Business context and reporting period
Key Tronic Corporation (KeyTronicEMS) provides electronics manufacturing services (EMS), including engineering, sourcing, PCB assembly, plastics and metal fabrication, and product assembly. This Form 10-K reports the 52-week fiscal year ended June 27, 2015; it also presents unaudited fourth-quarter results. Fiscal 2015 included the September 2014 acquisition of Ayrshire Electronics, which expanded capacity and diversified the customer base.
Financial performance and liquidity
Amounts below are in U.S. dollars; annual figures are for fiscal years ended June 27, 2015 and June 28, 2014, respectively.
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $434.0 million | $305.4 million |
| Gross profit / margin | $33.3 million / 7.7% | $26.9 million / 8.8% |
| Operating income / margin | $6.7 million / 1.5% | $9.3 million / 3.0% |
| Net income | $4.3 million | $7.6 million |
| Diluted earnings per share | $0.38 | $0.67 |
| Cash provided by operating activities | $7.7 million | $1.5 million |
| Capital expenditures | $8.8 million | $7.8 million |
Fourth-quarter FY2015 sales were $120.4 million, gross profit $10.4 million, and net income $2.3 million (diluted EPS $0.21), compared with fourth-quarter FY2014 sales of $72.1 million and net income of $1.4 million (diluted EPS $0.12).
At year-end, cash was $0.4 million, working capital $98.3 million, and the current ratio 2.1. Debt outstanding was approximately $42.9 million: $31.3 million under the term loan and $11.6 million on the revolver. The company reported $18.0 million of remaining availability under its $30 million revolving facility and compliance with covenants. After year-end, the revolving limit was increased to $45 million. Debt-to-equity was 0.43.
Material changes versus the prior comparable year
- Sales increased 42.1%, mainly reflecting $124.6 million of Ayrshire revenue; new program wins added about $17.3 million, partly offset by lower demand and program losses from existing customers.
- Ayrshire contributed $5.0 million of net income for the portion of the year included in results. Despite higher sales, annual net income fell $3.3 million, primarily due to reduced sales from longstanding customers and higher interest expense.
- Gross margin declined 1.1 percentage points, attributed mainly to higher overhead and unfavorable product mix. Operating margin declined 1.5 percentage points; interest expense rose to $1.4 million from $0.1 million, largely due to acquisition-related borrowing and factoring.
- Operating cash flow improved to $7.7 million, but remained below capital expenditures. Investing activities used $48.1 million, chiefly for the $48.0 million Ayrshire acquisition. Year-end cash declined by $5.4 million to $0.4 million.
- Customer concentration eased: the five largest customers represented 42% of sales, versus 62% in FY2014. Ayrshire generated $124.6 million in FY2015 revenue; the largest customer represented 17% of sales.
Outlook, risks, and contingencies
Management expected sequential growth as new programs ramped. FY2016 first-quarter revenue guidance was $122 million to $130 million. Management cited customer order levels, production start-up timing, and macroeconomic uncertainty as key determinants of results. No full-year earnings guidance was provided in the filing text.
- Margins may be pressured by new-program start-up inefficiencies, product mix, capacity utilization, pricing and component costs or shortages. Management said new programs were being ramped and highlighted the challenge of balancing capacity, staffing, and cost control.
- Customer orders can be delayed, rescheduled, or cancelled; the company generally lacks long-term volume purchase contracts. Customer concentration remains material despite diversification.
- Other cited risks include supplier dependence, competition, international operating and regulatory exposure, peso and renminbi fluctuations, interest-rate exposure, and the execution and integration of acquisitions.
- The company used $65.0 million of Mexican peso forward contracts and a $25.0 million interest-rate swap. The balance sheet reported accumulated other comprehensive loss of $4.8 million, including substantial derivative-related losses; the filing estimated about $1.8 million of net unrealized derivative loss would be reclassified into earnings within 12 months.
- Commitments included approximately $74.0 million of open purchase orders and $16.1 million of future minimum operating lease payments. Ordinary-course lawsuits and claims were not expected by management to have a material adverse effect.
- Cash dividends were restricted without bank consent, and management did not anticipate dividends in the foreseeable future. The company reported effective disclosure controls and internal control over financial reporting; the auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether FY2016 guidance was achieved and whether new customer programs ramped without further start-up costs or margin dilution.
- How much of the sales increase and earnings contribution is attributable to Ayrshire, and whether acquisition synergies and customer diversification persist.
- Subsequent gross and operating margin trends, particularly overhead absorption, product mix, and pricing.
- Debt repayment, revolver availability, covenant headroom, interest costs, and working-capital needs as the business grows.
- Customer retention and order variability, component availability, and the accounting and earnings impact of foreign-exchange hedges and unremitted foreign earnings.