10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended Commission File Number September 30, 2000 Number 0-11559 KEY TRONIC CORPORATION Washington 91-0849125 (State of Incorporation) (I.R.S. Employer Identification No.) ---------------------- North 4424 Sullivan Spokane, Washington 99216 (509) 928-8000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes / X / No / /. At October 26, 2000, 9,668,330 shares of Common Stock, no par value (the only class of common stock), were outstanding. KEY TRONIC CORPORATION Index Page No. PART I. FINANCIAL INFORMATION: Item 1. Financial Statements: Consolidated Balance Sheets - September 30, 2000 (Unaudited) and July 1, 2000 3-4 Consolidated Statements of Income (Unaudited) First Quarters Ended September 30, 2000 And October 2, 1999 5 Consolidated Statements of Cash Flows (Unaudited) First Quarters Ended September 30, 2000 and October 2, 1999 6 Notes to Consolidated Financial Statements 7-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-12 PART II. OTHER INFORMATION: Item 1. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Events 13 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14
KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) September 30, 2000 July 1 , 2000 ------------------------------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,170 $ 1,013 Trade receivables, less allowance for doubtful accounts of $275 and $855 43,976 34,008 Inventories 24,456 22,720 Real estate held for sale 1,806 1,843 Deferred income tax asset, net 671 889 Customer tooling 1,445 1,748 Other 9,368 6,565 ----- ----- Total current assets 82,892 68,786 ------ ------ Property, plant and equipment - at cost 103,129 103,175 Less accumulated depreciation 82,872 81,825 ------ ------ Total property, plant and equipment 20,257 21,350 ------ ------ Other assets: Deferred income tax asset, net 3,846 3,627 Other (net of accumulated amortization of $1,053 and $964) 692 1,031 Goodwill (net of accumulated amortization of $799 and $767) 989 1,021 --- ------- $108,676 $95,815 ======== =======
See accompanying notes to consolidated financial statements.
KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued, in thousands) September 30, 2000 July 1, 2000 ------------------------------------ (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations $ 2,150 $ 2,105 Accounts payable 31,074 24,315 Accrued compensation and vacation 2,995 2,303 Accrued taxes other than income taxes 910 1,146 Interest payable 46 54 Other 1,543 1,735 ----- ----- Total current liabilities 38,718 31,658 ------ ------ Long-term obligations, less current portion 23,072 17,555 ------ ------ Commitments and contingencies (Note 2) Shareholders' equity: Common stock, no par value, authorized 25,000 shares; issued and outstanding 9,668 and 9,641 shares 38,382 38,304 Retained earnings 8,259 8,053 Accumulated other comprehensive income 245 245 --- --- Total shareholders' equity 46,886 46,602 ------ ------ $108,676 $95,815 ======== ======= See accompanying notes to consolidated financial statements.
KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) First Quarters Ended September 30, 2000 October 2, 1999 -------------------------------------- (in thousands, except per share amounts) Net sales $51,214 $41,775 Cost of sales 45,910 35,807 ------ ------ Gross profit 5,304 5,968 Operating expenses: Research, development and engineering 814 880 Selling 1,534 2,183 General and administrative 2,135 2,243 ----- ------- Operating income 821 662 Interest expense 566 495 Other income (57) (118) ---- ----- Income before income tax provision 312 285 Income tax provision 106 75 --- -- Net income $206 $210 ==== ==== Earnings per share: Earnings per common share - basic and diluted $.02 $ .02 See accompanying notes to consolidated financial statements.
KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) First Quarters Ended September 30, 2000 October 2, 1999 ------------------------------------ (in thousands) Increase (decrease) in cash and cash equivalents: Cash flows from operating activities: Net income $206 $210 Adjustments to reconcile net income to cash used in operating activities: Depreciation and amortization 1,573 1,678 Provision for obsolete inventory 250 (210) Provision for doubtful receivables 198 25 Provision for warranty 50 (50) Gain on disposal of assets (4) (25) Deferred income taxes 0 282 Changes in operating assets and liabilities: Trade receivables (10,166) (3,036) Inventories (1,986) (1,111) Customer tooling 214 (249) Other assets (2,610) 921 Accounts payable 6,759 (990) Accrued compensation and vacation 692 (686) Other liabilities (383) (854) ----- ----- Cash used in operating activities (5,207) (4,095) ------- ------ Cash flows from investing activities: Proceeds from sale of property and equipment 4 33 Purchase of property and equipment (179) (437) ----- ----- Cash used in investing activities (175) (404) ----- ---- Cash flows from financing activities: Issuance of common stock 79 13 Proceeds from long-term obligations 6,023 4,782 Payments on long-term obligations (563) (563) ----- ---- Cash (used in) provided by financing activities 5,539 4,232 ----- ----- Net increase (decrease) in cash and cash equivalents 157 (267) --- ----- Cash and cash equivalents, beginning of period 1,013 1,866 ----- ----- Cash and cash equivalents, end of period $1,170 $1,599 ====== ====== See accompanying notes to consolidated financial statements.
KEY TRONIC CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Unaudited) The interim financial statements are unaudited but, in the opinion of management, reflect all adjustments of a normal and recurring nature necessary for a fair presentation of results of operations for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's annual report for the year ended July 1, 2000.
1. INVENTORIES September 30, 2000 July 1, 2000 (in thousands) Finished goods $7,157 $8,378 Work-in-process 2,924 2,512 Raw materials and supplies 17,002 14,179 Reserve for obsolescence (2,627) (2,349) ------- ------- $24,456 $22,720 ======= =======
2. COMMITMENTS The amount of firm commitments to contractors and suppliers for capital expenditures was approximately $512,000 at September 30, 2000. 3. LONG-TERM OBLIGATIONS
Long-term obligations consist of: September 30, 2000 July 1, 2000 (in thousands) Note payable - GECC (General Electric Capital Corporation) $ 2,744 $ 3,307 Revolving line 21,757 15,735 Deferred compensation obligation 721 618 --- --- 25,222 19,660 Less current portion (2,150) (2,105) ------ ------- $23,072 $17,555 ======= =======
4. SUPPLEMENTAL CASH FLOW INFORMATION
First Quarters Ended September 30, 2000 October 2, 1999 (in thousands) Interest payments $574 $481 Income tax payments 136 57
5. INCOME TAXES The income tax provision for the first quarter of fiscal year 2001 was $106,000 versus income tax provisions of $75,000 for the first fiscal quarter of the prior year. The $106,000 provision for the first quarter of fiscal year 2001 is the result of provisions on the earnings of foreign subsidiaries. The Company's tax expense is primarily from the income taxes on the earnings of the Company's foreign subsidiaries. The $75,000 provision for the first quarter of fiscal year 2000 was net of $288,000 in tax benefits on losses of foreign subsidiaries. The Company has tax loss carryforwards of approximately $34.4 million that expire in varying amounts in the years 2006 through 2020. 6. ADOPTION OF FINANCIAL ACCOUNTING STANDARDS NO. 128 The Company has adopted Financial Accounting Standards No. 128 which requires the presentation of "basic EPS" and "diluted EPS". Basic EPS is computed by dividing income available to common shareholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Diluted EPS is computed by dividing income available to common shareholders by the weighted-average number of common shares and common share equivalents outstanding during the period. Key Tronic uses the Treasury Stock Method required by the standard in calculating the dilutive effect of common stock equivalents. Because of the dilutive nature of outstanding options and warrants, the current quarter's loss creates an antidilutive effect. Therefore the weighted average diluted shares equals the basic weighted average shares. There were no adjustments to the income available to common shareholders for the first quarters ended September 30, 2000 and October 2, 1999. The following table presents the Company's calculations of weighted average shares outstanding (number of shares):
' Adjustment for Potential Weighted Avg. Shares Common shares Total For the Quarter Ended September 30, 2000 9,655,171 293,139 9,948,310 October 2, 1999 9,633,230 301,817 9,935,047
FORWARD-LOOKING STATEMENTS This Quarterly Report contains forward-looking statements in addition to historical information. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Risks and uncertainties that might cause such differences include, but are not limited to those outlined in "Management's Discussion and Analysis of Financial Condition and Results of Operations-Risks and Uncertainties That May Affect Future Results." Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's opinions only as of the date hereof. The Company undertakes no obligation to revise or publicly release the results of any revision to forward-looking statements. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including Quarterly Reports on Form 10-Q. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL RESOURCES AND LIQUIDITY Operating activities used $5.2 million of cash during the first quarter of fiscal year 2001 versus $4.1 million during the same period of the prior year. This change in cash for operating activities is due primarily to the Company's increased accounts receivables offset in part by increased accounts payable. The increase in accounts receivable is due primarily to increased sales and delayed payments by one of the Company's significant customers while the increase in accounts payable was attributable primarily to increased purchased materials for future Electronic Manufacturing Services (EMS) projects. In previous filings, EMS was designated as Contract Design and Manufacturing (CDM). During the first quarter of fiscal year 2001, $0.2 million was expended in capital additions versus $0.4 million spent in capital additions in the same period in the previous fiscal year. The Company anticipates capital expenditures of approximately $2.3 million through the remainder of the current fiscal year ending June 30, 2001. Actual capital expenditures may vary from anticipated expenditures depending upon future results of operations. See RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS, pages 11-12. Capital expenditures are expected to be financed with internally generated funds. The Company has a financing agreement, which contains a term note for up to $11,000,000 and a revolving loan for up to $30 million. During the second quarter of fiscal year 1998, the company entered into an operating lease arrangement with GECC which reduced the borrowing limit by $4.2 million. The revolving loan agreement and term note are secured by the assets of the corporation. The agreement contains financial covenants that relate to maximum capital expenditures, minimum debt service coverage, minimum earnings before interest expense, income tax, depreciation, amortization, and maximum leverage percentages. In addition to these financial covenants, the financing agreement restricts investments, disposition of assets, and payment of dividends. At September 30, 2000 and July 1, 2000, the Company was in compliance with all debt covenants. The term note is payable in quarterly installments of principal, each in the amount of $500,000, which commenced in March 1998 and will end in December 2002. In addition to these scheduled payments, the Company is also paying $21,000 per month against the term note, which is a special agreement with GECC resulting from the Company's lease of its Cheney facility. If debt service coverage is greater than 1.4, this note bears interest at two and three-quarters percent (2.75%) in excess of the applicable London Interbank Offered Rate (LIBOR). If debt service coverage is less than or equal to 1.4, this note bears interest at three percent (3.00%) in excess of the applicable LIBOR rate. At September 30, 2000, the applicable LIBOR rate was 6.62%, and the applicable interest rate was 9.62%. The revolving loan with GECC is renewable and covers an initial period of five years expiring on December 31, 2001. If debt service coverage is greater than 1.4, the applicable interest rate is two and one-half percent (2.5%) in excess of the applicable LIBOR rate. If debt service coverage is less than or equal to 1.4, the applicable interest rate is two and three-quarters percent (2.75%) in excess of the applicable LIBOR rate. At September 30, 2000, the Company had two LIBOR contracts outstanding, one for $5 million and one for $12 million. The LIBOR rate on the $5 million and $12 million LIBOR contract was 6.62%, and the applicable interest rate was 9.37%. LIBOR rates fluctuate on a daily basis. Interest on additional borrowing under the revolving loan is charged at an index rate at 10%. At September 30, 2000, there was $21.8 million borrowed on the revolving loan and approximately $4.0 million available for use under the revolving loan. The Company is required to pay fees of .0375% on the unused revolving loan balance. The revolving loan balance has increased $6.0 million since the Company's fiscal year end at July 1, 2000. This increase can be attributed to cash needs resulting from increased trade receivables and slower than expected payments from customers. Real estate held for sale is carried at the lower of cost or net realizable value. In September of 1997, the Company signed a five year operating lease with a local company for this property. The lease terms include an option to buy the property upon notice at any time during the course of the lease. The Company believes that cash, cash equivalents, funds available under the line of credit, and internally generated funds can satisfy cash requirements for a period in excess of 12 months. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to the risk of fluctuating interest rates in the normal course of business. The Company's major market risk relates to its secured debt. A portion of the Company's accounts receivable and inventories are used as collateral for its term and revolving debt. The interest rates applicable to the Company's debt fluctuate with the LIBOR. Over the past fiscal quarter the highest LIBOR rate was 6.68%. LIBOR rates fluctuate on a daily basis. The Company does not enter into derivative transactions or leveraged swap agreements. Although the Company has international operations, the functional currency for all active subsidiaries, is the U.S. dollar. The Company imports for its own use raw materials that are used in its manufacturing operations. Such purchases are denominated in U.S. dollars and are paid under normal trade terms. NET SALES Net sales for the fiscal 2001 first quarter ended September 30, 2000 were $51.2 million compared to $41.8 million for the first quarter of the previous year. The increase is due to increased business in the Company's EMS projects. EMS revenue accounted for 75.1% of total revenue in the first quarter of fiscal year 2001 versus 45.9% of total revenue in the first quarter of fiscal year 2000. The increase in EMS revenue as a percentage of sales is a direct result of the company's strategy to grow this part of it's business. Keyboard unit shipments decreased 54% for the first quarter of fiscal year 2001 compared to the first quarter of fiscal year 2000, while the average selling price remained fairly consistent. The decrease in units shipped is due primarily to decreased customer orders for keyboards. The decrease in keyboard revenues was offset in part by the increase in EMS revenue. COST OF SALES Cost of sales were 89.6% of revenue in the first quarter of fiscal year 2001, compared to 85.7% for the first quarter of fiscal year 2000. The cost of sales percentage increased as a result of keeping up with higher sales volume. During the first quarter of fiscal year 2001, management placed additional emphasis on material cost reductions through negotiations with major suppliers, as well as changed product designs. RESEARCH, DEVELOPMENT AND ENGINEERING Research, development and engineering (RD&E) expenses were $0.8 million in the first quarter of fiscal year 2001 and $0.9 million for the same period of fiscal year 2000. As a percentage of sales, RD&E expenditures were 1.6% in the first quarter of fiscal year 2001, compared to 2.1% for the same period of the prior year. These decreases were due primarily to project delays and cost controls during the fiscal year 2001. SELLING EXPENSES Selling expenses were $1.5 million in the first quarter of fiscal year 2001 compared to $2.2 million in the first quarter of fiscal year 2000. Selling expenses as a percentage of revenue were 3.0% for the quarter compared to 5.2% in the same quarter of fiscal year 2000. These decreases can be attributed to reduced distribution keyboard sales, which resulted in lower costs for volume incentive rebates and cooperative advertising. GENERAL AND ADMINISTRATIVE General and administrative (G&A) expenses remained fairly constant. They were $2.1 million in the first quarter of fiscal 2001 and $2.2 million for 2000. As a percentage of revenue, G&A expenses were 4.2% in the third quarter of fiscal year 2001 versus 5.4% in the same quarter of the prior year. INTEREST Interest expense was $566,000 in the first quarter of fiscal 2001 compared to $495,000 for the first quarter of fiscal year 2000. This increase resulted from higher interest rates associated with additional borrowing required to cover operating expenses. INCOME TAXES The income tax provision for the first quarter of fiscal year 2001 was $106,000 versus income tax provisions of $75,000 for the first fiscal quarter of the prior year. The $106,000 provision for the first quarter of fiscal year 2001 is the result of provisions on the earnings of foreign subsidiaries. The Company's tax expense is primarily from the income taxes on the earnings of the Company's foreign subsidiaries. The $75,000 provision for the first quarter of fiscal year 2000 was net of $288,000 in tax benefits on losses of foreign subsidiaries. The Company has tax loss carryforwards of approximately $34.4 million that expire in varying amounts in the years 2006 through 2020. ESOP No contributions to the Employee Stock Ownership Plan (ESOP) were made during the first quarter of fiscal years 2001 and 2000. BACKLOG The Company's backlog at the end of first fiscal quarter of fiscal year 2001 was $23.6 million compared to $35 million at the end of fiscal year 2000 and $11.5 million at the end of the first quarter of fiscal year 2000. The decrease in the backlog from fiscal year end is attributable in part to orders shipped in the fourth quarter of fiscal year 2000 that had been held up in the third quarter by part shortages from Asian suppliers. RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS The following risks and uncertainties could affect the Company's actual results and could cause results to differ materially from past results or those contemplated by the Company's forward-looking statements. When used herein, the words "expects", "believes", "anticipates" and similar expressions are intended to identify forward-looking statements. Potential Fluctuations in Quarterly Results. The Company's quarterly operating results have varied in the past and may vary in the future due to a variety of factors, including changes in overall demand for computer products, success of customers' programs, timing of new programs, new product introductions or technological advances by the Company, its customers and its competitors and changes in pricing policies by the Company, its customers and its competitors. For example, the Company relies on customers' forecasts to plan its business. If those forecasts are overly optimistic, the Company's revenues and profits may fall short of expectations. Conversely, if those forecasts are too conservative, the Company could have an unexpected increase in revenues and profits. Competition. The EMS and keyboard industries are intensely competitive. Most of the Company's principal competitors are headquartered in Asian countries that have a low cost labor force. Those competitors may offer customers lower prices on certain high volume programs. This could result in price reductions, reduced margins and loss of market share, all of which would materially and adversely affect the Company's business, operating results and financial condition. In addition, competitors can copy the Company's non-proprietary designs after the Company has invested in development of products for customers, thereby enabling such competitors to offer lower prices on such products due to savings in development costs. Concentration of Major Customers. At present, the Company's customer base is highly concentrated, and there can be no assurance that its customer base will not become more concentrated. Three of the Company's EMS customers accounted for 38%, 9%, and 8% of net sales during fiscal 2000. In 1999, these same customers accounted for 24%, 11% and 13% of the Company's net sales. There can be no assurance that the Company's principal customers will continue to purchase products from the Company at current levels. Moreover, the Company typically does not enter into long-term volume purchase contracts with its customers, and the Company's customers have certain rights to extend or delay the shipment of their orders. The loss of one or more of the Company's major customers or the reduction, delay or cancellation of orders from such customers could materially and adversely affect the Company's business, operating results and financial condition. Dependence on Key Personnel. The Company's future success depends in large part on the continued service of its key technical, marketing and management personnel and on its ability to continue to attract and retain qualified employees. The competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting and retaining such personnel. The loss of key employees could have a material adverse effect on the Company's business, operating results and financial condition. Litigation. The Company currently has fifteen lawsuits by computer keyboard users which are in state or federal courts in New York. These suits allege that specific keyboard products manufactured by the Company were sold with manufacturing, design and warning defects which caused or contributed to injury. The alleged injuries are not specifically identified but are referred to as repetitive stress injuries (RSI) or cumulative trauma disorders (CTD). These suits seek compensatory damages and some seek punitive damages. It is more likely than not that compensatory damages, if awarded, will be covered by insurance; however, the likelihood that punitive damages, if awarded, will be covered by insurance is remote. A total of 123 lawsuits have been dismissed in California, Connecticut, Florida, Illinois, Kansas, Kentucky, Maryland, Massachusetts, Michigan, New Jersey, New York, Pennsylvania and Texas. Technological Change and New Product Risk. The market for the Company's products is characterized by rapidly changing technology, evolving industry standards, frequent new product introductions and relatively short product life cycles. The introduction of products embodying new technologies or the emergence of new industry standards can render existing products obsolete or unmarketable. The Company's success will depend upon its ability to enhance its existing products and to develop and introduce, on a timely and cost-effective basis, new products that keep pace with technological developments and emerging industry standards and address evolving and increasingly sophisticated customer requirements. Failure to do so could substantially harm the Company's competitive position. There can be no assurance that the Company will be successful in identifying, developing, manufacturing and marketing products that respond to technological change, emerging industry standards or evolving customer requirements. Dilution and Stock Price Volatility. As of September 30, 2000, there were outstanding options and warrants for the purchase of approximately 2,000,000 shares of common stock of the Company (Common Stock), of which options and warrants for approximately 1,400,000 shares were vested and exercisable. Holders of the Common Stock will suffer immediate and substantial dilution to the extent outstanding options and warrants to purchase the Common Stock are exercised. The stock price of the Company may be subject to wide fluctuations and possible rapid increases or declines over a short time period. These fluctuations may be due to factors specific to the Company such as variations in quarterly operating results or changes in analysts' earnings estimates, or to factors relating to the computer industry or to the securities markets in general, which, in recent years, have experienced significant price fluctuations. These fluctuations often have been unrelated to the operating performance of the specific companies whose stocks are traded. PART II. OTHER INFORMATION: Item 1. Legal Proceedings None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Events Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. KEY TRONIC CORPORATION /s/ Jack W. Oehlke November 15, 2000 Jack W. Oehlke Date (Director, President and Chief Executive Officer) /s/ Ronald F. Klawitter November 15, 2000 Ronald F. Klawitter Date Principal Financial Officer Principal Accounting Officer SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.