Key Tronic Corporation — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended September 26, 2020, the first quarter of fiscal 2021. The comparable period ended September 28, 2019. Key Tronic provides contract manufacturing, engineering, assembly and related services from facilities in the United States, Mexico, China and Vietnam.
Financial results and liquidity
| Metric | Quarter ended Sep. 26, 2020 | Prior-year quarter |
|---|---|---|
| Net sales | $123.2 million | $105.3 million |
| Gross profit / gross margin | $10.0 million / 8.1% | $9.3 million / 8.8% |
| Operating income / margin | $2.8 million / 2.3% | $2.5 million / 2.4% |
| Net income | $1.7 million | $1.6 million |
| Diluted earnings per share | $0.16 | $0.14 |
| Cash used in operating activities | $9.4 million | $10.3 million |
| Capital expenditures | $3.2 million | $3.0 million |
Sales increased 17.0% year over year, reflecting higher demand for new and existing programs. Net income rose about 11%, while gross margin declined 0.7 percentage points, mainly because of pandemic-related costs, including employee retention and workplace safety measures. Operating margin edged down 0.1 percentage points. Research and engineering expense increased; lower travel costs helped reduce selling, general and administrative expense.
Operating cash outflow reflected working-capital needs, including increases in receivables and inventory and decreases in accrued compensation and accounts payable. The company did not factor receivables in the quarter, compared with approximately $17.8 million factored in the year-ago period. Cash and equivalents were $1.5 million at quarter-end, versus $0.6 million at June 27, 2020. Management reported a 2.5 current ratio and 0.7 debt-to-equity ratio.
Total debt was approximately $85.6 million before unamortized debt issuance costs. Revolving borrowings were $80.7 million, with $12.3 million available under the $93 million asset-based facility; equipment financing outstanding was $4.9 million. The company replaced its Wells Fargo credit arrangements with a five-year Bank of America facility on August 14, 2020, maturing in 2025. It reported compliance with financial covenants. Interest rates on outstanding debt ranged from 3.00% to 4.85% at quarter-end.
Changes, outlook and risks
- Backlog rose to approximately $201.9 million from $159.9 million a year earlier. Management cautioned that backlog is not a reliable measure of future sales because shipment schedules can change.
- Management cited successful program launches, rebounding demand and growth in healthcare, industrial controls and telecommunications programs. New wins included audio/video editing, indoor air quality, utility meters, warehouse management and automation.
- For fiscal Q2, management expected continued strong revenue growth, but gave no numerical forecast. It planned further capacity investment while noting that pandemic-related uncertainty and labor shortages constrained production, particularly in Juarez.
- COVID-19 has caused sharp changes in customer demand and may bring further facility closures, labor constraints, supply-chain disruption, higher freight and safety costs, collection delays and currency volatility. Customer concentration, flexible order schedules, component shortages, new-program ramp costs and competition also pose risks. The top three customers represented 36.8% of sales, and many customer arrangements are not firm long-term purchase commitments.
- Financing and hedge changes: the company paid a $0.9 million interest-rate-swap termination fee when it refinanced; liabilities from terminated swaps will be amortized to interest expense over the original swap terms. Foreign-currency forward contracts had $30.0 million notional value. The company also reported a $178,000 obsolete-inventory provision, versus $21,000 a year earlier.
- Ordinary-course litigation was not expected by management to have a material adverse effect. Management said disclosure controls were effective and reported no significant change in internal control over financial reporting.
Important facts for investors to verify
- Whether strong sales and backlog convert into shipments and cash, given changing customer schedules and labor and component constraints.
- Whether gross margins recover as pandemic-related costs, program mix and ramp expenses change.
- Working-capital trends, especially receivables, inventory, collections and operating cash flow.
- Revolver availability, borrowing costs and continued compliance with credit covenants.
- Customer concentration, COVID-19 developments, foreign-currency hedging outcomes and the potential effect of supply disruptions.