Key Tronic Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended June 28, 2014 (52 weeks). This is an annual filing, not a standalone quarterly filing; fourth-quarter figures are also summarized below. Amounts are in U.S. dollars.
Business context and financial performance
Key Tronic provides electronic manufacturing services (EMS) to OEMs, with manufacturing operations in the United States, Mexico and China. Keyboard sales are now a small part of the business. Management reported lower demand from longstanding customers, alongside ramping new programs, customer diversification and investment in capacity. The company acquired Sabre, a Juarez sheet-metal fabricator, on July 1, 2013.
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $305.4 million | $361.0 million |
| Gross profit / margin | $26.9 million / 8.8% | $34.5 million / 9.6% |
| Operating income / margin | $9.3 million / 3.0% | $18.1 million / 5.0% |
| Net income | $7.6 million | $12.6 million |
| Diluted EPS | $0.67 | $1.12 |
| Operating cash flow | $1.5 million | $29.3 million |
| Capital expenditures | $7.8 million | $3.5 million |
FY2014 revenue fell 15.4%. Lower demand from current programs reduced revenue by approximately $67.4 million and program losses by $5.2 million; new program wins and Sabre contributed approximately $17.0 million. Gross margin declined 0.8 percentage points: improved material costs were outweighed by higher production overhead as the company added employees and capacity. Operating income also reflected increased engineering, program-management and administrative costs relative to lower sales.
Fourth-quarter FY2014 sales were $72.1 million, versus $84.6 million in fourth-quarter FY2013. Fourth-quarter net income was $1.4 million, versus $2.4 million; diluted EPS was $0.12, versus $0.21.
Liquidity, debt and balance sheet
- Cash was $5.8 million at year-end, down from $10.8 million. Net working capital was $71.0 million; management reported a 2.4 current ratio.
- No balance was drawn on the $30 million revolving credit facility at year-end, leaving $30 million available; the company reported compliance with covenants. The facility was extended to October 2018 and is secured by substantially all company assets.
- The company had a $7.9 million current liability to Wells Fargo under its receivables purchase program. This was financing, not a balance on the revolving line.
- Total assets were $156.7 million and shareholders’ equity was $103.6 million. Long-term liabilities were $0.8 million.
- Operating cash flow fell sharply, mainly reflecting a $10.5 million increase in inventory and a $2.7 million increase in receivables, partly offset by higher payables. Investing cash outflow was $13.8 million, including Sabre and capital spending; financing cash inflow was $7.3 million.
- Open material purchase orders were approximately $47.7 million, and operating lease commitments totaled $8.2 million. The filing says customer arrangements generally reduce exposure for materials purchased within agreed lead times.
Outlook, risks and notable items
- Management expected new programs to continue ramping and anticipated sequential revenue growth in FY2015. It forecast first-quarter FY2015 revenue of $76–$82 million, excluding any impact from the subsequent CDR acquisition.
- On September 3, 2014, after year-end, the company acquired CDR Manufacturing (Ayrshire Electronics) for $46.9 million cash, funded with a term loan and the existing revolving facility. Purchase-price allocation and related closing costs had not yet been determined in the filing.
- Backlog was approximately $103.1 million on July 26, 2014, compared with $60.0 million a year earlier. Management cautioned that orders may be canceled or rescheduled, so backlog is not a reliable forecast of sales.
- Customer concentration remains significant: the top five customers represented 62% of FY2014 sales, down from 71% in FY2013; three customers individually represented 20%, 15% and 15%. Customer demand shifts, cancellations or loss of a major account could materially affect results.
- Other key exposures include component shortages and supplier concentration, competitive pricing and margin pressure, program start-up costs and execution, macroeconomic uncertainty, foreign exchange and interest-rate movements, and reliance on international operations. The company hedges some peso-denominated expenses.
- FY2014 tax expense included a one-time $1.5 million benefit from repeal of Mexico’s IETU tax regime. Approximately $13.3 million of foreign earnings were treated as permanently reinvested; repatriation could trigger additional U.S. tax.
- Ordinary-course litigation was not considered likely to have a material adverse effect. The auditor issued an unqualified opinion on the financial statements and internal controls; management also assessed disclosure controls and internal control over financial reporting as effective.
Most important facts for investors to verify
- Whether new programs deliver the forecast growth and improve facility utilization and margins after the FY2014 revenue and operating-income declines.
- How the CDR acquisition is financed in practice, including term-loan and revolver balances, interest costs, covenants, integration costs and purchase-price allocation.
- Whether inventory and working-capital investment convert into operating cash flow, given FY2014 cash generation of only $1.5 million.
- Whether customer concentration continues to decline and whether major customer orders and backlog translate into shipments.
- Whether tax-credit realization, foreign-earnings repatriation and currency hedges affect future cash taxes, earnings or equity.