Key Tronic Corporation — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2015, ended December 27, 2014. The quarter was 13 weeks; the six-month period was 26 weeks. Comparisons are with the periods ended December 28, 2013.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $114.3 million, up 46.1% | $200.7 million, up 28.4% |
| Gross profit / margin | $9.2 million / 8.1%, versus $7.0 million / 8.9% | $13.5 million / 6.7%, versus $13.6 million / 8.7% |
| Operating income / margin | $2.5 million / 2.2%, versus $2.4 million / 3.0% | $0.8 million / 0.4%, versus $4.8 million / 3.1% |
| Net income | $1.6 million, versus $3.1 million | $0.1 million, versus $4.8 million |
| Diluted EPS | $0.14, versus $0.27 | $0.01, versus $0.43 |
| Operating cash flow | Quarter-only amount not separately provided clearly | $5.2 million provided, versus $0.5 million used |
Second-quarter revenue growth primarily reflected approximately $39.0 million from the Ayrshire acquisition and $3.0 million from new programs, partly offset by lower demand and program losses. For the six months, the acquisition added approximately $50.3 million in sales, with new program wins also contributing. The company reported 164 distinct customers, compared with 57 a year earlier; its three largest customers represented 36.9% of second-quarter sales, down from 49.2%.
Quarterly gross margin declined mainly because of unfavorable product mix, higher material costs, and new-product ramp inefficiencies. Six-month margin was additionally affected by higher overhead and first-quarter ramp costs. Six-month SG&A included approximately $0.8 million of non-recurring Ayrshire transaction costs. Net interest expense increased to $0.4 million for the quarter and $0.6 million for six months, primarily due to acquisition-related borrowing. The prior-year comparison benefited from a $1.5 million discrete Mexican tax benefit; the current six-month effective tax rate was 53.0%.
Cash, debt, and liquidity
At December 27, 2014, cash was $0.2 million, current assets were $159.2 million, and current liabilities were $63.9 million (current ratio 2.5). Total reported debt was approximately $45.7 million: $5.0 million current, $28.8 million long-term term-loan balance, and $12.0 million revolving borrowings. The company had $17.7 million available under its $30 million revolving facility and reported compliance with its financial covenants. Debt-to-equity was 0.46.
For the six months, investing cash use was $48.7 million, including $48.0 million net cash paid for Ayrshire and $4.7 million of property and equipment purchases, partly offset by $3.9 million in proceeds from sale of fixed assets. Financing provided $38.0 million, including $35.0 million in term-loan proceeds and revolving-credit activity. Cash declined by $5.6 million from $5.8 million to $0.2 million. Management said operating cash generation, available borrowing capacity, and leasing options should meet expected needs.
Acquisition, outlook, and risks
Key Tronic acquired all of Ayrshire Electronics on September 3, 2014, for approximately $48.0 million, funded with term debt, revolving borrowings, and cash. Ayrshire expanded printed-circuit-board assembly capacity, U.S. operations, and the customer base. Preliminary purchase accounting recorded $8.2 million of goodwill; the purchase-price allocation remained subject to finalization. Management cited a robust new-business pipeline, anticipated improved operating efficiencies and profitability as programs ramped, and customer diversification.
For fiscal 2015’s third quarter, management expected revenue of $108 million to $116 million. Results were described as dependent on customer order levels, new-program startup timing, and industry-wide global supply-chain shortages. Backlog was $97.8 million versus $56.0 million a year earlier, but the filing cautions that backlog is not a reliable measure of future sales.
Key exposures include customer demand and concentration, non-firm long-term purchase commitments, component shortages and pricing, competitive margin pressure, program ramp costs, foreign currency and interest-rate movements, foreign operations and tax incentives, acquisition integration, and potential goodwill or intangible-asset impairment. The company held $69.4 million in Mexican-peso forward contracts, with a reported net fair-value liability of approximately $4.5 million; accumulated other comprehensive loss from hedges was $2.9 million. A $25 million interest-rate swap was intended to reduce borrowing-rate exposure. Management reported no material change in previously disclosed risk factors. Ordinary-course legal proceedings were not expected to have a material adverse effect, and disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether Ayrshire integration, new-program ramps, and the expected margin recovery support the stated third-quarter revenue outlook.
- How much of reported growth and backlog is attributable to Ayrshire versus organic customer demand, and whether customer concentration continues to decline.
- Cash conversion and working-capital needs, given cash of $0.2 million, acquisition-related debt, and substantial supplier commitments.
- The impact of hedge fair-value movements and the extent to which the $25 million swap limits interest-rate exposure.
- Final Ayrshire purchase-price allocation, transaction costs, and any subsequent changes to goodwill, intangible assets, or tax estimates.