Key Tronic Corporation — Form 10-Q Summary
Reporting-period note: The supplied filing is for the fiscal third quarter ended March 28, 2020, and the nine months then ended. This differs from the request metadata’s “2019 Q3.” Amounts below are in U.S. dollars; financial-statement figures are rounded to millions unless stated otherwise.
Business context and reporting period
Key Tronic provides electronic manufacturing services, including engineering, procurement, manufacturing, assembly, and testing, for customers across multiple industries. The filing compares the 13-week quarter and 39-week year-to-date period with the corresponding periods ended March 30, 2019.
Financial performance and liquidity
| Metric | Quarter ended March 28, 2020 | Prior-year quarter | Nine months ended March 28, 2020 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $111.5m | $108.0m | $333.5m | $358.5m |
| Gross profit / margin | $9.2m / 8.3% | $6.8m / 6.3% | $26.6m / 8.0% | $26.2m / 7.3% |
| Operating income (loss) | $1.8m | $(12.5)m | $5.8m | $(7.4)m |
| Net income (loss) | $0.9m | $(12.0)m | $3.3m | $(8.8)m |
| Diluted EPS | $0.08 | $(1.11) | $0.30 | $(0.82) |
- Quarterly change: Sales increased 3.2% year over year. Gross margin improved 2.0 percentage points, which management attributed mainly to higher revenue and Juarez facility streamlining.
- Year-to-date change: Sales declined 7.0%, while gross margin improved 0.7 percentage points. Management cited sheet-metal demand and workload-balancing challenges in the second quarter, plus China supply-chain delays in the third quarter, as factors behind lower sales.
- Cash flow: Operating activities used $32.1m in the nine months, versus $3.4m provided in the prior-year period. Working capital was a major use: receivables rose $19.5m and inventory rose $13.7m. The receivables increase was partly attributed to not factoring receivables in the third quarter. Investing activities used $0.9m; financing activities provided $33.6m. Cash at period-end was $1.3m.
- Balance sheet and liquidity: Current assets were $230.0m and current liabilities $101.6m; management reported a 2.3 current ratio and 0.6 debt-to-equity ratio. Total debt was approximately $70.0m, including $57.2m drawn on the revolving facility. The $65.0m facility had $7.4m available after $0.4m of letters of credit. The company reported compliance with debt covenants.
- Other metrics: Interest expense was $0.8m for the quarter and $2.0m year to date. The allowance for doubtful accounts rose to $0.6m from $0.1m at fiscal year-end, including a $0.6m write-down of one pandemic-affected customer receivable during the quarter. Net unrealized hedge losses reduced nine-month comprehensive income by $5.0m.
Material changes, outlook, and risks
- The prior-year quarter and nine-month results included a $12.4m goodwill and intangible-asset impairment charge; no such charge was recorded in the current periods. This materially affects year-over-year operating-income and net-income comparisons.
- COVID-19 caused temporary China facility shutdowns early in 2020 and delayed key components. China operations were returning to full operation and supply-chain disruptions were abating by the filing date. Juarez facilities briefly closed in April and resumed operations six days later; U.S. and Vietnam facilities continued operating normally.
- Demand effects were mixed but net positive in management’s assessment: home-consumer, healthcare, and home-exercise programs increased, while gaming demand fell. Backlog was $208.1m at March 28, 2020, versus $151.5m a year earlier; management cautioned that backlog is not a reliable measure of future sales because orders and shipment timing can change.
- Management cited new program wins, investment in Mexico, U.S., and Vietnam capacity, and a robust pipeline as growth opportunities. It remained optimistic about longer-term growth, but provided no specific fourth-quarter guidance because customer demand, costs, facility closures, and supply disruptions were too uncertain.
- Key risks include volatile customer orders and concentration, limited long-term purchase commitments, component shortages, working-capital needs, customer collectability, ramp-up costs, competition and margin pressure, foreign-exchange fluctuations, and reliance on credit availability and covenant compliance. The top three customers represented 34.7% of quarterly sales, down from 39.1% a year earlier.
- Other notable items: the company adopted operating-lease accounting, recognizing $15.3m of right-of-use assets and $14.9m of lease liabilities at March 28, 2020. Management said the CARES Act was not expected to have a material overall financial-statement impact, while noting a tentative refund claim for AMT credits.
Important facts for investors to verify
- Whether the strong reported backlog converts into shipments and revenue, and how much is subject to customer changes or delays.
- Whether receivables and inventory convert to cash; operating cash use and revolver borrowings increased substantially.
- Whether COVID-related customer demand, supply availability, operating costs, and facility conditions support margins and production plans.
- Whether customer-specific credit exposure, including the receivable write-down, leads to further collection losses.
- Whether the company maintains covenant compliance and adequate borrowing availability as working-capital requirements evolve.
- How foreign-currency and interest-rate hedges perform: the filing reports material unrealized hedge losses and approximately $2.2m expected to be reclassified into earnings within 12 months.