KEY TRONIC CORP
For the period ended Mar 30, 2024. Filed May 14, 2024.
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A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Mar 30, 2024 · Filed May 14, 2024
KTCC$1.32+1.5%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2023-12-30; filed 2024-02-08.
0000719733-24-000012
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-03-30; filed 2024-05-14.
0000719733-24-000023
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 171 previous paragraphs and 176 current paragraphs.
106 unchanged; 56 reworded; 12 added; 7 removed; 2 previous and 2 current paragraphs rearranged.
Tables are not compared: 2 previous and 2 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (12)
Current report
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.
Current report
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.
Current report
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.
Current report
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.
Current report
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 andpermanent book-to-tax differences relative to the respective pretax income (or loss) amounts of each period.
Current report
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.
Current report
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.
Current report
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.
Current report
•cash liquidity, the ability to acquire new debt capacity, and capital constraints;
Current report
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.
Current report
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.
Current report
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
Removed paragraphs (7)
Previous report
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.
Previous report
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.
Previous report
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.
Previous report
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.”
Previous report
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.”
Previous report
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.
Previous report
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.
Reworded paragraphs (56)
Previous wording
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.
Current wording
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.
Previous wording
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. We expect that concentration to our top three customers will decrease during the fiscal year.
Current wording
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.
Previous wording
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.
Current wording
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.
Previous wording
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.
Current wording
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.
Previous wording
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. 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 third quarter of fiscal 2024, the Company sees the Peso weakening to the US dollar which may translate into improving conditions moving forward.
Current wording
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.
Previous wording
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.
Current wording
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.
Previous wording
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. It is provided to assist in assessing differences in our overall performance (in thousands):
Current wording
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):
Previous wording
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.
Current wording
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.
Previous wording
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.
Current wording
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.
Previous wording
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 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. The provisions are established for inventory that we have determined customers are not contractually responsible for and for inventory that we believe customers will be unable to purchase.
Current wording
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 $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. The provisions are established for inventory that we have determined customers are not contractually responsible for and for inventory that we believe customers will be unable to purchase.
Previous wording
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.
Current wording
There were no significant changes to operating expenses during the presented quarters. Total 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.
Previous wording
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.
Current wording
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.
Previous wording
Comparison of the Six Months Ended December 30, 2023 with the Six Months Ended December 31, 2022
Current wording
Comparison of the Nine Months Ended March 30, 2024 with the Nine Months Ended April 1, 2023
Previous wording
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. It is provided to assist in assessing differences in our overall performance (in thousands):
Current wording
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):
Previous wording
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.
Current wording
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.
Previous wording
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.
Current wording
The $8.2 million increase in net sales from the prior year period wasprimarily 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.
Previous wording
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.
Current wording
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.
Previous wording
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 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. The provisions are established for inventory that we have determined customers are not contractually responsible for and for inventory that we believe customers will be unable to purchase.
Current wording
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 $80,000 and $455,000 for obsolete inventory during the nine 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. The provisions are established for inventory that we have determined customers are not contractually responsible for and for inventory that we believe customers will be unable to purchase.
Previous wording
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.
Current wording
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.
Previous wording
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.
Current wording
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.
Previous wording
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.
Current wording
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. 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.
Previous wording
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. 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. based facilities. Order backlog consists of purchase orders received for products expected to be shipped within the next 12 months, although shipment dates are subject to change due to design modifications or changes in other customer requirements. Order backlog should not be considered an accurate measure of future net sales.
Current wording
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. based facilities. Order backlog consists of purchase orders received for products expected to be shipped within the next 12 months, although shipment dates are subject to change due to design modifications or changes in other customer requirements. Order backlog should not be considered an accurate measure of future net sales.
Previous wording
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.
Current wording
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.
Previous wording
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.
Current wording
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.
Previous wording
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.
Current wording
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.
Previous wording
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.
Current wording
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.
Previous wording
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 $8.0 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.
Current wording
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 loans.
Previous wording
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.
Current wording
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.
Previous wording
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.
Current wording
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.
Previous wording
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. 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.
Current wording
Our cash requirements are affected by the level of current operations and new programs. 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. 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.
Previous wording
As of December 30, 2023, we had approximately $2.9 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. We have accrued withholding taxes for expected future repatriation of foreign earnings as discussed in Note 5 of the “Notes to Consolidated Financial Statements.”
Current wording
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 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.”
Previous wording
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.
Current wording
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 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.
Previous wording
•our locations may also be impacted by future temporary closures and labor constraints as a result of COVID-19.
Current wording
•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 .
Previous wording
Adverse macroeconomic conditions as 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. We may not be able to increase our product prices enough to offset these increased costs. In addition, any increase in our product prices may reduce our future customer orders and profitability. Inflation may further exacerbate other risk factors discussed in this Quarterly Report on Form 10-Q, including disruptions to international operations.
Current wording
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. 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. In addition, any increase in our product prices may reduce our future customer orders and profitability. Inflation may further exacerbate other risk factors discussed in this Quarterly Report on Form 10-Q, including disruptions to international operations.
Previous wording
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.
Current wording
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.
Previous wording
At present, our customer base is concentrated and could become more or less concentrated. There can be no assurance that our principal customers will continue to purchase products from us at current levels. Moreover, we typically do not enter into long-term volume purchase contracts with our customers, and our customers have certain rights to extend or delay the shipment of their orders. 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.
Current wording
At present, our customer base is concentrated and could become more or less concentrated. There can be no assurance that ourprincipal customers will continue to purchase products from us at current levels. Moreover, we typically do not enter into long-term volume purchase contracts with our customers, and our customers have certain rights to extend or delay the shipment of their orders. 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.
Previous wording
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 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.
Current wording
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.
Previous wording
We are dependent on many suppliers, including sole source suppliers, to provide key components and raw materials used in manufacturing customers’ products. We have seen supply shortages in certain electronic components. 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. 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.
Current wording
We are dependent on many suppliers, including sole source suppliers, to provide key components and raw materials used in manufacturing customers’ products. We have seen supply shortages in certain electronic components. 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’ 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.
Previous wording
Fluctuations in foreign currency exchange rates could increase our operating costs.
Current wording
Fluctuations in foreign currency exchange rates have increased, and could continue to increase, our operating costs.
Previous wording
We have manufacturing operations located in Mexico and China. A significant portion of our operations are denominated in the Mexican peso and the Chinese currency, the renminbi ("RMB"). Currency exchange rates fluctuate daily as a result of a number of factors, including changes in a country's political and economic policies. Volatility in the currencies of our entities and the United States dollar, as well as inflationary costs, could seriously harm our business, operating results and financial condition. The primary impact of currency exchange fluctuations is on the cash, receivables, payables and expenses of our operating entities. 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.
Current wording
We have manufacturing operations located in Mexico and China. A significant portion of our operations are denominated in the Mexican Peso and the Chinese currency, the renminbi ("RMB"). Currency exchange rates fluctuate daily as a result of a number of factors, including changes in a country's political and economic policies. Volatility in the currencies of our entities and the United States dollar, as well as inflationary costs, could seriously harm our business, operating results and financial condition. The primary impact of currency exchange fluctuations is on the cash, receivables, payables and expenses of our operating entities. 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 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..
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Rearranged current paragraphs (2)
Current report — wording carried from elsewhere
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.
Current report — wording carried from elsewhere
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.
Rearranged previous paragraphs (2)
Previous report — wording carried elsewhere
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.
Previous report — wording carried elsewhere
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.