Business context and reporting period
Key Tronic Corporation provides electronic manufacturing services, including engineering, procurement, assembly and manufacturing. This 10-Q reports the fiscal third quarter and first nine months ended March 28, 2015; the request metadata’s “2014 Q3” does not match the filing period. The quarter was 13 weeks and the nine-month period was 39 weeks. Results include Ayrshire Electronics, acquired September 3, 2014.
Financial performance and position
Amounts are in U.S. dollars; financial statement figures are in millions except per-share amounts.
| Metric | Quarter ended Mar. 28, 2015 | Prior-year quarter | Nine months ended Mar. 28, 2015 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $112.9 | $77.0 | $313.6 | $233.3 |
| Gross profit / margin | $9.4 / 8.4% | $6.6 / 8.6% | $22.9 / 7.3% | $20.2 / 8.7% |
| Operating income / margin | $2.6 / 2.3% | $2.2 / 2.9% | $3.4 / 1.1% | $7.0 / 3.0% |
| Net income | $1.9 | $1.4 | $2.0 | $6.2 |
| Diluted EPS | $0.16 | $0.12 | $0.17 | $0.55 |
- Quarterly sales rose 46.6%, primarily from approximately $36.7 million of Ayrshire revenue; nine-month sales rose 34.4%, primarily from approximately $87.0 million of Ayrshire revenue. Management also cited new program wins, partly offset by lower demand and program losses.
- Quarterly gross margin declined 0.2 percentage points year over year, which management attributed mainly to higher overhead, partly offset by Ayrshire. Nine-month gross margin declined 1.4 points, reflecting higher overhead and material costs and first-quarter new-program ramp inefficiencies.
- Nine-month operating income and net income fell despite higher sales. SG&A rose with Ayrshire and included approximately $0.8 million of non-recurring acquisition closing costs; interest expense rose to $0.9 million from $0.05 million as acquisition-related borrowing increased.
- Quarterly effective tax rate was 16.7%, versus 35.6%, mainly due to federal R&D tax credits, including an approximately $0.2 million discrete benefit. The nine-month rate was 19.9%, versus 10.8%; the prior-year period included a $1.5 million discrete benefit related to Mexico’s IETU tax regime.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $7.0 million, versus $2.4 million. The increase was primarily supported by higher accounts payable and lower receivables; inventory increased by $0.8 million.
- Investing cash use was $48.6 million, including $48.0 million for Ayrshire net of cash acquired and $7.1 million of capital expenditures, partly offset by $6.5 million of equipment-related proceeds. Financing provided $36.2 million.
- Cash was $0.3 million at March 28, 2015, down from $5.8 million at June 28, 2014. Current assets were $168.9 million and current liabilities $73.6 million; management reported a 2.3 current ratio.
- Debt included a $32.5 million term loan and $11.5 million revolver balance. Of the $30.0 million revolver, $18.2 million remained available. The term loan and revolver are secured by substantially all company assets; the company reported compliance with its financial covenants.
- Working capital included $69.7 million of receivables and $78.0 million of inventory. Accounts payable was $50.3 million. Shareholders’ equity was $99.4 million; debt-to-equity was 0.44 as reported by management.
Changes, outlook, risks and unusual items
- Ayrshire expanded PCB assembly capacity, U.S. operations and the customer base. Goodwill increased to $10.0 million from $1.7 million at fiscal year-end; net intangible assets rose to $7.3 million from $2.1 million. Management’s annual goodwill impairment test concluded fair value exceeded carrying value.
- Top-three-customer sales concentration fell to 31.2% of quarterly sales from 54.2% a year earlier, primarily reflecting the acquisition and lower production for certain longstanding customers. Management cautioned that customer orders are not generally firm long-term purchase commitments.
- For fiscal Q4 2015, management expected revenue of $115 million to $125 million, sequential revenue growth, improved operating efficiencies and profitability, and moderation in declines in certain longstanding programs. Outcomes depend on customer orders, new-program ramp timing and global supply-chain shortages.
- Backlog was approximately $117.6 million, versus $64.6 million a year earlier, largely reflecting Ayrshire and new programs. Backlog covers expected shipments over the next 12 months and is not a reliable measure of future sales.
- Cash flow hedge losses were significant: nine-month other comprehensive loss was $6.8 million, and accumulated other comprehensive loss was $4.4 million. Foreign-currency forward contracts had $70.2 million notional value and approximately $6.6 million negative fair value; management expected about $1.4 million of net unrealized loss to be reclassified to earnings within 12 months. A $25.0 million interest-rate swap fixed the LIBOR component on part of the debt from September 2015 through September 2019.
- Key risks include demand and program volatility, customer concentration and cancellations, component shortages, margin pressure and new-program ramp costs, acquisition integration, foreign-currency exposure, and access to credit. Management said it had adequate liquidity for foreseeable needs. Ordinary-course legal matters were not expected to have a material adverse effect; no material risk-factor changes were reported.
Important facts for investors to verify
- Confirm the fiscal-period labeling: the filing covers the quarter ended March 28, 2015, despite the request metadata stating 2014 Q3.
- Assess how much reported growth and backlog convert into sustained sales and cash generation after separating Ayrshire’s contribution from organic growth.
- Track gross margins, operating costs, customer demand, component availability and execution of new-program ramps against management’s Q4 outlook.
- Monitor acquisition-related debt, revolver availability, covenant compliance, working-capital needs and cash conversion.
- Review hedge valuations and the timing and income-statement effects of expected loss reclassifications, as well as the tax-credit assumptions supporting the effective tax rate.