Key Tronic Corporation — Form 10-Q Summary
Business context and reporting period. Key Tronic provides electronic manufacturing services to original equipment manufacturers across multiple end markets. This filing covers the fiscal third quarter ended April 2, 2016, and the first nine months of fiscal 2016. The quarter was 14 weeks, compared with 13 weeks in the prior-year quarter; fiscal 2016 is a 53-week year. Dollar amounts below are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Three months ended Apr. 2, 2016 | Prior-year quarter | Nine months ended Apr. 2, 2016 | Prior-year period |
|---|---|---|---|---|
| Net sales | $118.4 | $112.9 | $361.1 | $313.6 |
| Gross profit / margin | $10.0 / 8.4% | $9.4 / 8.4% | $28.0 / 7.8% | $22.9 / 7.3% |
| Operating income / margin | $2.8 / 2.3% | $2.6 / 2.3% | $6.9 / 1.9% | $3.4 / 1.1% |
| Net income | $1.8 | $1.9 | $4.4 | $2.0 |
| Diluted EPS | $0.16 | $0.16 | $0.39 | $0.17 |
| Net cash from operating activities | Not provided for the quarter | $0.2 | $7.0 |
- Quarterly sales rose 4.9%, with new program wins partly offset by lower demand from a longstanding customer. The extra week in the current quarter affects comparability. Nine-month sales rose 15.1%, reflecting new programs and a full nine months of Ayrshire results versus a partial prior-year contribution.
- Quarterly gross margin and operating margin were flat year over year. Nine-month gross margin improved primarily from lower material-related costs, partly offset by higher overhead; operating margin also improved as operating expenses fell as a share of sales.
- Quarterly net income declined modestly despite higher operating income, primarily because interest expense increased to $0.62 from $0.32, reflecting higher average revolver borrowings used to fund operating growth. Nine-month net income improved; the effective tax rate fell to 16.7% from 19.9%, partly due to federal R&D credits.
- Operating cash flow was only $0.2, down from $7.0. A $17.3 decrease in receivables was largely offset by a $16.4 increase in inventory and a $5.3 decrease in accounts payable. The company received about $57.1 of cash from sold receivables during the nine months, versus $4.5 in the prior-year period.
- Investing activities used $3.8, including $10.0 of property and equipment purchases, partly offset by $6.2 of proceeds from equipment sale-and-leaseback transactions. Financing activities provided $3.5; cash declined $0.1 to $0.3.
- At April 2, cash was $0.3, current assets were $179.3, and current liabilities were $83.1; management reported a 2.2 current ratio. Total debt was approximately $46.0, consisting of a $27.5 term loan and $18.5 revolver borrowings. The $45.0 revolver had $26.1 available, and the company reported compliance with its financial covenants. Management cited a 0.4 debt-to-equity ratio.
Material changes, outlook, and risks
- Backlog was $123.5 at April 2, compared with $117.6 a year earlier. The filing cautions that backlog is not a reliable measure of future sales because shipment timing and customer requirements can change.
- Management expected fourth-quarter fiscal 2016 revenue of $117–$122 and diluted EPS of $0.16–$0.21, assuming a 25% tax rate. It expected new-program ramps to outpace the decline in a longstanding customer’s business and anticipated gradually improving operating efficiencies. Results remain dependent on customer orders and program start-up timing.
- After quarter-end, management approved closure of the Harrodsburg, Kentucky facility, with customer programs to be transferred primarily to other U.S. facilities. The company expected approximately $0.25 of closure and transfer costs and anticipated shutdown by the end of fiscal 2017’s first quarter.
- Key risks include customer concentration and variable, often nonbinding customer orders; demand changes and program start-up inefficiencies; component shortages and supplier dependence; competitive pricing and margin pressure; foreign exchange exposure; interest-rate and financing risk; and operational, regulatory, and geopolitical risks across its U.S., Mexico, and China facilities. The top three customers represented 31.9% of quarterly sales, versus 31.2% a year earlier.
- Foreign-currency forward contracts had a $67.8 notional amount; management expected approximately $2.8 of net unrealized losses to be reclassified into earnings within 12 months. The company also had a $25.0 interest-rate swap, with $22.0 remaining notional at quarter-end. Management said ordinary-course legal matters were not expected to have a material adverse effect. No material changes to previously reported risk factors were identified.
Important facts for investors to verify
- Whether new program ramps and customer diversification offset reduced demand from the longstanding customer, and how much reported quarterly growth reflects the additional week.
- Whether inventory growth, working-capital requirements, receivables factoring, and low operating cash generation improve or persist.
- Whether the company maintains revolver availability and covenant compliance as debt and interest costs evolve.
- Whether forecast fourth-quarter sales and diluted EPS are achieved, and whether margins and operating efficiencies improve.
- The actual costs, timing, and operational effects of the Harrodsburg closure and customer-program transfers.