Key Tronic Corporation — Q1 FY2015 Form 10-Q
Reporting period: Three months ended September 27, 2014 (13 weeks), compared with the three months ended September 28, 2013. Unaudited results include Ayrshire Electronics from its September 3, 2014 acquisition, so the quarter includes about one month of Ayrshire operations.
Financial performance
| Metric | Q1 FY2015 | Prior-year quarter |
|---|---|---|
| Net sales | $86.3 million | $78.0 million |
| Gross profit / margin | $4.2 million / 4.9% | $6.6 million / 8.5% |
| Operating income (loss) | ($1.7 million) / (2.0%) | $2.5 million / 3.2% |
| Net income (loss) | ($1.5 million); ($0.14) per diluted share | $1.7 million; $0.15 per diluted share |
| Cash used in operating activities | $2.1 million | $1.6 million |
| Cash and cash equivalents, quarter-end | $1.0 million | $2.0 million |
Sales rose 10.7%, but cost of sales grew faster, reducing gross margin by 3.6 percentage points. Management attributed weaker profitability mainly to unfavorable product mix and higher material costs, inefficiencies during a rapid new-product ramp, and approximately $775,000 of Ayrshire acquisition closing costs. SG&A increased to $4.6 million from $2.8 million. Net interest expense was $189,000, versus $22,000.
Balance sheet, debt and liquidity
- At September 27, 2014, total assets were $218.5 million and shareholders’ equity was $100.6 million. Current assets were $169.1 million and current liabilities $68.7 million; management reported a 2.5 current ratio.
- Debt comprised a $35.0 million term loan, $17.9 million revolving-credit balance, and $5.0 million current portion of debt; management reported debt-to-equity of 0.53. The revolver had $11.7 million available, subject to availability, and $0.3 million in letters of credit. The company reported compliance with loan covenants.
- Cash fell by $4.8 million during the quarter. Investing used $47.8 million, principally for the Ayrshire acquisition; financing provided $45.1 million, including $35.0 million of term-loan proceeds.
- Trade receivables were $74.7 million and inventory $74.7 million at quarter-end. Accounts payable was $49.0 million. The company said operating cash, borrowing capacity and leasing options should meet foreseeable needs.
Material changes and notable items
- On September 3, 2014, Key Tronic acquired all outstanding shares of Ayrshire for approximately $47.8 million net of acquired cash. The acquisition added five locations, expanded printed circuit board assembly capacity, and broadened the customer base. Preliminary purchase accounting recorded $8.0 million of goodwill; final allocation remained pending.
- Reported sales growth included approximately $11.3 million from Ayrshire and $10.6 million from new programs, partly offset by a $13.5 million decline in demand from existing programs. Pro forma sales, assuming Ayrshire had been acquired before the periods shown, were $109.8 million in the current quarter and $109.2 million in the prior-year quarter; pro forma net loss/income was ($0.9 million) and $2.0 million, respectively.
- Backlog was approximately $96.8 million, versus $55.1 million a year earlier. The filing cautions that backlog is not a reliable measure of future sales and orders may change.
- Foreign-currency forward contracts had a $68.7 million notional amount. The quarter’s unrealized foreign-exchange-contract loss in other comprehensive income was $1.7 million net of tax. Subsequent to quarter-end, the company entered into a $25.0 million interest-rate swap, effective September 1, 2015.
Outlook, risks and contingencies
Management expected Q2 FY2015 revenue of $105 million to $115 million and anticipated stronger revenue growth and a return to profitability as new programs ramped and Ayrshire contributed for a full quarter. It expected product mix and margins to gradually normalize, while noting that new-program startup costs would continue to affect efficiency. These are forward-looking expectations, not reported results.
Key risks cited include customer demand variability and concentration, the lack of firm long-term purchase commitments, component shortages and supplier dependence, pricing and competitive pressure, new-program ramp costs, foreign-exchange and floating-rate debt exposure, and integration and execution risks from acquisitions. The company also identified potential tax and goodwill/intangible-asset valuation risks. It reported no significant off-balance-sheet arrangements; ordinary-course legal proceedings were not expected by management to have a material adverse effect. No material changes to the prior annual report’s risk factors were reported.
Important facts for investors to verify
- Whether the forecast Q2 revenue range and expected return to profitability were achieved, and whether new-program ramp inefficiencies and margins improved.
- How Ayrshire performed over a full quarter, whether expected synergies and customer diversification materialized, and whether final purchase accounting changed materially.
- Whether customer demand, backlog conversion and customer concentration developed as expected; backlog is not a firm sales commitment.
- Whether operating cash flow and working-capital needs supported liquidity, and whether the company remained within debt covenants while servicing its floating-rate borrowings.
- Whether foreign-exchange hedges, acquisition integration, tax repatriation assumptions, and goodwill or intangible-asset valuations created material gains, costs or impairment risks.