Key Tronic Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter ended April 3, 2021, and nine months ended that date. The request metadata says “2020 Q1,” but the filing covers fiscal 2021 Q3. The quarter was 14 weeks versus 13 weeks in the prior-year quarter. Filed July 6, 2021, after delays related to an internal investigation.
Financial performance
| Metric | Three months ended Apr. 3, 2021 | Prior-year quarter | Nine months ended Apr. 3, 2021 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $134.6 million | $111.5 million | $386.1 million | $333.5 million |
| Gross profit / margin | $11.1 million / 8.2% | $9.2 million / 8.3% | $31.7 million / 8.2% | $26.6 million / 8.0% |
| Operating income / margin | $2.6 million / 1.9% | $1.8 million / 1.6% | $8.1 million / 2.1% | $5.8 million / 1.7% |
| Net income | $0.9 million | $0.9 million | $4.2 million | $3.3 million |
| Diluted EPS | $0.08 | $0.08 | $0.38 | $0.30 |
Quarterly sales rose 20.8%, driven by new and existing customer programs, but supply constraints limited shipments. Quarterly net income was slightly lower despite higher sales and operating income, reflecting higher interest and tax expense, among other costs. For the nine-month period, sales increased 15.8% and net income increased $0.9 million year over year.
Cash flow, debt and liquidity
- Cash was $1.3 million at April 3, 2021, versus $0.6 million at fiscal year-end June 27, 2020.
- Nine-month operating cash use was $17.7 million, an improvement from $32.1 million used in the prior-year period. Working-capital demands included increases of $26.9 million in receivables and $15.8 million in inventory.
- Capital expenditures were $9.7 million; financing provided $28.1 million. The company reported a $1.3 million net increase in cash over the nine months.
- Total debt was approximately $100.4 million, including $90.0 million outstanding on the revolving facility. Only $3.0 million remained available under the $93 million facility. Reported current ratio was 2.5 and debt-to-equity ratio 0.8.
- Debt interest rates ranged from 3.25% to 5.52%. The company said it was in compliance with financial covenants at quarter-end.
Business changes, outlook and risks
- Management attributed year-over-year sales growth to new program ramps and demand from existing customers. Backlog was $236.6 million, versus $208.1 million a year earlier; the filing cautions that backlog is not a reliable measure of future sales.
- Management expected continued strong revenue growth in fiscal Q4 2021 and was investing in capacity. No quantified earnings or full-year guidance was provided.
- Margins faced component shortages, logistics constraints, COVID-related expenses, and a four-day Mexico-facility closure caused by a winter storm and power disruptions. The company also cited labor shortages and customer demand uncertainty.
- The top three customers represented 37.9% of quarterly sales, up from 34.7% a year earlier. Customer orders generally are not firm long-term purchase commitments.
- The Audit Committee concluded that inventory and cost of goods sold were improperly recorded at the Oakdale, Minnesota facility in fiscal Q4 2020 and the first six months of fiscal 2021, understating cost of sales and overstating inventory. Other inventory errors were also found. The filing says the financial impact did not require restatement, but identifies a material weakness in inventory controls and ineffective disclosure controls as of April 3, 2021.
- The company incurred approximately $0.7 million of investigation costs in the quarter and expected further costs in fiscal Q4. It was cooperating with the SEC; the outcome of any regulatory inquiry was uncertain.
- COVID-19, supply-chain disruption, customer concentration, foreign operations and currency movements, interest-rate exposure, and the availability of credit are material risks. Management said projected operating cash, credit availability and leasing capacity should meet foreseeable requirements, while noting anticipated slower collections from some customers and higher inventory.
Most important facts to verify
- Whether inventory-control remediation is effective and the material weakness is resolved; monitor for any further adjustments or restatement.
- Progress and potential costs or consequences from the SEC inquiry and the internal investigation.
- Whether component availability, logistics and customer demand support the expected fiscal Q4 revenue growth.
- Working-capital trends, particularly receivables and inventory, and the company’s ability to generate operating cash.
- Remaining revolver availability, covenant compliance and refinancing or liquidity needs given the limited $3.0 million borrowing availability.
- Customer concentration and the conversion of backlog into shipments and revenue.