Key Tronic Corporation — Q1 FY2014 Form 10-Q
Reporting period: 13 weeks ended September 28, 2013. The unaudited results are compared with the 13 weeks ended September 29, 2012.
Financial results
| Metric | Q1 FY2014 | Prior-year quarter |
|---|---|---|
| Net sales | $78.0 million | $97.5 million |
| Gross profit / margin | $6.6 million / 8.5% | $9.5 million / 9.7% |
| Operating income / margin | $2.5 million / 3.2% | $5.7 million / 5.8% |
| Net income | $1.7 million | $3.7 million |
| Diluted EPS | $0.16 | $0.35 |
| Operating cash flow | $(1.6) million | $6.0 million |
Revenue fell 20.0% year over year, and net income declined about 54%. Gross margin contracted 1.2 percentage points, primarily due to higher overhead costs as lower revenue reduced fixed-cost absorption; lower material-related costs partially offset the impact. Operating expenses rose to 5.3% of sales from 3.9%, reflecting lower sales, higher labor-related costs, and increased program-management and engineering headcount.
Cash and cash equivalents were $2.0 million at September 28, down from $10.8 million at June 29. Investing activities used $7.2 million, including the Sabre acquisition, and capital expenditures were $1.1 million. The company reported no revolving-credit borrowings, with $30.0 million available under its facility, and said it was in compliance with covenants. Current assets were $105.2 million and current liabilities $37.8 million; management reported a 2.8 current ratio. Total liabilities were $40.4 million. The filing does not report a bank-debt balance outstanding; other long-term obligations were reported separately.
Business developments and comparison
Management attributed the sales decline mainly to reduced demand from two large, longstanding customers, program losses, and the uncertain macroeconomic environment. Lower current-program revenue was partially offset by new program wins and Sabre revenue. Sales concentration among the top five customers decreased to 64.2% from 73.1% a year earlier. The company served 57 customers across 189 programs, compared with 51 customers and 168 programs a year earlier. Backlog was $55.1 million, down from $81.0 million; management cautioned that backlog is not a reliable measure of future sales.
On July 1, 2013, Key Tronic acquired substantially all assets of Sabre Assembly & Manufacturing Co., a sheet-metal fabricator in Juarez, Mexico, for approximately $6.0 million in cash. The acquisition expands the company’s manufacturing offerings. The purchase-price allocation was preliminary at filing; recorded assets included $1.6 million of goodwill and $2.3 million of identifiable intangible assets.
Outlook, risks, and unusual items
For Q2 FY2014, management expected revenue of $75 million to $80 million. It anticipated strong sequential growth in the second half of FY2014 as new-customer programs ramp, while noting that program startups typically take more than 18 months to contribute revenue. Results depend on customer orders, production-start timing, and global component supply conditions. Management said operating cash, the credit facility, and leasing capacity should meet foreseeable capital needs.
Risks highlighted include dependence on major customers and non-firm purchase commitments, variable demand and fixed-cost exposure, supply shortages, competitive pricing, new-program startup costs, international operations and currency movements, and reliance on tax incentives. The company had $68.5 million of Mexican-peso forward contracts outstanding; these hedge forecast expenses and are not held for speculation. The quarter included a discrete benefit related to research-and-development tax credits, contributing to a 30.1% effective tax rate versus 32.9% a year earlier. Management also expects to repatriate about $9.6 million of foreign earnings, with related domestic and estimated withholding taxes recorded in deferred taxes. Ordinary-course legal proceedings were not expected by management to materially affect the company.
Important facts for investors to verify
- Whether the Q2 revenue range and expected second-half program ramps were achieved, including timing and customer order levels.
- Whether customer concentration and backlog continue to decline or improve, and how much backlog converts to shipments.
- Sabre’s integration, contribution to revenue and margins, and final purchase-price allocation.
- Cash conversion and working-capital trends, given negative operating cash flow and the sharp reduction in cash during the quarter.
- Exposure to component shortages, foreign-exchange movements, customer program changes, and tax-credit or repatriation assumptions.