Key Tronic Corporation — Form 10-Q Summary
Period note: The request identifies “2020 Q3,” but this filing covers the quarter ended April 2, 2022 (fiscal 2022 Q3) and the nine months then ended. The quarter was 13 weeks; the prior-year comparison was 14 weeks.
Business context and reporting period
Key Tronic is a contract manufacturer providing engineering, materials management, assembly, and manufacturing services from facilities in the United States, Mexico, China, and Vietnam. Results below are unaudited; amounts are in millions except per-share data.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Net sales | $138.4 | $134.6 | $405.6 | $386.1 |
| Gross profit / margin | $11.5 / 8.3% | $11.1 / 8.2% | $31.5 / 7.8% | $31.7 / 8.2% |
| Operating income / margin | $2.8 / 2.0% | $2.6 / 1.9% | $6.5 / 1.6% | $8.1 / 2.1% |
| Interest expense, net | $1.6 | $1.0 | $3.6 | $2.5 |
| Net income | $1.0 | $0.9 | $2.4 | $4.2 |
| Diluted EPS | $0.09 | $0.08 | $0.22 | $0.38 |
Quarterly sales rose 2.8%; nine-month sales rose 5.1%. Quarterly gross margin improved slightly, while nine-month gross margin contracted. Nine-month operating income fell 19%, and net income fell 42%, reflecting margin pressure, higher operating expenses, and increased interest costs. Quarterly net income increased despite lower pretax income, in part because the tax provision was lower.
Cash flow, debt, and liquidity
- Cash used in operating activities was $11.6 million for nine months, versus $17.7 million in the prior-year period. Working-capital demands included increases in receivables ($27.6 million) and inventory ($18.3 million), partly offset by a $32.4 million increase in accounts payable.
- Capital expenditures were $4.1 million; cash used in investing activities was also $4.1 million. Financing activities provided $14.0 million. Cash declined $1.8 million to $1.7 million.
- At April 2, 2022, the company reported $99.7 million outstanding on its revolving facility, $15.8 million available, and $0.3 million in letters of credit. Equipment loans totaled $8.4 million; total debt was approximately $108.2 million before unamortized issuance costs. The company was compliant with financial covenants.
- Management reported a 2.1 current ratio and 0.9 debt-to-equity ratio, and stated available liquidity was expected to meet foreseeable operating needs. Current assets were $344.1 million and current liabilities $164.3 million.
Changes, outlook, risks, and unusual items
- Management said sales were constrained by component shortages, logistics delays, factory downtime, overtime, and a COVID-related shutdown at the Shanghai facility. It reported that customer demand exceeded production capacity.
- Backlog was approximately $384.1 million, versus $236.6 million a year earlier. The filing cautions that backlog is not a reliable measure of future sales because timing and customer requirements may change.
- Management expects new programs to ramp, including a power-equipment program at the Mexico facility in the first part of the next fiscal year. It sees potential for significant growth in fiscal 2023 and beyond, but gives no numerical revenue or earnings guidance.
- Legal expenses tied to the SEC’s review of the prior-year whistleblower complaint were approximately $0.06 per diluted share in the quarter; management said costs could continue at a similar pace. The company is cooperating with the SEC and cannot predict the outcome or potential expense of inquiries or related proceedings.
- Supply-chain disruptions, COVID-related closures and labor constraints, customer concentration and nonbinding purchase commitments, inflation and currency movements, rising interest rates, and dependence on credit availability remain risks. The top three customers accounted for 34.4% of quarterly sales, down from 37.9% a year earlier.
- Management stated disclosure controls were effective at April 2, 2022. It said a previously identified material weakness had been remediated as of July 3, 2021, while noting remediation efforts and related expenses continue. Ordinary-course litigation was not expected by management to have a material adverse effect.
Key facts for investors to verify
- Confirm the intended reporting period: this filing is fiscal 2022 Q3, not 2020 Q3.
- Track whether backlog converts to shipments and whether component availability, logistics, and China-related disruptions improve.
- Monitor gross margins, working-capital absorption, and revolving-credit borrowings and availability.
- Assess the scale and duration of SEC-related legal costs and any developments in the SEC review or internal-control remediation.
- Evaluate the timing, costs, and customer demand associated with the planned program ramps; backlog and management’s growth commentary are not firm guidance.