Key Tronic Corporation — Form 10-Q Summary
Reporting period: Quarter ended March 30, 2019, the third quarter of fiscal 2019, and nine months ended March 30, 2019. The request metadata says “2018 Q3,” but the filing covers fiscal 2019 Q3.
Business context and financial performance
Key Tronic provides electronics manufacturing services, including engineering, procurement, manufacturing and assembly for customers across multiple industries. Amounts below are in U.S. dollars; financial statement figures are in thousands unless noted.
| Metric | Three months ended March 30, 2019 | Year-over-year comparison | Nine months ended March 30, 2019 |
|---|---|---|---|
| Net sales | $108.0 million | Down 0.4% from $108.4 million | $358.5 million, up 8.9% from $329.3 million |
| Gross profit / margin | $6.8 million / 6.3% | Margin down from 7.5% | $26.2 million / 7.3%, versus 7.5% |
| Operating income (loss) | $(12.5) million | Versus $0.8 million income | $(7.4) million |
| Net income (loss) | $(12.0) million; $(1.11) per share | Versus $0.6 million income; $0.06 per share | $(8.8) million; $(0.82) per share, versus $0.9 million income |
The quarter included a $12.4 million impairment charge: $10.0 million of goodwill and $2.5 million of customer-relationship intangibles. Management attributed the impairment to weaker program revenue, delayed new-program orders, higher discount rates and market capitalization below book value. The charge was noncash.
Cash flow, debt and liquidity
- Operating cash flow: $3.4 million for the nine months, versus $4.0 million in the prior-year period. It included a $6.7 million arbitration-settlement receipt; contract assets increased $8.2 million and accounts payable declined $7.4 million.
- Investing cash flow: $1.1 million used, including $5.8 million of property and equipment purchases, partly offset by $4.8 million of deferred proceeds from factored receivables.
- Financing cash flow: The cash flow statement reports $2.5 million used, including $4.4 million of term-debt repayments and net revolving-credit borrowings. The MD&A instead describes $2.5 million as provided; this inconsistency should be checked.
- Cash: $165,000 at March 30, 2019, down from $343,000 at June 30, 2018. Current ratio was 2.1, according to management.
- Debt: Approximately $32.5 million total, comprising $18.1 million drawn on the revolving facility, $12.5 million on the acquisition term loan and $2.0 million on the equipment loan. The $45 million revolving facility had $26.5 million available. The company reported compliance with financial covenants.
Material changes and accounting effects
- Third-quarter revenue was nearly flat, but gross margin fell 1.2 percentage points. Management cited lower sales, higher material and overhead costs, and severance expense; two large customers reduced or shifted orders, and two new-program launches were delayed.
- Nine-month revenue growth reflected new program wins, current-customer demand and adoption of ASC 606. ASC 606 increased reported nine-month revenue by $8.2 million and gross profit by $1.1 million; without adoption, revenue would have been $350.2 million. Prior-year figures were not restated, limiting direct comparability.
- ASC 606 moved qualifying customer-specific manufacturing revenue from shipment-date recognition to recognition over time. At quarter-end, contract assets were $20.1 million.
- Order backlog was approximately $151.5 million, compared with $129.2 million a year earlier. The filing cautions that backlog is not a reliable measure of future sales because orders and shipment timing can change.
Outlook, risks and contingencies
For fiscal Q4 2019, management expected revenue of $112 million to $117 million and assumed a 20% effective tax rate. Results depend on customer orders and the timing of new-program production starts. Management cited a stronger pipeline, new wins and potential benefits from North American production; it also planned additional Vietnam capacity to lower costs and diversify manufacturing. No full-year or EPS guidance was provided.
- Customer concentration rose: the top three customers represented 39.1% of reported third-quarter sales, versus 30.6% a year earlier. Without ASC 606, the current-period figure was 30.9%.
- Risks include order reductions or delays, program start-up costs, component shortages, pricing pressure, foreign-exchange and interest-rate exposure, and reliance on a limited number of customers and suppliers. The company hedged some peso expenses and part of its term-loan interest exposure.
- Ordinary-course litigation was not expected by management to have a material adverse effect. The filing reports no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether customer orders recover and delayed programs ramp as expected, particularly given the elevated customer concentration.
- Whether gross margins improve after material-cost pressure and severance expense, and how much reported growth reflects ASC 606 timing.
- The financing-cash-flow inconsistency between the cash flow statement and MD&A.
- Liquidity and covenant headroom, given low cash balances, variable-rate debt and dependence on the revolving facility and receivables-factoring programs.
- Whether additional impairment, tax adjustments or withholding taxes on future foreign-earnings repatriation arise.