Business Context and Reporting Period
Company: KEY TRONIC CORP
Filing Type: Form 10-Q (Unaudited)
Reporting Period: First Quarter ended September 29, 2001 (Fiscal Year 2002)
Business Overview: Key Tronic operates in the Electronic Manufacturing Services (EMS) and computer keyboard sectors. The company reported a shift in revenue mix, with EMS accounting for 85.5% of total sales compared to 75.1% in the prior year, while keyboard sales declined significantly.
Key Financial Metrics
| Metric | Q1 FY2002 (Sep 29, 2001) | Q1 FY2001 (Sep 30, 2000) |
|---|---|---|
| Net Sales | $34.6 million | $51.2 million |
| Gross Profit | $2.1 million | $5.3 million |
| Gross Margin | 6.2% | 10.4% |
| Operating Income (Loss) | $(0.9) million | $0.8 million |
| Net Income (Loss) | $(0.98) million | $0.21 million |
| Earnings Per Share (Basic/Diluted) | $(0.10) | $0.02 |
| Cash and Cash Equivalents | $0.7 million | $1.2 million (End of period) |
| Operating Cash Flow | $(4.3) million | $(5.2) million |
| Total Debt (Current + Long-term) | $13.4 million | $9.5 million |
| Backlog | $49.3 million | $23.6 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 32.4% year-over-year, driven by a significant drop in orders from a major customer and a continuing decline in keyboard sales.
- Margin Compression: Gross margin fell from 10.4% to 6.2% due to lower sales volumes resulting in excess operational capacity.
- Profitability: The company swung from a net profit of $206,000 to a net loss of $982,000. Operating expenses were reduced, but not enough to offset the revenue drop.
- Debt Structure: On August 24, 2001, the company refinanced its debt, replacing a GECC loan with a new $25 million revolving credit facility from CIT Group/Business Credit, Inc. Total long-term obligations increased from $9.5 million to $13.4 million.
- Inventory Build-up: Inventories increased by $4.4 million (to $25.0 million) due to a build-up of fabricated parts for a specific EMS customer.
Guidance, Outlook, and Risks
- Capital Expenditures: The company anticipates spending approximately $1.4 million on capital expenditures for the remainder of fiscal year 2002, to be financed by internally generated funds.
- Liquidity: Management believes the new revolving credit facility and internal funds are sufficient to meet cash requirements for over 12 months.
- Customer Concentration: The company faces high risk due to customer concentration. Three EMS customers accounted for 71% of net sales in fiscal 2001. Loss of a major customer could materially adversely affect results.
- Litigation: There are 11 active lawsuits in New York alleging repetitive stress injuries (RSI) from keyboard products. While compensatory damages are likely covered by insurance, punitive damages may not be. 127 similar suits have been dismissed in other states.
- Operational Changes: The company ceased significant operations in Ireland during the quarter, reversing a cumulative translation adjustment of $245,000.
Investor Verification Checklist
- Major Customer Dependency: Verify the status of orders from the "significant customer" cited as the primary cause of the revenue decline.
- Inventory Valuation: Assess the risk of obsolescence given the $4.4 million increase in inventory levels and the $2.7 million reserve for obsolescence.
- Debt Covenants: Review the financial covenants in the new CIT credit agreement (minimum EBITDA, tangible net worth) to ensure compliance given the current operating loss.
- Litigation Exposure: Monitor the status of the 11 active keyboard injury lawsuits and the potential for uninsured punitive damages.
- Backlog Quality: Confirm the convertibility of the $49.3 million backlog into revenue, noting it is down from $81.5 million at the prior fiscal year-end.