Key Tronic(US:KTCC)2020-02-05 21:16Financial Performance - Total revenue for the second quarter of fiscal year 2020 was $116.7 million, a decrease of 5.1% compared to $123.0 million in the same period of fiscal year 2019[92][109]. - Gross profit as a percentage of net sales was 7.0% for the second quarter of fiscal year 2020, down from 8.0% in the same quarter of the prior fiscal year, primarily due to increased factory spending[95][110]. - Operating income as a percentage of net sales decreased to 1.3% in the second quarter of fiscal year 2020 from 2.1% in the same quarter of fiscal year 2019[96]. - Net income for the second quarter of fiscal year 2020 was $0.8 million, or $0.08 per share, compared to $1.6 million, or $0.15 per share, in the same quarter of fiscal year 2019[97]. - Net sales for the six months ended December 28, 2019 were $222.0 million, a decrease of 11.4% from $250.5 million for the same period in 2018, primarily due to production delays caused by increased demand for sheet metals[119]. - Operating income for the six months ended December 28, 2019 was $4.0 million, down from $5.2 million in the same period of 2018, reflecting a decrease of 22%[119]. Expenses and Costs - Research, development, and engineering expenses were $1.7 million for the three months ended December 28, 2019, consistent with 1.5% of net sales[113]. - Selling, general, and administrative expenses decreased to $4.9 million, or 4.2% of net sales, for the three months ended December 28, 2019, down from 4.4% in the same period of the prior year[114]. - Interest expense decreased to $0.5 million for the three months ended December 28, 2019, compared to $0.7 million in the same period of the prior year[115]. - Total operating expenses decreased to $13.4 million, representing 6.0% of net sales, compared to $14.2 million or 5.7% of net sales in the prior year[123]. - Gross profit margin for the six months ended December 28, 2019 was 7.8%, slightly up from 7.7% in the prior year, with a decrease in overhead costs partially offset by increased material costs[120]. Cash Flow and Financing - Total cash used in operating activities for the six months ended December 28, 2019, was $8.4 million, with $32.0 million in borrowings on a $55.0 million revolving line of credit[101]. - Net cash used in operating activities was $8.4 million for the six months ended December 28, 2019, compared to $5.1 million in the prior year, primarily due to increased inventory and accounts receivable[128][129]. - Cash used in investing activities increased to $2.0 million for the six months ended December 28, 2019, up from $0.3 million in the same period of 2018, mainly for equipment purchases[132]. - Cash provided by financing activities was $10.3 million for the six months ended December 28, 2019, compared to $5.2 million in the same period of the previous fiscal year, driven by borrowings under the revolving line of credit[134]. - The company had approximately $22.6 million available under the revolving line of credit facility as of December 28, 2019, an increase from $20.2 million available the previous year[135]. - The company has $32.0 million in borrowings under its revolving credit facility, $13.3 million on its term loan, and $1.3 million on its equipment term loan as of December 28, 2019[178]. Market and Operational Risks - The concentration of net sales from the top three customers increased to 37.0% in the second quarter of fiscal year 2020 from 36.6% in the same period of the prior fiscal year[93]. - The company is dependent on a limited number of suppliers for critical components, which may lead to operational interruptions if shortages or price increases occur[147]. - Recent supply shortages in electronic components have been exacerbated by the coronavirus outbreak in China, potentially causing production delays[148]. - The company operates in a highly competitive EMS industry, where competitors may offer lower prices, impacting margins and market share[149]. - The company faces risks related to political and economic instability in manufacturing locations, which could affect shipping and production capabilities[152]. - Fluctuations in foreign currency exchange rates, particularly with the Mexican peso and Chinese renminbi, could increase operating costs[155]. - The company relies on key personnel for success, and the loss of such employees could adversely affect operations and financial condition[156]. - Start-up costs and inefficiencies related to new programs may negatively impact gross margins and operating results if these programs do not meet expected sales volumes[158]. - Changes in customer production timing and demand schedules complicate production scheduling and resource allocation, potentially leading to excess inventory[159]. - Increased energy prices could raise raw material and transportation costs, impacting profitability if product prices cannot be adjusted accordingly[168]. Regulatory and Compliance Issues - Compliance with the Sarbanes-Oxley Act and Dodd-Frank Act has increased legal, financial, and accounting costs, with expectations of continued cost increases indefinitely[173]. - Current and future acquisitions may require additional equity or debt financing, potentially diluting existing shareholders or affecting credit ratings[174]. - Integration of acquired businesses may face complications, including management distraction and significant restructuring charges, impacting return on invested capital[175]. - Changes in financial accounting standards may adversely affect reported financial results and increase implementation costs[176]. - The company has $25.8 million in foreign currency forward contracts to hedge against fluctuations, with a fair value of $3.1 million as of December 28, 2019[179].