Key Tronic Corporation — Form 10-Q Summary
Business and period: Key Tronic provides electronics manufacturing services, including engineering, procurement, assembly, testing, and manufacturing. This unaudited report covers the 13-week second quarter and 26-week first half of fiscal 2013, ended December 29, 2012; comparisons are with the corresponding periods of fiscal 2012.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | First half FY2013 | First half FY2012 |
|---|---|---|---|---|
| Net sales | $94.6 million | $84.5 million | $192.1 million | $154.2 million |
| Gross profit / margin | $9.5 million / 10.0% | $6.9 million / 8.1% | $19.0 million / 9.9% | $11.9 million / 7.7% |
| Operating income / margin | $5.3 million / 5.6% | $2.8 million / 3.3% | $11.0 million / 5.7% | $4.4 million / 2.9% |
| Net income | $3.6 million | $3.2 million | $7.3 million | $4.4 million |
| Diluted EPS | $0.33 | $0.30 | $0.67 | $0.42 |
- Quarterly sales increased 12.0%; first-half sales increased 24.5%. Management attributed growth primarily to new programs and higher demand from existing programs.
- Gross-margin improvement reflected lower material costs as a share of sales and better overhead absorption. Operating expenses rose modestly in dollars but declined as a share of sales.
- First-half operating cash flow was $12.4 million, versus $0.8 million a year earlier. The improvement reflected higher earnings and working-capital changes, including lower inventory and receivables, partly offset by lower accounts payable.
- First-half capital expenditures were $2.2 million; investing cash outflow was $2.1 million. Financing cash outflow was $10.6 million, primarily reflecting net repayments under the revolving facility. Cash declined by $0.3 million to $0.2 million.
- At December 29, 2012, total assets were $136.5 million, current assets $114.4 million, and current liabilities $41.7 million. Management reported a 2.7 current ratio.
- Revolving debt was $4.7 million, down from $15.0 million at June 30, 2012. The $30.0 million facility had $25.3 million available at quarter-end; the borrowing rate was 3.25%. Debt-to-equity was reported as 0.06. The company said it was in compliance with its covenants.
Changes, outlook, and key considerations
- Quarterly earnings rose only 12.8% despite 12.0% sales growth; management cited improved margins and operating leverage, partly offset by a higher tax provision. The prior-year quarter and half-year benefited from a discrete research and development tax-credit item.
- Management expected third-quarter fiscal 2013 revenue of $83 million to $90 million and described expected modest revenue growth for the rest of the fiscal year. It cited a significant slowdown in demand from one customer, while anticipating that new-program ramps would more than offset that decline. These are forward-looking expectations, not guarantees.
- The American Taxpayer Relief Act, signed January 2, 2013, retroactively reinstated the federal R&D credit for qualifying costs from January 1, 2012 through December 31, 2013. The company said related benefits for the reported period would be recognized starting in fiscal Q3.
- Customer concentration remains material: the top five customers generated 72.9% of Q2 sales, versus 71.8% a year earlier. Most customer arrangements are not firm long-term purchase commitments. Management reported 169 programs and 52 customers, compared with 149 programs and 40 customers a year earlier.
- Order backlog was $64.9 million, versus $53.2 million a year earlier, but management cautioned that backlog is not a reliable measure of future sales because orders and shipment dates can change.
- Key risks include customer order volatility and concentration, macroeconomic weakness, component shortages and supplier dependence, competitive pricing, new-program start-up costs, foreign operations and currency exposure, and dependence on credit availability. The company hedges some Mexican-peso expenses; outstanding forward contracts had a $57.1 million notional amount, with an estimated $0.4 million net unrealized loss expected to be reclassified into earnings within 12 months.
- Other items: first-half SG&A included a favorable, non-recurring adjustment of about $0.5 million related to eliminating a deferred-compensation liability. Supplier capital-expenditure commitments were about $0.1 million; the warranty reserve was about $11,000. Management said ordinary-course legal matters were not expected to have a material adverse effect, and reported disclosure controls as effective.
Investor verification priorities
- Track whether new-program production offsets the disclosed customer slowdown and whether third-quarter revenue falls within the $83 million to $90 million outlook.
- Review customer concentration, order cancellations or delays, and the quality and timing of backlog conversion.
- Assess whether improved gross margins and operating cash flow persist, including the effects of working-capital movements and program ramps.
- Confirm the timing and realized impact of reinstated R&D tax credits, and distinguish recurring earnings from prior-year tax benefits and the one-time SG&A adjustment.
- Monitor liquidity, revolving-credit availability and covenant compliance, as well as component supply, foreign-exchange hedges, and related risks.