Key Tronic Corporation
05/08/2026 | Press release | Distributed by Public on 05/08/2026 11:38
Quarterly Report for Quarter Ending MARCH 28, 2026 (Form 10-Q)
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 include, but are not limited to those including such words as aims, anticipates, believes, continues, could, estimates, expects, hopes, intends, plans, predicts, projects, targets, or will, similar verbs, or nouns corresponding to such verbs, which may be forward looking. Forward-looking statements also include other passages that are relevant to expected future events, performances, and actions or that can only be fully evaluated by events that will occur in the future. Forward-looking statements in this Quarterly Report include, without limitation, the Company's statements regarding its expectations with
respect to financial conditions and results, including revenue, earnings, and margins, the Company's ability to shift its focus in China and build out production capacity in the US and Vietnam and the timing of completion of those facilities, cost savings from headcount reduction and the wind-down of manufacturing operations in China, demand for certain products and the effectiveness of some of its programs, business from customers and programs, new program launches, impacts from operational streamlining and efficiencies, including reductions in inventories, and impacts of repairs to its facilities from winter storm damage.
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, sourcing 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. Our 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 domestic and 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 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
During the third quarter of fiscal 2026, we won new programs in automotive technology, industrial tooling, pest control and industrial power management.
We reported net sales of $89.6 million the third quarter of fiscal year 2026, down 20.0 percent from $112.0 million in the same period of fiscal year 2025. Decreases in revenue were largely attributable to decreased demand from a legacy customer and an end-of-life program transition. The reported revenue for the third quarter of fiscal year 2026 was also adversely impacted by Winter Storm Fern in the South which caused temporary site closures due to facility damage that the Company expects will be largely covered by insurance. Finally, Key Tronic faced challenges during the quarter related to customer design delays on a new program with a legacy customer, as well as delays in receiving allocated components on a separate program. The Company is expecting revenue growth on increased demand from legacy customers and new program launches in its fourth quarter of 2026. This includes the ongoing ramp of a new manufacturing services contract with a large data processing OEM that consigns its material and components for new production in our Corinth, Mississippi manufacturing facility and is estimated to grow over time.
The Company reported margin improvements in the third quarter of fiscal year 2026, despite lower revenue levels compared to prior periods.This demonstrates the operating efficiencies gained from our cost-cutting initiatives during the past two years. Gross margin and operating margins were 8.0 percent and (0.3) percent, respectively, in the third quarter of fiscal year 2026 compared to 7.7 percent and (0.4) percent, respectively, for the same period of fiscal year 2025. Adjusted gross margin was 8.5% for the third quarter of fiscal year 2026 up from 8.4% in the same period of fiscal year 2025. See "Non-GAAP Financial Measures," below for additional information about adjusted gross margin. As revenue rebounds, Key Tronic expects continued margin increases in coming periods.
Gross margin and operating margin was 5.6 percent and (3.9) percent for the year-to-date period of fiscal year 2026 compared to 8.3 percent and 0.8 percent, respectively, for the same period of fiscal year 2025. These decreases in gross and operating margins are primarily related to the significant one-time expenses related to the wind-down of China manufacturing operations and severance expenses incurred in Mexico as discussed above.
During the quarter, the Company continued to prepare for anticipated long-term growth by executing its near-shoring and tariff mitigation strategies to reduce costs while maintaining the diversity and flexibility of its key locations and capabilities. Key Tronic believes that these cost reductions have enabled the Company to become more competitive on recent quoting opportunities. During the quarter, Key Tronic continued the wind-down of its manufacturing operations at its China based facility that began in its second quarter. As previously reported, the Company instead intends to refocus operations in China on sourcing and procurement activities intended to support its remaining global locations. This initiative is expected to shift more production to the Company's expanding facilities in the US and Vietnam. The wind-down is expected to be completed by the end of the current fiscal year, and is anticipated to save approximately $1.2 million per quarter following completion. During the third quarter of fiscal year 2026, there were no significant additional charges related to this wind-down.
The concentration of our top three customers' net sales decreased to 21.6 percent of total sales in the third quarter of fiscal year 2026 from 33.5 percent in the same period of the prior fiscal year. This decrease is related to a decrease in demand from a longstanding customer as well as the transition of an end of life program. As new customer programs ramp, we expect that concentration of our top three customers will continue to decrease.
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.
Net loss for the third quarter of fiscal year 2026 was $(2.6) million or $(0.24) per diluted share, as compared to net loss of $(0.6) million or $(0.06) per diluted share for the third quarter of fiscal year 2025. Year-to-date net loss for the first nine months of fiscal year 2026 was $(13.5) million or $(1.24) per diluted share, compared to $(4.4) million, or $(0.41) per diluted share for the same period of fiscal year 2025. The year-over-year decreases in earnings are a result of the wind-down of manufacturing operations in China, additional headcount reductions in Mexico, and continued reduced demand from longstanding customers.
The adjusted net income was $(2.8) million or $(0.26) per share for the third quarter of fiscal year 2026, compared to adjusted net income of $0.1 million or $0.01 per share for the same period of fiscal year 2025. For the first nine months of fiscal year 2026, the adjusted net loss was $(3.9) million or $(0.36) per share, compared to adjusted net loss of $(1.2) million or $(0.11) per share for the same period of fiscal year 2025. See "Non-GAAP Financial Measures," below for additional information about adjusted net income (loss) and adjusted net income (loss) per share.
Moving into the fourth quarter of fiscal year 2026, we continue to see a favorable trend of contract manufacturing returning to North America, and continued market uncertainty related to current and future potential tariffs. In response to these sustained and ongoing trends, the Company continues to restructure its Juarez operations to focus on higher volume manufacturing, while lower volume products with higher service level requirements will migrate to our other sites. These restructuring efforts resulted in a significant headcount reduction which started in the third quarter of fiscal year 2024, continued into the third quarter of fiscal year 2026 and may include smaller further reductions throughout the remainder of fiscal year 2026. Key Tronic believes that these cost reductions have enabled the Company to become more competitive on recent quoting opportunities, and is expecting both revenue and margin growth as a result.
Additionally, global logistics problems, China-U.S. geopolitical tensions and related tariff increases may continue to drive Original Equipment Manufacturers ("OEMs") to examine their traditional outsourcing strategies. The decision to onshore or near shore production appears to be becoming more widely accepted as a smart, long-term strategy. As previously announced, the Company has increased its production capacity and capabilities in its Arkansas and Vietnam facilities in order to continue to benefit from this growing customer demand for rebalancing their contract manufacturing. All of these changes to the Company's international and domestic manufacturing footprint and cost structure provide flexibility to respond to market conditions. We expect this will allow us to mitigate tariff implications and optimize pricing for our customers. As a result, we see opportunities for growth moving forward.
We maintain a strong balance sheet with a current ratio of 2.1 and a debt-to-equity ratio of 1.0 as of March 28, 2026. Total cash provided by operating activities as defined on our cash flow statement was $10.0 million for the nine months ended March 28, 2026. We believe we maintain sufficient liquidity for our expected future operations and as of March 28, 2026, had $66.3 million in borrowings under our asset-based revolving credit facility with $20.2 million remaining available and $0.4 million of cash on hand.
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
•Inactive, Obsolete, and Surplus Inventory Valuation
•Allowance for Credit Losses
•Income Taxes
Please refer to the discussion of critical accounting policies in our most recent Annual Report on Form 10-K for the fiscal year ended June 28, 2025, for further details.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 28, 2026 with the Three Months Ended March 29, 2025
The financial information and discussion below should be read in conjunction with the Consolidated Financial Statements and Notes.
The following table sets forth certain information regarding the components of our condensed consolidated statements of operations for the three months ended March 28, 2026 as compared to the three months ended March 29, 2025. It is provided to assist in assessing differences in our overall performance (in thousands):
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| March 28, 2026 |
% of net sales |
March 29, 2025 |
% of net sales |
$ change |
% point change |
||||||||||||||||||||||||||||||
| Net sales | $ | 89,571 | 100.0 | % | $ | 111,974 | 100.0 | % | $ | (22,403) | - | % | |||||||||||||||||||||||
| Cost of sales | 82,388 | 92.0 | % | 103,367 | 92.3 | % | (20,979) | (0.3) | % | ||||||||||||||||||||||||||
| Gross profit | 7,183 | 8.0 | % | 8,607 | 7.7 | % | (1,424) | 0.3 | % | ||||||||||||||||||||||||||
| Research, development and engineering | 1,825 | 2.0 | % | 2,308 | 2.1 | % | (483) | (0.1) | % | ||||||||||||||||||||||||||
| Selling, general and administrative | 6,233 | 7.0 | % | 6,758 | 6.0 | % | (525) | 1.0 | % | ||||||||||||||||||||||||||
| Gain on insurance proceeds, net of losses | (637) | (0.7) | % | - | - | % | (637) | (0.7) | % | ||||||||||||||||||||||||||
| Total operating expenses | 7,421 | 8.3 | % | 9,066 | 8.1 | % | (1,645) | 0.2 | % | ||||||||||||||||||||||||||
| Operating loss | (238) | (0.3) | % | (459) | (0.4) | % | 221 | 0.1 | % | ||||||||||||||||||||||||||
| Interest expense, net | 2,396 | 2.7 | % | 2,581 | 2.3 | % | (185) | 0.4 | % | ||||||||||||||||||||||||||
| Loss before income taxes | (2,634) | (2.9) | % | (3,040) | (2.7) | % | 406 | (0.2) | % | ||||||||||||||||||||||||||
| Income tax benefit | (9) | - | % | (2,436) | (2.2) | % | 2,427 | 2.2 | % | ||||||||||||||||||||||||||
| Net loss | $ | (2,625) | (2.9) | % | $ | (604) | (0.5) | % | $ | (2,021) | (2.4) | % | |||||||||||||||||||||||
| Effective income tax rate | 0.3 | % | 80.1 | % | |||||||||||||||||||||||||||||||
Net Sales
Net sales of $89.6 million for the third quarter of fiscal year 2026 decreased by 20.0 percent as compared to net sales of $112.0 million for the third quarter of fiscal year 2025.
As noted above, the $22.4 million decrease was primarily due to reductions in demand of approximately $16.1 million from a longstanding customer and $7.2 million on the transition of an end-of-life program. Net sales for the third quarter of fiscal year 2026 was also adversely impacted by Winter Storm Fern in the southern United States, which caused temporary site closures due to facility damage, as well as certain customer design delays on a new program with a legacy customer and delays in receiving allocated components on a separate program.
Gross Profit
Gross profit as a percentage of net sales for the three months ended March 28, 2026 was 8.0 percent compared to 7.7 percent for the three months ended March 29, 2025. The quarter-over-quarter increases in gross margins is primarily related to the efficiency gains from the company's cost reduction initiatives over the past two years.
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, all of which can fluctuate significantly from quarter to quarter.
Included in gross profit are charges related to reductions in the carrying value of our inventory due to obsolescence. We recorded an impairment of approximately $0.3 million and $0.0 million for obsolete inventory during the three months ended March 28, 2026 and March 29, 2025, 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 also inventory that we believe customers will be unable to purchase.
Operating Expenses
There were no significant changes to operating expenses during the third quarter of fiscal year 2026. Total research, development, and engineering ("RD&E") expenses were $1.8 million during the three months ended March 28, 2026 and $2.3 million during the three months ended March 29, 2025, respectively. Total RD&E expenses as a percent of net sales were 2.0 percent during the three months ended March 28, 2026 and 2.1 percent during the three months ended March 29, 2025.
Total selling, general and administrative ("SG&A") expenses were $6.2 million during the three months ended March 28, 2026 compared to $6.8 million for the three months ended March 29, 2025. Total SG&A expenses as a percentage of net sales were 7.0 percent for the three months ended March 28, 2026 and 6.0 percent for the three months ended March 29, 2025. The decrease is attributable to less reserve charges for customer receivables.
Interest
Interest expense was $2.4 million during the three months ended March 28, 2026 and $2.6 million during the three months ended March 29, 2025. This decrease is largely attributable to less overall debt outstanding.
Income Taxes
The effective tax rate for the three months ended March 28, 2026 was 0.3 percent compared to 80.1 percent for the three months ended March 29, 2025. The decrease was primarily due to permanent book-to-tax differences relative to the respective pretax income (or loss) amounts of each period, no tax benefit for losses incurred in China, and federal research and development tax credits.
Our judgments regarding deferred tax assets and liabilities may change due to changes in market conditions, changes in estimates, changes in tax laws or other factors. If assumptions and estimates change in the future, the deferred tax assets and liability will be adjusted accordingly and any increase or decrease will result in an additional deferred income tax expense or benefit in subsequent periods. For further information on taxes, see Note 5, "Income Taxes" of the Notes to Consolidated Financial Statements.
Comparison of the Nine Months Ended March 28, 2026 with the Nine Months Ended March 29, 2025
The financial information and discussion below should be read in conjunction with the Consolidated Financial Statements and Notes.
The following table sets forth certain information regarding the components of our condensed consolidated statements of operations for the nine months ended March 28, 2026 as compared to the nine months ended March 29, 2025. It is provided to assist in assessing differences in our overall performance (in thousands):
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| March 28, 2026 |
% of net sales |
March 29, 2025 |
% of net sales |
$ change |
% point change |
||||||||||||||||||||||||||||||
| Net sales | $ | 284,640 | 100.0 | % | $ | 357,385 | 100.0 | % | $ | (72,745) | - | % | |||||||||||||||||||||||
| Cost of sales | 268,643 | 94.4 | % | 327,769 | 91.7 | % | (59,126) | 2.7 | % | ||||||||||||||||||||||||||
| Gross profit | 15,997 | 5.6 | % | 29,616 | 8.3 | % | (13,619) | (2.7) | % | ||||||||||||||||||||||||||
| Research, development and engineering | 5,748 | 2.0 | % | 6,917 | 1.9 | % | (1,169) | 0.1 | % | ||||||||||||||||||||||||||
| Selling, general and administrative | 21,966 | 7.7 | % | 19,835 | 5.6 | % | 2,131 | 2.1 | % | ||||||||||||||||||||||||||
| Gain on insurance proceeds, net of losses | (637) | (0.7) | % | - | - | % | (637) | (0.7) | % | ||||||||||||||||||||||||||
| Total operating expenses | 27,077 | 9.0 | % | 26,752 | 7.5 | % | 325 | 1.5 | % | ||||||||||||||||||||||||||
| Operating income (loss) | (11,080) | (3.9) | % | 2,864 | 0.8 | % | (13,944) | (4.7) | % | ||||||||||||||||||||||||||
| Interest expense, net | 7,543 | 2.7 | % | 9,748 | 2.7 | % | (2,205) | - | % | ||||||||||||||||||||||||||
| Loss before income taxes | (18,623) | (6.5) | % | (6,884) | (1.9) | % | (11,739) | (4.6) | % | ||||||||||||||||||||||||||
| Income tax benefit | (5,173) | (1.8) | % | (2,490) | (0.7) | % | (2,683) | (1.1) | % | ||||||||||||||||||||||||||
| Net loss | $ | (13,450) | (4.7) | % | $ | (4,394) | (1.2) | % | $ | (9,056) | (3.5) | % | |||||||||||||||||||||||
| Effective income tax rate | 27.8 | % | 36.2 | % | |||||||||||||||||||||||||||||||
Net Sales
Net sales of $284.6 million for the nine months ended March 28, 2026 decreased by 20.4 percent as compared to net sales of $357.4 million for the nine months ended March 29, 2025.
The $72.7 million decrease was primarily due to reductions in demand of approximately $97 million from longstanding or end-of-life customers, offset by approximately $25 million in additional revenue from currently ramping programs or increases in demand from other longstanding customers. This includes the ongoing ramp of a new manufacturing services contract with a large data processing OEM that consigns its material and components for new production in our Corinth, Mississippi manufacturing facility.
Gross Profit
Gross profit as a percentage of net sales for the nine months ended March 28, 2026 was 5.6 percent compared to 8.3 percent for the nine months ended March 29, 2025. The year-over-year decreases in gross and operating margins are primarily related to the significant one-time expenses related to the wind-down of China manufacturing operations and severance expenses incurred in Mexico as discussed above.
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, all of which can fluctuate significantly from quarter to quarter.
Included in gross profit are charges related to reductions in the carrying value of our inventory due to obsolescence. We recorded an impairment of approximately $2.9 million and $0.0 million for obsolete inventory during the nine months ended March 28, 2026 and March 29, 2025, respectively. Approximately $1.0 million of this amount is related to the wind-down of our manufacturing operations in China. 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 also inventory that we believe customers will be unable to purchase.
Operating Expenses
There were no significant changes to operating expenses during the nine months ended March 28, 2026. Total research, development, and engineering ("RD&E") expenses were $5.7 million during the nine months ended March 28, 2026 and $6.9 million during the nine months ended March 29, 2025, respectively. Total RD&E expenses as a percent of net sales were 2.0 percent during the nine months ended March 28, 2026 and 1.9 percent during the nine months ended March 29, 2025.
Total selling, general and administrative ("SG&A") expenses were $22.0 million during the nine months ended March 28, 2026 compared to $19.8 million for the nine months ended March 29, 2025. Total SG&A expenses as a percentage of net sales were 7.7 percent for the nine months ended March 28, 2026 and 5.6 percent for the nine months ended March 29, 2025. These increases are attributable to approximately $3.4 million in estimated reserves associated with the decision to wind-down manufacturing in China partially offset by less variable spend due to the decrease in revenues.
Interest
Interest expense was $7.5 million during the nine months ended March 28, 2026 and $9.7 million during the nine months ended March 29, 2025. This decrease is largely attributable to lower interest costs as a result of refinancing our debt with a new lender in December 2024, which resulted in a $1.0 million write-off of unamortized loan fees in December of 2024, and a reduction in amounts borrowed, as described in Note 4 of the "Notes to Consolidated Financial Statements."
Income Taxes
The effective tax rate for the nine months ended March 28, 2026 was 27.8 percent compared to 36.2 percent for the nine months ended March 29, 2025. The decrease was primarily was primarily due to federal research and development tax credits, permanent book-to-tax differences relative to the respective pretax income (or loss) amounts of each period, no tax benefit for losses incurred in China, and the impairment of deferred tax assets in China.
Our judgments regarding deferred tax assets and liabilities may change due to changes in market conditions, changes in estimates, changes in tax laws or other factors. If assumptions and estimates change in the future, the deferred tax assets and liability will be adjusted accordingly and any increase or decrease will result in an additional deferred income tax expense or benefit in subsequent periods.
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared in accordance with generally accepted accounting principles in the United States (GAAP), we use certain non-GAAP financial measures, adjusted net income (loss), and adjusted net income (loss) per share, diluted. We provide these non-GAAP financial measures because we believe they provide greater transparency related to our core operations and represent supplemental information used by management in its financial and operational decision making. We exclude (or include) certain items in our non-GAAP financial measures as we believe the net result is a measure of our core business. We believe this facilitates operating performance comparisons from period to period by eliminating potential differences caused by the existence and timing of certain income and expense items that would not otherwise be apparent on a GAAP basis.
In addition, during this period, we have provided adjusted cost of sales, adjusted gross profit, and adjusted gross margin. These additions supplement adjusted net income (loss) by mapping the portion of the identified adjustments utilized in the calculation of adjusted net income (loss) to relevant financial statement line items for re-calculation of the adjusted metrics presented. We have provided these additional non-GAAP financial measures because we believe they provide greater transparency related to our core operations and represent supplemental information used by management in its financial and operational decision making.
Non-GAAP performance measures should be considered in addition to, and not as a substitute for, results prepared in accordance with GAAP. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. Our non-GAAP financial measures may be different from those reported by other companies.
See the table below entitled "Reconciliation of GAAP to non-GAAP measures" for reconciliations of adjusted net income (loss) and adjusted cost of sales to the most directly comparable GAAP measure, which is GAAP net income (loss), and GAAP cost of sales, respectively, as well as the computation of adjusted gross profit, adjusted gross margin, and adjusted net income (loss) per share, diluted.
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
| (in thousands, except per share amounts) | March 28, 2026 | March 29, 2025 | March 28, 2026 | March 29, 2025 | ||||||||||||||||||||||||||||
| GAAP net loss | $ | (2,625) | $ | (604) | $ | (13,450) | $ | (4,394) | ||||||||||||||||||||||||
| Severance expenses | 215 | 818 | 5,720 | 2,857 | ||||||||||||||||||||||||||||
| China manufacturing wind-down | 235 | - | 6,403 | - | ||||||||||||||||||||||||||||
| Stock-based compensation expense | (31) | 26 | 468 | 109 | ||||||||||||||||||||||||||||
| Gain on insurance proceeds, net of losses | (637) | (637) | ||||||||||||||||||||||||||||||
| Write-off of unamortized loan fees | - | - | - | 1,012 | ||||||||||||||||||||||||||||
| Income tax effect of non-GAAP adjustments (1) | 44 | (169) | (2,391) | (796) | ||||||||||||||||||||||||||||
| Adjusted net income (loss): | $ | (2,799) | $ | 71 | $ | (3,887) | $ | (1,212) | ||||||||||||||||||||||||
| Adjusted net income (loss) per share - non-GAAP Diluted | $ | (0.26) | $ | 0.01 | $ | (0.36) | $ | (0.11) | ||||||||||||||||||||||||
| Weighted average shares outstanding - Diluted | 10,859 | 10,775 | 10,830 | 10,762 | ||||||||||||||||||||||||||||
| GAAP cost of sales | $ | 82,388 | $ | 103,367 | $ | 268,643 | $ | 327,769 | ||||||||||||||||||||||||
| Severance expenses | 215 | 818 | 5,720 | 2,857 | ||||||||||||||||||||||||||||
| China manufacturing wind-down | 235 | - | 3,010 | - | ||||||||||||||||||||||||||||
| Adjusted cost of sales | $ | 81,938 | $ | 102,549 | $ | 259,913 | $ | 324,912 | ||||||||||||||||||||||||
| Total gross profit adjustments | $ | 450 | $ | 818 | $ | 8,730 | $ | 2,857 | ||||||||||||||||||||||||
| GAAP gross profit | $ | 7,183 | $ | 8,607 | $ | 15,997 | $ | 29,616 | ||||||||||||||||||||||||
| Total gross profit adjustments | 450 | 818 | 8,730 | 2,857 | ||||||||||||||||||||||||||||
| Adjusted gross profit | $ | 7,633 | $ | 9,425 | $ | 24,727 | $ | 32,473 | ||||||||||||||||||||||||
| GAAP net sales | $ | 89,571 | $ | 111,974 | $ | 284,640 | $ | 357,385 | ||||||||||||||||||||||||
| Adjusted gross margin | 8.5 | % | 8.4 | % | 8.7 | % | 9.1 | % | ||||||||||||||||||||||||
| (1) Income tax effects are calculated using an effective tax rate of 20%, which approximates the effective statutory tax rate for the presented periods. | ||||||||||||||||||||||||||||||||
BACKLOG
On March 28, 2026, we had an order backlog of approximately $159.5 million. This compares with a backlog of approximately $138.1 million on March 29, 2025. The increase in order backlog is primarily related to strengthening of demand for a number of existing programs. We expect backlog to increase in the coming periods due to recent sizable program wins. 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.
CAPITAL RESOURCES AND LIQUIDITY
Operating Cash Flow
Net cash provided by operating activities for the nine months ended March 28, 2026 was $10.0 million. Net cash provided by operating activities was $10.1 million for the nine months ended March 29, 2025.
The $10.0 million of net cash provided by operating activities for the nine months ended March 28, 2026 was primarily related to $13.5 million in net loss for the period adjusted for $7.1 million of depreciation and amortization, an $9.6 million decrease in accounts receivable, a $8.6 million decrease in inventories, a $0.1 million decrease in contract assets, a $2.1 million increase in accounts payable partially offset by a $2.2 million decrease in accrued compensation and vacation, a $4.0 million decrease in other liabilities, and a $2.1 million increase in other assets.
The $10.1 million of net cash provided by operating activities for the nine months ended March 29, 2025 was primarily related to $4.4 million in net loss for the period adjusted for $7.9 million of depreciation and amortization, a $5.8 million decrease in inventory, a $19.6 million decrease in accounts receivable, a $2.2 million decrease in contract assets, and partially offset by a $14.1 million decrease in accounts payable, a $7.3 million increase in other assets, a $0.4 million decrease in other liabilities and a $0.7 million decrease in accrued compensation and vacation.
Accounts receivable fluctuates based on the timing of shipments, terms offered, and collections that occurred during the quarter. While overall net sales are not typically seasonal in nature, we ship the majority of our product during the latter half of the quarter. We purchase inventory based on customer forecasts and orders, and when those forecasts and orders change, the amount of inventory may also fluctuate. Accounts payable fluctuates with changes in inventory levels, volume of inventory purchases, negotiated supplier terms and taking advantage of early pay discounts.
Investing Cash Flow
Cash used in investing activities was $3.7 million during the nine months ended March 28, 2026 as compared to cash used in investing activities of $3.0 million during the nine months ended March 29, 2025. Our primary investing activities during the nine months ended March 28, 2026 and March 29, 2025, related to purchasing equipment to support increased production levels for new programs.
Leases are often utilized when potential technical obsolescence and funding requirement advantages outweigh the benefits of equipment ownership. Total capital expenditures are expected to be approximately $5-$8 million during the fiscal year, some 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.
Financing Cash Flow
Cash used in financing activities was $7.2 million during the nine months ended March 28, 2026 as compared to $9.4 million used in financing activities in the same period of the previous fiscal year. Our primary financing activities during the nine months ended March 28, 2026, and March 29, 2025, were borrowings and repayments under our asset-based credit agreement with BMO Bank, N.A. that provides for an asset-based senior secured revolving credit facility (the "Credit Facility") of up to $115 million, maturing on December 3, 2029, our prior loan and security agreement, as amended, with Bank of America, N.A. and term loans.
Our cash requirements are affected by the level of current operations and new programs. As discussed in Note 4 - "Long Term Debt" of the Notes to the Consolidated Financial Statements, we entered into the Credit Facility, and also entered into a $28 million term loan (the "Term Loan") credit agreement with Callodine Commercial Finance, LLC.
We believe that projected cash from operations, funds available under the Credit Facility and leasing capabilities will be sufficient to meet our working and fixed capital requirements for at least the next 12 months.
As of March 28, 2026, we had approximately $0.4 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 28, 2026 would approximate $11,000. We have accrued withholding taxes for expected future repatriation of foreign earnings as discussed in Note 5 of the "Notes to Consolidated Financial Statements."
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
We have included a summary of our Contractual Obligations in our Annual Report on Form 10-K for the fiscal year ended June 28, 2025. There have been no material changes in contractual obligations outside the ordinary course of business since June 28, 2025. See Note 4 - "Long-Term Debt" of the Notes to Consolidated Financial Statements for additional information.
RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS
The following risks and uncertainties could affect our actual results and could cause results to differ materially from past results or those contemplated by our forward-looking statements. When used herein, the words "expects," "believes," "anticipates" and other similar expressions are intended to identify forward-looking statements.
RISKS RELATED TO OUR BUSINESS AND STRATEGY
Our operations may be subject to certain risks.
We manufacture and/or source product in facilities located in Mexico, China, Vietnam, and the United States. These operations may be subject to a number of risks, including:
•difficulties in staffing, turnover, and managing onshore and offshore operations;
•political and economic instability (including acts of terrorism, pandemics, civil unrest, forms of violence and outbreaks of war), which could impact our ability to ship, manufacture, and/or receive product;
•impact of tariffs assessed or threatened on countries in which we may manufacture product or from which we may buy components;
•unexpected changes in regulatory requirements and laws, including those related to climate change;
•longer customer payment cycles and difficulty collecting accounts receivable;
•cash liquidity, the ability to acquire new debt capacity, and capital constraints;
•export duties, import controls and trade barriers (including quotas);
•governmental restrictions on the transfer of funds;
•burdens of complying with a wide variety of foreign laws and labor practices; subject to trade wars and tariffs;
•our locations are subject to physical and operational risks from natural disasters, severe weather events, and climate change
•our locations may also be impacted by future temporary closures and labor constraints as a result of local mandates for medical, climate, and unforeseen emergencies; and
•our locations may be impacted by future temporary closure related to cyberattacks.
Our operations in certain foreign locations receive favorable income tax treatment in the form of tax credits or other incentives. In the event that such tax incentives are not extended, are repealed, or we no longer qualify for such programs, our taxes may increase, which would reduce our net income.
Additionally, certain foreign jurisdictions restrict the amount of cash that can be transferred to the U.S. or impose taxes and penalties on such transfers of cash. To the extent we have excess cash in foreign locations that could be used in, or is needed by, our operations in the United States, we may incur significant penalties and/or taxes to repatriate these funds.
We may experience fluctuations in quarterly results of operations.
Our quarterly operating results have varied in the past and may vary in the future due to a variety of factors, including adverse changes in the U.S. and global macroeconomic environment, volatility in overall demand for our customers' products, success of customers' programs, timing of new programs, new product introductions or technological advances by us, our customers and our competitors, and changes in pricing policies by us, our customers, our suppliers, and our competitors. Our customer base is diverse in the markets they serve, however, decreases in demand, particularly from customers in certain industries, have
affected our results and could affect future quarterly results. Additionally, our customers could be adversely impacted by illiquidity in the credit markets which could directly impact our operating results.
Component procurement, production schedules, personnel and other resource requirements are based on estimates of customer requirements. Occasionally, our customers may request accelerated production that can stress resources and reduce operating margins. Conversely, our customers may abruptly lower, cancel, or delay production or new production launch which may lead to a sudden, unexpected increase in inventory or accounts receivable for which we may not be reimbursed even when under contract with customers. In addition, because many of our operating expenses are relatively fixed, a reduction in customer demand can harm our gross profit and operating results. The products which we manufacture for our customers have relatively short product lifecycles. Therefore, our business, operating results and financial condition are dependent in a significant way on our ability to obtain orders from new customers and new product programs from existing customers.
Operating results can also fluctuate if changes are made to significant estimates and assumptions. Significant estimates and assumptions include the allowance for credit losses, provision for inactive, obsolete, and surplus inventory, stock-based compensation, the valuation allowance on deferred tax assets, impairment of long-lived assets, long-term incentive compensation accrual, the provision for warranty costs, and the impact of hedging activities.
During the COVID-19 pandemic, we saw extreme shifts in demand from our customer base. The possibility of future temporary closures and labor constraints, as well as the inability to predict customer demand, costs, and future supply chain disruptions during pandemics or otherwise can materially impact operating results.
We are exposed to general economic conditions, which could have a material adverse impact on our business, operating results and financial condition.
Adverse economic conditions and uncertainty in the global economy such as unstable global financial and credit markets, changing trade policies, inflation, and recession can negatively impact our business. Unfavorable economic conditions could affect the demand for our customers' products by triggering a reduction or delaying orders as well as a decline in forecasts which could adversely affect our sales in future periods. Additionally, the financial strength of our customers and suppliers and their ability to obtain and rely on credit financing may affect their ability to fulfill their obligations to us and have an adverse effect on our financial results.
Adverse macroeconomic conditions have and may continue to affect our business. The conditions affect the Company's ability to predict and plan for future supply chain disruptions and fluctuations in customer demand and costs. Inflation has also risen globally to historically high levels. Continuing high levels of inflation have increased the costs of labor and other expenses, 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.
The ongoing wind-down of our China-based manufacturing operations may adversely affect our business, results of operations and financial condition.
On December 19, 2025, the Company committed to a plan to modify its China-based operations, and will end the manufacturing operations at its China-based facility. Instead, the Company intends to refocus operations in China on sourcing and procurement activities intended to support its remaining global locations. The wind down activities remain ongoing and are expected to be substantially completed by the end of the Company's fiscal year 2026. As wind down activities progress, we may discover other facts necessitating additional expenses or charges that may differ from our initial expectations. In addition, we may not be able to complete the wind down activities in all respects or in the expected time frame, due to factors outside of our control. If actual amounts were to differ from our estimates, or if the full and complete wind down takes longer than expected, our results of operations and financial condition could be materially and adversely affected.
Current and future U.S. trade policy could adversely affect our business and results of operations.
Although we maintain significant manufacturing capacity in the U.S. and are in the process of terminating our manufacturing operations in China, the majority of our manufacturing operations are currently located outside the U.S (in countries such as Vietnam and Mexico). We also source certain components and materials for our products from various countries, including China. The U.S. has imposed tariffs impacting certain components and products imported from these countries by us into the U.S. These tariffs apply to both components imported into the U.S. from these countries for use in the manufacture of products
at our U.S. plants and to certain of our customers' products that we manufacture for them in these countries and that are then imported into the U.S.
Changes in tariffs and other trade policies can be announced with little or no advance notice. The recent broad increase in tariffs on imported products and components from certain countries, including higher tariff levels on those imported from China and Mexico have resulted, and are expected to further result, in retaliatory measures on U.S. goods by those countries and others. If maintained, these tariffs, and the potential escalation of trade disputes, could pose a risk to our business that could affect our revenue and cost of sourcing materials. We are currently shielded from Mexico related tariffs under the United States-Mexico-Canada Agreement, but there is no assurance that this agreement will not be amended or cancelled in the future. Actions we take to adapt to new tariffs or trade restrictions may increase our costs or may cause us to modify our operations, and could drive up our prices to customers. For example, we incurred significant one-time expenses in the second quarter of 2026 related to the wind-down of our China manufacturing operations. Any decision by a large number of our customers to cease using our manufacturing services due to the application of tariffs could materially reduce our revenue and net income. In addition, tariffs or other trade restrictions have caused, and may continue to cause, adverse changes and uncertainty in U.S. and global financial and economic conditions, which adversely impacts the demand for our products.
In February 2026, the U.S. Supreme Court ruled that tariffs imposed under the International Emergency Economic Powers Act ("IEEPA") were unauthorized. In March 2026, the U.S. Court of International Trade ordered U.S. Customs and Border Protection to refund IEEPA tariffs collected; however, the refund process and timing remain uncertain, and the order may be subject to further government action or challenge. Accordingly, as of March 28, 2026, we have not recorded any benefit related to potential refunds of IEEPA tariffs paid.
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.
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.
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.
Our inability to enforce contracts with, or the bankruptcy or insolvency of, any of our principal customers could adversely affect our business.
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. For example, in the first quarter of fiscal 2026, our financial results were affected by inventory and receivable write-offs due to a customer bankruptcy. Customer bankruptcies also entail the risk of potential recovery by the bankruptcy estate of amounts previously paid to us that are deemed a preference under bankruptcy laws. There can be no assurance that customers will not declare bankruptcy or suffer financial distress, in which case our future revenues, net income and cash flow could be reduced.
In addition, we structure our agreements with customers to mitigate our risks related to obsolete, aged, or unsold inventory. However, enforcement of these contracts may result in material expense and delay in payment for inventory. If any of our significant customers become unable or unwilling to purchase such inventory, our business may be materially harmed.
We depend on a limited number of suppliers for certain components that are critical to our manufacturing processes. A shortage of these components or an increase in their price could interrupt our operations and result in a significant change in our results of operations.
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 closures or limited production due to macroeconomic conditions, natural disasters or other reasons, 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.
We operate in a highly competitive industry; if we are not able to compete effectively in the contract manufacturing industry, our business could be adversely affected.
Competitors may offer customers lower prices on certain high volume programs. This could result in price reductions, reduced margins and loss of market share, all of which would materially and adversely affect our business, operating results, and financial condition. If we were unable to provide comparable or better manufacturing services at a lower cost than our competitors, it could cause sales to decline. In addition, competitors can copy our non-proprietary designs and processes after we have invested in development of products for customers, thereby enabling such competitors to offer lower prices on such products due to savings in development costs.
Fluctuations in foreign currency exchange rates have increased and could continue to increase our operating costs.
We have manufacturing and other operations located in Mexico, China, and Vietnam. A significant portion of our operations are denominated in the Mexican Peso, the Chinese currency, the renminbi ("RMB"), and the Vietnamese dong. 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 future foreign currency fluctuations for a portion of our Mexican Peso denominated expenses. We currently do not hedge expenses denominated in RMB or the Vietnamese dong, and have occasionally also been unable to hedge expenses denominated in Mexican Peso. Losses have occurred from increases in the value of these currencies relative to the United States dollar and further losses could occur, which could be material to our business, financial results or operations.
Global economic and political events or significant currency exchange fluctuations, can occur, and cause further unexpected losses. Future headcount reductions or decrease in manufacturing capacity in Mexico could also cause significant changes in our ability to qualify for hedge accounting treatment of our forward contracts to hedge foreign currency fluctuations.
Our success will continue to depend to a significant extent on our key personnel and our ability to execute our management succession plans.
Our future success depends in large part on the continued service of our key technical, marketing and management personnel and on our ability to continue to attract and retain qualified production employees. There can be no assurance that we will be successful in attracting and retaining such personnel, particularly in our manufacturing locales that may be experiencing high demand for similar key personnel. The loss of key employees could have a material adverse effect on our business, operating results and financial condition.
In addition, we must successfully manage transition issues that may result from the departure or retirement of members of our leadership team. For example, our former Chief Executive Officer retired at the end of fiscal year 2024 and was succeeded by our former Chief Financial Officer. Any significant leadership change or senior management transition involves inherent risks and failure to ensure a smooth transition could hinder our strategic planning, business execution, and future performance. We cannot provide assurances that any changes of management personnel will not cause disruption to operations or customer relationships or a decline in our operating results.
Start-up costs and inefficiencies related to new or transferred programs can adversely affect our operating results and such costs may not be recoverable if such new programs or transferred programs are canceled or do not meet expected sales volumes.
Start-up costs, the management of labor and equipment resources in connection with the establishment of new programs and new customer relationships, and the need to obtain required resources in advance can adversely affect our gross margins and
operating results. These factors are particularly evident in the ramping stages of new programs. These factors also affect our ability to efficiently use labor and equipment. We continuously manage a number of new programs. Consequently, our exposure to these factors is consistently elevated. In addition, if any of these new programs or new customer relationships were terminated, our operating results could be harmed, particularly in the short term. We may not be able to recoup these start-up costs or replace anticipated new program revenues.
Customers may change production timing and demand schedules which makes it difficult for us to schedule production and capital expenditures and to maximize the efficiency of our manufacturing capacity.
Changes in demand for customer products reduce our ability to accurately estimate the future requirements of our customers. This makes it difficult to schedule production and maximize utilization of our manufacturing capacity. We must determine the levels of business that we will seek and accept from customers, set production schedules, commit to procuring inventory, and allocate personnel and resources, based on our estimates of our customers' requirements. Customers can require sudden increases and decreases in production which can put added stress on resources and reduce margins. Sudden decreases in production can lead to excess inventory on hand which may or may not be reimbursed by our customers even when under contract.
Continued growth could further lead to capacity constraints. We may need to transfer production to other facilities, acquire new facilities, or outsource production which could negatively impact gross margin.
Compliance or the failure to comply with current and future environmental and health laws or regulations could cause us significant expense.
We are subject to a variety of domestic and foreign environmental regulations relating to the use, storage, and disposal of materials used in our manufacturing processes. In addition, governmental focus on climate change may result in new environmental regulations that may negatively affect us, our vendors or our customers. As a result, we may incur additional costs or obligations in complying with any new environmental and reporting requirements, as well as increased indirect costs resulting from our vendors or suppliers that get passed on to us.
If we fail to comply with any present or future regulations, we could be subject to future liabilities or the suspension of current manufacturing operations. In addition, such regulations could restrict our ability to expand our operations or could require us to acquire costly equipment, substitute materials, or incur other significant expenses to comply with government regulations.
If our manufacturing processes and services do not comply with applicable statutory and regulatory requirements, or if we manufacture products containing design or manufacturing defects, demand for our services may decline and we may be subject to liability claims.
We manufacture and design products to our customers' specifications, and, in some cases, our manufacturing processes and facilities may need to comply with applicable statutory and regulatory requirements. For example, medical devices that we manufacture or design, as well as the facilities and manufacturing processes that we use to produce them, are regulated by the Food and Drug Administration and non-U.S. counterparts of this agency. In addition, our customers' products and the manufacturing processes that we use to produce them often are highly complex. As a result, products that we manufacture may at times contain manufacturing or design defects, and our manufacturing processes may be subject to errors or not be in compliance with applicable statutory and regulatory requirements. Defects in the products we manufacture or design, whether caused by a design, manufacturing or component failure or error, or deficiencies in our manufacturing processes, may result in delayed shipments to customers or reduced or canceled customer orders. If these defects or deficiencies are significant, our business reputation may also be damaged. The failure of the products that we manufacture or our manufacturing processes and facilities to comply with applicable statutory and regulatory requirements may subject us to legal fines or penalties and, in some cases, require us to shut down or incur considerable expense to correct a manufacturing process or facility. Our customers are required to indemnify us against liability associated with designing products to meet their specifications. However, if our customers are responsible for the defects, they may not, or may not have resources to, assume responsibility for any costs or liabilities arising from these defects, which could expose us to additional liability claims.
If we do not manage our growth effectively, our profitability could decline.
When our business or manufacturing capacity is experiencing growth, such as the expansion currently occurring in our Arkansas and Vietnam facilities, such growth can place considerable additional demands upon our management team and our
operational, financial and management information systems. Our ability to manage growth effectively requires us to continue to implement and improve these systems; avoid cost overruns; maintain customer, supplier and other favorable business relationships during possible transition periods; continue to develop the management skills of our managers and supervisors; and continue to train, motivate and manage our employees. Our failure to effectively manage growth could have a material adverse effect on our results of operations.
Energy price increases may negatively impact our results of operations.
Certain components that we use in our manufacturing process are petroleum-based. In addition, we, along with our suppliers and customers, rely on various energy sources in our transportation activities. While significant uncertainty currently exists about the future levels of energy prices, a significant increase, such as the increased fuel prices experienced in fiscal year 2022, is possible. Increased energy prices could cause an increase to our raw material costs and transportation costs. In addition, increased transportation costs related to certain suppliers and customers could be passed along to us. 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.
TECHNOLOGY RISKS
Our operations are subject to cyberattacks that have had and could have a material adverse effect on our business.
We are increasingly dependent on digital technologies and services to conduct our operations. We use these technologies for internal purposes, including data storage, processing and transmissions, as well as in our interactions with vendors and customers. Digital technologies and services are subject to the risk of cybersecurity incidents and some incidents can remain undetected for a period of time.
We routinely monitor our systems for cyber threats and believe we have sufficient processes in place to detect and remediate vulnerabilities. Nevertheless, we have experienced attempted security breaches, such as phishing emails and other targeted attacks. For example, as previously disclosed in our Form 8-K filed with the Securities and Exchange Commission (the "SEC") on May 10, 2024, as amended, we became aware of unauthorized access to our IT systems that resulted in a material impact on our financial condition and results of operations during the fourth quarter of fiscal year 2024 ending on June 29, 2024 (the "Previously Disclosed Cyber Incident"). We expect that our operations will continue to be subject to cyber threats, and any future cybersecurity incident could significantly disrupt our operations.
The threat actor in the Previously Disclosed Cyber Incident exfiltrated certain personally identifiable information, and future cybersecurity incidents could also result in the misappropriation of proprietary or confidential information of the Company or that of its customers, employees, vendors or suppliers. We have incurred and expect to continue to incur costs to mitigate against the Previously Disclosed Cyber Incident and other cybersecurity incidents as threats are expected to continue to become more persistent and sophisticated. If our systems for protecting against cybersecurity incidents, including the Previously Disclosed Cyber Incident, prove not to be sufficient, we could be adversely affected by, among other things, loss of or damage to intellectual property, proprietary or confidential information, or employee, vendor or customer data; interruption of our business operations; and increased costs to prevent, respond to or mitigate cybersecurity incidents. Any of these risks could harm our reputation and our relationships with employees, vendors and customers and may result in claims or enforcement actions and investigations against us.
Disruptions to our information systems, including losses of data or outages, could adversely affect our operations.
We rely on information technology networks and systems to process, transmit and store electronic information. In particular, we depend on our information technology infrastructure for a variety of functions, including worldwide financial reporting, inventory management, procurement, invoicing and email communications. Any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, terrorist attacks and similar events. If we or our vendors are unable to prevent such outages, our operations could be disrupted.
If we are unable to maintain our technological and manufacturing process expertise, our business could be adversely affected.
The markets for our customers' products are characterized by rapidly changing technology, evolving industry standards, frequent new product introductions and short product life cycles. The introduction of products embodying new technologies or
the emergence of new industry standards can render existing products obsolete or unmarketable. Our success will depend upon our customers' ability to enhance existing products and to develop and introduce, on a timely and cost-effective basis, new products that keep pace with technological developments and emerging industry standards and address evolving and increasingly sophisticated customer requirements. Failure of our customers to do so could substantially harm our customers' competitive positions. There can be no assurance that our customers will be successful in identifying, developing and marketing products that respond to technological change, emerging industry standards or evolving customer requirements.
RISKS RELATED TO CAPITAL AND FINANCING
Our failure to comply with the covenants in our credit arrangements could materially and adversely affect our financial condition.
We have restrictive covenants with our financial institutions that impact how we manage our business. We have not always met these covenants in the past and have had to obtain waivers and amend the Loan Agreement under our Term Loan, including for an event of default related to a breach of non-compliance with minimum required earnings before interest, depreciation, amortization, and other adjustments for the period ending March 29, 2025. The amendment permanently adds an additional reporting requirement, and requires minimum earnings before interest, taxes, depreciation, amortization, and other adjustments only if average daily availability for the applicable fiscal quarter is less than 12.5% of the combined borrowing base.
Our asset-based senior secured revolving credit facility (the "Credit Facility"), also includes certain financial covenants, including average and daily availability and, if triggered, earnings before interest, taxes, depreciation, amortization and other adjustments and a fixed charge coverage ratio covenant will apply. We have in the past failed to meet certain covenants, and may not meet such covenants in the future and may not be able to obtain waivers or amendments from the relevant lenders on terms acceptable to us, or at all. In the event we breach any covenant that results in an event of default, we may be required to amend the Credit Facility on terms that would be less favorable to us, such as an increase in the interest rate. Similarly, our lenders could choose to accelerate payment of the amounts owed by the Company. Under those circumstances our borrowings could become immediately payable. The amendment of our credit arrangements on unfavorable terms or the acceleration of our payment obligations thereunder, would have a material adverse effect on our business, financial condition, results of operations and cash flows. For a summary of our debt obligations, see Note 4 - "Long-Term Debt" of the Notes to Consolidated Financial Statements.
Our ability to secure and maintain sufficient credit arrangements is key to our continued operations.
There is no assurance that we will be able to retain, renew, or refinance our credit arrangements in the future.
In the event that 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. For a summary of our debt obligations, see Note 4 - "Long-Term Debt" of the Notes to Consolidated Financial Statements.
Adverse changes in the interest rates of our borrowings could adversely affect our financial condition.
We are exposed to interest rate risk under our revolving line of credit and term loans. We have not historically hedged the interest rate on our credit facility; therefore, unless we do so, significant changes in interest rates could adversely affect our results of operations. For a summary of our debt obligations, see Note 4 - "Long-Term Debt" of the Notes to Consolidated Financial Statements.
Cash and cash equivalents are exposed to concentrations of credit risk.
We place our cash with high credit quality institutions. At times, such balances may be in excess of the federal depository insurance limit or may be on deposit at institutions which are not covered by insurance. If such institutions were to become insolvent during which time it held our cash and cash equivalents in excess of the insurance limit, it could be necessary to obtain other credit financing to operate our facilities.
Our stock price is volatile.
Our stock price has and may continue to be subject to wide fluctuations and possible rapid increases or declines over a short time period. These fluctuations may be due to factors specific to us such as our stock's thinly traded nature, variations in
quarterly operating results, changes in earnings estimates, matters arising from the subject matter of the Audit Committee's internal investigation, or to factors relating to the contract manufacturing industry or to the securities markets in general, which, in recent years, have experienced significant price fluctuations. These fluctuations often have been unrelated to the operating performance of the specific companies whose stocks are traded. In addition, holders of our common stock will suffer immediate dilution to the extent outstanding equity awards are exercised to purchase common stock.
RISKS RELATED TO OUR CONTROLS AND PROCEDURES
In the past, we have concluded that our internal control over financial reporting and our disclosure controls and procedures were not effective due to the existence of material weaknesses, which has adversely affected our ability to report our financial results in a timely and accurate manner and similar recurrences could have a material adverse impact our business and financial condition.
We are required to evaluate the effectiveness of our disclosure controls and procedures and our internal control over financial reporting on a periodic basis and publicly disclose the results of these evaluations and related matters in accordance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). As described in Item 9A. Controls and Procedures of our Annual Report on Form 10-K for the fiscal year ended June 28, 2025, in the previous fiscal year we identified a material weakness in the design and implementation of effective controls over the accounting for revenue recognition relating to cost recovery of material price variances. We also identified a material weakness in the design and implementation of effective controls over the adoption of new accounting standards. As a result of these material weaknesses, our management concluded that our internal control over financial reporting and disclosure controls and procedures were not effective as of June 29, 2024.
We completed a remediation plan, as described in Item 9A. Controls and Procedures of our Annual Report on Form 10-K for the fiscal year ended June 28, 2025, designed to address the material weaknesses. Although these material weaknesses are considered remediated and internal control over financial reporting and control disclosures and procedures were effective as of June 28, 2025, there is no assurance that similar material weaknesses could arise from future changes in systems, personnel, or processes. Any of these risks could have a material adverse impact on our business and financial condition.
If we fail to maintain proper and effective internal controls, our business and financial condition could be materially adversely impacted.
We cannot assure you that we will not discover deficiencies in our internal control over financial reporting. Moreover, as discussed in the following risk factor, 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. We are a non-accelerated filer under the Securities Exchange Act of 1934 (the "Exchange Act") and are not required to comply with the auditor attestation requirements of Section 404(b) of 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.
Further and continued determinations that there are deficiencies in the effectiveness of the Company's internal control over financial reporting could result in another restatement of our consolidated financial statements, cause us to fail to meet our reporting obligations, reduce our ability to obtain financing, negatively affect investor confidence in our management and the accuracy of our financial statements and disclosures, or result in adverse publicity and concerns from investors, any of which could have a negative effect on the price of our common stock, subject us to regulatory investigations and penalties or stockholder litigation, and materially adversely impact our business, financial condition, results of operations and cash flows.
Due to inherent limitations, there can be no assurance that our system of disclosure and internal controls and procedures will be successful in preventing all errors, theft and fraud, or in informing management of all material information in a timely manner.
Management does not expect that our disclosure controls and procedures and internal controls over financial reporting will prevent all errors or fraud. A control system is designed to give reasonable, but not absolute, assurance that the objectives of the control system are met. In addition, any control system reflects resource constraints and the benefits of controls must be considered relative to their costs. Inherent limitations of a control system may include: judgments in decision making may be faulty, breakdowns can occur simply because of error or mistake and controls can be circumvented by collusion or management override. Due to the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
LEGAL AND ACCOUNTING RISKS
We restated certain of our prior consolidated financial statements in our 2024 Annual Report on Form 10-K, which resulted in unanticipated costs and may lead to additional risks and uncertainties, including loss of investor confidence, regulatory action or litigation.
As previously disclosed, in our 2024 Annual Report on Form 10-K, we restated or revised certain of our previously issued financial statements. This process was time-consuming and expensive, including unanticipated costs for accounting and legal fees. The restatement and revisions also expose us to additional risks that could adversely affect our business and financial condition, such as litigation, regulatory action or loss of investor confidence. Lawsuits or regulatory investigations may invoke federal and state securities law claims, contractual claims or other claims arising from the restatement, revisions and material weaknesses in our internal control over financial reporting. We may incur substantial defense costs regardless of the outcome of any litigation or regulatory investigation, and such events might cause a diversion of our management's time and attention. If we do not prevail in any litigation or regulatory action, we could be required to pay substantial damages, penalties or settlement costs. In addition, the restatement and revisions may lead to a loss of investor confidence and have negative impacts on the trading price of our common stock.
Legal proceedings and government investigations could affect our financial condition or results of operations.
In the past, we have been notified of claims relating to various matters including contractual matters, intellectual property rights or other issues arising in the ordinary course of business. In the event of such a claim, we may be required to spend a significant amount of money to defend or otherwise address the claim. Any litigation or dispute resolution, even where a claim is without merit, could result in substantial costs and diversion of resources. Accordingly, the resolution or adjudication of such disputes, even those encountered in the ordinary course of business, could have a material effect on our business, consolidated financial conditions and results of operations.
In addition, from time to time we, or our officers and members of our Board of Directors, may be involved in lawsuits and regulatory actions relating to our business and operations. As discussed in more detail under "Legal Proceedings," we reached a settlement with the SEC in April 2026 that fully resolved an inquiry by the SEC related to the subject matter of our 2021 internal investigation. If we are subject in the future to lawsuits or regulatory action, we could be required to pay monetary damages that may be in excess of our insurance coverage or may have additional penalties or other remedies imposed against us or our officers and directors. Any such expenses, the potential diversion of the attention of management and other personnel as a result of such legal proceedings, or negative publicity arising from any such matters could adversely affect our business, financial condition, results of operations and cash flows.
Changes in securities laws and regulations will increase our costs and risk of noncompliance.
We are subject to additional requirements contained in the U.S. federal securities laws, including the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The Sarbanes-Oxley and Dodd-Frank Acts required certain changes in some of our corporate governance, securities disclosure and compliance practices. The SEC and NASDAQ Global Market have promulgated new rules over time, resulting in increased legal, financial and accounting costs as well as a potential risk of noncompliance. Absent significant changes in related rules, which we cannot assure, we anticipate some level of increased costs related to these new regulations to continue indefinitely. We also expect these developments to make it more difficult and more expensive to obtain director and officer liability insurance, and we may be forced to accept reduced coverage or incur substantially higher costs to obtain coverage. Likewise, these developments may make it more difficult for us to attract and retain qualified members of our Board of Directors or qualified management personnel. Further, the costs associated with the compliance with and implementation of procedures under these and future laws and related rules could have a material impact on our results of operations. In addition, the costs associated with noncompliance with additional securities laws and regulations could also impact our business.
Changes in financial accounting standards may affect our reported financial condition or results of operations as well as increase costs related to implementation of new standards and modifications to internal controls.
Our consolidated financial statements are prepared in conformity with accounting standards generally accepted in the United States, or U.S. GAAP. These principles are subject to amendments made primarily by the Financial Accounting Standards Board ("FASB") and the SEC. A change in those policies can have a significant effect on our reported results and may affect our reporting of transactions which are completed before a change is announced. Changes to accounting rules or challenges to
our interpretation or application of the rules by regulators may have a material adverse effect on our reported financial results or on the way we conduct business.
GENERAL RISKS
Our levels of insurance coverage may not be sufficient for potential damages, claims or losses.
We have various forms of business and liability insurance which we believe are appropriate based on the needs of companies in our industry. As a result, not all of our potential business risks or potential losses would be covered by our insurance policies. If we sustain a significant claim or loss which is not covered by insurance, our net income could be negatively impacted.
We may encounter complications with acquisitions, which could potentially harm our business.
Any current or future acquisitions may require additional equity financing, which could be dilutive to our existing shareholders, or additional debt financing, which could potentially affect our credit ratings. Any downgrades in our credit ratings associated with an acquisition could adversely affect our ability to borrow by resulting in more restrictive borrowing terms. To integrate acquired businesses, we must implement our management information systems, operating systems and internal controls, and assimilate and manage the personnel of the acquired operations. The integration of acquired businesses may be further complicated by difficulties managing operations in geographically dispersed locations. The integration of acquired businesses may not be successful and could result in disruption by diverting management's attention from the core business. In addition, the integration of acquired businesses may require that we incur significant restructuring charges or other increases in our expenses and working capital requirements, which reduce our return on invested capital.
Acquisitions may involve numerous other risks and challenges including but not limited to: potential loss of key employees and customers of the acquired companies; the potential for deficiencies in internal controls at acquired companies; lack of experience operating in the geographic market or industry sector of the acquired business; constraints on available liquidity, and exposure to unanticipated liabilities of acquired companies. These and other factors could harm our ability to achieve anticipated levels of profitability at acquired operations or realize other anticipated benefits of an acquisition, and could adversely affect our consolidated business and operating results.
Key Tronic Corporation published this content on May 08, 2026, and is solely responsible for the information contained herein. Distributed via EDGAR on May 08, 2026 at 17:38 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]