Key Tronic Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended June 30, 2018. The filing also reports fourth-quarter results. Although the request metadata says “2017 Q4,” this 10-K covers FY2018.
Business context
Key Tronic provides electronic manufacturing services (EMS), including engineering, sourcing, fabrication, assembly, testing and logistics, to original equipment manufacturers. Operations span the United States, Mexico and China. The company reported increasing demand from some established customers and new programs, but also industry-wide component shortages that delayed deliveries and raised costs.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $446.3 million | $467.8 million |
| Gross profit / margin | $34.2 million / 7.7% | $38.3 million / 8.2% |
| Operating income / margin | $1.1 million / 0.2% | $9.5 million / 2.0% |
| Net income (loss) | $(1.3) million; $(0.12) diluted EPS | $5.6 million; $0.51 diluted EPS |
| Cash from operations | $11.5 million | $9.4 million |
| Capital expenditures | $4.5 million | $9.3 million |
FY2018 sales fell 4.6%, mainly from lower demand among current customers, partly offset by new program wins. Gross margin contracted 0.5 percentage points; management cited higher overhead, including severance related to streamlining Mexican facilities, partly offset by lower material costs. Operating results included a $4.5 million pretax arbitration-related loss.
Fourth-quarter sales were $117.0 million versus $118.5 million in FY2017 Q4. Gross profit was $9.4 million versus $9.8 million; the quarter reported a $2.2 million net loss versus $1.3 million net income, including the arbitration-related impact.
At year-end, cash was $0.3 million, working capital was $95.6 million and the current ratio was 2.0. Revolver borrowings were $16.2 million, with $28.4 million available; term loans were approximately $18.9 million, for total debt of about $35.1 million. Management said FY2018 debt declined by $8.0 million and expected operating cash flow, borrowing capacity, receivables sales and equipment financing to support planned needs. Operating cash flow benefited substantially from a $23.3 million increase in accounts payable; receivables increased $10.6 million.
Material changes and unusual items
- Net sales declined from FY2017, while the company said it replaced revenue lost from a large former customer and diversified its customer base.
- A former-customer dispute involved approximately $9.3 million of inventory and $1.9 million of receivables and related costs. An arbitration award of $6.7 million was announced September 5, 2018; related disposal costs and settlement effects produced a $4.5 million pretax FY2018 loss, or $3.4 million after tax.
- The company was not in compliance with all financial covenants at June 30, 2018 because of the arbitration loss, but obtained a Wells Fargo waiver. It expected renewal of its term loan and revolving credit agreement in FY2019; renewal was not assured in the filing.
- The five largest customers represented 42% of sales in both FY2018 and FY2017. One customer represented 19% of FY2018 sales.
Outlook, risks and contingencies
Management forecast FY2019 first-quarter revenue of $118 million to $122 million and expected significant sequential growth in revenue and earnings, while acknowledging ongoing supply-chain issues. It cited new program ramps, equipment and process investment in Mexico, and expansion of profitable U.S. facilities as growth supports.
Key risks include customer concentration and order cancellations or delays; shortages and price increases for components; new-program start-up costs and execution; competitive pricing and margin pressure; foreign exchange and interest-rate exposure; and dependence on financing and covenant compliance. Backlog was approximately $167.7 million on July 28, 2018, but the company cautioned that orders can be canceled or rescheduled and backlog is not a reliable forecast of sales.
FY2019 adoption of the new revenue-recognition standard was expected to shift most EMS revenue recognition from shipment to recognition over time. The company anticipated a $0.5 million to $2.0 million increase in opening retained earnings and higher contract assets, with corresponding changes to inventory presentation. The Tax Cuts and Jobs Act accounting remained provisional; the company expected to refine it in the first half of FY2019. The auditor issued an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether the arbitration award was collected and whether any additional costs or customer-related exposures remain.
- Progress on credit-agreement renewal, covenant compliance and repayment of debt due in FY2019–FY2020.
- Whether the forecast first-quarter revenue range and expected earnings growth were achieved, particularly amid component shortages.
- Actual customer concentration, program ramps and margins, including whether new business offsets any further declines in existing programs.
- The realized effects of revenue-recognition adoption, Tax Act adjustments and foreign withholding taxes on reported earnings and liquidity.