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 27, 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 January 28, 1998, 9,630,830 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 - December 27, 1997
(Unaudited) and June 28, 1997 (Audited) 3-4
Consolidated Statements of Income (Unaudited)
Second Quarters Ended December 27, 1997
and December 28, 1996 5
Consolidated Statements of Income (Unaudited)
Two Quarters Ended December 27, 1997
and December 28, 1996 6
Consolidated Statements of Cash Flows (Unaudited)
Two Quarters Ended December 27, 1997
and December 28, 1996 7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of
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
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 27, June 28,
1997 1997
(Unaudited) (Audited)
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 1,067 $ 2,812
Trade receivables, less allowance for doubtful
accounts of $905 and $905 26,957 26,989
Inventories 21,353 21,481
Real estate held for sale 2,207 2,243
Deferred income tax asset _ current, net 1,463 1,444
Customer tooling 4,302 3,016
Other 3,257 3,860
----- -----
Total current assets 60,606 61,845
------ ------
Property, Plant and Equipment - at cost 101,713 97,155
Less accumulated depreciation 69,577 65,135
------ ------
Total property, plant and equipment 32,136 32,020
Other Assets:
Deferred income tax asset, net 4,173 3,857
Other, (net of accumulated amortization
Of $168 and $81) 1,171 1,030
Goodwill(net of accumulated amortization
of $447 and $383) 1,340 1,403
----- -----
$99,426 $100,155
======= ========
See accompanying notes to consolidated financial statements.
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
December 27, June 28,
1997 1997
(Unaudited) (Audited)
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations $ 1,855 $ 1,379
Accounts payable 16,979 14,319
Accrued compensation and vacation 3,362 3,033
Accrued taxes other than income taxes 1,303 1,142
Interest payable 120 166
Other 3,602 3,289
----- ------
Total current liabilities 27,221 23,328
------ ------
Long-term Obligations, less current portion 22,150 27,010
------ -------
Commitments and Contingencies (Note 2)
Shareholders' Equity:
Common stock, no par value, authorized
25,000 shares; issued and outstanding
9,611 and 9,611 shares 38,165 38,165
Retained earnings 11,619 11,228
Foreign currency translation adjustment 271 424
--- ---
Total shareholders' equity 50,055 49,817
------ -------
$99,426 $100,155
======= =========
See accompanying notes to consolidated financial statements.
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Second Quarter Ended
December 27, December 28,
1997 1996
(in thousands, except per share amounts)
Net Sales $44,129 $47,102
Cost of sales (including warranty
provision of $384 and $344) 37,629 40,240
------ ------
Gross Profit on Sales 6,500 6,862
Operating Expenses:
Research, development and engineering 1,274 1,296
Selling 2,173 2,473
General and administrative 2,362 2,533
----- -------
Operating Income 691 560
--- ---
Interest expense 494 759
Other income (62) (258)
---- ------
Earnings before income tax provision 259 59
Income Tax Provision 11 3
-- --
Net Income $248 $56
==== ====
Earnings Per Share:
Earnings Per Common Share $0.03 $ 0.01
Earnings Per Common Share Assuming Dilution $0.03 $ 0.01
Weighted Average Shares Outstanding 9,631 8,540
Diluted Shares Outstanding 9,631 9,610
See accompanying notes to consolidated financial statements.
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Two Quarters Ended
December 27, December 28,
1997 1996
(in thousands, except per share amounts)
Net Sales $84,386 $92,439
Cost of sales (including warranty
provision of $992 and $771) 72,183 78,797
------ ------
Gross Profit on Sales 12,203 13,642
Operating Expenses:
Research, development and engineering 2,157 2,871
Selling 4,146 4,223
General and administrative 4,457 5,063
----- -----
Operating Income 1,443 1,485
----- -----
Interest expense 1,025 1,431
Other income (79) (307)
---- ------
Earnings before income tax provision 497 361
Income Tax Provision 106 98
--- ---
Net Income $391 $263
=== ====
Earnings Per Share:
Earnings Per Common Share $0.04 $ 0.03
Earnings Per Common Share Assuming Dilution $0.04 $ 0.03
Weighted Average Shares Outstanding 9,621 8,539
Diluted Shares Outstanding 9,621 9,521
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Two Quarters Ended
December 27, December 28,
1997 1996
(in thousands)
Increase (decrease) in Cash and Cash Equivalents:
Cash Flows from Operating Activities:
Net income $391 $263
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Depreciation and amortization 4,807 4,118
Provision for obsolete inventory 1,120 758
Provision for doubtful receivables 25 50
Provision for warranty 992 771
(Gain) or loss on disposal of property and equipment 12 (247)
Deferred income tax asset (335) (189)
Changes in Operating Assets and Liabilities:
Trade receivables 7 (7,817)
Inventories (522) (880)
Other assets (1,340) (1,476)
Accounts payable 2,660 1,147
Employee compensation and accrued vacation 329 155
Other liabilities (564) (2,454)
----- -------
Cash provided (used) by operating activities 7,582 (5,801)
----- -------
Cash Flows from Investing Activities:
Proceeds from sale of property and equip. 0 1,146
Purchase of property and equipment (4,753) (4,846)
------- -------
Cash used in investing activities (4,753) (3,700)
------- -------
Cash Flows from Financing Activities:
Other financing fees (37) (328)
Issuance of common stock 0 22
Proceeds from long-term obligations 0 9,797
Payments on long-term obligations (4,384) (1,115)
------- ------
Cash provided (used) by financing activities (4,421) 8,376
------- -----
Effect of exchange rate changes on cash (153) 7
----- ----
Net decrease in cash and cash equivalents (1,745) (1,118)
Cash and cash equivalents, beginning of period 2,812 2,569
----- -----
Cash and cash equivalents, end of period $1,067 $1,451
====== ======
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 June 28,
1997.
- ------------------------------------------------------------------------
1. INVENTORIES
December 27, June 28,
1997 1997
(Unaudited) (Audited)
(in thousands)
Finished goods $8,301 $9,119
Work-in-process 2,637 2,053
Raw materials and supplies 12,937 13,247
Reserve for obsolescence (2,522) (2,938)
------ ------
$21,353 $21,481
======= =======
2. COMMITMENTS AND CONTINGENCIES
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 PRPs and PLPs. 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 1998 and at fiscal year ends 1997, 1996, and 1995, 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 PRPs and PLPs,
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
PRPs and PLPs, 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 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 1998. 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 eighty suits by computer keyboard users which are
in State or Federal Courts in Illinois, New Jersey, New York, and Pennsylvania.
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 fifty-
nine suits have been dismissed in California, Connecticut, Florida, Illinois,
Kansas, Kentucky, Maryland, Massachusetts, Michigan, New Jersey, New York,
Pennsylvania and Texas. Eleven of the fifty-nine 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 as of December 27, 1997
and June 28, 1997.
3. LONG-TERM OBLIGATIONS
Long-term obligations consist of:
December 27, June 28,
1997 1997
(in thousands)
Note Payable - GECC $9,208 $10,750
Revolving Line 13,279 16,095
Litigation Reserve 900 900
Deferred compensation obligation 618 618
Capital lease obligations 0 26
----- ------
24,005 28,389
Less current portion (1,855) (1,379)
------- -------
$22,150 $27,010
======= =======
4. SUPPLEMENTAL CASH FLOW INFORMATION
Two Quarters Ended
December 27, December 28,
1997 1996
(in thousands)
Interest payments $1,071 $1,481
Income tax payments 93 92
5. ADOPTION OF FINANCIAL ACCOUNTING STANDARDS NO. 128
The Company has adopted Financial Accounting Standards NO. 128 which became
effective for any financial statements issued for periods ending after December
15, 1997. This new standard requires the presentation of "basic EPS" and
"diluted EPS". The objective of basic EPS is to measure the performance of an
entity over the reporting period. Basic EPS is computed by dividing income
available to common shareholders (the numerator) by the weighted-average number
of common shares outstanding (the denominator) during the period. Diluted EPS
is computed by dividing income available to common shareholders by the weighted-
average number of common shares and common share equivalents outstanding during
the period. Key Tronic uses the Treasury Stock Method required by the new
standard in calculating the dilutive effect of common stock equivalents.
The following table presents the Company's EPS calculations:
For the Quarter Ended
December 27, 1997
Income Weighted Avg. Shares Per Share
(Numerator) (Denominator) Amount
BASIC EPS
Income available to
common shareholders $248,000 9,630,610 $0.03
ADJUSTMENTS TO COMMON STOCK
FOR DILUTIVE OUTSTANDING OPTIONS 308
---
DILUTED EPS
Income available to
common shareholders + $248,000 9,630,918 $0.03
assumed conversions
For the Quarter Ended
December 28, 1996
Income Weighted Avg. Shares Per Share
(Numerator) (Denominator) Amount
BASIC EPS
Income available to
common shareholders $56,000 8,540,113 $0.01
ADJUSTMENTS TO COMMON STOCK
FOR DILUTIVE OUTSTANDING OPTIONS 1,069,862
---------
DILUTED EPS
Income available to
common shareholders + $56,000 9,609,975 $0.01
assumed conversions
Two Quarters Ended
December 27, 1997
Income Weighted Avg. Shares Per Share
(Numerator) (Denominator) Amount
BASIC EPS
Income available to
common shareholders $391,000 9,620,720 $0.04
ADJUSTMENTS TO COMMON STOCK
FOR DILUTIVE OUTSTANDING OPTIONS 394
---
DILUTED EPS
Income available to
common shareholders + $391,000 9,621,114 $0.04
assumed conversions
Two Quarters Ended
December 28, 1996
Income Weighted Avg. Shares Per Share
(Numerator) (Denominator) Amount
BASIC EPS
Income available to
common shareholders $263,000 8,538,541 $0.03
ADJUSTMENTS TO COMMON STOCK
FOR DILUTIVE OUTSTANDING OPTIONS 982,620
-------
DILUTED EPS
Income available to
common shareholders + $263,000 9,521,161 $0.03
assumed conversions
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Operating activities provided $7.6 million of cash during the first two
quarters of fiscal 1998 versus $5.8 million of cash used in operating activities
during the same period of the prior year. This change in available cash is due
primarily to increased earnings, decreases in accounts receivable and
inventories, and increased accounts payable.
During the first two quarters of fiscal 1998, $4.8 million was expended in
capital additions which matches the amount spent during the same period in the
previous fiscal year. The Company anticipates capital expenditures of
approximately $4.2 million through the remainder of the current fiscal year
ending June 27, 1998. Actual capital expenditures may vary from anticipated
expenditures depending upon future results of operations. See RISKS AND
UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS, pages 15-17. Capital expenditures
are expected to be financed with the combination of internally generated funds
and operating leases.
The Company has a secured financing agreement which contains a term note
for up to $11,000,000 and a revolving loan for up to $25,800,000. During the
second quarter of fiscal 1998, the Company entered into an operating lease
agreement with GECC which reduced the borrowing limit on the revolving loan by
$4.2 million. The revolving loan 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
interest expense, 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 December 27, 1997 and June 28, 1997, the Company was in
compliance with all debt covenants.
The term note 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. In addition to these
scheduled payments, the Company is also paying $21,000 per month against the
term note which is a special agreement with GECC resulting from the Company's
lease of its Cheney facility. If debt service coverage is greater than 1.4,
this note bears interest at 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 27, 1997, the applicable LIBOR
rate was 5.69531%, and the applicable interest rate was 7.69531%.
The revolving loan with GECC is renewable and covers an initial period of
five years expiring on December 31, 2001. If debt service coverage is greater
than 1.4, the applicable interest rate is one and one-half percent (1.5%) in
excess of the applicable LIBOR rate. If debt service coverage is less than or
equal to 1.4, the applicable interest rate is one and three-quarters percent
(1.75%) in excess of the applicable LIBOR rate. At December 27, 1997, the
applicable LIBOR rate was 5.69531%, and the applicable interest rate was
7.44531%. At December 27, 1997, there was $13.3 million borrowed on the
revolving loan and approximately $5.3 million available for use under the
revolving loan. The Company is required to pay fees on the unused revolving
loan balance.
The revolving loan balance has decreased $2.8 million since the Company's fiscal
year end at June 28, 1997. This decrease can be attributed to increased controls
on outgoing cash along with increased payments from the Company's subsidiary in
Ireland coupled with more aggressive collections thus making additional cash
available to pay down the revolving loan.
Real estate held for sale is carried at the lower of cost or net realizable
value. In September of 1997, the Company signed a five year operating lease
with a local company for this property. The lease terms include an option to
buy the property upon notice at any time during the course of the lease.
The Company believes that cash, cash equivalents, funds available under the
line of credit, and internally generated funds can satisfy cash requirements for
a period in excess of 12 months.
NET SALES
Net sales for the fiscal 1998 second quarter, which ended December 27,
1997, were $44.1 million compared to $47.1 million for the second quarter of the
previous year. For the six months ended December 27, 1997, sales were $84.4
million compared to $92.4 million for the same period of the previous year.
Keyboard shipments increased 10.5% from the second quarter of the prior
year while the average selling price decreased approximately 10.6%. For the six
months ended December 27, 1997, unit shipments increased approximately 3.6% over
the same period of the prior year while the average selling price decreased
10.6%. The increase in units shipped from the second quarter of fiscal year 1997
to the second quarter of fiscal year 1998 is due primarily to increased customer
orders. The decrease in average selling price is due primarily to the sale of
new lower cost products as well as competition from Asian companies.
Non-keyboard revenue accounted for 14.0% of total revenue in the second
quarter of fiscal 1998 versus 18.4% in the second quarter of the prior year. For
the six months ended December 27, 1997, non-keyboard revenue accounted for 18.2%
of total revenue versus 19.4% for the same period of the prior year. The
decrease in this segment of the Company's revenue base is attributable primarily
to decreasing shipments to two major OEM customers.
COST OF SALES
Cost of sales were 85.3% of revenue in the second quarter of 1998 compared
to 85.4% for the second quarter of 1997. Cost of sales were 85.5% of revenue
for the six months ended December 27, 1997, compared to 85.2% for the same
period of the prior year. The cost of sales percentage has remained
fairly constant despite lower unit pricing. The company continues to emphasize
cost reduction whenever feasible by increasing capacity in its Juarez, Mexico
facility. This facility was expanded during fiscal 1997 to increase available
manufacturing and molding capacity.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering expenses were $1.3 million in the second
quarter of fiscal 1998 and $1.3 million for the same period of fiscal 1997. As
a percentage of sales, R D & E expenditures were 2.9% in the second quarter of
1998 compared to 2.8% in the second quarter of 1997. Research, development, and
engineering expenses were $2.2 million for the six months ended December 27,
1997 compared to $2.9 million for the same period of the prior year. As a
percentage of sales, R D & E expenditures were 2.6% for the current six month
period versus 3.1% for the same period of the prior fiscal year. As a percent of
revenue the decrease is due primarily to increased recovery of engineering
design costs which are reflected in gross profit on sales. The following table
provides a comparative analysis of gross and net R D & E expenditures:
Gross Expenditures Net Expenditures
Q2 FY98 $1,958.6 $1,273.6
Q2 FY97 1,507.9 1,296.1
YTD FY98 3,621.4 2,157.4
YTD FY97 3,082.9 2,871.1
SELLING EXPENSES
Selling expenses were $2.2 million in the second quarter of 1998 compared
to $2.5 million in the second quarter of 1997. Selling expenses as a percentage
of revenue were 4.9% for the quarter compared to 5.3% in the same quarter of
fiscal 1997. For the six months ended December 27, 1997, selling expenses were
$4.1 million compared to $4.2 million for the same period of the prior year. As
a percentage of revenue for the current six month period, selling expenses were
4.9% compared to 4.6% for the same period of the prior year. Selling expenses
decreased in dollars due primarily to lower promotional expenses required for
new products. As a percentage of revenue, selling expenses increased due to the
decrease in revenue.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2.4 million in the second quarter
of 1998 compared to $2.5 million in the second quarter of fiscal 1997. As a
percentage of revenue, G&A expenses were 5.4% in the second quarter of fiscal
1998 matching the 5.4% for the second quarter of the prior year. For the six
months ended December 27, 1997, G&A expenses were $4.5 million compared to $5.1
million for the same period of the prior year. As a percentage of revenue G&A
expenses for the first six months of fiscal 1998 were 5.3% versus 5.5% for the
same period of the prior year. As a percentage of revenue the decrease is
primarily due to decreased spending. The decrease in dollar spending is
primarily due to decreased hiring costs and an insurance premium refund in the
first fiscal quarter of 1998.
INTEREST
Interest expense was $494,000 in the second quarter of 1998 compared to
$759,000 for the second quarter of 1997. For the six months ended December 27,
1997, interest expense was $1.0 million compared to $1.4 million for the same
period of the prior year. This decrease is due primarily to lower interest
charges resulting from additional payments of the GECC term note as well as
tighter cash controls making additional cash available to pay down the revolving
line of credit.
INCOME TAXES
The income taxes provision was $11,000 for the second quarter of fiscal
1998 and $3,000 for the second quarter of 1997. In the second quarter of 1998,
$223,000 of this provision and $90,000 of the 1997 provision relate to taxes on
earnings of foreign subsidiaries. The offsetting ($212,000) of the second
quarter 1998 provision relates to tax benefits on U.S. losses. The Company has
tax loss carryforwards of approximately $27.2 million which expire in varying
amounts in the years 2003 through 2010.
ESOP
No contributions to the Employee Stock Ownership Plan (ESOP) were made
during the second quarter of fiscal years 1998 and 1997.
BACKLOG
The Company's backlog at the end of the second fiscal quarter of 1998 was
$16.4 million compared to $18.4 million at the end of the 1997 fiscal year and
$26.4 million at the end of the second quarter of fiscal 1997. The decrease in
the backlog from fiscal year end is attributable to two major OEM customers
expanding their Just-In-Time (JIT) inventory systems, so that orders are not
placed in advance but are pulled from a stock location maintained by Key Tronic
Corporation.
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. Three of the Company's OEM customers accounted
for 34%, 11% and 7% individually, of net sales during fiscal 1997. In 1996,
these same customers accounted for 34%, 0% and 17% 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 eighty 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 December 27, 1997, there were
outstanding options and warrants for the purchase of approximately 1,300,000
shares of common stock of the Company ("Common Stock"), of which options and
warrants for approximately 900,000 shares were vested and exercisable. Holders
of the Common Stock will suffer immediate and substantial dilution to the extent
outstanding options and warrants to purchase the Common Stock are exercised. The
stock price of the Company may be subject to wide fluctuations and possible
rapid increases or declines over a short time period. These fluctuations may be
due to factors specific to the Company such as variations in quarterly operating
results or changes in analysts' earnings estimates, or to factors relating to
the computer industry or to the securities markets in general, which, in recent
years, have experienced significant price fluctuations. These fluctuations
often have been unrelated to the operating performance of the specific companies
whose stocks are traded.
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Events
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEY TRONIC CORPORATION
/s/ Jack W. Oehlke Date: February 6, 1998
Jack W. Oehlke
Director, President and
Chief Executive Officer
/s/ Ronald F. Klawitter Date: February 6, 1998
Ronald F. Klawitter
Principal Financial Officer
/s/ Keith D. Cripe Date: February 6, 1998
Keith D. Cripe
Principal Accounting Officer
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
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This schedule contains summary financial information extracted from the
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<PERIOD-TYPE> 3-MOS
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