Key Tronic Corporation — Form 10-Q Summary
Period: The filing covers the fiscal third quarter ended April 1, 2017 (13 weeks), and the nine months ended April 1, 2017. The prior-year quarter was 14 weeks. The request metadata says “2016 Q3,” but the filing itself reports fiscal Q3 2017.
Business context and results
Key Tronic provides electronics manufacturing services (EMS), including engineering, procurement, manufacturing and assembly, for customers across multiple industries. Management said new programs continued to ramp, partly offsetting weaker demand from some longstanding customers.
| Metric | Quarter ended Apr. 1, 2017 | Prior-year quarter | Nine months ended Apr. 1, 2017 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $113.6 million | $118.4 million | $349.3 million | $361.1 million |
| Gross profit / margin | $9.1 million / 8.0% | $10.0 million / 8.4% | $28.5 million / 8.1% | $28.0 million / 7.8% |
| Operating income / margin | $1.8 million / 1.6% | $2.8 million / 2.3% | $7.2 million / 2.1% | $6.9 million / 1.9% |
| Net income | $1.0 million | $1.8 million | $4.3 million | $4.4 million |
| Diluted EPS | $0.09 | $0.16 | $0.39 | $0.39 |
Cash flow and liquidity: Nine-month operating cash flow was $7.6 million, versus $0.2 million in the prior-year period. Investing used $7.5 million, primarily for production equipment; financing used $0.2 million. Cash was $0.9 million at quarter-end. Management reported a 2.3 current ratio and 0.4 debt-to-equity ratio.
Debt: Debt totaled approximately $44.4 million before unamortized issuance costs: $22.5 million on the term loan, $18.2 million on the revolver and $3.7 million on an equipment loan. The $45 million revolving facility had $26.4 million available, and the company said it was in compliance with covenants. Rates on outstanding debt ranged from 2.78% to 4.00%.
Material changes and management commentary
- Quarterly sales fell 4.1%, mainly due to softer demand from current customers, partly offset by new program wins. Net income declined 46% year over year; management attributed the decrease primarily to lower sales. The shorter quarter also affects comparison.
- For the first nine months, sales declined 3.3%, primarily because of lower sales to a former longstanding customer. Gross margin improved 0.3 percentage point, mainly from lower material costs, and operating income increased modestly. Net income was slightly lower, reflecting a higher effective tax rate.
- Management cited a strong pipeline of potential new business and expects new programs to support revenue growth in fiscal 2018. It continued investing in surface-mount technology, sheet metal and plastic molding capacity.
- Backlog was $126.9 million, versus $123.5 million a year earlier. The filing cautions that backlog is not a reliable measure of future sales because orders and shipment timing can change.
- The top three customers accounted for 32.8% of quarterly sales, up from 31.9% a year earlier. Most customer arrangements are not firm long-term purchase commitments.
Guidance, risks and unusual items
- Fourth-quarter fiscal 2017 guidance: Revenue of $112 million–$117 million and diluted EPS of $0.10–$0.15, assuming a 25% effective tax rate. Results depend on customer orders and timing of new-program production starts.
- Customer arbitration: The company began arbitration with a former customer over amounts it believes are reimbursable under a manufacturing agreement. The possible outcome could not be estimated; no potential loss was accrued, and legal costs are expensed as incurred. Management said the ultimate disposition could materially affect financial position, results or cash flows.
- Mexico tax agreement: A unilateral advance pricing agreement is expected to increase Mexican tax liabilities by about $0.4 million and reduce U.S. tax liabilities by about $0.4 million, with no material estimated net effect. The company anticipated finalization in fiscal Q4 2017.
- Hedging and comprehensive income: Nine-month other comprehensive income from hedging instruments was $2.5 million. About $3.5 million of net unrealized hedge losses was expected to be reclassified into earnings over the next 12 months. Foreign-currency and interest-rate movements, variable-rate debt and hedging outcomes remain relevant risks.
- Other principal risks include customer concentration and demand volatility, new-program ramp costs, component supply constraints, competition and pricing pressure, foreign operations and currency exposure, and access to credit. The filing reported no material changes to the prior annual report’s risk factors.
Important facts for investors to verify
- Whether new programs ramp as expected and offset weaker demand from existing customers, including the former major customer.
- Whether Q4 revenue and diluted EPS guidance is achieved, and how customer order changes affect margins and utilization.
- The progress and potential financial outcome of the former-customer arbitration, including any later accrual or settlement.
- Working-capital and cash-flow trends, available revolver capacity, debt maturities and continued covenant compliance.
- The final tax and earnings effects of the Mexico pricing agreement and the timing of hedge losses reclassified to earnings.
- Customer concentration, backlog conversion and any changes in component availability or program schedules.