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 26, 1998 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 February 8, 1999, 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 26, 1998
(Unaudited) and June 27, 1998 (Audited) 3-4
Consolidated Statements of Income (Unaudited)
Second Quarters Ended December 26, 1998
and December 27, 1997 5
Consolidated Statements of Income (Unaudited)
Two Quarters Ended December 26, 1998
and December 27, 1997 6
Consolidated Statements of Cash Flows (Unaudited)
Two Quarters Ended December 26, 1998
and December 27, 1997 7
Notes to Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Events 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
<TABLE>
<CAPTION>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 26, June 27,
1998 1998
(Unaudited) (Audited)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 561 $ 288
Trade receivables, less allowance for doubtful
accounts of $1,028 and $885 28,262 23,103
Inventories 24,220 24,723
Real estate held for sale 2,061 2,134
Deferred income tax asset _ current, net 1,244 1,681
Customer tooling 1,685 4,855
Other 4,592 3,127
Total current assets 62,625 59,911
Property, plant and equipment - at cost 104,286 103,551
Less accumulated depreciation 76,734 73,621
Total property, plant and equipment 27,552 29,930
Other Assets:
Deferred income tax asset, net 4,004 4,198
Other, (net of accumulated amortization
of $256 and $170) 1,425 1,770
Goodwill (net of accumulated amortization
of $575 and $511) 1,212 1,276
$96,818 $97,085
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued, in thousands)
December 26, June 27,
1998 1998
(Unaudited) (Audited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C>
Current portion of long-term obligations $ 2,105 $ 2,105
Accounts payable 15,306 15,525
Accrued compensation and vacation 2,800 2,750
Accrued taxes other than income taxes 1,477 1,558
Interest payable 106 132
Other 4,517 3,257
Total current liabilities 26,311 25,327
Long-term obligations, less current portion 20,295 22,898
Commitments and contingencies (Note 2)
Shareholders' Equity:
Common stock, no par value, authorized
25,000 shares; issued and outstanding
9,631 shares 38,273 38,273
Retained earnings 11,694 10,342
Foreign currency translation adjustment 245 245
Total shareholders' equity 50,212 48,860
$96,818 $97,085
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Second Quarters Ended
December 26, December 27,
1998 1997
(in thousands, except
per share amounts)
<S> <C> <C>
Net sales $47,973 $44,129
Cost of sales (including warranty
provision of $341 and $384) 40,384 37,629
Gross profit on sales 7,589 6,500
Operating expenses:
Research, development and engineering 1,383 1,274
Selling 2,344 2,173
General and administrative 2,167 2,362
Operating income 1,695 691
Interest expense 464 494
Other income (57) (62)
Earnings before income tax provision 1,288 259
Income tax provision 429 11
Net income $859 $248
Earnings per share:
Earnings per common share - basic and diluted $0.09 $ 0.03
Weighted average shares outstanding 9,631 9,631
Diluted shares outstanding 9,705 9,631
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Two Quarters Ended
December 26, December 27,
1998 1997
(in thousands, except
per share amounts)
<S> <C> <C>
Net sales $90,278 $84,386
Cost of sales (including warranty
provision of $670 and $992) 75,693 72,183
Gross profit on sales 14,585 12,203
Operating expenses:
Research, development and engineering 2,876 2,157
Selling 4,536 4,146
General and administrative 4,235 4,457
Operating income 2,938 1,443
Interest expense 992 1,025
Other income (113) (79)
Earnings before income tax provision 2,059 497
Income tax provision 707 106
Net income $1,352 $391
Earnings per share:
Earnings per common share - basic and diluted $0.14 $ 0.04
Weighted average shares outstanding 9,631 9,621
Diluted shares outstanding 9,659 9,621
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Two Quarters Ended
December 26, December 27,
1998 1997
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $1,352 $391
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 3,475 4,807
Provision for obsolete inventory 875 1,120
Provision for doubtful receivables 143 25
Provision for warranty 670 992
Gain on disposal of assets (10) 0
Deferred income taxes 631 (335)
Changes in operating assets and liabilities:
Trade receivables (5,302) 7
Inventories (372) (522)
Customer tooling 3,170 (1,286)
Other assets (1,206) (54)
Accounts payable (219) 2,660
Accrued compensation 50 329
Other liabilities 483 (564)
Cash provided by operating activities 3,740 7,582
Cash flows from investing activities:
Proceeds from sale of property plant and equipment 10 0
Purchase of property and equipment (874) (4,753)
Cash used in investing activities (864) (4,753)
Cash flows from financing activities:
Other financing fees 0 (37)
Payments on long-term obligations (2,603) (4,384)
Cash used in financing activities (2,603) (4,421)
Effect of exchange rate changes on cash 0 (153)
Net increase in cash and cash equivalents 273 (1,745)
Cash and cash equivalents, beginning of period 288 2,812
Cash and cash equivalents, end of period $561 $1,067
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 of a normal and recurring nature 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 27, 1998.
- -----------------------------------------------------------------------
1. INVENTORIES
<TABLE>
<CAPTION>
December 26, June 27,
1998 1998
(Unaudited) (Audited)
(in thousands)
<S> <C> <C>
Finished goods $11,887 $11,802
Work-in-process 3,158 3,106
Raw materials and supplies 11,898 12,554
Reserve for obsolescence (2,723) (2,739)
$24,220 $24,723
</TABLE>
2. COMMITMENTS
The amount of firm commitments to contractors and suppliers for capital
expenditures was approximately $690,000 at December 26, 1998.
3. LONG-TERM OBLIGATIONS
Long-term obligations consist of:
<TABLE>
<CAPTION> December 26, June 27,
1998 1998
(in thousands)
<S> <C> <C>
Note payable - GECC $ 7,206 $ 8,332
Revolving line 13,676 15,153
Litigation reserve 900 900
Deferred compensation obligation 618 618
22,400 25,003
Less current portion (2,105) (2,105)
$20,295 $22,898
</TABLE>
4. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Two Quarters Ended
December 26, December 27,
1998 1997
(in thousands)
<S> <C> <C>
Interest payments $1,018 $1,071
Income tax payments 322 93
</TABLE>
5. INCOME TAXES
The income tax provisions were $429,000 for the second quarter of fiscal
1999 and $11,000 for the second fiscal quarter of 1998. The amount of these
provisions related to taxes on foreign losses and earnings were ($101,000) for
the quarter ended December 26, 1998 and $223,000 for the quarter ended December
27, 1997. The offsetting ($212,000) of the second quarter of the fiscal 1998
provision relates to tax benefits on U.S. losses. For the six months ended
December 26, 1998 and December 27, 1997, the income taxes provisions were
$707,000 and $106,000, respectively. Included in these provisions were $31,000
and $370,000 for taxes on foreign earnings. The offsetting ($264,000) of the
provision for the six months ended December 27, 1997 relates to tax benefits on
U.S. losses. The Company has tax loss carryforwards of approximately $25.3
million which expire in varying amounts in the years 2006 through 2012.
6. ADOPTION OF FINANCIAL ACCOUNTING STANDARDS NO. 128
The Company has adopted Financial Accounting Standards No. 128 which
requires the presentation of "basic EPS" and "diluted EPS". 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.
There were no adjustments to the income available to common shareholders
for the second quarters and two quarters ended December 26, 1998 and December
27, 1997. The following table presents the Company's calculations of weighted
average shares (number of shares):
Adjustments For
Weighted Avg. Shares Dilutive O/S Option Total
For the Quarter Ended
December 26, 1998 9,630,830 74,357 9,705,187
December 27, 1997 9,630,610 308 9,630,918
For Two Quarters Ended
December 26, 1998 9,630,830 27,947 9,658,777
December 27, 1997 9,620,720 394 9,621,114
FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements in addition to
historical information. Forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those reflected in the forward-looking statements. Risks and uncertainties that
might cause such differences include, but are not limited to those outlined in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations_ Risks and Uncertainties That May Affect Future Results." Readers are
cautioned not to place undue reliance on forward-looking statements, which
reflect management's opinions only as of the date hereof. The Company
undertakes no obligation to revise or publicly release the results of any
revision to forward-looking statements. Readers should carefully review the
risk factors described in other documents the Company files from time to time
with the Securities and Exchange Commission, including Quarterly Reports on Form
10Q.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Operating activities provided $3.7 million of cash during the first two
quarters of fiscal 1999 versus $7.6 million of cash provided by operating
activities during the same period of the prior year. This change in available
cash is due primarily to increased accounts receivable and other current assets
offset by decreased customer tooling. The increases in accounts receivable are
due to increased sales in the last four weeks of the current quarter. The
increase in other assets is due primarily to increased non-trade receivables
associated with the Company's subcontractor in Shanghai, China and required
prepayments associated with lease contracts.
During the first two quarters of fiscal 1999, $.9 million was expended in
capital additions versus $4.8 million spent in capital additions in the same
period in the previous fiscal year. The Company anticipates capital
expenditures of approximately $3.4 million through the remainder of the current
fiscal year ending July 3, 1999. Actual capital expenditures may vary from
anticipated expenditures depending upon future results of operations. See RISKS
AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS, pages 13-14. Capital
expenditures are expected to be financed with internally generated funds.
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. 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 26,
1998 and June 27, 1998, the Company was in compliance with all debt covenants.
The term note is payable in quarterly installments of principal, each in
the amount of $500,000, commencing in March 1998 and ending 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 1.2, 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 1.2, this note bears interest at
two percent (2.00%) in excess of the applicable LIBOR rate. At December 26,
1998, the applicable LIBOR rate was 5.03422%, and the applicable interest rate
was 7.03422%.
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 1.2, 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 1.2, the applicable interest rate is one and three-quarters percent
(1.75%) in excess of the applicable LIBOR rate. At December 26, 1998, the
applicable LIBOR rate was 5.03422%, and the applicable interest rate was
6.78422%. At December 26, 1998, there was $13.7 million borrowed on the
revolving loan and approximately $6.3 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 $1.5 million since the Company's
fiscal year end at June 27, 1998. 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.
YEAR 2000 MATTERS
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000.
The Company has an internal committee made up of representatives from seven
strategic areas that are dedicated to the Year 2000 issue, and the committee
meets on a regular basis to discuss the Company's progress on any remaining
projects that are considered potential problem areas. During the second quarter
of fiscal 1999, the Company upgraded additional software programs that were not
compliant and has plans in place to complete this task within the next few
months. Any remaining hardware issues are being handled in a similar manner.
Costs associated with these upgrades have been immaterial and have been expensed
as incurred.
The Company actually started its Year 2000 readiness program in 1993 with
the upgrade of its business systems. Total budgeted costs associated with this
upgrade was $500,000, and this project was completed as scheduled in 1993.
Other costs associated with upgrades of PC's and other communication equipment,
security systems, software, facilities, and equipment was budgeted at less than
$1.5 million. These costs have been budgeted and spread over the past three
fiscal years as well as the current fiscal year, and the committee at this time
feels that its readiness programs are about 85% complete. July of 1999 has
been targeted as the completion date for any currently unresolved Year 2000
issues. The Company believes that this is a reasonable date based on
information currently available.
The Company has contacted all suppliers by survey regarding their year
2000 readiness. All suppliers responded to the survey, but not all of the
responses were sufficient to confirm their readiness, so the committee has
requested test data from some of the Company's suppliers and is in the process
of scheduling personal visits with some of the Company's more critical suppliers
in order to audit their compliance. The Company has also communicated with
other external agencies and is in the process of initiating formal
communications with all of its large customers to determine the extent to which
the Company is vulnerable to those parties' failure to remediate their own
Year 2000 issues. Production and test equipment as well as production
facilities have been evaluated for compliance, and at this time, they are
considered to be 92% compliant. These statistics include the Company's
foreign subsidiaries.
Progress has also been made in identifying and evaluating embedded systems.
The committee has plans in place to make sure that all date-sensitive systems
are compliant by the targeted completion date mentioned above.
Key Tronic believes that completed and planned modifications and conversions
of its internal systems and equipment will allow it to be Year 2000 compliant in
a timely manner. The Company can give no guarantee that the systems of the
other companies on which the Company's systems rely will be converted on time
or that a failure to convert by another company or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company. There can also be no assurance that contingency plans
will mitigate the effects of any noncompliance. It is believed that the most
reasonably likely worst case scenario for Year 2000 non-compliance to the
Company will be that the supply of goods and services by third parties to the
Company would be interrupted or delayed resulting in interruption or delay in
the Company's manufacture of products which could interfere with the Company's
ability to make shipments and therefore impact sales. As of December 26,
1998, the Company does not have contingency plans in place to cover these types
of problems, but it plans to have all such risks to its operations identifed
and addressed by contingency plans not later than mid 1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to the risk of fluctuating interest rates in the
normal course of business. The Company's major market risk relates to its
secured debt. A portion of the Company's accounts receivable and inventories
are used as collateral for its term and revolving debt. The interest rates
applicable to the Company's debt fluctuate with the London Interbank Offered
Rate (LIBOR). Over the past two fiscal quarters, the highest LIBOR rate was
5.66797% at the end of June, 1998. This rate continued through the month of
July, 1998 and it has since fluctuated between 5.03422 and 5.65625%. At
December 26, 1998, the effective LIBOR rate was 5.62875%.
The table below presents principal (or notional) amounts and related
weighted average variable interest rates by fiscal year of maturity. The
weighted average variable interest rates for fiscal years 1999 and thereafter
are estimated based on implied forward rates in the yield curve as of June 27,
1998. These forward rates have been increased by 2% for the term debt and 1.75%
for the revolving debt based on debt service coverage of less than 1.2 (see
discussion above related to the Company's debt). All items described in the
table are non-trading and are stated in U.S. dollars.
<TABLE>
<CAPTION> FAIR VALUE
DECEMBER 26, 1998
IN THOUSANDS 1999 2000 2001 2002 THEREAFTER TOTAL
Interest rate risk:
Long-term debt-floating rate:
<S> <C> <C> <C> <C> <C> <C> <C>
Secured term debt 1,000 2,000 2,000 2,000 269 7,269 7,269
Average interest rate 7.84% 7.87% 7.91% 7.92% 7.94%
Secured revolving debt 13,676 13,676 13,676
Average interest rate 7.67%
</TABLE>
The Company does not enter into derivative transactions or leveraged swap
agreements.
Although the Company does have international operations, the functional
currency for all active subsidiaries is the U.S. dollar, so it is not subject to
dramatic currency translation adjustments. The Company imports for its own use
raw materials that are used in its manufacturing operations. Such purchases are
denominated in U.S. dollars and are paid for under normal trade terms.
Management does not believe that the European conversion to Euro-currency
scheduled for January 1, 1999, will have a material effect on its financial
statements taken as a whole, primarily because its sales worldwide are
predominantly in U.S. dollars.
NET SALES
Net sales for the fiscal 1999 second quarter ended December 26, 1998 were
$48.0 million compared to $44.1 million for the second quarter of the previous
year. For the six months ended December 26, 1998, sales were $90.3 million
compared to $84.4 million for the same period of the previous year.
Keyboard shipments increased 24.4% from the second quarter of the prior
year while the average selling price decreased approximately 21.6%. For the six
months ended December 26, 1998, unit shipments increased approximately 30.7%
over the same period of the prior year while the average selling price decreased
21.1%. The increase in units shipped from the second quarter of fiscal year
1998 to the second quarter of fiscal year 1999 is due primarily to increased
customer orders. The decrease in average selling price is due primarily to the
sale of new lower cost products.
Non-keyboard revenue accounted for 17.1% of total revenue in the second
quarter of fiscal 1999 versus 14.0% of total revenue in the second quarter of
fiscal 1998. For the six months ended December 26, 1998, non-keyboard revenue
accounted for 21.1% of total revenue versus 18.2% of total revenue for the same
time period of the prior fiscal year. The increase in non-keyboard revenue as a
percentage of net sales is due primarily to increased shipments to two major OEM
customers.
COST OF SALES
Cost of sales were 84.2% of revenue in the second quarter of 1999 compared
to 85.3% for the second quarter of 1998. Cost of sales were 83.8% of revenue
for the six months ended December 27, 1997, compared to 85.5% for the same
period of the prior year. The cost of sales percentage has decreased 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. During the second quarter of fiscal 1999, additional emphasis was
placed on material cost reductions through negotiations with major suppliers as
well as changes to product designs that were conducive to lower costs.
During fiscal 1998, the Company began working with a subcontractor in
mainland China for the production of its keyboard products. The Company's
keyboard business will eventually be produced almost in entirety within China.
The Company plans to use its facility in Mexico to increase available capacity
for new and existing ODM products. This facility, in conjunction with a newly
organized subsidiary in Shanghai, China, will enable the Company to increase its
presence in this growing market.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering expenses were $1.4 million in the
second quarter of fiscal 1999 and $1.3 million for the same period of fiscal
1998. As a percentage of sales, R D & E expenditures were 2.9% in the second
quarter of 1999 which matches the percentage of sales in the second quarter of
1998. Research, development, and engineering expenses were $2.9 million for the
six months ended December 26, 1998 compared to $2.2 million for the same period
of the prior year. As a percentage of sales, R D & E expenditures were 3.2% for
the current six month period versus 2.6% for the same period of the prior fiscal
year. As a percent of revenue the increase is due primarily to increased new
product design activity associated with the Company's ODM business.
SELLING EXPENSES
Selling expenses were $2.3 million in the second quarter of fiscal 1999
compared to $2.2 million in the second quarter of fiscal 1998. Selling expenses
as a percentage of revenue were 4.9% for the quarter compared to 4.9% in the
same quarter of fiscal 1998. For the six months ended December 26, 1998,
selling expenses were $4.5 million compared to $4.1 million for the same period
of the prior year. As a percentage of revenue for the current six month period,
selling expenses were 5.0% compared to 4.9% for the same period of the prior
year. Selling expenses in dollars and percentages of revenue remained fairly
consistent. The slight increase in both dollars and percentages can be
attributed to increased promotional expenses for the Company's retail product
lines.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2.2 million in the second quarter
of fiscal 1999 compared to $2.4 million in the second quarter of fiscal 1998.
As a percentage of revenue, G&A expenses were 4.5% in the second quarter of
fiscal 1999 versus 5.4% in the same quarter of the prior year. For the six
months ended December 26, 1998, G&A expenses were $4.2 million compared to $4.5
million for the same period of the prior year. As a percentage of revenue G&A
expenses for the first six months of fiscal 1999 were 4.7% versus 5.3% for the
same period of the prior year. As a percentage of revenue the decrease is
primarily due to decreased spending in various administrative costs.
INTEREST
Interest expense was $464,000 in the second quarter of fiscal 1999 compared
to $494,000 for the second quarter of fiscal 1998. For the six months ended
December 26, 1998, interest expense was $992,000 compared to $1.0 million for
the same period of the prior year. This decrease is due primarily to lower
interest charges resulting from additional payments on 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 provisions were $429,000 for the second quarter of fiscal
1999 and $11,000 for the second fiscal quarter of 1998. The amount of these
provisions related to taxes on foreign losses and earnings were ($101,000) for
the quarter ended December 26, 1998 and $223,000 for the quarter ended December
27, 1997. The offsetting ($212,000) of the second quarter of the fiscal 1998
provision relates to tax benefits on U.S. losses. For the six months ended
December 26, 1998 and December 27, 1997, the income taxes provisions were
$707,000 and $106,000, respectively. Included in these provisions were $31,000
and $370,000 for taxes on foreign earnings. The offsetting ($264,000) of the
provision for the six months ended December 27, 1997 relates to tax benefits on
U.S. losses. The Company has tax loss carryforwards of approximately $25.3
million which expire in varying amounts in the years 2006 through 2012.
ESOP
No contributions to the Employee Stock Ownership Plan (ESOP) were made
during the second quarter of fiscal years 1999 and 1998.
BACKLOG
The Company's backlog at the end of the second fiscal quarter of 1999 was
$9.4 million compared to $12.9 million at the end of the 1998 fiscal year and
$16.4 million at the end of the second quarter of fiscal 1998. The decrease in
the backlog from fiscal year end and from the second quarter of fiscal 1998 is
attributable in part to increased sales in the last month of the current
quarter. The Company also supports two major OEM customers that have expanded
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. Two of the Company's OEM customers accounted for
31%, and 13% individually, of net sales during fiscal 1998. In 1997, these same
customers accounted for 34%, and 7% of the Company's net sales. In fiscal 1997,
another customer accounted for 11% of net sales; however, in fiscal 1998, this
customer accounted for only 2% 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 twenty-two 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 26, 1998, there were
outstanding options and warrants for the purchase of approximately 2,000,000
shares of common stock of the Company ("Common Stock"), of which options and
warrants for approximately 1,000,000 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.
Year 2000 Matters. The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar formal business activities.
Many of the Company's systems include hardware and packaged software purchased
from vendors who have represented that these systems are already Year 2000
compliant. The Company has also initiated a conversion from existing software
to programs that are represented to be Year 2000 compliant.
The Company has communicated with all of its significant suppliers, and other
external agencies, and is in the process of initiating formal communications
with all of its large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company can give no guarantee that the systems of other companies
on which the Company's systems rely will be converted on time or that a failure
to convert by another company or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
The date on which the Company plans to complete the Year 2000 modification and
testing processes are based on management's best estimates, which will be
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans, and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans.
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 February 10, 1999
Jack W. Oehlke Date:
(Director, President and
Chief Executive Officer)
/s/ Ronald F. Klawitter February 10, 1999
Ronald F. Klawitter Date:
Principal Financial Officer
/s/ Keith D. Cripe February 10, 1999
Keith D. Cripe Date:
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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