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Table of Contents
 
 
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 September 28, 2002
 
Commission File 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  ¨.
 
The number of shares outstanding of the registrant’s common stock as of October 25, 2002, was 9,672,580.
 

Table of Contents
 
KEY TRONIC CORPORATION
 
Index
 
         
Page Number
PART I.    FINANCIAL INFORMATION:
     
Item 1.
        
       
3
       
4
       
5
       
6-8
Item 2.
      
9-12
Item 3.
      
13
Item 4.
      
13
PART II.    OTHER INFORMATION:
     
Item 1.
      
13
Item 4.
      
13
Item 5.
      
13
Item 6.
      
13
  
14
  
15-16

2

Table of Contents
 
PART I:    FINANCIAL INFORMATION
 
Item 1:     Financial Statements
 
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
      
First Quarters Ended
  
      
September 28,
2002
       
September 29,
2001
  
      
(in thousands, except per share amounts)
  
Net sales
     
$
34,034
 
     
$
34,627
 
Cost of sales
     
 
30,528
 
     
 
32,495
 
      
    
Gross margin
     
 
3,506
 
     
 
2,132
 
Operating expenses:
                      
Research, development and engineering
     
 
710
 
     
 
558
 
Selling
     
 
467
 
     
 
721
 
General and administrative
     
 
1,794
 
     
 
1,745
 
      
    
Total operating expenses
     
 
2,971
 
     
 
3,024
 
Operating income (loss)
     
 
535
 
     
 
(892
)
Interest expense
     
 
238
 
     
 
341
 
Litigation settlement
     
 
(12,186
)
     
 
—  
 
Other income
     
 
(235
)
     
 
(29
)
      
    
Income (loss) before income tax provision (benefit)
     
 
12,718
 
     
 
(1,204
)
Income tax provision (benefit)
     
 
239
 
     
 
(222
)
      
    
Net income (loss)
     
$
12,479
 
     
$
(982
)
      
    
Earnings per share:
                      
Earnings (loss) per common share—basic and diluted
     
$
1.29
 
     
$
(.10
)
 
 
See accompanying notes to consolidated financial statements.

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Table of Contents
 
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
 
    
September 28, 2002
     
June 29, 2002*
  
    
(Unaudited)
         
ASSETS
                  
Current assets:
                  
Cash and cash equivalents
   
$
1,797
 
   
$
1,485
 
Trade receivables, less allowance for doubtful accounts of $268 and $444
   
 
18,489
 
   
 
20,978
 
Inventories
   
 
18,234
 
   
 
18,395
 
Other
   
 
2,348
 
   
 
2,588
 
    
  
Total current assets
   
 
40,868
 
   
 
43,446
 
    
  
Property, plant and equipment—at cost
   
 
85,779
 
   
 
85,286
 
Less: Accumulated depreciation
   
 
73,430
 
   
 
73,054
 
    
  
Total property, plant and equipment
   
 
12,349
 
   
 
12,232
 
    
  
Other assets:
                  
Other (net of accumulated amortization of $333 and $240)
   
 
1,125
 
   
 
996
 
Goodwill
   
 
765
 
   
 
765
 
    
  
Total assets
   
$
55,107
 
   
$
57,439
 
    
  
LIABILITIES AND SHAREHOLDERS’ EQUITY
                  
Current liabilities:
                  
Current portion of long-term obligations
   
$
355
 
   
$
228
 
Accounts payable
   
 
14,325
 
   
 
14,409
 
Accrued compensation and vacation
   
 
2,976
 
   
 
2,803
 
Litigation settlement—short-term
   
 
3,553
 
   
 
—  
 
Other
   
 
2,720
 
   
 
3,465
 
    
  
Total current liabilities
   
 
23,929
 
   
 
20,905
 
Long-term liabilities:
                  
Revolving loan—long-term
   
 
4,064
 
   
 
6,475
 
Litigation settlement—long-term
   
 
3,700
 
   
 
19,186
 
Other
   
 
1,224
 
   
 
1,162
 
    
  
Total long-term liabilities
   
 
8,988
 
   
 
26,823
 
Commitments and contingencies (Note 7)
                  
Shareholders’ equity:
                  
Common stock, no par value—shares authorized 25,000; outstanding 9,673 and 9,673
   
 
38,393
 
   
 
38,393
 
Accumulated deficit
   
 
(16,203
)
   
 
(28,682
)
    
  
Total shareholders’ equity
   
 
22,190
 
   
 
9,711
 
    
  
Total liabilities and stockholders’ equity
   
$
55,107
 
   
$
57,439
 
    
  
*The balance sheet at June 29, 2002 has been derived from the audited financial statements at that date.
 
See accompanying notes to consolidated financial statements.

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Table of Contents
 
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
    
First Quarters Ended
  
    
September 28, 2002
     
September 29, 2001
  
    
(in thousands)
  
Increase (decrease) in cash and cash equivalents:
                  
Cash flows from operating activities:
                  
Net income (loss)
   
$
12,479
 
   
$
(982
)
Adjustments to reconcile net income (loss) to cash used in operating activities:
                  
Depreciation and amortization
   
 
744
 
   
 
1,224
 
Provision for obsolete inventory
   
 
93
 
   
 
—  
 
Provision for doubtful receivables
   
 
(76
)
   
 
30
 
Litigation settlement
   
 
(12,186
)
   
 
—  
 
Loss on disposal of assets
   
 
10
 
   
 
1
 
Deferred income taxes
   
 
—  
 
   
 
(434
)
Accumulated foreign currency translation adjustment
   
 
—  
 
   
 
(245
)
Changes in operating assets and liabilities:
                  
Trade receivables
   
 
2,566
 
   
 
(1,885
)
Inventories
   
 
68
 
   
 
(4,363
)
Other assets
   
 
64
 
   
 
(851
)
Accounts payable
   
 
(85
)
   
 
2,656
 
Accrued compensation and vacation
   
 
174
 
   
 
529
 
Other liabilities
   
 
(512
)
   
 
(239
)
    
  
Cash provided by (used in) operating activities
   
 
3,339
 
   
 
(4,559
)
Cash flows from investing activities:
                  
Purchase of property and equipment
   
 
(675
)
   
 
(334
)
    
  
Cash used in investing activities
   
 
(675
)
   
 
(334
)
    
  
Cash flows from financing activities:
                  
Payment of financing costs
   
 
(150
)
   
 
(440
)
Borrowings under revolving credit agreement
   
 
33,521
 
   
 
33,041
 
Repayment of revolving credit agreement
   
 
(35,723
)
   
 
(29,132
)
    
  
Cash (used in) provided by financing activities
   
 
(2,352
)
   
 
3,469
 
Net increase (decrease) in cash and cash equivalents
   
 
312
 
   
 
(1,424
)
    
  
Cash and cash equivalents, beginning of period
   
 
1,485
 
   
 
2,137
 
    
  
Cash and cash equivalents, end of period
   
$
1,797
 
   
$
713
 
    
  
 
See accompanying notes to consolidated financial statements.

5

Table of Contents
KEY TRONIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
BASIS OF PRESENTATION
 
In the opinion of management, the accompanying unaudited consolidated interim financial statements reflect all adjustments of a normal and recurring nature necessary for a fair presentation, in all material respects, of the financial position, results of operations, and cash flows for the period presented. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the interim periods are not necessarily indicative of the results for the entire year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s 10-K report for the fiscal year ended June 29, 2002. Certain reclassifications have been made for consistent presentation.
 
On October 24, 2002, the Company announced the settlement of the litigation with F&G Scrolling Mouse LLC as explained in greater detail in Note 7 to these financial statements. Because this settlement was material to the Company’s financial position and results of operations, and because the settlement was reached prior to publication of this quarterly report, the financial statements have been adjusted to incorporate the settlement within them. Readers should be aware that the reported earnings for the quarter ended September 28, 2002, include a one-time benefit for reversal of previously recorded litigation expense. Excluding this benefit, net income would have been approximately $293,000 or $0.03 per share for the first quarter of fiscal 2003.
 
1.    INVENTORIES
 
The components of inventory consist of the following:
 
    
September 28,
2002
       
June 29,
2002
  
    
(in thousands)
  
Finished goods
   
$
7,442
 
     
$
8,323
 
Work-in-process
   
 
1,822
 
     
 
2,002
 
Raw materials and supplies
   
 
13,341
 
     
 
12,835
 
Reserve for obsolescence
   
 
(4,371
)
     
 
(4,765
)
    
    
    
$
18,234
 
     
$
18,395
 
    
    
 
2.    NEW ACCOUNTING PRONOUNCEMENTS
 
In July 2001, the Financial Accounting Standards Board (FASB) issued No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under the statement, the Company will address intangible assets that are acquired individually or with a group of other assets upon their acquisition and initially recorded in the financial statements. Goodwill in each reporting unit shall be tested for impairment as of the beginning of the fiscal year in which Statement 142 is initially applied in its entirety. An entity has six months from the date it initially applies Statement 142 to complete the first step of that transitional goodwill impairment test. The Company adopted SFAS No. 142 on June 30, 2002 but has not completed the transitional impairment test. The goodwill transitional impairment test is not expected to have a material impact. The adoption of SFAS No. 142 did not have a material impact on the Company’s financial statements.
 
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Under SFAS No. 143, the Company will report all legal obligations associated with the retirement o