Key Tronic Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months of fiscal 2020, ended December 28, 2019; comparative periods ended December 29, 2018. Key Tronic provides electronic manufacturing services (EMS), including manufacturing, engineering, procurement, and assembly for original equipment manufacturers.
Financial performance
| Metric | Quarter ended Dec. 28, 2019 | Prior-year quarter | Six months ended Dec. 28, 2019 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $116.7 million | $123.0 million | $222.0 million | $250.5 million |
| Gross profit / margin | $8.1 million / 7.0% | $9.9 million / 8.0% | $17.4 million / 7.8% | $19.4 million / 7.7% |
| Operating income / margin | $1.5 million / 1.3% | $2.6 million / 2.1% | $4.0 million / 1.8% | $5.2 million / 2.1% |
| Net income | $0.8 million | $1.6 million | $2.4 million | $3.2 million |
| Diluted EPS | $0.08 | $0.15 | $0.22 | $0.29 |
- Quarterly sales declined 5.1%; first-half sales fell 11.4% year over year. Quarterly gross margin declined 1.0 percentage point, while first-half gross margin edged up 0.1 point.
- Six-month operating cash flow was negative $8.4 million, compared with negative $5.1 million in the prior-year period. Working-capital use included a $13.5 million increase in receivables and a $9.8 million increase in inventory; contract assets declined $5.1 million.
- Six-month investing cash flow was negative $2.0 million, including $5.4 million of property and equipment purchases. Financing cash flow was positive $10.3 million. Cash declined $0.1 million to $0.5 million.
- At December 28, cash was $0.5 million, current assets were $218.2 million, and current liabilities were $108.3 million; management reported a 2.0 current ratio. Total debt was approximately $46.6 million, versus $36.3 million at June 29, 2019. The revolving facility had $32.0 million drawn and $22.6 million available; the facility limit had been increased to $55.0 million. Debt interest rates were 3.71%–3.80%, and the company reported compliance with its financial covenants.
- Total assets were $274.0 million and total liabilities were $157.2 million at period end. Operating lease liabilities were $14.3 million.
Drivers, changes, and management commentary
- Management attributed weaker sales to sheet-metal demand and workload-balancing constraints that caused production delays. It said increased factory spending while ramping production in Juarez and Vietnam reduced quarterly gross margin and earnings.
- Customer production shifts from China to Juarez required elevated spending in Juarez metal fabrication. Management said the response strengthened long-term customer relationships. Unhedged Mexican labor expenses also incurred unfavorable foreign-currency effects as the peso strengthened.
- The top three customers represented 37.0% of quarterly sales, compared with 36.6% a year earlier. Backlog was approximately $145.5 million, down from $151.2 million a year earlier; the filing cautions backlog is not a reliable measure of future sales.
- Management reported new business wins and a stronger pipeline, including programs in consumer medical devices, Wi-Fi-enabled signage, and temperature-control devices. It is investing in capacity in Mexico, the U.S., and Vietnam, including sheet-metal capacity, and expressed optimism about growth opportunities.
- Key Tronic adopted ASC 842 lease accounting in fiscal Q1 2020. Adoption added a $17.2 million right-of-use asset and a corresponding $16.2 million lease liability at transition; management said the change materially affected the balance sheet but did not materially affect income or cash flow.
Outlook, risks, and contingencies
- For fiscal Q3 2020, management expected revenue of $117 million to $122 million and assumed a 20% effective tax rate. It provided no specific earnings guidance. Results depend on customer orders and the timing of new-program production starts.
- Management said cash generated from operations, revolving-credit availability, and leasing opportunities should be sufficient for foreseeable operating and capital needs.
- Risks highlighted include customer concentration and orders that may be delayed or canceled; demand, production-ramp, and capacity challenges; component shortages and supplier delays; foreign-currency and interest-rate exposure; and reliance on credit availability and covenant compliance.
- The filing specifically noted that the company was monitoring potential production delays and longer transit times for critical parts related to the coronavirus outbreak in China.
- Ordinary-course litigation was not expected by management to have a material adverse effect. Warranty reserves were approximately $11,000. The company disclosed $4.1 million of unrecognized tax benefits associated with federal R&D credits and an estimated $0.8 million of potential Chinese withholding tax on future repatriations.
Important facts for investors to verify
- Whether sheet-metal capacity and Juarez/Vietnam production ramps improve shipment volumes, utilization, and margins.
- Whether working-capital outflows, particularly receivables and inventory growth, reverse and support positive operating cash flow.
- Customer order stability, top-customer concentration, backlog conversion, and the timing of new programs.
- Remaining revolver availability, debt balances, interest-rate hedges, and continued covenant compliance.
- Actual effects of China-related supply-chain disruption and currency movements on production, costs, and customer deliveries.