Business context and reporting period
Key Tronic Corporation is a contract manufacturer providing engineering, sourcing, assembly and related services to OEMs, with operations in the United States, Mexico, China and Vietnam. Although the request metadata says “2020 Q4,” this filing is the FY2022 Form 10-K for the year ended July 2, 2022; FY2020 appears only as a comparative year. The filing also provides FY2022 fourth-quarter results.
Key financial results
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $531.8 million | $518.7 million |
| Gross profit / margin | $43.2 million / 8.1% | $42.0 million / 8.1% |
| Operating income / margin | $8.8 million / 1.7% | $9.5 million / 1.8% |
| Net income | $3.4 million | $4.3 million |
| Diluted earnings per share | $0.31 | $0.39 |
| Cash used in operating activities | $4.9 million | $15.1 million |
FY2022 revenue rose 3%, but net income fell about 22%. Higher SG&A, including legal and professional fees related to SEC inquiries, and higher interest expense contributed to the earnings decline. Interest expense was $5.1 million versus $3.6 million. The effective tax rate was 8.5%, compared with 26.6%.
FY2022 fourth-quarter net sales were $126.2 million, gross profit $11.8 million and net income $1.0 million, or $0.09 per diluted share. In FY2021’s fourth quarter, sales were $132.6 million and net income was $0.2 million, or $0.02 per diluted share.
Balance sheet, debt and liquidity
At July 2, 2022, cash was $1.7 million, current assets $340.0 million and current liabilities $163.7 million; management reported a 2.1 current ratio. Total assets were $406.9 million and shareholders’ equity $124.9 million. Total debt was approximately $103.0 million, including a $94.6 million revolving loan and $7.4 million current debt. The debt-to-equity ratio was 0.86. The company reported $10.8 million of additional borrowing availability and compliance with loan covenants. Management said operating cash flow, borrowing capacity and equipment financing should meet foreseeable requirements.
Operating cash use improved from $15.1 million to $4.9 million, but working capital remained a major cash consumer: receivables increased $25.6 million and inventory increased $19.4 million, partly offset by a $28.6 million rise in accounts payable. Investing cash use was $8.1 million, primarily for equipment and finance-lease prepayments; financing provided $11.2 million.
Material changes and operating developments
- Revenue increased $13.1 million, mainly from new program wins and demand from existing customers, while supply, logistics and pandemic disruptions constrained shipments.
- Gross margin was unchanged at 8.1%; operating margin declined 0.1 percentage point to 1.7%.
- The Shanghai facility was closed for most of the fourth quarter under a government-mandated COVID-19 shutdown. Operations subsequently resumed.
- Foreign-destination sales fell to $93.8 million from $146.5 million; U.S. sales rose to $438.0 million from $372.2 million.
- The five largest customers generated 40% of sales in both FY2022 and FY2021. Two customers represented 13% and 12% of FY2022 sales.
- Order backlog was approximately $407.8 million on July 30, 2022, versus $303.2 million on July 31, 2021. The company cautions backlog can be canceled or rescheduled and is not a reliable predictor of future sales.
Outlook, risks and unusual items
For the first quarter of FY2023, management expected revenue of $125 million to $135 million. It warned that supply-chain disruption and COVID-related issues could continue to limit production and impair operating efficiency, particularly in China. Management cited strong demand and backlog, new program opportunities and continued North American manufacturing interest, but gave no full-year FY2023 earnings guidance.
Key risks include customer concentration and order changes, component shortages, inflation and transportation costs, foreign exchange and interest-rate exposure, international operating disruptions, and start-up costs or capacity constraints as programs ramp. Variable-rate debt exposes results to rising interest rates; the company had no foreign-currency forward contracts outstanding at year-end.
The company’s Audit Committee investigated alleged accounting irregularities; it found inventory and cost-of-sales accounting errors, but the investigation did not result in a restatement. The company is cooperating with SEC inquiries and said it could not estimate any potential loss or penalties. FY2022 results included higher related legal and professional fees. A prior material weakness in internal control was reported as remediated as of July 3, 2021; management and the auditor concluded controls were effective as of July 2, 2022. The auditor identified revenue recognized over time using cost-to-cost estimates as a critical audit matter. The auditor issued an unqualified opinion on the financial statements.
Ordinary-course lawsuits were not expected by management to have a material aggregate effect. Cash dividends are restricted under the credit agreements and are not anticipated in the foreseeable future.
Important facts for investors to verify
- Confirm the intended period: this filing reports FY2022, not 2020 Q4; review the FY2020 filing for the requested 2020 period.
- Track whether backlog converts to shipments and revenue, given customer rescheduling rights and persistent component and logistics constraints.
- Monitor operating cash flow, receivables and inventory growth, revolver availability, debt covenant compliance and borrowing costs.
- Assess the outcome and potential cost of the SEC inquiries, including whether further accounting or control issues emerge.
- Evaluate customer concentration, China production continuity, program ramp costs, and the sustainability of margins and FY2023 guidance.