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 September 30, 1995 Commission File Number
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 18, 1995, 8,532,015 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, 1995
and July 1, 1995 3-4
Consolidated Statements of Income - First Quarter
Ended September 30, 1995 and October 1, 1994 5
Consolidated Statements of Cash Flows - First
Quarter Ended September 30, 1995 and October 1, 1994 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of the
Financial Condition and Results of Operations 11-13
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Events 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, July 1,
1995 1995
(Unaudited) (Audited)
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 208 $ 4,455
Trade receivables, less allowance for doubtful
accounts of $1,185 and $1,185 33,218 33,964
Inventories (Note 1) 29,156 26,883
Real estate held for sale 2,243 2,243
Deferred income tax asset - current 1,488 1,531
Other 4,799 3,932
------ ------
Total current assets 71,112 73,008
------ ------
Property, Plant and Equipment - at cost 90,703 89,255
Less accumulated depreciation 57,494 55,387
------ ------
Total property, plant and equipment 33,209 33,868
------ ------
Other Assets:
Deferred income tax asset - non-current 4,512 5,269
Goodwill(net of accumulated amortization
of $160 and $128) 1,627 1,658
Other 1,197 1,283
------ ------
Total other assets 7,336 8,210
------ ------
$111,657 $115,086
========= =========
See accompanying notes to consolidated financial statements.
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
September 30, July 1,
1995 1995
(Unaudited) (Audited)
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations $ 5,026 $ 5,433
Accounts payable 23,653 21,650
Accrued compensation and vacation 2,379 4,152
Accrued taxes other than income taxes 1,711 1,468
Interest payable 248 329
Other 2,432 2,289
------ ------
Total current liabilities 35,449 35,321
------ ------
Long-term Obligations, less current portion 22,776 28,499
------ ------
Commitments and Contingencies (Note 2)
Shareholders' Equity:
Common stock, no par value, authorized
25,000 shares; issued and outstanding
8,527 and 8,456 shares 38,103 37,484
Retained earnings 14,336 12,741
Foreign currency translation adjustment 993 1,041
------ ------
Total shareholders' equity 53,432 51,266
------ ------
$111,657 $115,086
======== ========
See accompanying notes to consolidated financial statements.
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
First Quarter Ended
September 30, October 1,
1995 1994
(in thousands, except per share amounts)
Net Sales $60,550 $45,436
Cost of sales (including warranty
provision of $151 and $192) 51,625 39,093
------ ------
Gross Profit on Sales 8,925 6,343
Operating Expenses:
Research, development and engineering 1,558 1,325
Selling 979 1,225
General and administrative (including provision
for doubtful accounts receivable of $0
and $184) 3,038 2,598
------ ------
Operating Income 3,350 1,195
Interest Expense 815 670
Other (income)expense 3 (9)
------ ------
Earnings before federal taxes on income 2,532 534
Income Tax Provision 914 206
------ ------
Net Income $ 1,618 $ 328
========= ========
Earnings Per Share (See exhibit 11):
Net Income per Weighted Average Share N.A. $ 0.04
Primary Earnings Per Common Share $ .16 N.A.
Fully Diluted Earnings Per Common Share $ .16 N.A.
Weighted Average Shares Outstanding 8,488 8,273
Primary Shares Outstanding 10,417 N.A.
Fully Diluted Shares Outstanding 10,417 N.A.
See accompanying notes to consolidated financial statements.
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
First Quarter Ended
September 30, October 1,
1995 1994
(in thousands)
Increase (decrease) in Cash and Cash Equivalents:
Cash Flows from Operating Activities:
Net income $1,618 $ 328
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Depreciation and amortization 2,398 2,093
Provision for obsolete inventory 718 0
Provision for warranty 160 0
(Gain)/loss on disposal of property and equipment 3 (31)
Deferred income tax asset 800 179
Changes in Operating Assets and Liabilities:
Trade receivables 746 (2,769)
Inventories (2,991) (1,652)
Other assets (893) (884)
Accounts payable 2,003 2,967
Employee compensation and accrued vacation (1,773) 71
Other liabilities 145 (816)
------ ------
Cash provided (used) by operating activities 2,934 (514)
------ ------
Cash Flows from Investing Activities:
Proceeds from sale of property and equip. 15 222
Purchase of property and equipment (1,614) (1,186)
Change in other assets 0 (50)
------ ------
Cash used in investing activities (1,599) (1,014)
------ ------
Cash Flows from Financing Activities:
Other financing fees (23)
Issuance of common stock 619 59
Proceeds from long-term obligations 0 5,775
Payments on long-term obligations (6,130) (7,249)
------ ------
Cash used in financing activities (5,534) (1,415)
------ ------
Effect of exchange rate changes on cash (48) 475
------ ------
Net decrease in cash and cash equivalents (4,247) (2,468)
Cash and cash equivalents, beginning of year 4,455 4,996
------ ------
Cash and cash equivalents, end of quarter $ 208 $2,528
========= =======
Non-Cash Investing and Financing Activities:
See note 6 to these financial statements
See accompanying notes to consolidated financial statements.
KEY TRONIC CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments 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,
1995.
- ------------------------------------------------------------------------
1. INVENTORIES
September 30, July 1,
1995 1995
(Unaudited) (Audited)
(in thousands)
Finished goods $6,570 $7,891
Work-in-process 3,960 3,734
Raw materials and supplies 23,017 18,770
Reserve for obsolescence (4,391) (3,512)
------ ------
$29,156 $26,883
========= ========
2. COMMITMENTS AND CONTINGENCIES
CAPITAL COMMITMENTS - The amount of firm commitments to contractors and
suppliers for capital expenditures was approximately $539,000 at September 30,
1995.
Litigation
The Company used Mica Sanitary landfill until early 1975. Mica landfill is
a state lead National Priority List site ("NPL"). Mica landfill was placed on
the NPL in 1985. In l988 the Washington Department of Ecology and Spokane
County entered into a Consent Decree requiring the County to conduct a Remedial
Investigation (RI) followed by appropriate Remedial Action (RA). The RI was
completed in September 1992. An interim remedial action plan was completed in
late 1993 and instituted in mid 1994 to be followed by a 5 year performance
monitoring program to determine if additional remedial measures are needed. The
Company has not been named as a Potentially Liable Party ("PLP") under the State
Toxic Control Act ("STCA") or as a Potentially Responsible Party ("PRP") under
CERCLA, as amended ("CERCLA"). Prior to 1989 certain third parties were
designated PRP's and PLP's. The Company made a provision prior to the beginning
of fiscal year 1992 based on information then currently available to it, for its
estimate of probable legal costs to be associated with this matter. The accrued
balance was $900,000 at the end of the first fiscal quarter of 1996 and at the
end of fiscal 1995. The accrued balance reflects management's estimate of the
probable future legal costs associated with this matter. Management does not
believe there to be any reasonably probable losses beyond the existing accrual
for probable losses which could be material to future financial position or
results of operations. No provision has been made to cover any future costs to
the Company of any remedial action or clean-up activities because those costs,
if any, can not be determined at this time. Given the inherent uncertainty in
environmental matters, limited information available with respect to any future
remedial measures, limited information as to the number of PRP's and PLP's, the
uncertainty as to whether the Company will be designated a PRP or PLP with
respect to the site and the complexity of the circumstances surrounding this
matter, management's estimate is subject to and will change as facts and
circumstances warrant. Based upon publicly available estimated total costs of
remediation and clean-up at the site and the contributions to date of designated
PRP's and PLP's, management believes that insurance coverage is probable for any
possible future remedial or clean-up costs to the Company.
Pursuant to the Amended and Restated Purchase and Sale Agreement between
Honeywell, Inc. and Key Tronic Corporation, dated as of July 30, 1993 (the
"Agreement"), the Company assumed liability for a portion of any unknown and
unasserted claims against Honeywell, Inc. ("Honeywell") relating to
environmental matters and to product liability matters associated with products
manufactured by Honeywell prior to its ceasing manufacture of those products on
the closing date of the Agreement. Honeywell retained responsibility for
unasserted claims not assumed by the Company as follows: Honeywell retained
responsibility for unasserted environmental and product liability claims in
excess of $1,000,000 in the aggregate which 1) in the case of environmental
claims are discovered and asserted within two years following the closing date
or which 2) in the case of product liability claims are asserted within five
years following the closing date. Management estimates that unknown and
unasserted product liability claims in the amount of $1,000,000 during the 5
years following the closing of the Agreement are probable and recorded this
liability as part of the acquisition costs. The accrued balance was $412,000
and $610,000, respectively, at the end of the first fiscal quarter of 1996 and
at the end of fiscal 1995. The reduction in the accrued balance reflects charges
for expenses. Management does not believe there to be any reasonably probable
losses beyond the existing accrual for probable losses which could be material
to future financial position or results of operations. The Company has not made
a provision for Honeywell environmental claims which may be discovered and
asserted after the closing date or product liability claims which may be
asserted five or more years after the closing date, because management does not
believe such potential liabilities are estimable at this time. No environmental
claims have been asserted as of the first fiscal quarter of 1996. Given the
inherent uncertainty in litigation, in environmental matters and in contract
interpretation, the inherently limited information available with respect to
unasserted claims and the complexity of the circumstances surrounding these
matters, management's estimates are subject to and will change or be established
as facts and circumstances warrant.
The Company currently has one hundred twenty-two suits by computer keyboard
users which are in State or Federal Courts in California, Illinois, Kansas,
Massachusetts, Michigan, Pennsylvania, New Jersey, New York and Texas. These
suits allege that specific keyboard products manufactured by the company were
sold with manufacturing, design and warning defects which caused or contributed
to their injuries. 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 twenty suits have been
dismissed from California, Florida, Kentucky, New York and Texas. Of the
dismissed suits, one is on appeal in California and seven in New York. The
Company believes it has valid defenses and will vigorously defend these claims.
These claims are in the early stages of discovery. Given the early stage of
litigation, the complexity of the litigation, the inherent uncertainty of
litigation and the ultimate resolution of insurance coverage issues, the range
of probable losses in connection with these suits is not estimable at this time.
Therefore no provision has been made to cover any future costs. Management's
position will change if warranted by facts and circumstances.
The liability for litigation related matters, including compensatory
damages, remediation and legal costs, was $1.4 million, $1.6 million and $2.4
million as of September 30, 1995, July 1, 1995 and October 1, 1994,
respectively.
3. LONG-TERM OBLIGATIONS
On October 24, 1994 the Company entered into a secured financing agreement with
The CIT Group/Business Credit, Inc. (CIT). The agreement contains a $12 million
term note and a revolving loan for up to $28 million. The agreement is secured
by the assets of the Company. This agreement replaced a $5.0 million secured
revolving credit agreement and a $20.9 million note payable to a financial
institution. At September 30, 1995, and July 1, 1995, the company was in
compliance with all debt covenants and restrictions.
Details of this transaction are more fully reported on Form 8-K dated October
31, 1994.
Long-term obligations consist of:
September 30, July 1,
1995 1995
(in thousands)
Note Payable - financial institution $11,990 $11,990
Revolving Line 11,271 16,428
Note Payable - Honeywell, Inc. 2,737 3,649
Litigation Reserve 900 900
Deferred compensation obligation 647 657
Capital lease obligations 257 308
------ ------
27,802 33,932
Less current portion (5,026) (5,433)
------ ------
$22,776 $28,499
======== =======
4. SUPPLEMENTAL CASH FLOW INFORMATION
First Quarter Ended
September 30, October 1,
1995 1994
(in thousands)
Interest payments $801 $591
Income tax payments 120 0
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
The Company provided cash flows of $2.9 million from operating activities
for the first quarter of fiscal 1996 versus $.5 million of cash used in
operating activities during the same period of the prior year.
During the first quarter of 1996, $1.6 million was expended in capital
additions. During the first quarter of the prior year, $1.2 million was expended
in capital additions. The Company anticipates capital expenditures of
approximately $6.9 million through the remainder of the current fiscal year
ending June 29, 1996. Capital expenditures are expected to be financed with the
combination of internally generated funds, capital leases, and limited amounts
of secured indebtedness. The Company is also considering entering into certain
operating leases.
The Company has a secured financing agreement which contains a $12,000,000
term note and a revolving loan for up to $28,000,000. The agreement is secured
by the assets of the corporation. The agreement contains covenants that relate
to minimum net worth, minimum working capital, income statement and balance
sheet ratios and restricts investments, disposition of assets, and payment of
dividends. At September 30, 1995 and July 1, 1995, the company was in compliance
with all debt covenants and restrictions.
The term note is payable in quarterly installments of principal, each in
the amount of $500,000, commencing in November 1995 and maturing in November
2001. This note bears interest at one and three quarters percent (1.75%) in
excess of the Chemical Bank Rate, which approximates prime (8.5% at September
30, 1995).
The revolving loan is renewable and covers an initial period of
approximately three years expiring on the first business day of November 1997.
This loan bears interest at one and one half percent (1.50%) in excess of the
Chemical Bank Rate, which approximates prime. At September 30, 1995, there was
$14.8 million available for use under the revolving loan.
As a result of the acquisition of substantially all of the assets and
liabilities of the Honeywell Keyboard Division (HKD) in fiscal year 1994, the
Company has a $2.7 million note to Honeywell, Inc. This note has three
remaining installments of principal and interest payable on the last business
day of October 1995 and January and April of 1996. This note bears interest at
the prime rate.
Real estate held for sale is carried at net realizable value based upon
appraisals and management's intentions for sale or investment. Management is
actively marketing the properties through real estate brokers and has obtained
independent appraisals. The property is recorded at the lower of cost or net
realizable value.
During the first three months of fiscal year 1996 "other current assets"
increased by $.9 million. This increase is due to approximately $750,000 for
non-trade receivables and $180,000 for deposits.
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.
NET SALES
Net sales for the fiscal 1996 first quarter, which ended September 30,
1995, were $60.6 million compared to $45.4 million for the first quarter of the
previous year. The increase in revenue is a result of additional revenue from
existing customers, new customers and the addition of new product lines.
Keyboard shipments increased 41.1% over the first quarter from the prior
year while the average selling price decreased approximately 9.7%. The increase
in units shipped is due primarily to the sale of new products. The decrease in
average selling price is due primarily to price competition. Non-keyboard
revenue accounted for 13.2% of total revenue in the first quarter versus
9.1% in the first quarter of the prior year.
COST OF SALES
Cost of sales were 85.3% of revenue in the first quarter of 1996 compared
to 86.0% for the first quarter of 1995. The cost of sales percentage decreased
due to cost reductions resulting from increased operating efficiencies and
higher volumes.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering expenses were $1.6 million in the
first quarter of fiscal 1996 and $1.3 million for the same period of fiscal
1995. As a percentage of sales, R, D & E expenditures were 2.6% in the first
quarter of 1996 compared to 2.9% in the first quarter of 1995. As a percent of
revenue the decrease is due primarily to the increase in the revenue base.
SELLING EXPENSES
Selling expenses were $1.0 million in the first quarter of 1996 compared to
$1.2 million in the first quarter of 1995. Selling expenses as a percentage of
revenue were 1.6% for the quarter compared to 2.7% in the same quarter of fiscal
1995. Selling expenses decreased in dollars due to decreased commissions.
Commissions decreased due to the company's decision to discontinue the use of
outside sales representatives. As a percentage of revenue, selling expenses
decreased due to a combination of the increase in revenue and the decrease in
commissions.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $3.0 million in the first quarter
of 1996 compared to $2.6 million in the first quarter of fiscal 1995. As a
percent of revenue G&A expenses were 5.0% in the first quarter compared to 5.7%
during the first quarter of the prior year. As a percent of revenue the
decrease is primarily due to the increased revenue base. The increase in dollar
spending is primarily due to additional hiring costs and increases in both
insurance rates and coverage's.
INTEREST
Interest expense was $815,000 in the first quarter of 1996 compared to
$670,000 for the first quarter of 1995. These increases are due to higher
interest rates and refinancing cost amortization.
INCOME TAXES
Income taxes provision was $914,000 and $206,000 for the first quarter of
1996 and 1995, respectively. In the first quarter of 1996 $58,000 of this
provision and $27,000 of 1995's first quarter provision relate to taxes on
earnings of foreign subsidiaries. The remaining $856,000 of the first quarter
1996 provision relates to taxes on U.S. earnings. The Company has tax loss
carryforwards of approximately $33.7 million which expire in varying amounts in
the years 2003 through 2009.
ESOP
No contributions to the Employee Stock Ownership Plan (ESOP) were made
during the first quarter of fiscal years 1996 and 1995.
BACKLOG
The Company's backlog at the end of the first fiscal quarter of 1996 was
$42.9 million compared to $43.2 million at the end of the 1995 fiscal year and
$35.6 million at the end of the first quarter of fiscal 1995.
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
Exhibit 11 - Computation of Earnings Per Share
(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/ Fred Wenninger
Fred Wenninger Date: November 14, 1995
President and Chief
Executive Officer
/s/ Ronald F. Klawitter
Ronald F. Klawitter Date: November 14, 1995
Principal Financial &
Accounting Officer
Exhibit 11
KEY TRONIC CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(Unaudited)
First Quarter Ended
September 30, October 1,
1995 1994
------------- -----------
Primary
Earnings
Net Income $1,618 NOT
Add after tax interest expense APPLICABLE
applicable to term debt * 0
Add after tax interest income
applicable to short term paper * 0
Income applicable to common stock $1,618
======
Shares **
Weighted average shares outstanding 8,488
Assuming exercise of options reduced
by the number of shares which could
have been purchased with the proceeds
from exercise of such options * 1,929
Adjusted common stock outstanding 10,417
======
Primary earnings per common share $ .16
======
Assuming full dilution
Earnings
Net Income $1,618 NOT
Add after tax interest expense APPLICABLE
applicable to term debt *** 0
Add after tax interest income
applicable to short term paper *** 0
Income applicable to common stock $1,618
======
Shares **
Weighted average shares outstanding 8,488
Assuming exercise of options reduced
by the number of shares which could
have been purchased with the proceeds
from exercise of such options *** 1,929
Adjusted common stock outstanding 10,417
======
Fully diluted earnings per common share $ .16
======
* Proceeds calculated using average market price for the quarter.
** Application of modified treasury stock method of calculating common stock
equivalents due to potential dilution exceeding 20% (APB Opinion No. 15).
*** Proceeds calculated using higher of average or ending market price for
the quarter.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Key
Tronic Corporation's first quarter Form 10-Q for 1996 and is qualified in
its entirety by reference to such Form 10-Q.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-29-1996
<PERIOD-END> SEP-30-1995
<CASH> 208
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<PP&E> 90703
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<BONDS> 0
<COMMON> 38103
0
0
<OTHER-SE> 15329
<TOTAL-LIABILITY-AND-EQUITY> 111657
<SALES> 60550
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<CGS> 51625
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