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 March 30, 1996 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 May 7, 1996, 8,533,307 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 - March 30, 1996 and
July 1, 1995 3-4
Consolidated Statements of Income - Third Quarter
Ended March 30, 1996 and April 1, 1995 5
Consolidated Statements of Income - Three Quarters
Ended March 30, 1996 and April 1, 1995 6
Consolidated Statements of Cash Flows - Three Quarters
Ended March 30, 1996 and April 1, 1995 7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of the
Financial Condition and Results of Operations 11-19
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Events 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 30, July 1,
1996 1995
(Unaudited) (Audited)
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $1,387 $4,455
Trade receivables, less allowance for doubtful
accounts of $1,185 and $1,185 22,388 33,964
Inventories (Note 1) 21,024 26,883
Real estate held for sale 2,243 2,243
Deferred income tax asset - current 1,165 1,531
Other 3,826 3,932
------ ------
Total current assets 52,033 73,008
------ ------
Property, Plant and Equipment - at cost 95,101 89,255
Less accumulated depreciation 62,182 55,387
------ ------
Total property, plant and equipment 32,919 33,868
------ ------
Other Assets:
Deferred income tax asset - non-current 4,403 5,269
Goodwill(net of accumulated amortization
of $223 and $128) 1,563 1,658
Other 1,699 1,283
------ ------
Total other assets 7,665 8,210
------ ------
$92,617 $115,086
======= ========
See accompanying notes to consolidated financial statements.
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
March 30, July 1,
1996 1995
(Unaudited) (Audited)
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations $3,237 $5,433
Accounts payable 12,861 21,650
Accrued compensation and vacation 2,404 4,152
Accrued taxes other than income taxes 1,481 1,468
Interest payable 171 329
Other 2,347 2,289
------ ------
Total current liabilities 22,501 35,321
------ ------
Long-term Obligations, less current portion 16,902 28,499
------ ------
Commitments and Contingencies (Note 2)
Shareholders' Equity:
Common stock, no par value, authorized
25,000 shares; issued and outstanding
8,533 and 8,456 shares 38,162 37,484
Retained earnings 14,066 12,741
Foreign currency translation adjustment 986 1,041
------ ------
Total shareholders' equity 53,214 51,266
------- ------
$92,617 $115,086
======== ========
See accompanying notes to consolidated financial statements.
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Third Quarter Ended
March 30, April 1,
1996 1995
(in thousands, except per share amounts)
Net Sales $41,217 $53,187
Cost of sales (including warranty
provision of $231 and $275) 36,827 44,475
------ ------
Gross Profit on Sales 4,390 8,712
Operating Expenses:
Research, development and engineering 1,374 1,787
Selling 1,660 1,296
General and administrative 2,848 2,985
------ ------
Operating Income (Loss) (1,492) 2,644
Interest Expense (721) (838)
Other income 1,465 30
------ ------
Earnings (Loss) before federal taxes on income (748) 1,836
Income Tax Provision 218 437
------ ------
Net Income (Loss) $ (966) $1,399
======== =======
Earnings Per Share:
Net (Loss) per Weighted Average Share $ (.11) N.A.
Primary Earnings Per Common Share N.A. $.14
Fully Diluted Earnings Per Common Share N.A. $.14
Weighted Average Shares Outstanding 8,533 8,349
Primary Shares Outstanding N.A. 9,937
Fully Diluted Shares Outstanding N.A. 10,271
See accompanying notes to consolidated financial statements.
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Quarters Ended
March 30, April 1,
1996 1995
(in thousands, except per share amounts)
Net Sales $158,392 $147,371
Cost of sales (including warranty
provision of $699 and $763) 137,034 124,757
-------- -------
Gross Profit on Sales 21,358 22,614
Operating Expenses:
Research, development and engineering 4,344 4,566
Selling 3,922 3,902
General and administrative 9,350 8,233
------ ------
Operating Income 3,742 5,913
Interest Expense (2,422) (2,272)
Other income 1,528 50
------ ------
Earnings before federal taxes on income 2,848 3,691
Income Tax Provision 1,500 1,115
------ ------
Net Income $ 1,348 $ 2,576
======== ========
Earnings Per Share:
Primary Earnings Per Common Share $.13 $.27
Fully Diluted Earnings Per Common Share $.13 $.25
Primary Shares Outstanding 10,028 9,720
Fully Diluted Shares Outstanding 10,028 10,234
See accompanying notes to consolidated financial statements.
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Quarters Ended
March 30, April 1,
1996 1995
(in thousands)
Increase (decrease) in Cash and Cash Equivalents:
Cash Flows from Operating Activities:
Net income $1,348 $2,576
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Depreciation and amortization 7,505 6,582
Provision for obsolete inventory 918 1,363
Provision for doubtful receivables 0 160
Provision for warranty 700 763
(Gain) on disposal of property and equipment (4) (98)
Deferred income tax asset 1,232 951
Changes in Operating Assets and Liabilities:
Trade receivables 11,576 (3,450)
Inventories 4,941 (7,314)
Other assets (645) (623)
Accounts payable (8,789) (264)
Employee compensation and accrued vacation (1,748) 1,046
Other liabilities (788) (1,131)
------ -------
Cash provided by operating activities 16,246 561
------ -------
Cash Flows from Investing Activities:
Proceeds from sale of property and equip. 56 262
Purchase of property and equipment (6,178) (5,777)
------ -------
Cash used in investing activities (6,122) (5,515)
------ -------
Cash Flows from Financing Activities:
Refinancing Fees 0 (1,210)
Other financing fees (23) 0
Issuance of common stock 678 601
Proceeds from long-term obligations 2,506 28,368
Payments on long-term obligations (16,299) (26,883)
-------- --------
Cash provided (used) in financing activities (13,138) 876
-------- --------
Effect of exchange rate changes on cash (54) 1,093
------ -------
Net decrease in cash and cash equivalents (3,068) (2,985)
Cash and cash equivalents, beginning of year 4,455 4,996
------ ------
Cash and cash equivalents, end of quarter $ 1,387 $ 2,011
======== =======
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
March 30, July 1,
1996 1995
(Unaudited) (Audited)
(in thousands)
Finished goods $4,704 $7,891
Work-in-process 2,548 3,734
Raw materials and supplies 17,019 18,770
Reserve for obsolescence (3,247) (3,512)
------ ------
$21,024 $26,883
======== =======
2. COMMITMENTS AND CONTINGENCIES
CAPITAL COMMITMENTS - The amount of firm commitments to contractors and
suppliers for capital expenditures was approximately $113,000 at March 30,
1996.
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 1988 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.
At the end of the third fiscal quarter of 1996, the end of the third fiscal
quarter of 1995, and at the end of fiscal 1995, the accrued balance was
$900,000. 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, and based upon the recent settlement (see MD&A
below) and on-going negotiation with insurers, 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 $35,000,
$610,000, and $735,000, respectively, at the end of the third fiscal quarter of
1996, at the end of fiscal 1995, and at the end of the third fiscal quarter of
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 third 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 seventeen suits by computer keyboard
users which are in State or Federal Courts in California, Connecticut Illinois,
Kansas, Maryland, 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-nine suits have been dismissed from California, Illinois, Florida,
Kentucky, Massachusetts, New Jersey, 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 $1.0 million, $1.6 million and $2.2
million as of March 30, 1996, July 1, 1995 and April 1, 1995, respectively.
3. LONG-TERM OBLIGATIONS
The Company has a secured financing agreement which 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. At March 30, 1996, and July 1, 1995, the company
was in compliance with all debt covenants and restrictions.
Long-term obligations consist of:
March 30, July 1,
1996 1995
(in thousands)
Note Payable - financial institution $10,990 $11,990
Revolving Line 6,470 16,428
Note Payable - Honeywell, Inc. 912 3,649
Litigation Reserve 900 900
Deferred compensation obligation 627 657
Capital lease obligations 240 308
------ ------
20,139 33,932
Less current portion (3,237) (5,433)
------ ------
$16,902 $28,499
======= =======
4. SUPPLEMENTAL CASH FLOW INFORMATION
Third Quarter Ended
March 30, April 1,
1996 1995
(in thousands)
Interest payments $773 $808
Income tax payments 0 0
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
With the exception of historical information contained in this Discussion
and Analysis, statements contained herein are forward-looking and subject to
risks and uncertainties that could cause actual results to differ materially
from those reflected in the forward-looking statements, including those
discussed below and those set forth from time to time in the Company's other
Securities and Exchange Commission filings. Readers should not place undue
reliance on these forward-looking statements which reflect management's
analysis only as of the date hereof. The Company undertakes no obligation
to publicly release the results of any revision to these forward-looking
statements which may be made to reflect events or circumstances after the
date hereof or to reflect occurrence of unanticipated events.
CAPITAL RESOURCES AND LIQUIDITY
The Company provided cash flows of $16.2 million from operating activities
for the first three quarters of fiscal 1996 versus $.6 million of cash provided
in operating activities during the same period of the prior year.
During the first three quarters of 1996, $6.2 million was expended in
capital additions. During the first three quarters of the prior year, $5.8
million was expended in capital additions. The Company anticipates capital
expenditures of approximately $2.3 million through the remainder of the current
fiscal year ending June 29, 1996. Actual capital expenditures may vary from
anticipated expenditures depending upon future results of operations. See
RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS, page 16-19. Capital
expenditures are expected to be financed with a 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 March 30, 1996, 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 (8.25% at March 30,
1996).
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. The loan balance decreased $10.0
million since year end due to reduced inventories and receivables. At March
30, 1996, there was $10.9 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 note to Honeywell, Inc., which has one remaining installment of
principal for $900,000 and interest payable on the last business day of 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 nine months of fiscal year 1996 "trade receivables"
decreased $11.6 million. This decrease is the result of a decrease in revenue
for the third quarter and improved days sales outstanding.
Accounts payable and inventories decreased $8.8 million and $5.9 million,
respectively, during the first nine months of fiscal 1996. These decreases are
the result of decreased inventory requirements to support customer forecasts.
The effect of decreased inventory and the decreased trade receivables is
reflected in the revolving loan balance, which has decreased $10 million during
the first nine months of fiscal 1996.
On January 3, 1996, the Company reached a settlement in the amount of
$1,440,000 with one of its insurers for reimbursement of costs associated with
the Colbert landfill (a Superfund site), which were incurred and paid in
previous years. This amount is recorded as "other income" in the financial
statements in the current quarter. No settlement has been reached with the
final insurer, and therefore, the amount of the contingent gain is not
determinable. Negotiations have commenced, and any recoveries will be recorded
upon settlement.
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. This projection is subject
to uncertainty based upon future results of operations. See RISKS AND
UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS, page 16-19.
NET SALES
Net sales for the fiscal 1996 third quarter, which ended March 30, 1996,
were $41.2 million compared to $53.2 million for the third quarter of the
previous year. The decrease is due to a decrease in sales to two major OEM
customers. For the nine months ended March 30, 1996, sales were $158.4 million
compared to $147.4 million for the same period of the previous year. This is
mainly due to a year to date increase in sales to two major OEM customers.
Keyboard unit shipments decreased 20.8% over the third quarter from the
prior year while the average selling price decreased approximately 9.5%. These
decreases are due to a third quarter decrease in sales to two major OEM
customers and general market conditions. For the nine months ended March 30,
1996, unit shipments increased 12.6% over the same period of the prior year,
which is primarily due to general market conditions. For the nine months ended
March 30, 1996, the average selling price decreased 9.8% over the same period
of the prior year due to competitive forces on keyboard pricing. Non-Keyboard
revenue accounted for 18.7% of total revenue in the third quarter of 1996
versus 12.2% in the third quarter of the prior year. For the nine months ended
March 1, 1996, non-keyboard revenue accounted for 15.1% of total revenue versus
10.2% for the same period of the prior year. The latest forecasts from some
major customers lead the Company to expect a reduction in orders resulting in
an operating loss in the coming quarter. See POTENTIAL FLUCTUATIONS IN
QUARTERLY RESULTS, page 16 and CONCENTRATION OF MAJOR CUSTOMERS on page 16-17.
COST OF SALES
Cost of sales were 89.4% of revenue in the third quarter of 1996 compared
to 83.6% for the third quarter of 1995. Cost of sales were 86.5% of revenue
for the nine months ended March 30, 1996, compared to 84.7% for the same period
of the prior year. The cost of sales percentage increased due to a decrease in
average selling price and unfavorable absorption.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering expenses were $1.4 million in the
third quarter of fiscal 1996 and $1.8 million for the same period of fiscal
1995. As a percentage of sales, R, D & E expenditures were 3.3% in the third
quarter of 1996 compared to 3.4% in the third quarter of 1995. These decreases
are due to the completed development of a major program prior to the third
quarter in the current fiscal year. Research, development, and engineering
expenses were $4.3 million for the nine months ended March 30, 1996, and $4.6
million for the same period of the prior year. As a percentage of sales, R,
D & E expenditures were 2.7% during this period compared to 3.1% for the same
period of the prior year. As a percent of revenue the decrease is due
primarily to the increase in the revenue base.
SELLING EXPENSES
Selling expenses were $1.7 million in the third quarter of 1996 compared
to $1.3 million in the third quarter of 1995. Selling expenses as a percentage
of revenue were 4.0% for the quarter compared to 2.4% in the same quarter of
fiscal 1995. This increase is primarily due to costs associated with a planned
launch of new products into the retail market. Selling expenses were $3.9
million for the nine months ended March 30, 1996, compared to $3.9 million
for the same period of the prior year. Selling expenses as a percentage of
revenue were 2.5% during this period compared to 2.7% for the same period of
the prior year.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2.8 million in the third quarter
of 1996 compared to $3.0 million in the third quarter of fiscal 1995. This
decrease is primarily due to a decrease in bad debt provision. As a percent of
revenue G&A expenses were 6.9% in the third quarter of 1996 compared to 5.6%
during the third quarter of the prior year. This increase is mainly due to the
decrease in revenues. General and administrative expenses were $9.4 million
for the nine months ended March 30, 1996, compared to $8.2 million for the same
period of the prior year. As a percent of revenue, G&A expenses were 5.9%
during this period compared to 5.6% during the same period of the prior year.
The increase in G&A expenses is primarily due to increases in compensation,
insurance costs and foreign exchange losses.
INTEREST
Interest expense was $721,000 in the third quarter of 1996 compared to
$838,000 for the third quarter of 1995. This decrease is due to a decrease in
the revolving loan and long term debt. For the nine months ended March 30,
1996, interest expense was $2,422,000 compared to $2,272,000 for the same
period of the prior year. These increases are due to higher interest rates
and refinancing cost amortization.
INCOME TAXES
Income tax provision was $218,000 and $437,000 for the third quarter of
1996 and 1995, respectively. In the third quarter of 1996, $60,000 of this
provision and $89,000 of 1995's third quarter provision relate to taxes on
earnings of foreign subsidiaries. The balance of these provisions relates to
taxes on U.S. earnings. For the nine months ended March 30, 1996, the income
tax provision was $1,500,000 compared to $1,115,000 for the same period of the
prior year. Taxes on earnings of foreign subsidiaries account for $157,000
and $165,000, respectively, for the nine month periods ending March 30, 1996,
and April 1, 1995. The balance of this provision relates to taxes on U.S.
earnings. The Company has tax loss carryforwards of approximately $29.2
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 three quarters of fiscal years 1996 and 1995.
BACKLOG
The Company's backlog at the end of the third fiscal quarter of 1996 was
$25.7 million compared to $43.2 million at the end of the 1995 fiscal year and
$49.3 million at the end of the third quarter of fiscal 1995. The drop in
backlog from the end of fiscal 1995 is due primarily to a significant reduction
in a program for a major customer and a program that reached the end of its'
life for another customer.
RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS
The Company's future business, financial condition and actual results of
operations can be materially affected by numerous risks and uncertainties, some
of which are beyond the Company's control. The following discussion reviews
some of these risks and uncertainties:
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 success of customers'
programs, timing of new programs, new product introductions or technological
advances by the Company and its competitors and changes in pricing policies by
the Company 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 keyboard and other input device industry is intensely competitive.
Most of the Company's principal competitors are headquartered in Japan and
other Asian countries that have a low cost labor force. Those competitors may
be able to 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 OEM customers accounted for 32%, 20% and 7%
individually, of net sales during the first 9 months of fiscal 1996. In 1995,
the same customers accounted for 23%, 19% and 12% 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. In addition,
the Company does not have any employment contracts with its key 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 is a party to approximately 118 lawsuits brought by
computer keyboard users in state and federal courts. These lawsuits allege
that specific keyboard products manufactured by the Company were sold with
manufacturing, design and warning defects which caused or contributed to the
claimants' alleged injuries, generally referred to as repetitive stress
injuries (RSI) or cumulative trauma disorders (CTD). The Company believes
it has valid defenses to these claims, and it will vigorously defend them.
These lawsuits are in the early stages of discovery. At this time, management
believes that it is not likely that the ultimate outcome of these lawsuits will
have a material adverse effect on the Company's financial position. However,
given the limited information currently available, the complexity of the
litigation, the inherent uncertainty of litigation and the ultimate
resolution of insurance coverage issues, management's position will change
if warranted by facts and circumstances.
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
As of March 30, 1996, there were outstanding options for the purchase of
3,533,307 shares, of which options for approximately 2,956,380 shares were
vested and exercisable. Purchasers of the Common Stock offered hereby will
suffer immediate and substantial dilution to the extent outstanding options to
purchase the Company's Common Stock are exercised.
Possible Volatility of Stock Price
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' earning 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. Investors in
the Company's Common Stock should be willing to incur the risk of such
fluctuations.
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "KTCC". The following table sets forth, for the Company's fiscal
quarters indicated, the high and low closing sale price per share of the
Common Stock as reported by Nasdaq.
1996 High Low
1st Quarter $17.922 $13.875
2nd Quarter $13.875 $ 7.750
3rd Quarter $ 9.000 $ 5.375
1995 High Low
1st Quarter $11.500 $ 6.000
2nd Quarter $11.000 $ 9.000
3rd Quarter $14.375 $10.000
4th Quarter $16.125 $13.500
The Company has not paid any cash dividends on its Common Stock during the
last two fiscal years. The Company currently intends to retain its earnings
for its business and does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. The Company's ability to pay
dividends is limited by certain financial covenants in the Company's bank
loan agreements.
As of March 30, 1996, there were approximately 1,589 common shareholders
of record.
Control by the Hiller Key Tronic Partners, L.P. and The Hiller Group
Hiller Key Tronic Partners, L.P. ("HKT Partners") is a limited partnership
created by The Hiller Group, a corporate management organization. Pursuant to
an agreement between The Hiller Group and the Company, Stanley Hiller, Jr., who
currently has approximately 66.73% interest in HKT Partners, was appointed as a
Director and Chairman of the Company's Executive Committee in February 1992 and
acquired the right to designate three additional persons to be appointed to the
Company's Board of Directors. Mr. Hiller has served as Chairman of the Board
of Directors since September 1995. HKT Partners beneficially owns
approximately 24% of the outstanding shares of Common Stock of the Company.
This concentration of ownership, in conjunction with the agreement between the
Company and The Hiller Group, enables The Hiller Group to exert significant
control over corporate actions and may have the effect of delaying or
preventing a change in control of the Company.
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
None
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/ Fred Wenninger
-----------------------
Fred Wenninger Date: May 7, 1996
President
/s/ Ronald F. Klawitter
-----------------------
Ronald F. Klawitter Date: May 7, 1996
Principal Financial &
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Key Tronic
Corporation's 3rd Quarter Form 10-Q for 1996 and is qualified in its entirety
by reference to such Form 10-Q.
</LEGEND>
<CIK> 0000719733
<NAME> PAULA BENIQUEZ
<MULTIPLIER> 1000
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<FISCAL-YEAR-END> JUN-29-1996
<PERIOD-END> MAR-30-1996
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