Key Tronic Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended June 29, 2013 (52 weeks). The filing also reports fourth-quarter results. Amounts are in U.S. dollars; financial statement figures are in thousands unless otherwise stated.
Business context
Key Tronic provides electronic manufacturing services (EMS) to OEMs, including engineering, procurement, plastics molding, sheet-metal fabrication, assembly, and testing. Manufacturing operations are in the United States, Mexico, and China. EMS generated $358.6 million of FY2013 sales; keyboard sales were $2.4 million.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $361.0 million | $346.5 million |
| Gross profit / margin | $34.5 million / 9.6% | $29.8 million / 8.6% |
| Operating income / margin | $18.1 million / 5.0% | $14.4 million / 4.1% |
| Net income | $12.6 million | $11.6 million |
| Diluted EPS | $1.15 | $1.10 |
| Cash from operations | $29.3 million | Used $5.1 million |
| Capital expenditures | $3.5 million | $4.7 million |
At year-end, cash was $10.8 million, working capital was $73.8 million, and the current ratio was 2.9. The $30 million Wells Fargo revolver had no balance outstanding, leaving $30 million available; the company reported covenant compliance. Total assets were $135.1 million and shareholders’ equity was $94.2 million. The balance sheet also reported $2.0 million of current and long-term “other long-term obligations,” including lease obligations.
Fourth-quarter sales were $84.6 million versus $96.7 million in FY2012 Q4; net income was $2.4 million versus $3.8 million. FY2013 quarterly sales declined from $97.5 million in Q1 to $84.6 million in Q4.
Changes versus prior year
- Annual sales increased 4.2%, driven principally by new programs, partly offset by reduced orders from a large customer and program losses.
- Gross margin improved by 1.0 percentage point, mainly from lower material costs as a share of sales; higher overhead to support added staffing and capacity partly offset the benefit. Operating expenses were 4.5% of sales in both years.
- Net income rose 8.2%, while the effective tax rate increased to 29.5% from 16.0%, limiting earnings growth.
- Operating cash flow improved substantially, aided by lower receivables and inventories as sales eased in the fourth quarter. Inventory declined $13.3 million and receivables declined $13.6 million; accounts payable declined $16.6 million.
- Revolving debt fell from $15.0 million at FY2012 year-end to zero. Cash rose from $0.5 million to $10.8 million.
- Customer and program counts increased to 56 customers and 183 programs from 48 and 165. The five largest customers still represented 71% of sales; three customers individually accounted for 23%, 21%, and 19%.
Outlook, risks, and unusual items
- Management expected FY2014 Q1 sales of $73 million to $78 million, citing reduced orders from another large customer and slower-than-anticipated ramps for some new programs. Management said future results depend on customer orders, new-program timing, and macroeconomic conditions; no full-year earnings guidance was provided.
- Backlog was approximately $60.0 million on July 27, 2013, down from $83.1 million a year earlier. The company cautioned that orders may be rescheduled or canceled and backlog is not a reliable forecast of sales.
- Customer concentration, demand volatility, component shortages and supplier dependence, competitive pricing, program start-up costs, foreign operations and currency movements, and reliance on credit availability are key disclosed risks. The company had $68.5 million of open purchase-order commitments for materials and supplies, subject to cancellation terms and fluctuating requirements.
- Mexican-peso forward contracts of $69.7 million were outstanding at year-end; management uses them to hedge certain peso expenses. Foreign-exchange gains and losses may affect reported comprehensive income and future cost of sales.
- On July 1, 2013, after fiscal year-end, Key Tronic acquired Sabre Manufacturing for $6.0 million cash, funded from existing cash. Sabre adds sheet-metal fabrication capacity in Juarez; the initial purchase-price allocation had not been determined.
- Legal proceedings in the ordinary course were not expected by management to have a material adverse effect. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the customer order reductions and slower new-program ramps persisted, and whether the stated FY2014 Q1 sales range was achieved.
- Whether customer concentration decreased as new programs scaled up, given the top five customers’ 71% share of FY2013 sales.
- Whether the strong FY2013 operating cash flow reflects sustainable working-capital management or primarily the year-end sales and inventory decline.
- Sabre’s purchase-price allocation, integration costs, operating contribution, and effect on cash and capacity after acquisition.
- The realization and timing of tax credits and foreign-earnings repatriation: the filing reports $7.9 million of tax credit carryforwards and estimates additional U.S. tax if permanently reinvested foreign earnings are repatriated.