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 29, 1997 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 1, 1997 9,610,830 shares of Common Stock, no par value (the only
class of common stock), were outstanding.
<TABLE>
<CAPTION>
KEY TRONIC CORPORATION
Index
<S> <C> <C>
Page No.
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets - March 29, 1997
and June 29, 1996 3-4
Consolidated Statements of Income - Third Quarters
Ended March 29, 1997 and March 30, 1996 5
Consolidated Statements of Income - Two Quarters
Ended March 29, 1997 and March 30, 1996 6
Consolidated Statements of Cash Flows - Two Quarters
Ended March 29, 1997 and March 30, 1996 7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of the
Financial Condition and Results of Operations 12-18
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Events 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
<TABLE>
<CAPTION>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 29, June 29,
1997 1996
------------- --------
(Unaudited) (Audited)
(in thousands)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $566 $2,569
Trade receivables, less allowance for doubtful
accounts of $1,000 and $932 30,660 23,358
Inventories (Note 1) 23,305 21,966
Real estate held for sale 2,243 2,243
Deferred income tax asset - current 1,462 1,295
Other 6,236 3,322
------ ------
Total current assets 64,472 54,753
------ ------
Property, Plant and Equipment - at cost 99,993 94,609
Less accumulated depreciation 68,308 63,264
------ ------
Total property, plant and equipment 31,685 31,345
------ ------
Other Assets:
Deferred income tax asset - non-current 4,184 4,211
Goodwill(net of accumulated amortization
of $351 and $255) 1,435 1,531
Other 1,007 1,692
------ ------
Total other assets 6,626 7,434
------ ------
$102,783 $93,532
======== =======
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
March 29, June 29,
1997 1996
------------- --------
(Unaudited) (Audited)
(in thousands)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations $1,144 $2,265
Accounts payable 18,487 15,577
Accrued compensation and vacation 3,193 2,936
Accrued taxes other than income taxes 1,383 1,125
Interest payable 64 253
Other 2,100 4,577
------ ------
Total current liabilities 26,371 26,733
------ ------
Long-term Obligations, less current portion 26,625 17,323
------ ------
Commitments and Contingencies (Note 2)
Shareholders' Equity:
Common stock, no par value, authorized
25,000 shares; issued and outstanding
9,610 and 8,534 shares 38,164 38,142
Retained earnings 11,189 10,906
Foreign currency translation adjustment 434 428
------ ------
Total shareholders' equity 49,787 49,476
------ ----
$102,783 $93,532
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Third Quarter Ended
March 29, March 30,
1997 1996
------------- --------
(Unaudited) (Audited)
(in thousands, except
per share amounts)
<S> <C> <C>
Net Sales $49,195 $41,217
Cost of sales (including warranty
provision of $197 and $231) 42,677 36,827
------ ------
Gross Profit on Sales 6,518 4,390
Operating Expenses:
Research, development and engineering 1,139 1,374
Selling 2,238 1,660
General and administrative (including provision
for doubtful accounts receivable of $0
and $0) 2,433 2,848
------ ------
Operating Income (Loss) 708 (1,492)
------ ------
Interest Expense (307) (721)
Other (income)expense (41) 1,465
------ ------
Earnings (loss) before federal taxes on income 442 (748)
Income Tax Provision 176 218
------ ------
Income (loss) before extraordinary item 266 (966)
Extraordinary item - early extinguishment of debt 247 N.A.
(less applicable income taxes of $127) ------ ------
Net Income (Loss) $19 $(966)
======== =======
Earnings Per Share:
Net Loss Per Weighted Average Share N.A. $(.11)
Earnings Per Share Before Extraordinary Item:
Primary Earnings Per Common Share $0.03 N.A.
Fully Diluted Earnings Per Common Share $0.03 N.A.
Earnings Per Share After Extraordinary Item:
Primary Earnings Per Common Share $0.00 N.A.
Fully Diluted Earnings Per Common Share $0.00 N.A.
Weighted Average Shares Outstanding N.A. 8,533
Primary Shares Outstanding 9,446 N.A.
Fully Diluted Shares Outstanding 9,446 N.A.
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Quarters Ended
March 29, March 30,
1997 1996
------------- --------
(Unaudited) (Audited)
(in thousands, except
per share amounts)
<S> <C> <C>
Net Sales $141,634 $158,392
Cost of sales (including warranty
provision of $967 and $700) 121,474 137,034
------ ------
Gross Profit on Sales 20,160 21,358
Operating Expenses:
Research, development and engineering 4,010 4,344
Selling 6,461 3,922
General and administrative (including provision
for doubtful accounts receivable of $45
and $0) 7,496 9,350
------ ------
Operating Income 2,193 3,742
------ ------
Interest Expense 1,738 2,422
Other (income)expense (348) (1,528)
------ ------
Earnings before federal taxes on income 803 2,848
Income Tax Provision 274 1,500
------ ------
Income before extraordinary item 529 1,348
Extraordinary item - early extinguishment of debt 247 N.A.
(less applicable income taxes of $127) ------ ------
Net Income $282 $1,348
======== =======
Earnings Per Share:
Earnings Per Share Before Extraordinary Item:
Primary Earnings Per Common Share $0.06 N.A.
Fully Diluted Earnings Per Common Share $0.06 N.A.
Earnings Per Share After Extraordinary Item:
Primary Earnings Per Common Share $0.03 $0.13
Fully Diluted Earnings Per Common Share $0.03 $0.13
Primary Shares Outstanding 9,487 10,028
Fully Dilute Shares Outstanding 9,487 10,028
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Quarters Ended
March 29, March 30,
1997 1996
------ ------
(in thousands)
<S> <C> <C>
Increase (decrease) in Cash and Cash Equivalents:
Cash Flows from Operating Activities:
Net income $282 $1,348
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Depreciation and amortization 6,669 7,505
Provision for obsolete inventory 543 918
Provision for doubtful receivables 45 0
Provision for warranty 967 700
(Gain) or loss on disposal of property and equipment (266) (4)
Deferred income tax asset (140) 1,232
Changes in Operating Assets and Liabilities:
Trade receivables (7,346) 11,576
Inventories (1,882) 4,941
Other assets (2,074) (645)
Accounts payable 2,910 (8,789)
Employee compensation and accrued vacation 257 (1,748)
Other liabilities (3,375) (788)
------ ------
Cash provided (used) by operating activities (3,410) 16,246
------ ------
Cash Flows from Investing Activities:
Proceeds from sale of property and equip. 1,142 56
Purchase of property and equipment (7,151) (6,178)
------ ------
Cash used in investing activities (6,009) (6,122)
------ ------
Cash Flows from Financing Activities:
Other financing fees (793) (23)
Issuance of common stock 22 678
Proceeds from long-term obligations 26,210 2,506
Payments on long-term obligations (18,029) (16,299)
------ ------
Cash Provided by (used in) financing activities 7,410 (13,138)
------ ------
Effect of exchange rate changes on cash 6 (54)
------ ------
Net decrease in cash and cash equivalents (2,003) (3,068)
Cash and cash equivalents, beginning of period 2,569 4,455
------ ------
Cash and cash equivalents, end of period $566 $1,387
====== ======
See accompanying notes to consolidated financial statements.
</TABLE>
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
June 29, 1996.
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
1. INVENTORIES
March 29, June 29,
1997 1996
------------- --------
(Unaudited) (Audited)
(in thousands)
<S> <C> <C>
Finished goods $7,387 $5,381
Work-in-process 2,198 3,640
Raw materials and supplies 16,600 17,267
Reserve for obsolescence (2,880) (4,322)
------ ------
$23,305 $21,966
======== =======
</TABLE>
2. COMMITMENTS AND CONTINGENCIES
CAPITAL COMMITMENTS - The amount of firm commitments to contractors and
suppliers for capital expenditures was approximately $878,000 at March 29, 1997.
Litigation
The Company used Mica Sanitary landfill, a public dump site operated by the
County of Spokane, 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 County's RI was completed by
the County 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 be conducted by the County to determine if additional
remedial measures are needed. The 5 year performance monitoring program
commenced in the Spring of 1995. 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").
To date, test results have not shown the waste disposed of by the Company at
Mica to be a source of pollution or contamination. 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 and the Company's prior experience in connection with another NPL landfill
site where the Company disposed of a similar type of waste which it disposed of
at Mica, for its estimate of probable legal costs to be associated with this
matter. No provision has been made for probable liability for remedial action,
because management does not believe a range of probable or reasonably possible
costs is estimable at this time based upon the fact that the Company to date has
not been named a PRP or PLP and the uncertainty as to what additional pollution
or contamination will be disclosed over the course of the County's 5 year
monitoring and testing program. At the end of the third, second, and first
fiscal quarters of 1997 and at fiscal year end 1996, respectively, the accrued
balance for probable legal costs was $900,000. Management does not believe
there to be any reasonably possible losses for legal costs 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, uncertainty of the results of future monitoring
tests, 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 cost estimates 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 reasonably
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 known and unknown product liabilities and
unknown but potentially incurred environmental liabilities for a portion of any
pre-existing claims against Honeywell, Inc. ("Honeywell") which are asserted two
years after the closing date relating to environmental matters and five years
after the closing date with respect 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. 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
discovered and asserted in the future 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 reasonably probable at this time. No
environmental claims have been asserted as of the end of the third quarter of
fiscal 1997. 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 nine suits by computer keyboard users
which are in State or Federal Courts in Connecticut, Illinois, Maryland, New
Jersey, New York, Pennsylvania 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 thirty-five suits have been
dismissed in California, Florida, Kansas, Illinois, Kentucky, Massachusetts,
Michigan, New Jersey, New York and Texas. Six of the thirty-five dismissed
suits are on appeal, all 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 reasonably possible 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 Company's total accrual for litigation related matters, including
compensatory damages, and legal costs, was $.9 million, $1.0 million, and $1.0
million as of March 29, 1997, June 29, 1996, and March 30, 1996 respectively.
The Company has filed suit against its insurers for reimbursement of costs
associated with the Colbert landfill (a Superfund site). Settlements have
been reached with all but one insurer. Certain negotiations have commenced,
with the remaining insurer, and any recovery will be recorded upon
settlement.
3. LONG-TERM OBLIGATIONS
On December 31, 1996 the Company entered into a secured financing agreement
with General Electric Capital Corporation (GECC). The agreement contains an $11
million term note and a revolving loan for up to $30 million. The agreement is
secured by the assets of the Company. This agreement replaced an $8.4 million
term note and a revolving loan for up to $28 million that was payable to the CIT
Group/Business Credit, Inc. (CIT). At March 29, 1997 and June 29,1996, the
Company was in compliance with all debt covenants and restrictions.
Details of the GECC agreement are more fully reported on Form 8-K dated January
14, 1997.
Long-term obligations consist of:
<TABLE>
<CAPTION>
March 29, June 29,
1997 1996
------------- --------
(Unaudited) (Audited)
(in thousands)
<S> <C> <C>
Note Payable $11,000 $9,375
Revolving Line 15,210 8,508
Litigation Reserve 900 900
Deferred compensation obligation 618 618
Capital lease obligations 41 187
------ ------
27,769 19,588
Less current portion (1,144) (2,265)
------ ------
$26,625 $17,323
======== =======
</TABLE>
4. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Third Quarter Ended
March 29, March 30,
1997 1996
------------- --------
(Unaudited) (Audited)
(in thousands)
<S> <C> <C>
Interest payments $1,927 $773
Income tax payments 300 181
</TABLE>
5. EXTRAORDINARY ITEM - EXTINGUISHMENT OF DEBT
During the third fiscal quarter, the Company wrote off the remaining
unamortized refinancing fees associated with its previous financing arrangement
with the CIT Group/Business Credit, Inc. (CIT). The total of these fees was
approximately $374,000. Taxes applicable to this amount were approximately
$127,000 which left the remaining $247,000 as a reduction to income. Prior to
the early extinguishment of debt, primary and fully diluted earnings per share
for the third quarter would have been 0.03.
CAPITAL RESOURCES AND LIQUIDITY
The Company used cash flows of $3.4 million in operating activities for the
first three quarters of fiscal 1997 versus $16.2 million of cash provided from
operating activities during the same period of the prior year.
During the first three quarters of fiscal 1997, $7.2 million was expended
in capital additions. During the first three quarters of the prior year, $6.2
million was expended in capital additions. The Company anticipates capital
expenditures of approximately $4.4 million through the remainder of the current
fiscal year ending June 28, 1997. Actual capital expenditures may vary from
anticipated expenditures depending upon future results of operations. See RISKS
AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS, pages 16-18. Capital expendi-
tures are expected to be financed with the combination of internally generated
funds, capital leases, and limited amounts of secured indebtedness along with
several operating leases.
On December 31, 1996, the Company refinanced it's debt with General
Electric Capital Corporation (GECC). This secured financing agreement contains
an $11 million term note and a revolving credit agreement for up to $30 million.
This agreement replaced a secured revolving credit agreement for up to $28
million and an $8.4 million note payable to CIT. The agreement is 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 income tax, depreciation, and amortization, and maximum leverage
percentages. In addition to these financial covenants the financing agreement
restricts investments, disposition of assets, and payment of dividends. At
March 29, 1997 and June 29, 1996, the Company was in compliance with all debt
covenants.
The term note with GECC is payable in quarterly installments of principal,
each in the amount of $250,000, commencing in March 1997 and ending in December
1997. Thereafter, the quarterly installment payments of principal will be
$500,000 commencing in March 1998 and maturing in December 2002. If debt
service coverage is greater than 1.4, this note bears interest at one and three-
quarters percent (1.75%) 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 two percent (2.00%) in excess of the applicable LIBOR rate.
At March 29, 1997, the applicable LIBOR rate was 5.4375%. However, due to a
special agreement with GECC for the first ninety (90) days of the new loan
agreement, the interest rate applicable to the term note was 0.1648%.
The revolving loan with GECC is renewable and covers an initial period of
approximately five years expiring on December 31, 2001. If debt service
coverage is greater than 1.4, the applicable interest rate is one and one-half
percent (1.50%) in excess of the applicable LIBOR rate. If debt service
coverage is less than or equal to 1.4, the applicable interest rate is one and
three-quarters percent (1.75%) in excess of the applicable LIBOR rate. At March
29, 1997, the applicable LIBOR rate was 5.4375%, and the applicable interest
rate was 7.1875%. However, due to a special agreement with GECC for the first
ninety (90) days of the new loan agreement, the applicable interest rate on
approximately half of the outstanding revolving debt was 2.1875%. At March 29,
1997, there was $15.2 million borrowed on the revolving loan and approximately
$4.3 million available for use under the revolving loan.
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 1997 accounts receivable increased
by $7.3 million. This increase represents a higher sales activity level during
the third quarter versus the fourth quarter of last fiscal year. The accounts
receivable balance dropped from $7.8 million at the end of the Company's first
six months of fiscal 1997, despite a $2 million increase in revenue during the
third quarter. This decrease in the accounts receivable balance and the
resulting decrease in days sales outstanding was due to a more aggressive
collection performance during the third quarter.
The Company believes that cash, cash equivalents, funds available under the
line of credit, lease financing, and internally generated funds can satisfy cash
requirements for a period in excess of 12 months.
NET SALES
Net sales for the fiscal 1997 third quarter, which ended March 29, 1997,
were $49.2 million compared to $41.1 million for the third quarter of the
previous year. For the nine months ended March 29, 1997, sales were $141.6
million compared to $158.3 million for the same period of the previous year.
The increase in revenue from quarter to quarter is due primarily to new customer
sales. The decrease in revenue from year to year is due primarily to the phase
out of two major OEM customer programs and continuing price pressures in the
keyboard marketplace.
Keyboard shipments increased 60.1% from the third quarter of the prior year
while the average selling price decreased approximately 23.3%. For the nine
months ended March 29, 1997, unit shipments increased approximately 7.8% over
the same period of the prior year while the average selling price decreased
20.2%. The increase in units shipped from the third quarter of fiscal year 1996
to the third quarter of fiscal year 1997 is due primarily to increased customer
orders. The decrease in average selling price is due primarily to the sale of
new lower cost, lower margin products. In fiscal year 1996, the Company
experienced 60% of its keyboard sales in the first six months of the year. As
the above mentioned customer programs decreased, sales over the next two
quarters gradually declined. In the first nine months of fiscal 1997, the
Company's keyboard shipments have steadily increased; however, this trend is not
expected to carry forward to the fourth quarter due to several factors including
the phase out of another major OEM program and general market conditions. See
RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS, pages 16-18.
Non-keyboard revenue accounted for 16.3% of total revenue in the third
quarter of fiscal 1997 versus 19.1% in the third quarter of the prior year. For
the nine months ended March 29, 1997, non-keyboard revenue accounted for 18.4%
of total revenue versus 15.3% for the same period of the prior year. The
decrease in this segment of the Company's revenue base from quarter to quarter
is attributable primarily to reduced shipments to a major OEM customer. The
increase in this segment of the revenue base from year to year is due primarily
to shipments of a new product line to a major OEM.
COST OF SALES
Cost of sales were 86.8% of revenue in the third quarter of 1997 compared
to 89.4% for the third quarter of 1996. Cost of sales were 85.8% of revenue for
the nine months ended March 29, 1997, compared to 86.5% for the same period of
the prior year. The cost of sales percentage decreased despite lower unit
pricing primarily due to additional cost reductions. The company continues to
emphasize cost reduction whenever feasible by utilizing excess capacity in its
Juarez, Mexico facility to manufacture an increasing number of products.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering expenses were $1.1 million in the
third quarter of fiscal 1997 and $1.4 million for the same period of fiscal
1996. As a percentage of sales, R D & E expenditures were 2.3% in the third
quarter of 1997 compared to 3.3% in the third quarter of 1996. Research,
development, and engineering expenses were $4.0 million for the nine months
ended March 29, 1997 compared to $4.3 million for the same period of the prior
year. As a percentage of sales, R D & E expenditures were 2.8% for the current
nine month period versus 2.7% for the same period of the prior fiscal year. As
a percent of revenue the increase is due primarily to static activity over a
decreased year to date revenue base.
SELLING EXPENSES
Selling expenses were $2.2 million in the third quarter of 1997 compared to
$1.7 million in the third quarter of 1996. Selling expenses as a percentage of
revenue were 4.6% for the quarter compared to 4.0% in the same quarter of fiscal
1996. For the nine months ended March 29, 1997 selling expenses were $6.5
million compared to $3.9 million for the same period of the prior year. As a
percentage of revenue for the current nine month period, selling expenses were
4.6% compared to 2.5% for the same period of the prior year. Selling expenses
increased in dollars due primarily to the introduction of new products into the
retail market and an increase in the size of the sales force. As a percentage
of revenue, selling expenses increased due to a combination of the decrease in
year to date revenue and the increase in expenses as previously stated.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2.4 million in the third quarter
of 1997 compared to $2.8 million in the third quarter of fiscal 1996. As a
percentage of revenue, G&A expenses were 5.0% in the third quarter of fiscal
1997 compared to 6.9% for the third quarter of the prior year. For the nine
months ended March 29, 1997, G&A expenses were $7.5 million compared to $9.4
million for the same period of the prior year. As a percentage of revenue G&A
expenses for the first nine months of fiscal 1997 were 5.3% versus 5.9% for the
same period of the prior year. As a percentage of revenue the decrease is
primarily due to the decreased year to date revenue base. The decrease in
dollar spending is primarily due to decreases in hiring costs and decreases or
eliminations of other G&A costs as a result of the fourth quarter 1996
restructuring of the Company's facility in Ireland.
INTEREST
Interest expense was $307,000 in the third quarter of 1997 compared to
$721,000 for the third quarter of 1996. A major contributing factor to this
decrease is the special agreement with GECC for decreased interest rates for the
first ninety (90) days of the new financing package. For the nine months ended
March 29, 1997, interest expense was $1.7 million compared to $2.4 million for
the same period of the prior year. This decrease is due primarily to lower
interest rates and lower average outstanding debt throughout the first three
quarters of the fiscal year.
INCOME TAXES
Income tax provisions were $176,000 and $218,000 for the third quarter of
1997 and 1996, respectively. In the third quarter of 1997, none of this
provision relates to taxes on earnings of foreign subsidiaries, because tax
benefits associated with losses at the Company's subsidiary in Ireland offset
the provisions of other profitable foreign subsidiaries. In the third quarter
of 1996, $60,000 of the provision related to taxes on earnings of foreign
subsidiaries. The $176,000 of the third quarter 1997 provision relates to tax
provisions on U.S. earnings.
For the nine months ended March 29, 1997, the income tax provision was
$274,000 compared to $1.5 million for the same period of the prior year. Taxes
on earnings of foreign subsidiaries account for $287,000 and $157,000,
respectively, for the nine month periods ending March 29, 1997 and March 30,
1996. The balance of the 1997 provision relates to tax benefits from U.S.
losses. The Company has tax loss carryforwards of approximately $30.3 million
which expire in varying amounts in the years 2004 through 2010.
ESOP
No contributions to the Employee Stock Ownership Plan (ESOP) were made
during the second quarter of fiscal years 1997 and 1996.
BACKLOG
The Company's backlog at the end of the third fiscal quarter of 1997 was
$24.5 million compared to $24.6 million at the end of the 1996 fiscal year and
$25.7 million at the end of the third quarter of fiscal 1996. The decrease in
the backlog from fiscal year end is attributable primarily to decreased orders
from a major OEM.
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 keyboard and other input device industry is intensely competitive.
Most of the Company's principal competitors are headquartered in 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.
As of March 29, 1997, three of the Company's OEM customers accounted for 32.2%,
11.4%, and 11% individually, of net year to date sales. As of June 29, 1996, two
of the Company's OEM customers accounted for 34% and 10% of 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 is a party to approximately 109 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 and Stock Price Volatility
As of March 29, 1997, there were outstanding options and warrants for the
purchase of approximately 1,230,000 shares of common stock of the Company
("Common Stock"), of which options for approximately 855,000 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.
Control by 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, which terminated March 1, 1997, between The Hiller Group and the
Company, HKT Partners received options to purchase 2,396,923 shares of Common
Stock at an exercise price of $4.50 per share ("options"). On February 28,
1997, the Company entered into a Restricted Stock Agreement ("Agreement") with
HKT Partners to issue 1,070,396 shares of common stock to HKT Partners in
exchange for, and in cancellation of the options. The Agreement is subject to
the approval and ratification by the Company's shareholders prior to February
28, 1998. HKT Partners beneficially owns approximately 13% of the outstanding
shares of Common Stock. 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 potentially over any
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
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 14, 1997
President
/s/ Ronald F. Klawitter
Ronald F. Klawitter Date: May 14, 1997
Principal Financial Officer
/s/ Keith D. Cripe
Keith D. Cripe Date: May 14, 1997
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-END> MAR-29-1997
<CASH> 566
<SECURITIES> 0
<RECEIVABLES> 31,660
<ALLOWANCES> 1,000
<INVENTORY> 23,305
<CURRENT-ASSETS> 64,472
<PP&E> 99,993
<DEPRECIATION> 68,308
<TOTAL-ASSETS> 102,783
<CURRENT-LIABILITIES> 26,371
<BONDS> 0
0
0
<COMMON> 38,164
<OTHER-SE> 11,623
<TOTAL-LIABILITY-AND-EQUITY> 102,783
<SALES> 49,195
<TOTAL-REVENUES> 49,195
<CGS> 42,677
<TOTAL-COSTS> 42,677
<OTHER-EXPENSES> 5,769
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 307
<INCOME-PRETAX> 442
<INCOME-TAX> 176
<INCOME-CONTINUING> 266
<DISCONTINUED> 0
<EXTRAORDINARY> 247
<CHANGES> 0
<NET-INCOME> 19
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
