Business context and reporting period
Key Tronic Corporation is a contract manufacturer providing engineering, materials management, assembly and manufacturing services from facilities in the United States, Mexico, China and Vietnam. The filing covers the 13 weeks ended October 1, 2022, the first quarter of fiscal 2023, and compares it with the 13 weeks ended October 2, 2021. This differs from the request metadata’s “2021 Q1” label.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $137.3 million | $132.8 million |
| Gross profit / margin | $10.4 million / 7.6% | $10.1 million / 7.6% |
| Operating income / margin | $3.4 million / 2.4% | $2.1 million / 1.6% |
| Interest expense, net | $1.9 million | $1.0 million |
| Net income / diluted EPS | $1.2 million / $0.11 | $0.8 million / $0.07 |
| Cash used in operating activities | $5.8 million | $14.6 million |
| Capital expenditures | $2.5 million | $1.8 million |
Sales increased 3.4%, primarily from ramps of new programs. Gross margin was unchanged: lost production from Arkansas storm damage and new-program start-up costs offset efficiencies from higher revenue. Operating income improvement included a $0.9 million net insurance gain related to storm damage; excluding this unusual gain, the filing does not present a directly comparable adjusted operating-income measure. Higher interest rates and a larger average revolver balance drove increased interest expense. The effective tax rate was 21.8%, versus 26.0%, which management attributed mainly to expected federal R&D tax credits.
Liquidity, debt and cash flow
At October 1, 2022, cash was $2.1 million and current assets and liabilities were $359.6 million and $173.8 million, respectively; management reported a 2.1 current ratio and 0.9 debt-to-equity ratio. Cash from operations was negative as working capital increased, particularly inventory ($13.5 million) and contract assets ($4.4 million); the cash outflow was partly offset by a $12.7 million increase in accounts payable. Financing activities provided $8.8 million, including net revolver borrowings of $10.4 million, and cash increased $0.4 million over the quarter.
The revolver balance was $105.4 million, with $10.6 million available and $0.3 million of letters of credit outstanding. Equipment financing facilities had $7.8 million outstanding. The debt note reports total debt of $112.8 million before $0.5 million of unamortized issuance costs. Interest rates on outstanding debt ranged from 4.85% to 6.15%. The credit facility matures in 2026; its August 2022 amendment removed the cash-flow leverage-ratio covenant and increased the interest rate by 25 basis points. The company reported compliance with its financial covenants at quarter-end.
Business developments, outlook and risks
- Backlog was approximately $380.0 million, up from $320.9 million a year earlier. The company cautions backlog is not a reliable measure of future sales, as shipment timing can change.
- Management said supply-chain and transportation constraints continued to limit production, though some component lead times were gradually improving. Component shortages, delays and higher logistics and labor costs remain risks.
- New programs were ramping, and the company reported wins in audio, automation, electric vehicles and power distribution. Top-three-customer concentration declined to 25.4% of sales from 33.0%; customers generally do not make firm long-term purchase commitments.
- Management expects fiscal 2023 capital expenditures of approximately $9.0 million, some of which may be funded through finance leases. It believes operating cash flow, the revolver and leasing capacity will meet foreseeable needs, while noting anticipated slower collections from some customers and higher inventory to mitigate supply constraints. No specific revenue or earnings guidance was provided.
- A July 2022 lightning strike damaged the Arkansas facility and equipment, reducing production. The company recorded a $0.9 million net insurance gain in the quarter and received initial proceeds of $1.0 million after quarter-end; repairs and equipment replacement were expected to be completed in the second half of fiscal 2023.
- Other key exposures include customer demand shifts, inflation and recession risk, customer and supplier concentration, foreign exchange and variable interest rates, international operating and geopolitical risks, and cybersecurity. The company had no foreign-currency forward contracts outstanding at quarter-end.
- The filing describes an earlier material weakness in internal controls as remediated as of July 2021 and says disclosure controls were effective at October 1, 2022. It also notes the company is cooperating with the SEC regarding matters related to an Audit Committee internal investigation; the outcome and potential costs are uncertain.
Important facts for investors to verify
- Whether supply-chain improvements, backlog conversion and new-program ramps translate into shipments, cash generation and sustainable margins.
- How quickly inventory and contract assets convert to cash, and whether customer collection delays or working-capital requirements increase further.
- Available revolver capacity, borrowing costs, covenant compliance and the effect of the 2022 facility amendment on liquidity.
- Progress and final costs of Arkansas repairs, and whether additional insurance recoveries or losses arise.
- Developments in the SEC inquiry and internal-investigation matters, including any legal costs, penalties or control issues.
- Whether the reported filing period is the intended one: the filing is for Q1 FY2023 ended October 1, 2022, not Q1 2021.