Key Tronic Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended June 30, 2012. The filing also reports fourth-quarter FY2012 results; it is not a FY2011 fourth-quarter filing. Unless noted, dollar amounts are in millions.
Business context and reporting period
Key Tronic provides electronic manufacturing services (EMS) to original equipment manufacturers, including engineering, procurement, plastics molding, assembly, testing and logistics. Manufacturing operations are in the United States, Mexico and China. Keyboard sales were $2.8 million, a small part of the business.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $346.5 | $253.8 |
| Gross profit / margin | $29.8 / 8.6% | $20.6 / 8.1% |
| Operating income / margin | $14.4 / 4.1% | $6.9 / 2.7% |
| Net income | $11.6 | $5.7 |
| Diluted earnings per share | $1.10 | $0.55 |
| Cash used in operating activities | $5.1 | $2.6 |
| Capital expenditures | $4.7 | $3.8 |
FY2012 fourth-quarter sales were $96.7 million, gross profit $9.2 million, and net income $3.8 million; diluted EPS was $0.35. The filing reports FY2011 fourth-quarter sales of $66.0 million, gross profit of $5.0 million, net income of $1.5 million and diluted EPS of $0.15.
At year-end, cash was $0.5 million, working capital $76.2 million, and the current ratio 2.4. The revolving credit balance was $15.0 million, with $15.0 million of the $30 million facility available; the company reported compliance with covenants. Long-term liabilities were $19.1 million and shareholders’ equity $78.6 million. Management said available cash flow, borrowing capacity and equipment-lease financing should meet foreseeable needs.
Material changes versus the prior comparable period
- Annual sales rose 36.5%, primarily from new programs and increased demand in existing programs. New-program revenue increased approximately $90.6 million; program losses reduced sales by about $0.9 million.
- Gross margin improved 0.5 percentage point, as overhead leverage outweighed higher material costs from program mix. Operating margin increased 1.4 percentage points, reflecting margin improvement, expense leverage and operating efficiencies.
- Net income more than doubled, although income tax expense increased to $2.2 million from $0.7 million. The company used its remaining domestic and China net operating loss carryforwards.
- Operating cash use increased to $5.1 million, primarily reflecting higher receivables and inventory associated with growth. Receivables increased $20.3 million and inventory $17.6 million; accounts payable increased $16.9 million.
- Top-five customer concentration increased to 73% of sales from 62%. The company served 48 customers across 165 programs, versus 33 customers and 119 programs a year earlier. One customer represented 29% of sales.
Outlook, risks and unusual items
- Management expected first-quarter FY2013 sales of $94–$99 million. Results were identified as dependent on customer orders, new-program production ramps and macroeconomic conditions; no annual earnings guidance was provided.
- Backlog was approximately $83.1 million on July 28, 2012, versus $54.9 million a year earlier. The company cautioned that orders may be canceled or rescheduled and backlog is not a reliable forecast of future sales.
- Key risks include customer and program concentration, volatile demand and pricing, new-program start-up costs, component shortages, competition, international operating and currency exposure, and the ability to manage rapid growth. The company highlighted supplier dependence and the possibility that canceled programs could leave unrecovered start-up costs.
- Open purchase orders for materials and supplies were approximately $171.3 million; the filing notes that actual requirements vary with production and many orders are cancellable within negotiated terms. Contractual obligations also included $8.3 million of operating leases and $1.4 million of capital leases.
- Mexican-peso forward contracts had a $57.8 million notional amount and an approximately $1.0 million net fair-value liability at year-end. The resulting FY2012 unrealized hedge loss reduced other comprehensive income by $2.4 million, net of tax.
- Management did not expect ordinary-course legal proceedings to materially affect financial position, results or cash flow. The company reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether the major customer programs driving FY2012 growth continue, and how customer concentration evolves.
- Whether receivables and inventory convert to cash as production ramps, given negative operating cash flow despite higher earnings.
- Whether reported margin gains persist as material costs, product mix, utilization and start-up costs change.
- Current revolver availability, covenant compliance, borrowing rates and financing needs as the business grows.
- Realizability and timing of tax credits and planned foreign-earnings repatriation, including the disclosed estimated tax consequences.
- Whether backlog converts to shipments and revenue, recognizing the company’s cancellation and rescheduling caveat.