Key Tronic Corporation — FY2021 Form 10-K
Period clarification: The supplied filing is for the fiscal year ended July 3, 2021 (FY2021), not FY2019. FY2021 had 53 weeks; FY2020 had 52 weeks. Dollar figures below are U.S. dollars.
Business context and reporting period
Key Tronic is a global contract manufacturer serving OEMs, with engineering, sourcing, assembly, plastics and metal fabrication operations in the United States, Mexico, China and Vietnam. Contract manufacturing accounted for nearly all revenue. Management cited new program wins and strong demand, while pandemic-related component shortages and transportation and logistics disruptions constrained production and shipments.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $518.7 million | $449.5 million |
| Gross profit / margin | $42.0 million / 8.1% | $35.2 million / 7.8% |
| Operating income / margin | $9.5 million / 1.8% | $6.8 million / 1.5% |
| Net income | $4.3 million | $4.8 million |
| Diluted earnings per share | $0.39 | $0.44 |
| Cash from (used in) operations | $(15.1) million | $(31.0) million |
| Capital expenditures | $10.6 million | $8.6 million |
Revenue increased about 15%, principally from new programs and higher demand. Gross margin improved 0.3 percentage points, with Juarez streamlining and material-cost reductions partly offset by supply constraints, a four-day Mexico facility closure during a winter storm, and COVID-related costs. Net income declined despite higher operating income; net interest expense rose to $3.6 million from $2.5 million, and FY2021 had a $1.6 million tax provision versus a $0.4 million tax benefit in FY2020.
Operating cash use narrowed year over year but remained substantial, reflecting working-capital growth, including increases of $24.3 million in receivables and $23.1 million in inventory. At year-end, cash was $3.5 million, working capital was $172.5 million, and management reported a 2.4 current ratio. Total debt was approximately $100.4 million, including $90.9 million outstanding on the revolving facility; only $2.1 million of additional borrowing availability remained, and the company reported covenant compliance. A September 2021 amendment, after year-end, increased the facility commitment from $93 million to $120 million, subject to the borrowing base.
In FY2021’s fourth quarter, sales were $132.6 million, gross profit was $10.3 million, and net income was $0.2 million. Management cited supply-chain and logistics-related downtime and overtime, approximately $1.0 million of legal and professional fees associated with the internal investigation, and approximately $0.5 million of non-cash tax expense related to expired stock appreciation rights.
Material changes and outlook
The five largest customers represented 40% of FY2021 sales, unchanged from FY2020; one customer represented 24%, up from 18%. Consumer products increased to 51% of revenue from 44%, while industrial declined to 38% from 42%. Order backlog was approximately $303.2 million on July 31, 2021, compared with $215.3 million a year earlier; the filing cautions that orders can be rescheduled or canceled and backlog is not a reliable forecast of sales.
For the first quarter of FY2022, management forecast revenue of $125 million to $135 million. It expected component shortages to continue limiting production and harming operating efficiency despite customer demand and backlog. Management said capacity investments position the company for longer-term growth and noted a trend toward contract manufacturing returning to North America.
Risks, contingencies and unusual items
- Supply chain and COVID-19: Component shortages, freight delays, labor constraints, facility interruptions and unpredictable customer demand may reduce shipments, raise costs and pressure margins.
- Customer concentration: Customers generally do not make long-term volume commitments and may delay or cancel orders; loss or reduced demand from a major customer could materially affect results.
- Internal investigation and controls: The company identified inventory accounting errors that understated cost of sales and overstated inventory; it reported no restatement of previously filed statements. The SEC’s inquiries are ongoing, and the company cannot estimate any potential loss or penalties. Management and the auditor concluded the material weakness was remediated and internal controls were effective as of July 3, 2021.
- Debt and interest rates: Borrowings increased, rates were variable, and the filing identified LIBOR transition uncertainty. Credit agreements contain restrictive covenants and limit dividends.
- Other exposures: Risks include foreign exchange movements, dependence on some sole-source suppliers, foreign operations and tax incentives, product and regulatory liabilities, cybersecurity incidents, and litigation. Ordinary-course litigation was not expected by management to have a material aggregate effect.
Most important facts for investors to verify
- Whether component availability, freight and labor conditions improve enough to convert backlog into shipments and sustain the FY2022 revenue outlook.
- Whether working-capital needs continue to consume cash, and whether the amended revolving facility provides adequate borrowing availability under its borrowing base and covenants.
- Developments in the SEC inquiry, related legal and professional costs, and the effectiveness of inventory-control remediation over subsequent reporting periods.
- Whether customer concentration and the rising share of consumer revenue increase volatility or exposure to individual programs.
- Whether higher interest costs, currency movements and tax items materially affect earnings and cash generation.