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 April 3, 1999 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 April 20, 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 _ April 3, 1999
(Unaudited) and June 27, 1998 3-4
Consolidated Statements of Income (Unaudited)
Third Quarters Ended April 3, 1999
and March 28, 1998 5
Consolidated Statements of Income (Unaudited)
Three Quarters Ended April 3, 1999
and March 28, 1998 6
Consolidated Statements of Cash Flows (Unaudited)
Three Quarters Ended April 3, 1999
and March 28, 1998 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
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
April 3, 1999 June 27, 1998
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,358 $ 288
Trade receivables, less allowance for doubtful
accounts of $862 and $885 26,688 23,103
Inventories 23,395 24,723
Real estate held for sale 2,025 2,134
Deferred income tax asset _ current, net 1,279 1,681
Customer tooling 1,666 4,855
Other 6,924 3,127
----- -----
Total current assets 63,335 59,911
Property, plant and equipment - at cost 104,226 103,551
Less accumulated depreciation 77,751 73,621
----- -----
Total property, plant and equipment 26,475 29,930
Other Assets:
Deferred income tax asset, net 3,536 4,198
Other, (net of accumulated amortization
of $299 and $170) 1,222 1,770
Goodwill (net of accumulated amortization
of $607 and $511) 1,180 1,276
----- -----
$95,748 $97,085
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued, in thousands)
<TABLE>
<CAPTION>
April 3, 1999 June 27, 1998
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Current portion of long-term obligations $ 2,105 $ 2,105
Accounts payable 15,262 15,525
Accrued compensation and vacation 3,144 2,750
Accrued taxes other than income taxes 1,499 1,558
Interest payable 26 132
Other 3,564 3,257
----- -----
Total current liabilities 25,600 25,327
------ ------
Long-term obligations, less current portion 18,933 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 12,697 10,342
Foreign currency translation adjustment 245 245
--- ---
Total shareholders' equity 51,215 48,860
------ ------
$95,748 $97,085
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Third Quarter Ended
April 3, 1999 March 28, 1998
(in thousands, except per share amounts)
<S> <C> <C>
Net sales $45,155 $45,387
Cost of sales (including warranty
provision of $300 and $154) 37,525 39,393
------ ------
Gross profit on sales 7,630 5,994
Operating expenses:
Research, development and engineering 1,005 1,151
Selling 2,400 2,198
General and administrative 2,101 2,080
----- -------
Operating income 2,124 565
Interest expense 463 526
Other income (59) (111)
---- ----
Income before income tax provision 1,720 150
Income tax provision 718 3
--- -
Net income $1,002 $147
====== =====
Earnings per share:
Earnings per common share - basic and diluted $0.10 $ 0.02
Weighted average shares outstanding 9,631 9,631
Diluted shares outstanding 9,857 9,632
See accompanying notes to consolidated financial statements.
</TABLE>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Quarters Ended
April 3, 1999 March 28, 1998
(in thousands, except per share amounts)
<S> <C> <C>
Net sales $135,433 $129,773
Cost of sales (including warranty
provision of $969 and $1,145) 113,218 111,576
------ -------
Gross profit on sales 22,215 18,197
Operating expenses:
Research, development and engineering 3,881 3,308
Selling 6,935 6,344
General and administrative 6,337 6,537
----- -----
Operating income 5,062 2,008
Interest expense 1,455 1,551
Other income (172) (190)
----- ------
Income before income tax provision 3,779 647
Income tax provision 1,424 108
----- ---
Net income $2,355 $539
===== ====
Earnings per share:
Earnings per common share - basic and diluted $0.24 $ 0.06
Weighted average shares outstanding 9,631 9,624
Diluted shares outstanding 9,753 9,626
See accompanying notes to consolidated financial statements.
</TABLE>
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Quarters Ended
April 3, 1999 March 28, 1998
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $2,355 $539
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 5,258 7,294
Provision for obsolete inventory 1,115 1,170
Provision for doubtful receivables 334 50
Provision for warranty 969 1,145
Provision for litigation (900) 0
Gain on disposal of assets (31) (65)
Deferred income taxes 1,064 (526)
Changes in operating assets and liabilities:
Trade receivables (3,919) (2,854)
Inventories 213 (3,965)
Customer tooling 3,189 (2,787)
Other assets (3,378) 439
Accounts payable (263) 6,500
Accrued compensation and vacation 394 (280)
Other liabilities (827) (756)
----- -----
Cash provided by operating activities 5,573 5,904
----- -----
Cash flows from investing activities:
Proceeds from sale of property plant and equipment 42 80
Purchase of property and equipment (1,480) (6,311)
----- -----
Cash used in investing activities (1,438) (6,231)
----- -----
Cash flows from financing activities:
Other financing fees 0 (45)
Payments on long-term obligations (3,065) (1,337)
----- -----
Cash used in financing activities (3,065) (1,382)
----- -----
Effect of exchange rate changes on cash 0 (152)
----- -----
Net increase (decrease) in cash and cash equivalents 1,070 (1,861)
Cash and cash equivalents, beginning of period 288 2,812
----- -----
Cash and cash equivalents, end of period $1,358 $951
====== ======
See accompanying notes to consolidated financial statements.
</TABLE>
KEY TRONIC CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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>
April 3, 1999 June 27, 1998
(in thousands)
<S> <C> <C>
Finished goods $11,876 $11,802
Work-in-process 2,911 3,106
Raw materials and supplies 11,250 12,554
Reserve for obsolescence (2,642) (2,739)
------ ------
$23,395 $24,723
======= =======
</TABLE>
2. COMMITMENTS
The amount of firm commitments to contractors and suppliers for capital
expenditures was approximately $800,000 at April 3,
1999.
3. LONG-TERM OBLIGATIONS
Long-term obligations consist of:
<TABLE>
April 3, 1999 June 27, 1998
(in thousands)
<S> <C> <C>
Note payable _ GECC (General Electric Capital Corporation) $ 6,122 $ 8,332
Revolving line 14,298 15,153
Litigation reserve 0 900
Deferred compensation obligation 618 618
--- ---
21,038 25,003
Less current portion (2,105) (2,105)
------- --------
$18,933 $22,898
======= =======
</TABLE>
Management has considered the facts and circumstances surrounding its
litigation on the MICA sanitary landfill and has determined that an accrual is
no longer needed as of the quarter ended April 3, 1999. Accordingly,
management has reversed its accrual of $900,000 in the third quarter of fiscal
1999.
4. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Three Quarters Ended
April 3, 1999 March 28, 1998
(in thousands)
<S> <C> <C>
Interest payments $1,561 $1,575
Income tax payments 146 149
</TABLE>
5. INCOME TAXES
The income tax provisions were $718,000 for the third quarter of fiscal
1999 and $3,000 for the third quarter of fiscal 1998. For the quarter ended
April 3, 1999, the income tax provision included a benefit on foreign losses of
$261,000; whereas, for the quarter ended March 28, 1998, the income tax
provision included taxes on foreign income of $172,000. The offsetting
($169,000) of the third quarter of the fiscal 1998 provision relates to tax
benefits on U.S. losses. For the nine months ended April 3, 1999 and March 28,
1998, the income tax provisions were $1,424,000 and $108,000, respectively.
Included in these provisions were $292,000 and $542,000 for taxes on foreign
earnings, respectively. The offsetting ($434,000) of the provision for the
nine months ended March 28, 1998 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 standard in calculating the dilutive effect of
common stock equivalents.
There were no adjustments to the income available to common shareholders
for the third quarters and three quarters ended April 3, 1999 and March 28,
1998. The following table presents the Company's calculations of weighted
average shares outstanding (number of shares):
<TABLE>
<CAPTION>
Adjustments For
Weighted Avg. Shares Dilutive O/S Option Total
For the Quarter Ended
- ---------------------
<S> <C> <C> <C>
April 3, 1999 9,630,830 225,923 9,856,753
March 28, 1998 9,630,830 802 9,631,632
For Three Quarters Ended
- ------------------------
April 3, 1999 9,630,830 122,389 9,753,219
March 28, 1998 9,624,090 2,324 9,626,414
</TABLE>
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
10-Q.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Operating activities provided $5.6 million of cash during the first three
quarters of fiscal 1999 versus $5.9 million of cash provided by operating
activities during the same period of the prior year. The fiscal 1999 change in
available cash is due primarily to net income, increased accounts receivable and
other current assets offset by decreased customer tooling. The increase in
accounts receivable are due to increased sales 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 three quarters of fiscal 1999, $1.4 million was expended
in capital additions versus $6.2 million spent in capital additions in the same
period in the previous fiscal year. The Company anticipates capital expenditures
of approximately $1.3 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 April 3, 1999
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 1.4, 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 April 3, 1999,
the applicable LIBOR rate was 4.93875%, and the applicable interest rate was
6.68875%.
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 April 3, 1999, the
applicable LIBOR rate was 4.93750%, and the applicable interest rate was
6.43750%. At April 3, 1999, there was $14.3 million borrowed on the revolving
loan and approximately $4.0 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 $0.9 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 lower capital expenditures 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 third 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 cost 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 95% 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 contacted all suppliers by survey regarding their year 2000
readiness several months ago. All suppliers responded to the survey, but not
all of the responses were sufficient to confirm their readiness, so the
committee requested test data from some of the Company's suppliers and has
reviewed some of the Company's more critical suppliers in order to confirm their
compliance. The Company has also communicated with its banks and other external
agencies that provide critical services to the company and assurances and
documentation have been received to indicate full compliance. Production and
test equipment as well as production facilities have been evaluated for
compliance, and at this time, they are considered to be 95% compliant. These
statistics include the Company's foreign subsidiaries. Any embedded systems
have been identified and remediated as a part of the production facilities
evaluation.
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 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 non-compliance. 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. All interruptions or delays could
interfere with the Company's ability to make shipments and therefore impact
sales and cash flows. As of April 3, 1999, the Company has discussed
contingency plans to cover these types of problems. Any necessary formal
documentation to communicate these contingency plans will be completed by 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 three 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 4.93688 and 5.65625%. At April
3, 1999, the effective LIBOR rate was 4.93750% for the revolver debt and
4.93875% for the term debt. The difference between these two rates is due to
LIBOR contract renewals on separate days during the period. LIBOR rates
fluctuate on a daily basis.
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, except for KTS (Key Tronic Shanghai) is
the U.S. dollar. RMB is the functional currency for KTS and at this time RMB is
fixed and requires no currency translation adjustment. 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.
NET SALES
Net sales for the fiscal 1999 third quarter ended April 3, 1999 were $45.2
million compared to $45.4 million for the third quarter of the previous year.
For the nine months ended April 3, 1999, sales were $135.4 million compared to
$129.8 million for the same period of the previous year.
Keyboard shipments for the third quarter of fiscal year 1999 were about
the same as the third quarter of the prior year while the average selling price
decreased approximately 9.1%. For the nine months ended April 3, 1999, unit
shipments increased approximately 17.9% over the same period of the prior year
while the average selling price decreased 16.5%. The increase in units shipped
from the nine months ending March 28, 1998 to the nine months ending April 3,
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 18.1% of total revenue in the third
quarter of fiscal 1999 versus 8.1% of total revenue in the third quarter of
fiscal 1998. For the nine months ended April 3, 1999, non-keyboard revenue
accounted for 14.1% of total revenue versus 14.7% 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 83.1% of revenue in the third quarter of 1999 compared
to 86.8% for the third quarter of 1998. Cost of sales were 83.6% of revenue for
the nine months ended April 3, 1999, compared to 86.0% 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 third 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 (Original Design Manufacturing) products. This
facility, in conjunction with a newly organized subsidiary in Shanghai, China,
which began activity this quarter, will enable the Company to increase its
presence in this growing market.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering expenses were $1.0 million in the
third quarter of fiscal 1999 and $1.2 million for the same period of fiscal
1998. As a percentage of sales, R D & E expenditures were 2.2% in the third
quarter of 1999 compared to 2.5% for the same period of the prior year.
Research, development, and engineering expenses were $3.9 million for the nine
months ended April 3, 1999 compared to $3.3 million for the same period of the
prior year. As a percentage of sales, R D & E expenditures were 2.9% for the
current nine 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 exceptionally
large charge-outs to customers in Q1 FY98 which lowered that year's R&D spending
to an abnormally low level.
SELLING EXPENSES
Selling expenses were $2.4 million in the third quarter of fiscal 1999
compared to $2.2 million in the third quarter of fiscal 1998. Selling expenses
as a percentage of revenue were 5.3% for the quarter compared to 4.8% in the
same quarter of fiscal 1998. For the nine months ended April 3, 1999, selling
expenses were $6.9 million compared to $6.3 million for the same period of the
prior year. As a percentage of revenue for the current nine month period,
selling expenses were 5.1% 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 distribution
products and increased selling expenses in Europe.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2.1 million in the third
quarters of fiscal 1999 and fiscal 1998. As a percentage of revenue, G&A
expenses were 4.7% in the third quarter of fiscal 1999 versus 4.6% in the same
quarter of the prior year. For the nine months ended April 3, 1999, G&A
expenses were $6.3 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 nine months of
fiscal 1999 were 4.7% versus 5.0% for the same period of the prior year. As a
percentage of revenue the slight decrease is primarily due to decreased spending
in various administrative costs, as well as increased revenue in fiscal 1999.
For the three quarters ended April 3, 1999, the Company recorded $775,000
for its Incentive Compensation Program based upon the Company's fiscal year to
date performance, and $900,000 for the reversal of its MICA sanitary landfill
litigation accrual. Management has considered the facts and circumstances
surrounding its litigation on the MICA sanitary landfill and has determined that
an accrual is no longer needed as of the quarter ended April 3, 1999.
Accordingly, management has reversed its accrual of $900,000 in the third
quarter of fiscal 1999.
INTEREST
Interest expense was $463,000 in the third quarter of fiscal 1999 compared
to $526,000 for the third quarter of fiscal 1998. For the nine months ended
April 3, 1999, interest expense was $1,455,000 compared to $1,551,000 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 tax provisions were $718,000 for the third quarter of fiscal
1999 and $3,000 for the third quarter of fiscal 1998. For the quarter ended
April 3, 1999, the income tax provision included a benefit on foreign losses of
$261,000; whereas, for the quarter ended March 28, 1998, the income tax
provision included taxes on foreign income of $172,000. The offsetting
($169,000) of the third quarter of the fiscal 1998 provision relates to tax
benefits on U.S. losses. For the nine months ended April 3, 1999 and March 28,
1998, the income tax provisions were $1,424,000 and $108,000, respectively.
Included in these provisions were $292,000 and $542,000 for taxes on foreign
earnings, respectively. The offsetting ($434,000) of the provision for the
nine months ended March 28, 1998 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 third quarter of fiscal years 1999 and 1998.
BACKLOG
The Company's backlog at the end of the third fiscal quarter of 1999 was
$8.4 million compared to $12.9 million at the end of the 1998 fiscal year and
$13.8 million at the end of the third quarter of fiscal 1998. The decrease in
the backlog from fiscal year end and from the third 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.
Subsequent to the quarter ended April 3, 1999, the Company obtained significant
ODM contracts for three new customers. This success was offset with the loss of
a keyboard product to a major customer. The offsetting effect to revenues for
contracts is not expected to be significant. Management considers these events
to be in the normal course of operations.
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 has twenty-two suits by computer keyboard
users which are in State or Federal Courts in Illinois, New Jersey, New York,
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 one hundred and sixteen suits have been dismissed in California, Connecticut,
Florida, Illinois, Kansas, Kentucky, Maryland, Massachusetts, Michigan, New
Jersey, New York, Pennsylvania and Texas. One of the one hundred and sixteen
dismissed suits is on appeal in New York.
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 April 3, 1999, 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 _____________
Jack W. Oehlke Date:
(Director, President and
Chief Executive Officer)
/s/ Ronald F. Klawitter _____________
Ronald F. Klawitter Date:
Principal Financial Officer
/s/ Keith D. Cripe _____________
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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying financial statemetns and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-END> APR-03-1999
<CASH> 1358
<SECURITIES> 0
<RECEIVABLES> 27550
<ALLOWANCES> 862
<INVENTORY> 23395
<CURRENT-ASSETS> 63335
<PP&E> 104226
<DEPRECIATION> 77751
<TOTAL-ASSETS> 95748
<CURRENT-LIABILITIES> 25600
<BONDS> 0
0
0
<COMMON> 38273
<OTHER-SE> 12942
<TOTAL-LIABILITY-AND-EQUITY> 95748
<SALES> 45155
<TOTAL-REVENUES> 45155
<CGS> 37525
<TOTAL-COSTS> 37525
<OTHER-EXPENSES> 5447
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 463
<INCOME-PRETAX> 1720
<INCOME-TAX> 718
<INCOME-CONTINUING> 1002
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1002
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
