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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 29, 2002
Commission File Number 0-11559
KEY TRONIC CORPORATION
| Washington |
|
91-0849125 |
| (State of Incorporation) |
|
(I.R.S. Employer Identification
No.) |
N. 4424 Sullivan Road
Spokane, Washington 99216
(509) 928-8000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
The registrant has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months, and has been subject to such filing requirements during the past 90 days.
Indicate by checkmark if delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the Registrant was $9,564,388 as of June 29, 2002.
The number of shares of Common Stock of the Registrant outstanding as of June 29, 2002 was 9,672,580 shares.
The Exhibit Index is located at pages 31-32.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference
to the extent specified herein:
| |
| Document Description |
|
10-K Part |
| |
| Proxy Statement dated September 26, 2001 |
|
III |
KEY TRONIC CORPORATION
2002 FORM 10-K
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Page
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| Part I |
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| Item 1. |
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3-5 |
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| Item 2. |
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6 |
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| Item 3. |
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6 |
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| Item 4. |
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6 |
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| Part II |
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| Item 5. |
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7 |
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| Item 6. |
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7 |
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| Item 7. |
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8-13 |
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| Item 7A. |
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13-14 |
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| Item 8. |
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15-28 |
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| Item 9. |
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28 |
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| Part III |
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| Item 10. |
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29-30 |
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| Item 11. |
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30 |
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| Item 12. |
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30 |
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| Item 13. |
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31 |
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| Part IV |
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| Item 14. |
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31-37 |
FORWARD-LOOKING STATEMENTS
This Annual 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.
PART I
Key Tronic Corporation (dba KeyTronicEMS), a Washington corporation
organized in 1969, and its subsidiaries (hereinafter collectively called the “Company” or “Key Tronic” unless the context otherwise requires) are principally engaged in electronic manufacturing services (EMS) for original
equipment manufacturers (OEMs). The Company also manufactures keyboards for personal computers, terminals, and workstations primarily in standard layouts that can be sold directly from stock.
BACKGROUND
Historically, Key Tronic was a
manufacturer of only electronic keyboards, but about four years ago, after assessing its strengths and capabilities, the Company’s focus was shifted to electronic manufacturing services (EMS). Presently, Key Tronic is known as an independent
provider of a mix of EMS services for OEMs. The Company’s manufacturing capabilities include tool making, precision molding, prototype design, liquid plastic injection molding, printed circuit board assembly (both through-hole and surface-
mount), and full box build.
Operations are currently conducted in facilities in the United States, China, Ireland
and Mexico. This global production capability provides customers with benefits of improved supply-chain management, reduced inventory, lower transportation costs and reduced product fulfillment time.
The EMS industry is comprised of companies that provide a range of manufacturing services for OEMs. The EMS industry has experienced rapid
growth over the past several years as more and more OEMs shift to external manufacturing, and it is expected to continue in this growth pattern for several years.
CUSTOMERS AND MARKETING
OEM MARKETS
The Company provides manufacturing services for outsourced OEM products. Key Tronic is capable of providing a mix of EMS services
including product design, tool making, precision molding, prototype design, liquid plastic injection molding, printed circuit board assembly, full box build, and screened silver flexible circuit membranes. The percentage of revenues from EMS
services for the fiscal years ended June 29, 2002, June 30, 2001, and July 1, 2000 were 89.4%, 76.2%, and 55.5%, respectively. Sales of such products are generally not seasonal in nature.
Hewlett Packard accounted for approximately 10%, 39%, and 38% of the Company’s consolidated revenues in fiscal years 2002, 2001, and 2000, respectively. Lexmark
accounted for 13%, 27%, and 13% of consolidated revenues in fiscal years 2002, 2001, and 2000, respectively. During fiscal year 2002, the Company performed product design, plastic injection molding, and manufacturing for Clorox Products
Manufacturing Company, a new customer who accounted for 39% of consolidated revenue. No other customers accounted for 10% or more of consolidated revenues in the three fiscal years presented. In the fiscal years ended June 29, 2002, June 30, 2001,
and July 1, 2000, the five largest customers accounted for 76%, 81%, and 72% of total sales, respectively.
Although keyboard manufacturing is still included in the Company’s product offerings, annual sales continue to decline. During the fiscal years ended June 29, 2002, June 30, 2001, and July 1, 2000, the Company realized revenues
of approximately $18.3 million, $38.6 million, and $70.5 million, respectively, from the sale of keyboards representing approximately 10.4%, 23.3%, and 42.9% of consolidated revenues. The keyboard market has continued to trend toward standard
keyboard layouts. In order to accommodate the demand for standard products, the Company maintains a purchase-from-stock program. The most popular standard layouts are built and stocked for immediate availability. These products serve as enhancements
to or replacements for the original system-supplied
3
keyboards. Keyboard sales can increase somewhat during the last half of each calendar year in conjunction with the holiday season, but generally
sales of these products are not seasonal in nature.
The Company markets its products and services primarily
through its direct sales organization aided by strategically located field sales people and distributors. Although the Company established relationships with several independent sales organizations to assist in marketing the Company’s EMS
product lines in the U.S., commissions earned and paid during fiscal year 2002 were insignificant.
MANUFACTURING
Since inception, the Company has made substantial investments in developing and expanding its now extensive capital equipment
base to achieve selective vertical integration in its manufacturing processes. The Company designs and develops tooling for injection molding machines and manufactures the majority of plastic parts used in the products it manufactures. Additionally,
the Company has invested in equipment to produce screened silver flexible circuit membranes.
The Company’s
automated manufacturing processes enable it to work closely with its customers during design and prototype stages of production for new custom products and to jointly increase productivity and reduce response time to the marketplace. Key Tronic uses
computer-aided design techniques and unique software to assist in preparation of the tool design layout and tool fabrications, to reduce tooling costs, improve component and product quality and enhance turnaround time during product development.
Key Tronic uses a variety of manual and highly automated assembly processes in its facilities, depending upon
product complexity and degree of customization. Automated processes include component insertion, surface-mount technology, flexible robotic assembly, computerized vision system quality inspection, automated switch and keytop installation, and
automated functional testing.
The Company purchases materials and components for its products from a number of
different suppliers both domestic and international. Key Tronic develops close working relationships with its suppliers, many of whom have been supplying products to the Company for several years.
FOREIGN MARKETS
Information concerning geographic areas for the years ended June 29, 2002, June 30, 2001, and July 1, 2000 is summarized in the following table.
| |
|
Domestic Exports
|
|
U.S. Operations
|
|
|
Mexico Operations
|
|
Ireland Operations
|
|
|
Far East Operations
|
|
Eliminations
|
|
|
Consolidated
|
|
| |
|
(in thousands) |
|
| 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unaffiliated Customers |
|
$ |
26,888 |
|
$ |
143,324 |
|
|
$ |
— |
|
$ |
5,291 |
|
|
$ |
88 |
|
$ |
— |
|
|
$ |
175,591 |
|
| Affiliates |
|
|
|
|
|
3,187 |
|
|
|
40,438 |
|
|
(60 |
) |
|
|
19,037 |
|
|
62,602 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
26,888 |
|
$ |
146,511 |
|
|
$ |
40,438 |
|
$ |
5,231 |
|
|
$ |
19,125 |
|
$ |
(62,602 |
) |
|
$ |
175,591 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) before income Taxes |
|
$ |
— |
|
$ |
(22,242 |
) |
|
$ |
2,023 |
|
$ |
(885 |
) |
|
$ |
948 |
|
$ |
210 |
|
|
$ |
(19,946 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
— |
|
$ |
38,940 |
|
|
$ |
14,658 |
|
$ |
3,161 |
|
|
$ |
9,511 |
|
$ |
(8,831 |
) |
|
$ |
57,439 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unaffiliated customers |
|
$ |
77,842 |
|
$ |
76,950 |
|
|
$ |
— |
|
$ |
9,617 |
|
|
$ |
1,456 |
|
$ |
— |
|
|
$ |
165,865 |
|
| Affiliates |
|
|
— |
|
|
6,355 |
|
|
|
41,829 |
|
|
12 |
|
|
|
22,312 |
|
|
(70,508 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
77,842 |
|
$ |
83,305 |
|
|
$ |
41,829 |
|
$ |
9,629 |
|
|
$ |
23,768 |
|
$ |
(70,508 |
) |
|
$ |
165,865 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) before income Taxes |
|
$ |
— |
|
$ |
(14,714 |
) |
|
$ |
2,955 |
|
$ |
(978 |
) |
|
$ |
1,865 |
|
$ |
142 |
|
|
$ |
(10,730 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
— |
|
$ |
68,394 |
|
|
$ |
20,703 |
|
$ |
5,879 |
|
|
$ |
8,056 |
|
$ |
(28,661 |
) |
|
$ |
74,371 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
| 2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unaffiliated customers |
|
$ |
53,657 |
|
$ |
97,956 |
|
|
$ |
— |
|
$ |
11,616 |
|
|
$ |
1,124 |
|
$ |
— |
|
|
$ |
164,353 |
|
| Affiliates |
|
|
— |
|
|
10,571 |
|
|
|
22,311 |
|
|
142 |
|
|
|
20,987 |
|
|
(54,011 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
53,657 |
|
$ |
108,527 |
|
|
$ |
22,311 |
|
$ |
11,758 |
|
|
$ |
22,111 |
|
$ |
(54,011 |
) |
|
$ |
164,353 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) before income taxes |
|
$ |
— |
|
$ |
(6,016 |
) |
|
$ |
1,318 |
|
$ |
(1,786 |
) |
|
$ |
1,418 |
|
$ |
(103 |
) |
|
$ |
(5,169 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
— |
|
$ |
103,271 |
|
|
$ |
7,714 |
|
$ |
11,401 |
|
|
$ |
18,854 |
|
$ |
(45,425 |
) |
|
$ |
95,815 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal year 2002, $32.3 million, or 18.4% of the Company’s
revenues were from foreign sales, primarily sales in Europe, the Far East, and Mexico. Foreign sales in fiscal years 2001 and 2000 were $88.9 million and $65.3 million, respectively. Foreign sales are made primarily through the Company’s direct
sales force in the U.S. and Ireland. Key Tronic Shanghai (KTS), the Company’s facility in Shanghai, China, is used to support customer requirements within the local area as well as for export.
For additional financial information about foreign operations, see Note 12 to the Consolidated Financial Statements.
BACKLOG
At August 3, 2002, the Company had an order backlog of approximately $24.6 million. This compares with a backlog of approximately $81.5 million at August 11, 2001. The decrease in backlog is primarily attributable to a different
order placement process by a major EMS customer in the current fiscal year. As of August 11, 2001, this customer had placed a blanket purchase order with the Company that covered its forecasted annual requirement of product. A few months after this
date, the customer chose instead to cancel the blanket purchase order and replace it with more accurate purchase orders on a monthly basis. Order backlog is not necessarily indicative of future sales. Order backlog consists of purchase orders
received for products expected to be shipped approximately within the next fiscal year, although shipment dates are subject to change due to design modifications or other customer requirements.
RESEARCH, DEVELOPMENT, AND ENGINEERING
The
Company’s research, development, and engineering expenses (RD&E) were $2.6 million, $2.7 million, and $2.8 million in fiscal years 2002, 2001, and 2000, respectively. Research, development and engineering expenses as a percentage of sales
were 1.5%, 1.6%, and 1.7% in fiscal years 2002, 2001, and 2000, respectively. RD&E expenses have remained relatively consistent.
COMPETITION
The Company believes that its principal competitors in the EMS market are:
Plexus Corp, SCI Systems, ACT Manufacturing, Celestica, Flextronics International, Jabil Circuits, and Solectron. The principal methods of competition are price, quality, and the range of services offered.
TRADEMARKS AND PATENTS
The Company owns several keyboard patents; however, since the Company’s focus is now electronic manufacturing services, management believes that these patents will not have a significant impact on future revenues. The Key Tronic
name and logo are federally registered trademarks, and the Company believes they are valuable assets in its business. In fiscal year 2001, Key Tronic began operating under the trade name “KeyTronicEMS” to better represent its primary
business concentration.
EMPLOYEES
As of July 25, 2002, the Company had approximately 1,953 employees compared to 2,151 on July 28, 2001. The Company’s employees in Ireland and Reynosa are represented by local unions. The Company
has never experienced any material interruption of production due to labor disputes.
The Company’s employee
benefit program includes a bonus program involving periodic payments to all employees based on quarterly before-tax income. The Company maintains a tax-qualified profit sharing plan, a 401(k) plan, which provides a matching company contribution on a
portion of the employee’s contribution, and also provides group health, life, and disability insurance plans. The Company also offers an Executive Stock Option Plan and an Employee Stock Ownership Plan to certain individuals.
5
On December 27, 2000,
the Company sold two contiguous parcels of land and its corporate headquarters building in Spokane to Royal Hills Associates L.L.C. (RHA) for approximately $6 million in cash. In connection with the sale, the Company entered into a 10-year lease
agreement with RHA for one floor of the two-story building, which the Company will continue to occupy as its headquarters. Under the terms of the sale agreement, the Company had guaranteed the rent on the second floor of the building for one year
following the closing date of December 27, 2000. In January 2002, the Company’s monthly rent payment decreased from $62,125 to $30,875 plus allocated expenses. The Company also owns a 165,000 sq. ft. assembly and molding facility in Juarez,
Mexico in addition to a 45,000 sq. ft. manufacturing and assembly facility in Las Cruces, New Mexico. At the end of November 2001, the Company leased an additional 49,411 sq. ft. in Juarez, Mexico to be used primarily as warehouse space with some
light manufacturing. The Company leases a manufacturing facility in the Spokane Industrial Park with a total of 96,000 sq. ft. and two warehouses in El Paso, Texas, totaling 52,800 sq. ft. In Dundalk, Ireland, the Company leases 24,200 sq. ft. of
office and warehouse space. The two leases in El Paso were renewed during fiscal year 2001, and both expire on July 31, 2003. On September 1, 2001, the Company signed a 12-month lease agreement for an additional 32,000 sq. ft. of warehouse space in
El Paso, Texas. This lease was renewed on a month-to-month basis. In March 2000, the Company entered into a five-year lease for a 140,000 sq. ft. manufacturing facility in Reynosa, Mexico. In September 1997, the Company signed a five-year operating
lease with a local company for property owned by the Company, which is located in Cheney, Washington. The lease terms included an option to buy the property upon notice at any time during the course of the lease. On February 21, 2002, the Company
sold the real estate, which was held for sale and carried at the lower of cost or net realized value, for $1,705,628 and recorded a gain of $84,000. During the fourth fiscal quarter of 1998, the Company leased space of approximately 36,000 sq. ft.
in a building in Shanghai, China. The Company began an assembly operation in this facility in the third quarter of fiscal year 1999. The Company considers its properties in good condition, well maintained and suitable for operations. The Company
considers the productive capacity of its current facilities sufficient to carry on the Company’s business.
On December 20, 2001, a jury in Seattle federal court
rendered a verdict in the case of F&G Scrolling Mouse, LLC, Fernando Falcon and Federico Gilligan v. Microsoft Corporation, Honeywell, Inc., and Key Tronic Corporation, United States District Court for the Western District of
Washington, Case No. C99-995C finding that Key Tronic misappropriated trade secrets and breached a confidentiality agreement with Plaintiffs Fernando Falcon, Federico Gilligan and their company, F&G Scrolling Mouse LLC. Plaintiffs alleged
that Key Tronic misappropriated plaintiffs’ trade secrets and breached a confidentiality agreement by disclosing to Microsoft, in violation of that agreement, information provided by Plaintiffs to Key Tronic pursuant to the confidentiality
agreement. Plaintiffs alleged that they were damaged as a result of Microsoft’s subsequent use of Plaintiffs’ trade secrets in the development of Microsoft’s IntelliMouse product. Honeywell was dismissed without prejudice from this
action on December 2, 1999, and Plaintiffs settled with Microsoft and dismissed that defendant with prejudice on March 30, 2000.
Although the jury found that the misappropriation was not willful, it awarded damages in the amount of $16.5 million. The judgment was subsequently increased to approximately $19.2 million through an award of pre-judgment interest.
The trial court denied Key Tronic’s motion for judgment as a matter of law and motion for new trial. Key Tronic filed notice of appeal to the U.S. Court of Appeals for the Ninth Circuit on May 16, 2002. On June 6, 2002, the bankruptcy court
granted a stay of execution on the judgment pending the outcome of the appeal to the Ninth Circuit. Under the terms of the stay of execution of judgment, the court approved a supersedeas bond on the terms requested by Key Tronic in the amount of
$1.75 million, with quarterly additions of 50% of the company’s operating income, as security for the $19.2 million judgment. Key Tronic intends to vigorously pursue its appeal in this matter. An unfavorable outcome in this matter could likely
impair the Company’s ability to continue as a going concern and have a material adverse impact on the Company’s cash flows.
The Company is also subject to various legal proceedings and claims that arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, the outcome of these matters is not
expected to have any material adverse impact on the consolidated financial position, results of operations or cash flows of the Company.
Also see Note 10 to the June 29, 2002 Consolidated Financial Statements.
None
6
PART II
Market Information
Key Tronic Corporation’s common stock is traded in the
over-the-counter market and is listed on the NASDAQ National Market System under the symbol KTCC. Quarterly high and low closing sales prices for Key Tronic common stock for fiscal years 2002 and 2001 were as follows:
| |
|
2002
|
|
2001
|
| |
|
High
|
|
Low
|
|
High
|
|
Low
|
| First Quarter |
|
2.650 |
|
1.420 |
|
5.438 |
|
3.000 |
| Second Quarter |
|
2.900 |
|
1.200 |
|
5.125 |
|
2.125 |
| Third Quarter |
|
1.570 |
|
0.950 |
|
3.031 |
|
2.063 |
| Fourth Quarter |
|
2.060 |
|
0.680 |
|
2.250 |
|
1.438 |
High and low stock prices are based on the daily closing price
reported by the NASDAQ National Market System. These quotations represent prices between dealers without adjustment for markups, markdowns, and commissions, and may not represent actual transactions.
Holders and Dividends
As of June 29, 2002, the Company had 1,410 shareholders of record. The Company’s current line of credit agreement contains a covenant that prohibits the declaration or payment of dividends (see
Note 5 to Consolidated Financial Statements). The Company has never paid a cash dividend and does not anticipate payment of dividends on its Common Stock in the foreseeable future.
The following selected consolidated financial data of the Company should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and the other financial information included elsewhere in this Form 10-K.
KEY TRONIC TEN-YEAR FINANCIAL HIGHLIGHTS