Key Tronic Corporation — Form 10-Q Summary
Business context and reporting period
Key Tronic provides electronic manufacturing services, including engineering, procurement, materials management, manufacturing and assembly. The filing covers the 13-week third quarter and 39 weeks ended March 31, 2012, compared with periods ended April 2, 2011. Although the request metadata says “2011 Q3,” the filing itself is for fiscal 2012 Q3.
Financial performance
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Net sales | $95.5 million | $63.4 million | $249.7 million | $187.8 million |
| Gross profit / margin | $8.7 million / 9.1% | $4.2 million / 6.7% | $20.6 million / 8.2% | $15.6 million / 8.3% |
| Operating income / margin | $4.7 million / 4.9% | $0.9 million / 1.5% | $9.1 million / 3.6% | $5.3 million / 2.8% |
| Net income | $3.4 million | $0.7 million | $7.8 million | $4.2 million |
| Diluted EPS | $0.32 | $0.07 | $0.74 | $0.40 |
Third-quarter sales rose 50.6%; nine-month sales rose 33.0%. Q3 gross margin improved 2.4 percentage points, which management attributed to lower material costs as a share of sales and better overhead absorption. Nine-month gross margin slipped 0.1 point as higher material content in some new programs largely offset improved overhead leverage. Nine-month effective tax rate was 10.6%, versus 15.3%, helped by additional R&D tax credits; the Q3 rate was 25.6%, versus 5.4%.
Cash flow, debt and liquidity
- Operating activities used $6.9 million in cash during the first nine months, an improvement from $11.3 million used in the prior-year period. Growth drove increases in receivables ($19.3 million) and inventory ($13.0 million); higher accounts payable provided $14.8 million of cash.
- Investing activities used $3.6 million, including $3.6 million of property and equipment purchases; this included $1.8 million for a building and land in Juarez, Mexico. Financing activities provided $9.8 million.
- At March 31, cash was $0.5 million, current assets were $122.9 million and current liabilities were $49.6 million. Management reported a 2.5 current ratio.
- Revolver borrowings were $16.2 million, up from $6.0 million at July 2, 2011, under a $30.0 million facility; $13.8 million remained available. The rate was 2.35%–3.25%, and the facility matures October 2016. The company reported compliance with covenants. Total liabilities were $76.5 million and shareholders’ equity was $74.7 million.
Changes, outlook and risks
- Management attributed Q3 sales growth mainly to new programs and increased demand from existing programs. For the nine-month period, new programs contributed approximately $68.8 million of increased revenue, partly offset by softer demand and program losses.
- Backlog was approximately $72.6 million, versus $46.2 million a year earlier; the company cautioned backlog is not a reliable measure of future sales. The five largest customers accounted for 72.6% of Q3 sales, compared with 64.1% a year earlier; 42 customers generated revenue, versus 29.
- Management forecast fourth-quarter FY2012 sales of $93 million–$98 million and expected modest revenue growth, dependent on customer orders, new-program ramps and industry-wide component availability. It said operating cash flow, revolver capacity and leasing opportunities should support foreseeable capital needs.
- Key exposures include customer concentration and order variability, macroeconomic weakness, component shortages and supplier dependence, new-program startup costs, pricing and margin pressure, international operations, foreign exchange and interest-rate movements, and inventory/receivables growth. The company hedged Mexican-peso expenses with $41.0 million notional of forward contracts; subsequent to quarter-end it entered into additional forwards and $5.6 million of cross-currency swaps.
- The company recognized additional R&D tax credits during FY2012, including a $4.0 million recognition in the December quarter and $0.4 million in the March quarter, with $2.2 million of additional unrecognized tax benefits recorded in connection with the credits. Management expected to repatriate approximately $8.8 million of foreign earnings and recorded related estimated taxes.
- Management stated ordinary-course legal matters were not expected to have a material adverse effect, and reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective; no significant changes in internal control over financial reporting were reported.
Most important facts for investors to verify
- Whether strong sales growth and the $93 million–$98 million Q4 sales outlook were realized, and whether backlog converted to shipments.
- Whether customer concentration, program ramps and component shortages affected revenue continuity and gross margins.
- Whether working-capital demands—especially receivables and inventory—continued to consume operating cash, and how that affected revolver use and liquidity.
- Whether R&D tax credits, valuation allowances and anticipated foreign-earnings repatriation produced the expected tax benefits and cash costs.
- Whether the foreign-exchange hedges and added swaps effectively limited currency exposure, and whether covenant compliance and borrowing availability were maintained.