Key Tronic Corporation — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2013, ended March 30, 2013 (13-week and 39-week periods). The filing period differs from the request metadata’s “2012 Q3.” Financial figures below are in millions of dollars except per-share amounts.
Business context
Key Tronic provides electronics manufacturing services, including engineering, procurement, materials management, manufacturing and assembly. It serves customers across several industries, with production principally in Mexico and China. The quarter reflected an anticipated production slowdown at a large customer; new program ramps and a broader customer base only partly offset weaker demand.
Financial performance
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Net sales | $84.3 | $95.5 | $276.4 | $249.7 |
| Gross profit / margin | $7.9 / 9.3% | $8.7 / 9.1% | $26.8 / 9.7% | $20.6 / 8.2% |
| Operating income / margin | $3.6 / 4.3% | $4.7 / 4.9% | $14.6 / 5.3% | $9.1 / 3.6% |
| Net income | $2.9 | $3.4 | $10.2 | $7.8 |
| Diluted EPS | $0.26 | $0.32 | $0.94 | $0.74 |
Quarterly sales declined 11.7% year over year, and net income fell about 15.6%; gross margin edged up, but operating margin declined as operating expenses rose relative to sales. Nine-month sales grew about 10.7% and net income about 30.3%. Nine-month gross margin improved mainly from lower material costs and better overhead absorption. Interest expense was $0.04 million for the quarter and $0.25 million year to date, down year over year as average revolver borrowings decreased.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $20.8 million, versus cash use of $6.9 million in the prior-year period. Management attributed the improvement to higher earnings and working-capital management; receivables and inventory fell, partly offset by a reduction in accounts payable.
- Capital expenditures were $2.8 million; cash used in investing activities was $2.6 million. Cash increased $2.7 million to $3.2 million.
- At March 30, 2013, total assets were $134.2 million, current assets $107.9 million and current liabilities $38.6 million. The company reported a 2.8 current ratio.
- Revolving debt was zero, compared with $15.0 million at June 30, 2012; the full $30.0 million facility was available. The company reported compliance with its covenants. Shareholders’ equity was $93.0 million.
Material changes, outlook and risks
- Management forecast fourth-quarter FY2013 revenue of $83–$87 million and expected results similar to Q3, with renewed sequential growth anticipated in the coming fiscal year. This outlook depends on customer orders and new-program ramp timing.
- Backlog was $64.2 million, down from $72.6 million a year earlier. The company cautioned that backlog is not a reliable measure of future sales because orders and shipment dates can change.
- Sales concentration moderated: the top five customers represented 62.4% of Q3 sales versus 72.6% a year earlier. The company had 56 customers and 177 programs, compared with 42 customers and 155 programs.
- Key risks include demand changes or order delays from major customers, short product lifecycles, macroeconomic uncertainty, component shortages, competition and pricing pressure, new-program startup costs, and foreign-exchange and international-operating risks. Most customer arrangements are not firm long-term purchase commitments.
- Foreign-currency forward contracts hedged Mexican-peso expenses; notional value was $62.2 million and reported fair value was a net asset of approximately $4.3 million. The nine-month increase in accumulated other comprehensive income included a $3.5 million after-tax unrealized hedge gain.
- The quarter’s tax provision included a net $0.49 million benefit from the retroactive reinstatement of federal R&D tax credits. The nine-month effective tax rate was 29.1%, compared with 10.6% a year earlier, principally reflecting the prior-year benefit from tax credits. Nine-month SG&A also included a nonrecurring approximately $0.5 million benefit from eliminating a deferred-compensation liability.
- Management said ordinary-course legal matters were not expected to materially affect financial position, results or cash flows. Disclosure controls were assessed as effective, and no material changes in internal control were reported.
Important facts for investors to verify
- Whether the major customer’s reduced production continues, and whether new programs ramp enough to meet the revenue outlook and support margins.
- Customer order levels, backlog conversion, customer concentration and exposure to nonbinding forecasts or shipment changes.
- Cash-flow sustainability after working-capital reductions, particularly the movements in receivables, inventory and payables.
- Availability and covenant compliance under the revolver, and any future borrowing needs or changes in interest rates.
- Realization and timing of tax-credit benefits, expected foreign-earnings repatriation taxes, and potential foreign-exchange effects on earnings.