Business context and reporting period
Key Tronic Corporation provides electronic manufacturing services, including engineering, procurement, materials management, manufacturing, assembly and testing. This unaudited Form 10-Q covers the first quarter of fiscal 2013, the 13 weeks ended September 29, 2012; comparisons are with the 13 weeks ended October 1, 2011.
Financial performance and position
| Metric | Q1 FY2013 | Prior-year quarter |
|---|---|---|
| Net sales | $97.5 million | $69.8 million |
| Gross profit / margin | $9.5 million / 9.7% | $5.0 million / 7.2% |
| Operating income / margin | $5.7 million / 5.8% | $1.6 million / 2.3% |
| Net income | $3.7 million | $1.2 million |
| Diluted EPS | $0.35 | $0.12 |
| Operating cash flow | $6.0 million provided | $5.8 million used |
| Capital expenditures | $0.7 million | $0.4 million |
At September 29, 2012, cash was $1.8 million, current assets were $125.5 million and current liabilities were $49.9 million; management reported a 2.5 current ratio. Revolver borrowings were $11.1 million, with $18.9 million of the $30 million facility available and a 3.25% interest rate. The facility is secured by substantially all company assets. Total liabilities were $63.4 million and shareholders’ equity was $83.9 million. The company reported compliance with all loan covenants.
Material changes versus the prior comparable period
- Sales increased 39.8%, primarily from new programs and higher demand in existing programs. New-program revenue contributed approximately $19.9 million of the increase, and increased demand contributed approximately $7.9 million, partly offset by program losses and macroeconomic uncertainty.
- Gross margin expanded 2.5 percentage points, attributed to lower material costs as a share of sales and improved overhead absorption. Operating expenses rose in dollars but declined to 3.9% of sales from 4.9%, supporting higher operating margin.
- Net income rose to $3.7 million from $1.2 million. The effective tax rate increased to 32.9% from 17.5%, which management attributed to foreign-currency changes and R&D tax credits not being extended for the period.
- Operating cash flow improved by $11.8 million year over year, reflecting higher earnings and working-capital movements. Receivables and inventory declined, while accounts payable also declined.
- Comprehensive income was $5.0 million, including a $1.2 million after-tax unrealized foreign-exchange hedge gain; the prior-year period included a $4.3 million loss on that item.
Outlook, risks and other notable items
For Q2 FY2013, management expected revenue of $93 million to $99 million and diluted EPS of $0.32 to $0.38. It anticipated modest revenue growth during the remainder of the fiscal year, driven by production ramps for new programs. Results depend on customer orders, program launch timing and global supply-chain conditions. Backlog was approximately $81.0 million, versus $53.2 million a year earlier; the company cautioned that backlog is not a reliable measure of future sales because shipment dates and orders may change.
Top-five customers accounted for 73.1% of sales, up from 71.5%; the company had 51 customers and 168 programs. Most customer arrangements are not firm long-term purchase commitments. Key risks include customer concentration and order delays or cancellations, uncertain economic conditions, component shortages and supplier dependence, pricing and competition, new-program ramp costs, foreign operations and currency movements, and reliance on credit availability. Mexican-peso forward contracts had a $52.2 million notional amount and maturities through March 2015; the company reported no speculative use of derivatives.
SG&A included a favorable, non-recurring adjustment of approximately $0.5 million from eliminating a deferred-compensation liability. The company expected to repatriate approximately $7.9 million of foreign earnings and had recorded related estimated domestic and withholding taxes. It disclosed $2.9 million of unrecognized tax benefits associated with federal R&D credits. Supplier capital-expenditure commitments were approximately $0.5 million. Management said ordinary-course legal matters were not expected to materially affect financial position, results or cash flows; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether forecast revenue and EPS were achieved, and whether new-program ramps translated into sustained growth and margins.
- Customer concentration, order visibility, backlog conversion, and the extent to which major-customer forecasts or cancellations affect production.
- Whether component shortages or other supply-chain constraints affected shipments, costs or customer relationships.
- Working-capital and operating-cash-flow sustainability, revolver availability, covenant compliance and borrowing costs.
- Effects of tax-credit availability, foreign-earnings repatriation and foreign-exchange hedges on future earnings and cash flows.
- Potential margin effects from the one-time deferred-compensation adjustment and ongoing costs of new-program starts.