Key Tronic Corporation — Form 10-Q Summary
Period clarification: Although the request metadata says “2020 Q1,” this filing reports the 13-week first quarter of fiscal 2022, ended October 2, 2021. The comparable quarter ended September 26, 2020. Figures are unaudited; dollar amounts below are in millions unless stated otherwise.
Business context and results
Key Tronic provides contract manufacturing, engineering, assembly and related services from facilities in the United States, Mexico, China and Vietnam. Management said demand from new and existing customers remained strong, but supply-chain, transportation and logistics constraints continued to limit production.
| Metric | Quarter ended Oct. 2, 2021 | Comparable quarter | Change |
|---|---|---|---|
| Net sales | $132.8 | $123.2 | Up 7.8% |
| Gross profit / gross margin | $10.1 / 7.6% | $10.0 / 8.1% | Margin down 0.5 percentage point |
| Operating income / margin | $2.1 / 1.6% | $2.8 / 2.3% | Income down $0.7 |
| Net income | $0.8 | $1.7 | Down $0.9 |
| Diluted EPS | $0.07 | $0.16 | Down $0.09 |
| Net interest expense | $1.0 | $0.7 | Up $0.3 |
Cash flow, balance sheet and liquidity
- Operating cash flow was a use of $14.6 million, versus a use of $9.4 million in the prior-year quarter. The current-quarter outflow chiefly reflected higher receivables ($16.2 million) and inventory ($5.9 million), partly offset by higher accounts payable ($18.8 million).
- Investing cash flow was a use of $1.8 million, primarily for property and equipment purchases. Financing activities provided $14.5 million. Cash declined $1.9 million to $1.5 million.
- At quarter-end, current assets were $324.3 million and current liabilities were $142.0 million; management reported a 2.3 current ratio. Total assets were $391.3 million and shareholders’ equity was $123.1 million.
- Total debt was approximately $110.8 million before $0.6 million of unamortized issuance costs. Revolver borrowings were $101.3 million; $12.0 million remained available, subject to the borrowing base. The facility was amended to increase its stated size from $93 million to $120 million and now matures September 3, 2026. The company reported compliance with its financial covenants.
- Debt-to-equity was 0.9 as reported by management. Lease liabilities and other obligations are also reflected in the balance sheet.
Material changes, outlook and risks
- Sales increased with new program wins and demand for existing programs, but component shortages and shipping delays caused factory downtime. Management attributed lower margins to supply constraints, overtime and downtime, and continued, though easing, COVID-related costs.
- SG&A rose to $5.6 million from $5.0 million, partly due to legal and professional expenses of approximately $0.4 million related to a previously disclosed internal investigation. Interest expense also increased, reflecting higher average revolver borrowings and interest rates.
- Order backlog was approximately $320.9 million, compared with $201.9 million a year earlier. The company cautioned that backlog is not a reliable measure of future sales and may be affected by shipment timing and customer changes.
- No numerical earnings or sales guidance was provided. Management expected component shortages, logistics delays and COVID-related challenges to continue into the second quarter, while citing a favorable trend of contract manufacturing returning to North America and investments in North American and Vietnam capacity as support for longer-term growth.
- Key risks include supply constraints, customer concentration and order volatility, labor availability, foreign-exchange and interest-rate exposure, and the possibility of higher costs or delayed shipments. The top three customers represented 33.0% of sales, down from 34.7% a year earlier.
- The company is cooperating with the SEC regarding matters related to the internal investigation; the filing does not state an outcome. Management said the previously identified material weakness in internal control was remediated as of July 3, 2021, and that disclosure controls were effective as of October 2, 2021. It also cautioned that future deficiencies or investigations could entail additional expense, distraction, litigation or regulatory consequences.
- Other disclosed uncertainties include potential supply-chain and demand disruptions from COVID-19, foreign operations and tax incentives, and the transition away from LIBOR. Management said ordinary-course legal proceedings were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether component availability, logistics and customer demand improve enough to convert the elevated backlog into shipments and revenue.
- Whether working-capital needs—especially receivables and inventory—continue to consume cash, and how much borrowing capacity remains available under the borrowing base.
- Whether gross margins recover from 7.6% and whether higher interest expense and investigation-related costs persist.
- Developments in the SEC inquiries and internal investigation, including any new costs, proceedings or control deficiencies.
- The terms and effects of the amended credit facility, covenant compliance, variable-rate exposure and LIBOR transition.