Key Tronic(KTCC) - 2021 Q1 - Quarterly Report

Part I: Financial Information Financial Statements (Unaudited) Unaudited Q3 2020 financials show increased assets and liabilities, with net sales up 17% to $123.2 million and net income of $1.7 million Condensed Consolidated Balance Sheets As of September 26, 2020, total assets increased to $317.8 million, total liabilities rose to $199.2 million, and shareholders' equity reached $118.6 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | September 26, 2020 | June 27, 2020 | | :--- | :--- | :--- | | Total current assets | $256,065 | $242,764 | | Total assets | $317,812 | $304,861 | | Total current liabilities | $101,650 | $112,219 | | Revolving loan | $80,414 | $60,094 | | Total liabilities | $199,205 | $189,304 | | Total shareholders' equity | $118,607 | $115,557 | Condensed Consolidated Statements of Income Net sales for Q1 FY2021 increased 17.0% to $123.2 million, resulting in a net income of $1.7 million or $0.16 per diluted share Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Three Months Ended Sep 26, 2020 | Three Months Ended Sep 28, 2019 | | :--- | :--- | :--- | | Net sales | $123,207 | $105,285 | | Gross profit | $10,015 | $9,273 | | Operating income | $2,796 | $2,539 | | Net income | $1,719 | $1,552 | | Net income per share — Diluted | $0.16 | $0.14 | Condensed Consolidated Statements of Cash Flows Q1 FY2021 saw $9.4 million cash used in operations, $3.2 million in investing, and $13.5 million provided by financing activities Consolidated Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended Sep 26, 2020 | Three Months Ended Sep 28, 2019 | | :--- | :--- | :--- | | Cash used in operating activities | $(9,439) | $(10,313) | | Cash used in investing activities | $(3,186) | $(1,271) | | Cash provided by financing activities | $13,543 | $11,487 | | Net increase (decrease) in cash | $918 | $(97) | Notes to Condensed Consolidated Financial Statements Notes detail COVID-19 risks, a new $93 million Bank of America loan, 'over-time' revenue recognition, and foreign currency hedging - The company has identified significant risks and uncertainties related to the COVID-19 pandemic, which could materially impact operating results through shifts in customer demand, supply chain disruptions, and increased costs[25] - On August 14, 2020, the Company entered into a new five-year, $93 million asset-based senior secured revolving credit facility with Bank of America, with $80.7 million outstanding and $12.3 million available as of September 26, 2020[37] - The majority of the company's revenue is recognized 'over-time' using a cost-to-cost method, due to products having no alternative use and enforceable payment rights[70] - The company uses foreign currency forward contracts to hedge Mexican peso fluctuations, with $30.0 million notional outstanding as of September 26, 2020, and terminated interest rate swaps in August 2020[60][61][62] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 FY2021 revenue growth of 17% to $123.2 million, gross margin decline due to COVID-19 costs, and increased backlog to $201.9 million Executive Summary Q1 FY2021 revenue grew 17% to $123.2 million, but gross margin declined to 8.1% due to COVID-19 costs, with new program wins - Revenue for Q1 fiscal 2021 was $123.2 million, a 17% increase from $105.3 million in the prior-year period[83] - Gross margin decreased to 8.1% from 8.8% year-over-year, primarily due to additional costs from the COVID-19 crisis[86] - New program wins included products for audio/video editing, indoor air quality, utility meters, warehouse management, and automation[83][89] Results of Operations Q1 FY2021 net sales increased 17.0% to $123.2 million, but gross profit margin declined to 8.1% due to COVID-19 costs, and the effective tax rate rose to 18.7% Comparison of Operations (in thousands) | Metric | Q1 FY2021 | Q1 FY2020 | $ Change | % Point Change (of Net Sales) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $123,207 | $105,285 | $17,922 | — | | Gross profit | $10,015 | $9,273 | $742 | (0.7)% | | Operating income | $2,796 | $2,539 | $257 | (0.1)% | | Net income | $1,719 | $1,552 | $167 | (0.1)% | - The $17.9 million increase in net sales was driven by higher demand for new and current programs, partially constrained by COVID-19 related labor shortages in Juarez[99] - The effective tax rate increased to 18.7% from 15.1%, primarily due to reduced federal research and development tax credits[107] Backlog Order backlog significantly increased to approximately $201.9 million as of September 26, 2020, driven by COVID-19 related demand Order Backlog Comparison | Date | Backlog Amount | | :--- | :--- | | September 26, 2020 | ~$201.9 million | | September 28, 2019 | ~$159.9 million | - The increase in backlog was related to the COVID-19 pandemic's effect on customer demand, particularly for home-consumer products, healthcare, and home exercise equipment[108] Capital Resources and Liquidity Net cash used in operations was $9.4 million, driven by increased receivables and inventory, with $12.3 million available on the credit facility - Net cash used in operating activities was $9.4 million, compared to $10.3 million in the prior-year period[110] - The company did not factor any accounts receivable in Q1 2021, unlike $17.8 million factored in Q1 2020, contributing to the increased accounts receivable balance[111][113] - As of September 26, 2020, the company had approximately $12.3 million available under its asset-based revolving credit facility[117] Risks and Uncertainties Key risks include COVID-19 impacts, foreign operations challenges, customer/supplier concentration, and demand volatility affecting quarterly results - The COVID-19 pandemic presents significant risks, including shifts in customer demand, facility closures, labor constraints, and supply chain disruptions[126][128] - Operations in Mexico, China, and Vietnam are subject to risks like political/economic instability, regulatory changes, trade barriers, and natural disasters[121][125] - A majority of sales come from a small number of customers, and loss of orders could adversely affect business due to non-long-term contracts[129][130] - Dependence on a limited number of suppliers for critical components creates risk of operational interruptions from shortages or price increases[131] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from fluctuating interest rates on its debt and foreign currency exchange rates, mitigated by forward contracts - The company is exposed to interest rate risk from its asset-based senior revolving credit facility, with $80.7 million outstanding as of September 26, 2020, subject to LIBOR fluctuations[160] - The company faces foreign currency exchange risk from operations in Mexico, China, and Vietnam, using Mexican peso forward contracts totaling $30.0 million outstanding to hedge expenses[161] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 26, 2020, with no significant changes in internal controls - Management, including the CEO and CFO, concluded that disclosure controls and procedures are effective as of the reporting period end[162] - No significant changes were made to the company's internal control over financial reporting during the quarter[164] Part II: Other Information Legal Proceedings The company is involved in various ordinary course legal actions, which management expects will not materially affect financial position - The company is involved in various legal actions arising in the ordinary course of business, which management does not expect to have a material adverse effect on its financial condition[166] Risk Factors No material changes to risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended June 27, 2020 - There are no material changes to the risk factors set forth in the Company's Annual Report on Form 10-K for the year ended June 27, 2020[167] Exhibits This section lists exhibits filed with Form 10-Q, including CEO and CFO certifications and XBRL data files - The exhibits filed include CEO and CFO certifications pursuant to Exchange Act Rules and 18 U.S.C. 1350, along with XBRL Interactive Data Files[168]