Key Tronic Corporation — Form 10-Q Summary
Business context and reporting period. Key Tronic provides electronics manufacturing services, including engineering, procurement, materials management, manufacturing, assembly and testing. This unaudited report covers the 13-week first quarter of fiscal 2012, ended October 1, 2011; comparisons are with the 13 weeks ended October 2, 2010 unless otherwise stated. Financial amounts below are in millions of dollars unless indicated.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $69.8 | $63.3 | +10.1% |
| Gross profit / margin | $5.0 / 7.2% | $6.0 / 9.4% | Margin down 2.2 percentage points |
| Operating income / margin | $1.6 / 2.3% | $2.6 / 4.1% | Margin down 1.8 percentage points |
| Net income | $1.2 | $1.7 | Down 28.4% |
| Diluted EPS | $0.12 | $0.17 | Down $0.05 |
| Cash used in operating activities | $5.8 | $7.5 | Use narrowed by $1.8 |
| Capital expenditures | $0.4 | $1.6 | Lower spending |
Cost of sales rose to $64.8 million, or 92.8% of sales, from $57.4 million, or 90.6%. Operating expenses were $3.4 million, broadly stable year over year. Interest expense increased to $0.1 million from $0.07 million. The effective tax rate declined to 17.5% from 31.7%, primarily reflecting lower foreign tax rates and changes in deferred foreign tax liabilities related to currency movements.
Balance sheet and liquidity
- At October 1, 2011, cash was $0.35 million; current assets were $103.5 million and current liabilities were $40.2 million. Management reported a 2.6 current ratio and $63.3 million of working capital.
- Revolving-credit borrowings were $11.3 million, up from $6.0 million at July 2, 2011. Of the $30 million facility, $18.7 million remained available. The company reported compliance with all financial covenants; the facility matures October 2013 and is secured by substantially all company assets.
- Total liabilities were $58.5 million and shareholders’ equity was $65.2 million. The filing reports a long-term debt-to-equity ratio of 0.20.
- Operating cash use reflected working-capital investment, including increases in receivables and inventory, partly offset by higher accounts payable. Cash declined by $0.9 million during the quarter to $0.35 million.
Material changes and management commentary
- Sales increased mainly on approximately $16.8 million of higher revenue from new programs for new and existing customers, partly offset by a $7.4 million decline in demand from current programs and an approximately $3.0 million decline from end-of-life programs and, to a lesser extent, program losses.
- Gross margin contracted as material costs increased by 2.8 percentage points of sales, reflecting higher material content in certain products and program mix. Improved overhead leverage offset 0.6 percentage points. Management said margins also depend on utilization, pricing, program ramps and material costs.
- Top-five customers accounted for 71.5% of sales, up from 58.7% a year earlier. Backlog was approximately $53.2 million, versus $52.4 million a year earlier; the filing cautions backlog is not a reliable measure of future sales.
- Management said it expects growth from increased production of new programs, while noting uncertain macroeconomic conditions and global supply-chain component shortages. It believes operating cash flow, borrowing availability and equipment leasing will support foreseeable capital needs.
Outlook, risks and unusual items
- Near-term outlook: Management forecast second-quarter fiscal 2012 sales of $75 million to $80 million. No clear full-year earnings or revenue guidance is provided.
- Customer and demand risks: Customer orders can change, be delayed or cancelled; most arrangements are not firm long-term purchase commitments. Increased customer concentration heightens exposure to major-account changes.
- Operating risks: Management cited macroeconomic and credit-market uncertainty, intense EMS competition, component shortages, foreign operations, program ramp costs, and potential fluctuations in utilization, pricing and material costs. Foreign exchange, interest rates, environmental compliance and product quality are also identified risks.
- Currency hedges: The company had $42.3 million notional of Mexican-peso forward contracts, with a net fair-value liability of approximately $3.9 million at quarter-end. A $4.3 million net-of-tax unrealized hedge loss was recorded in other comprehensive income; approximately $0.5 million of existing losses was expected to be reclassified into earnings within 12 months. Management stated the contracts hedge forecast expenses and are not held for speculation.
- Taxes and contingencies: The company expects to repatriate approximately $8 million of foreign earnings and has recorded related estimated taxes in deferred taxes. It reported approximately $13.0 million of domestic net operating losses and $5.9 million of tax credits, with a $0.7 million valuation allowance for certain research-and-development credits. Management said ordinary-course legal matters are not expected to materially affect results; no material firm capital-expenditure commitments were reported.
Important facts for investors to verify
- Whether forecast second-quarter sales of $75–$80 million were achieved, and how subsequent revenue compares with the reported backlog.
- Whether new program ramps sustain sales growth and improve gross margin despite material-content costs and supply constraints.
- Whether customer concentration, especially the 71.5% top-five share, changes and whether major customers maintain orders.
- Whether working-capital needs continue to consume cash, and how revolver usage and covenant compliance evolve.
- How Mexican-peso hedge losses are reclassified into cost of sales, and whether currency movements materially affect margins or taxes.
- Whether anticipated foreign-earnings repatriation, tax-credit utilization and related tax estimates change.