Key Tronic Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended June 29, 2019 (52 weeks). This is an annual report, not a standalone 2018 Q4 filing; fourth-quarter figures below are for FY2019 Q4.
Business context and performance
Key Tronic provides electronic manufacturing services (EMS), including engineering, sourcing, assembly, plastics and metal fabrication, and operates in the United States, Mexico, China, and Vietnam. EMS accounted for nearly all FY2019 revenue. The company reported new program wins and growth in sales, but described component supply disruption, customer-driven program delays, and tariff-related demand reductions late in the year.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $464.0 million | $446.3 million |
| Gross profit / margin | $34.6 million / 7.5% | $34.2 million / 7.7% |
| Operating income (loss) / margin | $(6.0) million / (1.3)% | $1.1 million / 0.2% |
| Net income (loss) | $(8.0) million; $(0.74) per diluted share | $(1.3) million; $(0.12) per diluted share |
| Cash from operating activities | $0.9 million | $3.1 million |
| Capital expenditures | $8.4 million | $4.5 million |
| Cash and net working capital | $0.6 million; $104.7 million | $0.3 million; $95.6 million |
| Debt at year-end | $36.3 million | $34.9 million |
FY2019 Q4 net sales were $105.6 million, gross profit was $8.4 million, and net income was $0.8 million ($0.08 per diluted share). The company reported a 2.1 current ratio and $21.3 million available under its revolving credit facility at year-end.
Changes versus the prior year
- Sales rose 4.0%, primarily from new program wins, higher demand from existing customers, and the adoption of ASC 606.
- Gross margin declined 0.2 percentage points. Higher material costs were partly offset by lower overhead costs.
- Operating results included $12.4 million of goodwill and intangible-asset impairment charges; the company also cited $1.1 million of severance expense. The impairment followed weaker revenue in certain programs and delays in new programs.
- FY2018 included a $4.5 million loss related to an arbitration settlement; in FY2019, the company received approximately $6.7 million in settlement proceeds.
- Cash from operations fell to $0.9 million. FY2019 cash-flow presentation reflects adoption of a standard that moved deferred receipts from factored receivables from operating to investing activities; FY2018 was retrospectively reclassified.
- ASC 606 increased reported FY2019 sales by $10.3 million and gross profit by $1.9 million compared with the amounts that would have been reported under prior revenue-recognition rules. Without that adoption, net loss would have been $9.9 million.
Outlook, risks, and unusual items
Management forecast FY2020 Q1 revenue of $115 million to $120 million and said the late-year supply, program-ramp, and tariff-related disruptions were largely resolved. It cited new business in smart security, architectural LED lighting, power meters and smart grid, and wireless power, and expressed optimism about growth. The filing provides no full-year FY2020 earnings or margin guidance.
Key risks include customer concentration (the five largest customers generated 41% of sales; one customer represented 17%), the lack of long-term volume purchase commitments, order cancellations or delays, component shortages, competitive pricing pressure, new-program start-up costs, tariffs and foreign operating risks, and currency and interest-rate exposure. The company had $23.4 million outstanding on its revolving facility and $13.0 million in term loans at year-end, with secured debt and financial covenants; it reported covenant compliance. A September 2019 credit amendment subsequently increased the term loan by $5 million.
Other notable items: backlog was approximately $159.5 million in July 2019, versus $167.7 million a year earlier, but management cautioned that backlog is not a reliable predictor of sales. The company reported ordinary-course litigation that it did not expect to materially affect its financial position or results. The auditor issued an unqualified opinion on the financial statements and internal controls.
Investor verification priorities
- Assess whether projected growth and new-program ramps translate into sustained sales and improved margins, especially after the reported Q4 disruptions.
- Reconcile reported results with ASC 606 effects and the $12.4 million impairment; review the assumptions underlying goodwill valuation.
- Monitor operating cash generation, working-capital needs, receivables factoring, and the impact of contract assets on liquidity.
- Review debt terms, the subsequent $5 million term-loan increase, covenant headroom, and refinancing or interest-rate exposure.
- Track major-customer demand, component availability, tariff developments, and the degree to which backlog converts to shipments.