Key Tronic Corporation (NASDAQ: KTCC) — Form 10-K Summary
Reporting period: Fiscal year ended June 27, 2020 (52 weeks), with quarterly data for the fourth quarter. The filing was signed September 11, 2020. Although the request metadata says “2019 Q4,” this filing reports fiscal 2020.
Business context
Key Tronic provides electronic manufacturing services to original equipment manufacturers, including engineering, sourcing, assembly, testing, plastics and metal fabrication. It operates facilities in the United States, Mexico, China and Vietnam. Its five largest customers represented 40% of fiscal 2020 sales; one customer accounted for 18%.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $449.5 million | $464.0 million |
| Gross profit / margin | $35.2 million / 7.8% | $34.6 million / 7.5% |
| Operating income (loss) | $6.8 million | $(6.0) million |
| Net income (loss) | $4.8 million; $0.44 diluted EPS | $(8.0) million; $(0.74) diluted EPS |
| Cash from operating activities | $(31.0) million | $0.9 million |
| Capital expenditures | $8.6 million | $8.4 million |
Fourth-quarter sales were $116.0 million versus $105.6 million a year earlier; net income was $1.5 million versus $0.8 million. Fourth-quarter revenue was constrained by temporary COVID-19-related shutdowns at the Juarez facilities.
Cash and cash equivalents were $0.6 million at year-end. Current assets were $242.8 million and current liabilities $112.2 million; management reported a 2.2 current ratio. Net working capital was $130.5 million. Debt totaled approximately $71.0 million, including $60.1 million outstanding on the revolving facility; $4.5 million remained available under that facility at year-end. The company reported a 0.61 debt-to-equity ratio and compliance with its loan covenants.
Operating cash use reflected working-capital demands, including increases of $28.3 million in receivables and $14.7 million in inventory; the company also had no factored receivables outstanding at year-end. Total assets rose to $304.9 million from $238.3 million, in part reflecting adoption of lease accounting, which added right-of-use assets and lease liabilities to the balance sheet.
Changes versus the prior year
- Sales fell 3.1%, primarily due to Juarez production disruption during the pandemic. Gross margin improved 0.3 percentage points, which management attributed mainly to Juarez streamlining and material-cost reductions, partly offset by COVID-related expenses.
- Operating results returned to profit. The comparison benefited substantially from the absence of fiscal 2019’s $12.4 million goodwill and intangible-asset impairment and $1.1 million severance expense; the impairment was recorded after program declines and customer-order delays.
- Sales mix shifted: consumer increased to 44% of sales from 39%; industrial declined to 42% from 44%; gaming declined to 5% from 8%.
- Research, development and engineering expense increased to $7.4 million from $6.6 million. Net interest expense declined to $2.5 million from $2.8 million, primarily due to lower line-of-credit rates.
- Operating cash flow deteriorated from $0.9 million provided to $31.0 million used, reflecting working-capital investment and the year-end change in receivables factoring.
Outlook, risks and unusual items
Management forecast first-quarter fiscal 2021 revenue of $118 million to $125 million, while warning that it might update guidance because of COVID-19 uncertainty. A large program began ramping in the fourth quarter and was expected to contribute approximately $100 million in annual revenue when fully ramped. Backlog was approximately $215.3 million on July 25, 2020, versus $159.5 million a year earlier; the company cautioned that orders can be canceled or rescheduled and backlog is not a reliable predictor of sales.
Management cited new program wins in sanitizer dispensing, automotive controls, oil and gas drilling, wireless security and personal protective equipment, and described an improving opportunity to win contract manufacturing work in North America. It said planned growth would be supported by operating cash flow, borrowing capacity, receivables sales and equipment financing.
Key risks include unpredictable COVID-19 effects on demand, facility operations and supply chains; customer concentration and lack of long-term volume commitments; component shortages and price increases; fixed-cost underutilization and new-program start-up costs; competition and margin pressure; foreign currency exposure; and debt covenant and refinancing risk. Legal claims in the ordinary course were not expected by management to materially affect financial position, results or cash flow.
Subsequent financing: On August 14, 2020, the company replaced its Wells Fargo agreement with a five-year Bank of America asset-based revolving facility of up to $93 million, with an option to increase commitments by up to $25 million subject to conditions. It used the facility to repay the prior credit facility and reported approximately $16 million of availability immediately after closing. New covenants include a minimum fixed-charge coverage ratio of 1.25 to 1.0 and a maximum cash-flow leverage ratio of 6.00 to 1.00.
The company adopted lease accounting in fiscal 2020, materially affecting the balance sheet but not materially affecting income or cash flows. The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether the announced large program ramps on schedule and delivers the anticipated annual revenue, and whether the $215.3 million backlog converts to shipments.
- How COVID-19, particularly any renewed Juarez disruption, affects sales, production costs, supply availability and customer demand.
- Whether working capital and receivables collections improve after the $31.0 million operating cash outflow and the sharp increases in receivables and inventory.
- Borrowing availability, covenant headroom and compliance under the new Bank of America facility, including its borrowing-base and reserve requirements.
- Customer concentration, the elevated doubtful-account allowance ($0.6 million versus $0.1 million), and the recoverability of customer-related inventory.
- Foreign-exchange hedge exposures and the impact of currency movements; the filing reports $36.7 million of foreign-currency contracts and swaps outstanding at fiscal year-end.