Key Tronic Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended July 1, 2017. The filing also reports fourth-quarter results; this is not a fiscal 2016 annual filing. Dollar amounts below are U.S. dollars.
Business context and financial performance
Key Tronic provides electronics manufacturing services (EMS), including engineering, sourcing, assembly, plastics molding and sheet-metal fabrication, primarily for original equipment manufacturers. Operations span the United States, Mexico and China. EMS generated $466.6 million of FY2017 revenue; keyboard sales contributed $1.2 million.
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $467.8 million | $485.0 million |
| Gross profit / margin | $38.3 million / 8.2% | $38.8 million / 8.0% |
| Operating income / margin | $9.5 million / 2.0% | $10.4 million / 2.1% |
| Net income | $5.6 million | $6.5 million |
| Diluted earnings per share | $0.51 | $0.58 |
| Cash from operations | $9.4 million | $4.6 million |
| Capital expenditures | $9.3 million | $13.3 million |
Fourth-quarter FY2017 sales were $118.5 million, gross profit was $9.8 million, net income was $1.3 million, and diluted EPS was $0.12. In fourth-quarter FY2016, those figures were $123.9 million, $10.8 million, $2.1 million and $0.20, respectively.
Liquidity, debt and balance sheet
- At July 1, 2017, cash was $0.4 million, net working capital was $100.4 million, and the current ratio was 2.3.
- Total debt was approximately $43.1 million: $18.3 million outstanding on the revolving facility and $24.6 million in term and equipment loans. The company reported $26.3 million of additional revolving availability and compliance with its financial covenants.
- Shareholders’ equity was $116.6 million; total assets were $232.8 million. Long-term liabilities were $38.5 million.
- Operating cash flow improved from FY2016, primarily reflecting lower inventory, partly offset by increased receivables and reduced accounts payable. Receivables factoring totaled $86.5 million during FY2017.
Changes, outlook and management commentary
- Annual sales fell 3.5%, mainly because of lower demand from a longstanding customer and the Harrodsburg, Kentucky facility closure, partly offset by new program wins. That customer represented 18% of sales in both FY2017 and FY2016; the five largest customers generated 42% of FY2017 sales.
- Gross margin improved 0.2 percentage points. Management attributed the change mainly to lower material costs and a more favorable mix, partly offset by higher overhead costs. Operating margin and net income declined, with management citing higher SG&A, particularly legal fees, and lower sales.
- The company won nine significant programs during FY2017, including two awarded in the fourth quarter. Management said new programs were ramping and expected revenue growth and increasing profitability in the second half of FY2018. For FY2018 first quarter, it forecast revenue of $110–$115 million. Results remain dependent on customer orders, new-program ramp timing and geopolitical conditions.
- Management said operating cash flow, borrowing capacity, receivables sales and equipment financing should support planned operations and growth. The company does not anticipate paying dividends; its credit agreement restricts dividends without bank consent.
Risks, contingencies and unusual items
- The company is pursuing arbitration against a former customer for approximately $9 million related to inventory, cancellation fees and carrying costs. No gain or loss was accrued; legal costs are expensed as incurred. The outcome could materially affect financial position, results or cash flows.
- Customer concentration, the absence of long-term volume purchase commitments, order changes or cancellations, and new-program start-up costs create revenue, margin and inventory risks.
- Key risks also include component supply shortages, intense price competition, foreign exchange exposure, interest-rate changes, international operating conditions and dependence on key personnel. The company hedges some Mexican-peso expenses and part of its term-loan interest exposure, but does not hedge RMB expenses.
- Goodwill was $10.0 million; the annual impairment analysis estimated reporting-unit fair value at approximately 20% above carrying value. Future cash flows or market valuation below assumptions could lead to impairment.
- The company expects the new revenue standard to change its EMS revenue recognition from point-in-time to over-time recognition and said the impact may be material, including increased contract assets and lower finished-goods and work-in-process inventory. Adoption was planned for FY2019; transition method had not been selected.
- Management and the auditor reported effective disclosure controls and internal control over financial reporting. The audited financial statements received an unqualified opinion.
Important facts for investors to verify
- Progress and collectability of the approximately $9 million former-customer arbitration claim, including any subsequent resolution or accounting change.
- Whether new program ramps offset continued declines or order reductions from longstanding customers, and how customer concentration evolves.
- Actual FY2018 revenue, profitability and cash generation versus management’s first-quarter revenue range and second-half outlook.
- Debt balances, revolving availability, covenant compliance and the effects of interest rates, peso movements and derivative settlements.
- Implementation choices and financial statement effects of the new revenue-recognition standard, including the eventual transition method.