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 December 28, 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 January 9, 1997, 8,540,434 shares of Common Stock, no par value (the
only class of common stock), were outstanding.
1
<TABLE>
<CAPTION>
KEY TRONIC CORPORATION
Index
<S> <C> <C>
Page No.
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets - December 28, 1996
and June 29, 1996 3-4
Consolidated Statements of Income - Second Quarters
Ended December 28, 1996 and December 30, 1995 5
Consolidated Statements of Income - Two Quarters
Ended December 28, 1996 and December 30, 1995 6
Consolidated Statements of Cash Flows - Two Quarters
Ended December 28, 1996 and December 30, 1995 7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of the
Financial Condition and Results of Operations 11-18
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
2
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<TABLE>
<CAPTION>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 28, June 29,
1996 1996
(Unaudited) (Audited)
(in thousands)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 1,451 $ 2,569
Trade receivables, less allowance for doubtful
accounts of $905 and $932 31,125 23,358
Inventories (Note 1) 22,572 21,966
Real estate held for sale 2,243 2,243
Deferred income tax asset - current 1,216 1,295
Other 4,901 3,322
------ ------
Total current assets 63,508 54,753
------ ------
Property, Plant and Equipment - at cost 97,734 94,609
Less accumulated depreciation 66,273 63,264
------ ------
Total property, plant and equipment 31,461 31,345
------ ------
Other Assets:
Deferred income tax asset - non-current 4,479 4,211
Goodwill(net of accumulated amortization
of $319 and $255) 1,467 1,531
Other 1,210 1,692
------ ------
Total other assets 7,156 7,434
------ ------
$102,125 $93,532
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
<TABLE>
<CAPTION>
December 28, June 29,
1996 1996
------ ------
(Unaudited) (Audited)
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C>
Current portion of long-term obligations $ 2,175 $ 2,265
Accounts payable 16,724 15,577
Accrued compensation and vacation 3,091 2,936
Accrued taxes other than income taxes 927 1,125
Interest payable 202 253
Other 3,142 4,577
------ ------
Total current liabilities 26,261 26,733
------ ------
Long-term Obligations, less current portion 26,095 17,323
------ ------
Commitments and Contingencies (Note 2)
Shareholders' Equity:
Common stock, no par value, authorized
25,000 shares; issued and outstanding
8,540 and 8,534 shares 38,164 38,142
Retained earnings 11,170 10,906
Foreign currency translation adjustment 435 428
------ ------
Total shareholders' equity 49,769 49,476
------ ------
$102,125 $93,532
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Second Quarter Ended
December 28, December 30,
1996 1995
---------- -------
(in thousands, except
per share amounts)
<S> <C> <C>
Net Sales $ 47,102 $56,624
Cost of sales (including warranty
provision of $344 and $318) 40,240 48,581
------ ------
Gross Profit on Sales 6,862 8,043
Operating Expenses:
Research, development and engineering 1,296 1,412
Selling 2,473 1,283
General and administrative (including provision
for doubtful accounts receivable of $25
and $25) 2,533 3,464
------ ------
Operating Income 560 1,884
------ ------
Interest Expense 759 854
Other (income) expense (258) (34)
------ ------
Earnings before federal taxes on income 59 1,064
Income Tax Provision 3 368
------ ------
Net Income $56 $696
====== ======
Earnings Per Share (See exhibit 11):
Primary Earnings Per Common Share $0.01 $ 0.07
Fully Diluted Earnings Per Common Share $0.01 $ 0.07
Primary Shares Outstanding 9,610 9,996
Fully Diluted Shares Outstanding 9,610 9,996
See accompanying notes to consolidated financial statements.
5
</TABLE>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Two Quarters Ended
December 28, December 30,
1996 1995
------ ------
(in thousands, except
per share amounts)
<S> <C> <C>
Net Sales $ 92,439 $117,174
Cost of sales (including warranty
provision of $771 and $469) 78,797 100,207
------ ------
Gross Profit on Sales 13,642 16,967
Operating Expenses:
Research, development and engineering 2,871 2,970
Selling 4,223 2,262
General and administrative (including provision
for doubtful accounts receivable of $50
and $25) 5,063 6,502
------ ------
Operating Income 1,485 5,233
------ ------
Interest Expense 1,431 1,701
Other (income)expense (307) (63)
------ ------
Earnings before federal taxes on income 361 3,595
Income Tax Provision 98 1,282
------ ------
Net Income $263 $2,313
====== ======
Earnings Per Share (See exhibit 11):
Primary Earnings Per Common Share $0.03 $ 0.23
Fully Diluted Earnings Per Common Share $0.03 $ 0.23
Primary Shares Outstanding 9,521 10,220
Fully Diluted Shares Outstanding 9,521 10,220
See accompanying notes to consolidated financial statements.
6
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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<CAPTION>
Two Quarters Ended
December 28, December 30,
1996 1995
------ ------
(in thousands)
Increase (decrease) in Cash and Cash Equivalents:
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 264 $2,313
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Depreciation and amortization 4,118 4,934
Provision for obsolete inventory 274 868
Provision for doubtful receivables 50 25
Provision for warranty 771 469
(Gain) or loss on disposal of property and equipment (247) (6)
Deferred income tax asset (189) 1,075
Changes in Operating Assets and Liabilities:
Trade receivables (7,817) 4,263
Inventories (880) (1,304)
Other assets (993) 468
Accounts payable 1,147 (5,441)
Employee compensation and accrued vacation 155 (1,774)
Other liabilities (2,454) (228)
------ ------
Cash provided (used) by operating activities (5,801) 5,662
------ ------
Cash Flows from Investing Activities:
Proceeds from sale of property and equip. 1,146 54
Purchase of property and equipment (4,846) (4,296)
------ ------
Cash used in investing activities (3,700) (4,242
------ ------
Cash Flows from Financing Activities:
Other financing fees (328) (23)
Issuance of common stock 22 678
Proceeds from long-term obligations 9,797 2,506
Payments on long-term obligations (1,115) (7,589)
------ ------
Cash Provided by (used in) financing activities 8,376 (4,428)
------ ------
Effect of exchange rate changes on cash 7 (55)
------ ------
Net decrease in cash and cash equivalents (1,118) (3,063)
Cash and cash equivalents, beginning of quarter 2,569 4,455
------ ------
Cash and cash equivalents, end of quarter $1,451 $1,392
====== ======
Non-Cash Investing and Financing Activities:
See note 4 to these financial statements
See accompanying notes to consolidated financial statements.
7
</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.
- ------------------------------------------------------------------------
1. INVENTORIES
<TABLE>
<CAPTION>
December 28, December 30,
1996 1996
------ ------
(Unaudited) (Audited)
(in thousands)
<S> <C> <C>
Finished goods $ 7,205 $5,381
Work-in-process 3,092 3,640
Raw materials and supplies 15,318 17,267
Reserve for obsolescence (3,043) (4,322)
------ ------
$22,572 $21,966
======= =======
</TABLE>
2. COMMITMENTS AND CONTINGENCIES
CAPITAL COMMITMENTS - The amount of firm commitments to contractors and
suppliers for capital expenditures was approximately $1,023,000 at December 28,
1996.
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
8
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 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 any pre-existing
claims against Honeywell, Inc. ("Honeywell") which are asserted two or more
years after the closing date relating to environmental matters and five or more
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 two or more years after the closing date or product
liability claims which may be discovered and 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 second 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
9
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 $1.2
million as of December 28, 1996, June 29, 1996, and December 30, 1995
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 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 December 28, 1996 and June 29,1996, the company was
in compliance with all debt covenants and restrictions.
Details of the CIT agreement are more fully reported on Form 8-K dated
October 31, 1994.
10
Long-term obligations consist of:
<TABLE>
<CAPTION>
December 28, June 29,
1996 1996
------ ------
(in thousands)
<S> <C> <C>
Note Payable - CIT $8,375 $9,375
Revolving Line 18,304 8,508
Litigation Reserve 900 900
Deferred compensation obligation 618 618
Capital lease obligations 73 187
------ ------
28,270 19,588
Less current portion (2,175) (2,265)
------ ------
$26,095 $17,323
====== =======
</TABLE>
4. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Second Quarter Ended
December 28, December 30,
1996 1995
------ ------
(in thousands)
<S> <C> <C>
Interest payments $ 727 $ 869
Income tax payments 221 168
</TABLE>
5. SUBSEQUENT EVENT
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 a secured revolving credit agreement for up to $28 million and an
$8.4 million note payable to CIT (see note 3 above). Details of the GECC
agreement are more fully reported on Form 8-K dated January 14, 1997.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
The Company used cash flows of $5.8 million in operating activities for the
first two quarters of fiscal 1997 versus $5.7 million of cash provided from
operating activities during the same period of the prior year.
During the first two quarters of fiscal 1997, $4.8 million was expended in
capital additions. During the first two quarters of the prior year, $4.3 million
was expended in capital additions. The Company anticipates capital expenditures
of approximately $5.7 million through the remainder of the current fiscal year
11
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 13-15. Capital expenditures
are expected to be financed with the combination of internally generated funds,
capital leases, and secured indebtedness along with several operating leases.
At December 28, 1996, the Company had a secured financing agreement which
contained an $8.4 million term note and an $18.3 million revolving loan. The
agreement was secured by the assets of the corporation. The agreement contained
covenants that related to minimum net worth, minimum working capital, income
statement and balance sheet ratios and restricts investments, disposition of
assets, and payment of dividends. At December 28, 1996 and June 29, 1996, the
company was in compliance with all debt covenants.
Subsequent to the end of the company's second fiscal quarter, 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. 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.
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 December 31, 1996, the applicable LIBOR rate was five and one-half percent
(5.50%), and the interest rate applicable to the term note was seven and one-
half percent (7.50%).
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
December 31, 1996, the applicable LIBOR rate was five and one-half percent
(5.50%), and the applicable interest rate was seven and one-quarter percent
(7.25%). At December 31, 1996, there was $15.7 million borrowed on the
revolving loan and approximately $5.3 million available for use under the
revolving loan.
12
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 six months of fiscal 1997 accounts receivable increased by
$7.8 million. This increase is due primarily to increased sales in the last
month of the second quarter, and increased days sales outstanding.
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 1997 second quarter, which ended December 28,
1996, were $47.1 million compared to $56.6 million for the second quarter of the
previous year. For the six months ended December 28, 1996, sales were $92.4
million compared to $117.2 million for the same period of the previous year.
The decreased sales were due primarily to the phase out of two major OEM
customer programs.
Keyboard shipments decreased 2.4% from the second quarter of the prior year
while the average selling price decreased approximately 18.6%. For the six
months ended December 28, 1996, unit shipments decreased approximately 9.5% over
the same period of the prior year while the average selling price decreased
18.4%. The decrease in units shipped from the second quarter of fiscal year 1996
to the second quarter of fiscal year 1997 is due primarily to decreased 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 six months of fiscal 1997, the
Company's keyboard shipments have remained fairly consistent with those
experienced at the end of fiscal 1996 with some increase in the second quarter.
Non-keyboard revenue accounted for 18.4% of total revenue in the second
quarter of fiscal 1997 versus 14.6% in the second quarter of the prior year. For
the six months ended December 28, 1996, non-keyboard revenue accounted for 19.4%
of total revenue versus 13.9% for the same period of the prior year. The
increase in this segment of the Company's revenue base is attributable primarily
to increasing shipments to a major OEM customer.
COST OF SALES
- -------------
Cost of sales were 85.4% of revenue in the second quarter of 1997 compared
to 85.8% for the second quarter of 1996. Cost of sales were 85.2% of revenue
for the six months ended December 28, 1996, compared to 85.5% for the same
13
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 $1.3 million in the
second 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 2.8% in the second
quarter of 1997 compared to 2.5% in the second quarter of 1996. Research,
development, and engineering expenses were $2.9 million for the six months ended
December 28, 1996 compared to $3.0 million for the same period of the prior
year. As a percentage of sales, R D & E expenditures were 3.1% for the current
six month period versus 2.5% 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 revenue base.
SELLING EXPENSES
- ----------------
Selling expenses were $2.5 million in the second quarter of 1997 compared
to $1.3 million in the second quarter of 1996. Selling expenses as a percentage
of revenue were 5.3% for the quarter compared to 2.3% in the same quarter of
fiscal 1996. For the six months ended December 28, 1996, selling expenses were
$4.2 million compared to $2.3 million for the same period of the prior year. As
a percentage of revenue for the current six month period, selling expenses were
4.6% compared to 1.9% 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. As a percentage of revenue, selling expenses increased due to a
combination of the decrease in revenue and the increase in expenses as
previously stated.
GENERAL AND ADMINISTRATIVE
- --------------------------
General and administrative expenses were $2.5 million in the second quarter
of 1997 compared to $3.5 million in the second quarter of fiscal 1996. As a
percentage of revenue, G&A expenses were 5.4% in the second quarter of fiscal
1997 compared to 6.1% for the second quarter of the prior year. For the six
months ended December 28, 1996, G&A expenses were $5.1 million compared to $6.5
million for the same period of the prior year. As a percentage of revenue G&A
expenses for the first six months of fiscal 1997 were 5.5% versus 5.6% for the
same period of the prior year. As a percentage of revenue the decrease is
primarily due to the decreased 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.
14
INTEREST
- --------
Interest expense was $759,000 in the second quarter of 1997 compared to
$854,000 for the second quarter of 1996. For the six months ended December 28,
1996, interest expense was $1.4 million compared to $1.7 million for the same
period of the prior year. This decrease is due primarily to a decrease in the
average outstanding debt throughout the quarter.
INCOME TAXES
- ------------
Income tax provisions were $3,000 and $368,000 for the second quarter of
1997 and 1996, respectively. In the second quarter of 1997 $88,000 of this
provision and $38,000 of 1996's second quarter provision relate to taxes on
earnings of foreign subsidiaries. The remaining ($85,000) of the second quarter
1997 provision relates to tax benefits on U.S. earnings. For the six months
ended December 28, 1996, the income tax provision was $98,000 compared to $1.3
million for the same period of the prior year. Taxes on earnings of foreign
subsidiaries account for $307,000 and $97,000, respectively, for the six month
periods ending December 28, 1996 and December 30, 1995. The remaining
($209,000) of the 1997 provision relates to tax benefits on U.S. earnings. 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 second fiscal quarter of 1997 was
$26.4 million compared to $24.6 million at the end of the 1996 fiscal year and
$28.4 million at the end of the second quarter of fiscal 1996. The increase in
the backlog from fiscal year end is attributable primarily to increased 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,
15
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.
Three of the Company's OEM customers accounted for 34%, 10% and 8% individually,
of net sales during 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. 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
16
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 June 29, 1996, there were outstanding options and warrants for the
purchase of approximately 3,670,000 shares of common stock of the Company
("Common Stock"), of which options for approximately 2,671,000 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 terminates March 1, 1997, between The Hiller Group and the
17
Company, HKT Partners received options to purchase 2,396,923 shares of Common
Stock at an exercise price of $4.50 per share. The options terminate on March
1, 1997. HKT Partners beneficially owns approximately 24% 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.
18
<TABLE>
<S> <C>
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
Part II. Other Information (continued)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
Form 8-K dated January 14, 1997 reporting the secured
financing agreement with General Electric Capital Corporation
(GECC).*
* Previously filed.
</TABLE>
19
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: 2/11/97
President
/s/ Ronald F. Klawitter
-----------------------
Ronald F. Klawitter Date: 2/11/97
Principal Financial Officer
/s/ Keith D. Cripe
-----------------------
Keith D. Cripe Date: 2/11/97
Principal Accounting Officer
20
<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> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-END> DEC-28-1996
<CASH> 1451
<SECURITIES> 0
<RECEIVABLES> 32030
<ALLOWANCES> 905
<INVENTORY> 22572
<CURRENT-ASSETS> 63508
<PP&E> 97734
<DEPRECIATION> 66273
<TOTAL-ASSETS> 102125
<CURRENT-LIABILITIES> 26261
<BONDS> 0
38164
0
<COMMON> 0
<OTHER-SE> 11605
<TOTAL-LIABILITY-AND-EQUITY> 102125
<SALES> 47102
<TOTAL-REVENUES> 47102
<CGS> 40240
<TOTAL-COSTS> 40240
<OTHER-EXPENSES> 6019
<LOSS-PROVISION> 25
<INTEREST-EXPENSE> 759
<INCOME-PRETAX> 59
<INCOME-TAX> 3
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<DISCONTINUED> 0
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</TABLE>
