclassified From AOCI Into Income		AOCI Balance as of March 30, 2024
Forward contracts	Cost of sales	$	191	$	(191)	$	—	$	—
Interest rate swap	Interest expense	—		—		—		—
Total		$	191	$	(191)	$	—	$	—

Derivatives Designated as Hedging Instruments	Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	AOCI Balance as of January 1, 2023		Effective Portion Recorded In AOCI		Effective Portion Reclassified From AOCI Into Income		AOCI Balance as of April 1, 2023
Forward contracts	Cost of sales	$	—	$	—	$	—	$	—
Interest rate swap	Interest expense	(213)		—		58		(155)
Total		$	(213)	$	—	$	58	$	(155)

The following tables summarize the gain (loss) on derivative instruments, net of tax, on the Consolidated Statements of Operations for the nine months ended March 30, 2024 and April 1, 2023, respectively (in thousands):


Derivatives Designated as Hedging Instruments	Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	AOCI Balance as of July 1, 2023		Effective Portion Recorded In AOCI		Effective Portion Reclassified From AOCI Into Income		AOCI Balance as of March 30, 2024
Forward contracts	Cost of sales	$	—	$	72	$	(72)	$	—
Interest rate swap	Interest expense	(97)		—		97		—
Total		$	(97)	$	72	$	25	$	—

Derivatives Designated as Hedging Instruments	Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	AOCI Balance as of July 2, 2022		Effective Portion Recorded In AOCI		Effective Portion Reclassified From AOCI Into Income		AOCI Balance as of April 1, 2023
Forward contracts	Cost of sales	$	(79)	$	—	$	79	$	—
Interest rate swap	Interest expense	(346)		—		191		(155)
Total		$	(425)	$	—	$	270	$	(155)

As of March 30, 2024, the Company does not have any foreign exchange contracts with credit-risk-related contingent features. The Company is subject to the risk of fluctuating interest rates from our line of credit and foreign currency risk resulting from our China operations. The Company does not currently manage these risk exposures by using derivative instruments.

10.Revenue

Revenue Recognition

The Company specializes in services ranging from product manufacturing to engineering and tooling services. The first step in its process for revenue recognition is to identify the contract with a customer. A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations. A contract can be written, oral, or implied. The Company generally enters into manufacturing service agreements (“MSA”) with its customers that outline the terms of the business relationship between the customer and the Company. This includes matters such as warranty, indemnification, transfer of title and risk of loss, liability for excess and obsolete inventory, pricing, payment terms, etc. The Company will also bid on a program-by-program basis for customers in which an executed MSA may not be in place. In these instances, as well as when we have an MSA in place, we receive customer purchase orders for specific quantities and timing of products. As a result, the Company considers its contract with a customer to be the combination of the MSA and the purchase order. The transaction price is fixed and set forth in each purchase order. In the Company's normal course of business, there are no variable pricing components, or material amounts refunded to customers in the form of refunds or rebates.

The Company assesses whether control of the product or services promised under the contract is transferred to the customer at a point in time (shipment) or over time (as we manufacture the product). The Company is first required to evaluate whether its contracts meet the criteria for 'over-time' or 'point-in-time' recognition. The Company has determined that for the majority of its contracts the Company is manufacturing products for which there is no alternative use due to the unique nature of the customer-specific product, IP and other contract restrictions. The Company has an enforceable right to payment including a reasonable profit for performance completed to date with respect to these contracts. As a result, revenue is recognized under these contracts 'over-time' based on the input cost-to-cost method as it better depicts the transfer of control. This input method is based on the ratio of costs incurred to date as compared to the total estimated costs at completion of the performance obligation. For all other contracts that do not meet these criteria, such as manufacturing contracts for which the terms do not provide an enforceable right to payment for performance completed to date, the Company recognizes revenue when it has transferred control of the related manufactured products which generally occurs upon shipment to the customer. Revenue from engineering services is recognized over time as the services are performed.

The Company’s sales arrangements do not contain any significant financing component for its customers.

The Company generally provides a warranty for workmanship on its manufacturing contracts. Although we offer warranties on our products, our warranties are considered to be assurance-type in nature and do not cover anything beyond ensuring that the product is functioning as intended. Based on the guidance in ASC 606, assurance-type warranties do not represent separate performance obligations; therefore, the primary performance obligation in the majority of our contracts is the delivery of a specific good through the purchase order submitted by our customer.

The Company elected not to disclose information about remaining performance obligations as they are part of contracts that that have expected durations of one year or less.

The Company has elected to expense costs to obtain contracts as incurred as these costs are immaterial to the financial statements.

During the first nine months of fiscal year 2024, no revenues were recognized from performance obligations satisfied or partially satisfied in previous periods.

Contract Balances

A contract asset is recognized when the Company has recognized revenue, but has not issued an invoice for payment. Contract assets are classified separately on the condensed consolidated balance sheet and transferred to receivables when the right to payment becomes unconditional. The following table summarizes the activity in the Company’s contract assets during the nine months ended March 30, 2024 (in thousands):


	Contract Assets
Beginning balance, July 1, 2023	$	29,925
Revenue recognized	372,652
Amounts collected or invoiced	(373,958)
Ending balance, March 30, 2024	$	28,619

Disaggregation of Revenue

The following table presents the Company’s revenue disaggregated for the three and nine months ended March 30, 2024 and April 1, 2023 (in thousands):


	Revenue
Recognition	Three Months Ended				Nine Months Ended
	March 30, 2024		April 1, 2023		March 30, 2024		April 1, 2023
Over-Time	$	118,467	$	160,628	$	372,652	$	414,835
Point-in-Time	22,060		3,925		61,055		10,689
Total	$	140,527	$	164,553	$	433,707	$	425,524

11.Leases

The Company has several commitments under operating and financing leases for warehouses, manufacturing facilities, office buildings, and equipment with initial terms that expire at various dates during the next 1 year to 10 years.

The Company has some leases that include an extension clause. Management has considered the likelihood of exercising each extension option included and estimated the duration of the extension option, for those leases management determined to be reasonably certain, in calculating the lease term for measurement of the right of use asset and liability.

For operating leases, management assumed a discount rate of 4.25%. The weighted average discount rate is disclosed in the tables below.

The components of lease cost for the three months and nine months ended March 30, 2024 and were (in thousands):


		Three Months Ended				Nine Months Ended
		March 30, 2024		April 1, 2023		March 30, 2024		April 1, 2023
Lease cost	Classification
Operating lease cost	Cost of sales	$	1,199	$	962	$	3,548	$	3,402
Operating lease cost	Selling, general and administrative expenses	$	184	$	187	$	551	$	554

Financing lease cost	Cost of sales	$	1,129	$	1,062	$	3,594	$	2,922
Financing lease cost	Selling, general and administrative expenses	$	51	$	40	$	155	$	117

Total lease cost		$	2,563	$	2,251	$	7,848	$	6,995

Fixed lease cost		$	1,331	$	1,956	$	4,657	$	6,156
Short-term lease cost		$	1,232	$	295	$	3,191	$	839
Total lease cost		$	2,563	$	2,251	$	7,848	$	6,995

Amounts reported in the Consolidated Balance Sheet as of March 30, 2024 were (in thousands, except weighted average lease term and discount rate):


	March 30, 2024		July 1, 2023
Operating Leases:
Operating lease right of use assets	$	16,790	$	16,202
Operating lease liabilities (1)	$	16,790	$	16,202

Weighted-average remaining lease term (in years)
Operating leases	4.25		4.55

Weighted-average discount rate
Operating leases	4.25%		4.00%

Financing Leases (2):
Financing lease right of use assets	$	4,610	$	9,718
Financing lease liabilities	$	3,170	$	8,278

Weighted-average remaining lease term (in years)
Financing leases	1.23		1.89

Weighted-average discount rate
Financing leases	10.88%		9.96%

(1) The current portion of the total operating lease liabilities of $5.4 million is classified under Other Current Liabilities, resulting in $11.4 million classified under Operating Lease Liabilities in the Long-term Liabilities section of the condensed consolidated balance sheet.

(2) The total finance lease right of use assets of $4.6 million is classified under Other Long-term Assets. The current portion of the total finance lease liabilities of $2.8 million is classified under Current portion of debt, net, resulting in $0.3 million classified in Other Long-term Liabilities section of the condensed consolidated balance sheet.

Future lease payments under non-cancellable leases as of March 30, 2024 are as follows (in thousands):


Fiscal Years Ending	Operating Leases		Finance Leases
2024 (1)	$	1,529	$	1,112
2025	$	5,104	$	1,909
2026	$	4,147	$	501
2027	$	3,238	$	—
2028	$	2,281	$	—
Thereafter	$	1,873	$	—
Total undiscounted lease payments	$	18,172	$	3,522
Less: present value discount	$	(1,382)	$	(352)
Total lease liabilities	$	16,790	$	3,170

(1) Represents estimated lease payments for the remaining three-month period ending June 29, 2024.

12. Subsequent Events

On May 6, 2024, we detected unauthorized third party access to portions of our information technology (“IT”) systems. Upon detection of this outside threat, we activated our cyber incident procedure to investigate, contain, and remediate the incident, including beginning an investigation with external cybersecurity experts and notifying law enforcement. The incident has caused disruptions, and limitation of access, to portions of the Company’s business applications supporting aspects of the Company’s operations and corporate functions, including financial and operating reporting systems. As the investigation of the incident is ongoing, the full scope, nature and impact of the incident are not yet known, but based on the information reviewed to date, we believe the unauthorized activity has been contained and are working diligently to bring the impacted portions of our IT systems back online. While we do not believe the incident is reasonably likely to have a material impact on the Company, including our financial condition or results of operations, we continue to investigate the incident.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

References in this report to “the Company,” “Key Tronic,” “we,” “our,” or “us” mean Key Tronic Corporation together with its subsidiaries, except where the context otherwise requires.

This Quarterly Report contains forward-looking statements in addition to historical information. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Risks and uncertainties that might cause such differences include, but are not limited to those outlined in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risks and Uncertainties that May Affect Future Results.” Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management’s opinions only as of the date hereof. The Company undertakes no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof and disclaims any obligation to do so. Readers should carefully review the risk factors described in this report and other periodic reports the Company files from time to time with the Securities and Exchange Commission, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K.

Overview

Key Tronic is a leading contract manufacturer offering value-added design and manufacturing services from its facilities in the United States, Mexico, China, and Vietnam. The Company provides its customers full engineering services, materials management, worldwide manufacturing facilities, assembly services, in-house testing, and worldwide distribution. Its customers include some of the world’s leading original equipment manufacturers. Our combined capabilities and vertical integration are proving to be a desirable offering to our expanded customer base.

Our international production capability provides our customers with benefits of improved supply-chain management, reduced inventories, lower transportation costs, and reduced product fulfillment time. We continue to make investments in all of our operating facilities to give us the production capacity, capabilities, and logistical advantages to continue to win new business. The following information should be read in conjunction with the consolidated financial statements included herein and with Part II Item 1A, Risk Factors included as part of this filing.

Our mission is to provide our customers with superior manufacturing and engineering services at the lowest total cost for the highest quality products, and create long-term mutually beneficial business relationships by employing our “Trust, Commitment, Results” philosophy.

Executive Summary

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.

Net sales to our largest customers may vary significantly from quarter to quarter depending on the size and timing of customer program commencement, forecasts, delays, and design modifications. We remain dependent on continued net sales to our significant customers and most contracts with customers are not firm long-term purchase commitments. We seek to maintain flexibility in production capacity by employing skilled temporary and short-term labor and by utilizing short-term leases on equipment and manufacturing facilities. 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 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 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 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-year 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 manufacturing. 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. The decision to onshore or near shore production appears to be becoming more widely accepted as a smart long-term strategy. 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. At the same time, these price reductions are offset by increasing wages at our North American facilities. 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

Preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities. These estimates and assumptions are based on historical results as well as future expectations. Actual results could vary from our estimates and assumptions.

The accounting policies and estimates listed below are those that we believe are the most critical to our consolidated financial condition and results of operations. They are also the accounting policies that typically require our most difficult, subjective and complex judgments and estimates, often for matters that are inherently uncertain.

•Revenue Recognition