Key Tronic Corporation — FY2016 Form 10-K
Period clarification: The filing is the annual report for the fiscal year ended July 2, 2016, not a standalone “2015 Q4” filing. It includes unaudited fourth-quarter results for FY2016 and comparative FY2015 quarters. Dollar amounts below are in U.S. dollars.
Business context and reporting period
Key Tronic provides electronic manufacturing services (EMS), including engineering, sourcing, PCB assembly, plastics and metal fabrication, and finished-product assembly. FY2016 was a 53-week year; FY2015 was 52 weeks. The Ayrshire acquisition, completed in September 2014, contributed for a full year in FY2016. The company operates in the United States, Mexico, and China.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $485.0 million | $434.0 million |
| Gross profit / margin | $38.8 million / 8.0% | $33.3 million / 7.7% |
| Operating income / margin | $10.4 million / 2.1% | $6.7 million / 1.5% |
| Net income | $6.5 million | $4.3 million |
| Diluted EPS | $0.58 | $0.38 |
| Cash from operations | $4.6 million | $7.7 million |
| Capital expenditures | $13.3 million | $8.8 million |
Sales rose 11.7%, primarily on new program wins and a full year of Ayrshire, partly offset by lower demand from a longstanding customer. Improved material costs and mix lifted gross margin; higher overhead from new-program ramp inefficiencies partly offset that benefit. Interest expense rose to $2.3 million from $1.4 million, mainly due to a full year of term-loan interest and greater average revolver borrowings.
At July 2, 2016, cash was $1.0 million, working capital was $97.3 million, and the current ratio was 2.2. Debt comprised a $26.3 million term loan and $18.1 million revolving borrowings, or $44.3 million total; $26.5 million of revolver capacity remained available. The company reported compliance with debt covenants. Operating cash flow was below capital expenditures, with inventory growth of $16.2 million a principal cash use. The company also sold $78.0 million of receivables during FY2016 under factoring programs.
For FY2016 Q4, sales were $123.9 million, gross profit $10.8 million, net income $2.1 million, and diluted EPS $0.20. In FY2015 Q4, the comparable figures were $120.4 million, $10.4 million, $2.3 million, and $0.21, respectively.
Material changes and notable items
- Five largest customers represented 41% of FY2016 sales versus 42% in FY2015; one customer accounted for 18% of sales and 24% of year-end trade receivables.
- Inventory increased to $107.0 million from $91.6 million. The obsolete-inventory reserve was $1.1 million, up from $0.4 million.
- Shareholders’ equity increased to $105.6 million from $100.8 million. Accumulated other comprehensive loss reached $7.6 million, largely reflecting hedging losses.
- The company announced closure of its Harrodsburg, Kentucky facility by the end of FY2017 Q1, with customer programs transferring to other facilities. Estimated closure and transfer costs were approximately $250,000.
- Foreign-currency forward contracts had a reported net fair-value liability of approximately $11.1 million at year-end; management expected about $3.3 million of net unrealized loss to be reclassified into earnings within 12 months.
- Management’s annual goodwill impairment test concluded that reporting-unit fair value exceeded carrying value; no impairment charge was recorded. The auditor gave unqualified opinions on the financial statements and internal controls.
Outlook, risks, and contingencies
Management expected FY2017 Q1 revenue of $117 million to $122 million, describing this as a slight decline because of exits from several small programs and a decision to disengage from a longstanding customer. Longer-term results depend on customer orders, timing and successful ramp-up of new programs, capacity utilization, and macroeconomic conditions. Management said operating cash flow, borrowing capacity, receivables factoring, and equipment financing should fund planned operations and growth.
Principal risks include customer concentration and order cancellations or delays; competitive pricing and thin margins; new-program start-up costs and utilization inefficiencies; component shortages and supplier dependence; foreign-exchange and variable-interest-rate exposure; and the ability to manage growth and integration. The company also disclosed operating, regulatory, natural-disaster, tax-repatriation, product-quality, and information-system risks. Ordinary-course lawsuits were not expected by management to have a material adverse effect.
Most important facts for investors to verify
- Whether the reported FY2017 Q1 revenue range and customer disengagement proceeded as expected.
- Whether inventory growth, working-capital needs, and operating cash generation improved relative to capital spending.
- Whether customer concentration, especially Customer A’s sales and receivables share, changed materially.
- Whether the Harrodsburg closure and program transfers were completed near the stated timing and cost.
- How debt balances, covenant headroom, receivables factoring, and foreign-exchange hedge losses evolved after year-end.
- Whether new-program ramps restored margins without additional material start-up costs or inventory reserves.