Key Tronic Corp 10-Q for FY2020 Q3

Key Tronic Corp (KTCC)

10-Q 2020-05-06 For: 2020-03-28

Added on April 06, 2026

About this 10-Q

Key Tronic Corp filed this 10-Q on May 6, 2020, covering the quarter ended March 28, 2020 (FY2020 Q3).

Headline figures

Quarter ended March 28, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.

Revenue: $111.46M; up 3.2% from $107.95M a year earlier
Net income: $910K; compared with a net loss of $11.98M a year earlier
Diluted EPS: $0.08; compared with -$1.11 a year earlier

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Washington	91-0849125
(State of Incorporation)	(I.R.S. Employer Identification No.)



Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☒

Emerging growth company	☐



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, no par value	KTCC	NASDAQ Global Market



		Page No.

PART I.	FINANCIAL INFORMATION:

Item 1.	Financial Statements (Unaudited):	3

	Condensed Consolidated Balance Sheets	3

	Condensed Consolidated Statements of Income (Loss)	4

	Condensed Consolidated Statements of Comprehensive Income (Loss)	5

	Condensed Consolidated Statements of Cash Flows	6

	Condensed Consolidated Statements of Shareholders’ Equity	7

	Notes to Condensed Consolidated Financial Statements	8-21

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21-34

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34

Item 4.	Controls and Procedures	34

PART II.	OTHER INFORMATION:

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds*

Item 3.	Defaults upon Senior Securities*

Item 4.	Mine Safety Disclosures*

Item 5.	Other Information*

Item 6.	Exhibits	35

Signatures		36



	March 28, 2020			June 29, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	1,302		$	601
Trade receivables, net of allowance for doubtful accounts of $609 and $58	77,329			58,429
Contract assets	17,681			22,161
Inventories, net	114,052			100,431
Other	19,597			16,477
Total current assets	229,961			198,099
Property, plant and equipment, net	30,594			29,413
Operating lease right-of-use assets, net	15,347			—
Other assets:
Deferred income tax asset	9,825			7,840
Other intangible assets, net	—			657
Other	2,676			2,301
Total other assets	12,501			10,798
Total assets	$	288,403		$	238,310
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	71,893		$	73,571
Accrued compensation and vacation	6,702			6,759
Current portion of debt, net	7,508			5,841
Other	15,470			7,233
Total current liabilities	101,573			93,404
Long-term liabilities:
Term loans	5,210			7,091
Revolving loan	57,236			23,356
Operating lease liabilities	10,327			—
Other long-term obligations	1,117			—
Total long-term liabilities	73,890			30,447
Total liabilities	175,463			123,851
Commitments and contingencies (Note 9)
Shareholders’ equity:
Common stock, no par value—shares authorized 25,000; issued and outstanding 10,760 and 10,760 shares, respectively	46,880			46,680
Retained earnings	68,639			65,353
Accumulated other comprehensive gain (loss)	(2,579		)	2,426
Total shareholders’ equity	112,940			114,459
Total liabilities and shareholders’ equity	$	288,403		$	238,310



	Three Months Ended					Nine Months Ended
	March 28, 2020		March 30, 2019			March 28, 2020		March 30, 2019
Net sales	$	111,455	$	107,954		$	333,462	$	358,463
Cost of sales	102,207		101,147			306,819		332,243
Gross profit	9,248		6,807			26,643		26,220
Research, development and engineering expenses	1,749		1,398			5,129		4,955
Selling, general and administrative expenses	5,735		5,497			15,713		16,184
Impairment of goodwill and intangibles	—		12,448			—		12,448
Total operating expenses	7,484		19,343			20,842		33,587
Operating income (loss)	1,764		(12,536		)	5,801		(7,367		)
Interest expense, net	754		720			1,988		2,105
Income (loss) before income taxes	1,010		(13,256		)	3,813		(9,472		)
Income tax provision (benefit)	100		(1,275		)	527		(673		)
Net income (loss)	$	910	$	(11,981	)	$	3,286	$	(8,799	)
Net income (loss) per share — Basic	$	0.08	$	(1.11	)	$	0.31	$	(0.82	)
Weighted average shares outstanding — Basic	10,760		10,760			10,760		10,760
Net income (loss) per share — Diluted	$	0.08	$	(1.11	)	$	0.30	$	(0.82	)
Weighted average shares outstanding — Diluted	10,885		10,760			10,813		10,760



	March 28, 2020		June 29, 2019
Finished goods	$	15,390	$	11,969
Work-in-process	19,346		11,705
Raw materials and supplies	79,316		76,757
	$	114,052	$	100,431



Fiscal Years Ending	Amount
2020 ⁽¹⁾	$	1,884
2021	7,537
2022	2,917
2023	417
2024	57,236
Total debt	$	69,991
Unamortized debt issuance costs	(37		)
Long-term debt, net of debt issuance costs	$	69,954



	Three Months Ended
	(in thousands, except share and per share information)
	March 28, 2020		March 30, 2019
Net income (loss)	$	910	$	(11,981	)
Weighted average shares outstanding—basic	10,760		10,760
Effect of dilutive common stock awards	125		—
Weighted average shares outstanding—diluted	10,885		10,760
Net income (loss) per share—basic	$	0.08	$	(1.11	)
Net income (loss) per share—diluted	$	0.08	$	(1.11	)
Antidilutive SARs not included in diluted earnings per share	720		1,005



	July 26, 2019		July 27, 2018
SARs Granted	170,000		161,250
Strike Price	$	4.93	$	8.17
Fair Value	$	1.23	$	2.27



Quarter Ending	Notional Contracts in MXN		Notional Contracts in USD		Estimated Fair Value
June 27, 2020	$	138,213	$	6,257	$	(365	)
September 26, 2020	$	141,173	$	6,729	$	(790	)
December 26, 2020	$	132,773	$	6,241	$	(725	)
April 3, 2021	$	148,253	$	6,682	$	(598	)
July 3, 2021	$	144,725	$	6,446	$	(576	)
October 2, 2021	$	146,373	$	5,502	$	360
January 1, 2022	$	137,973	$	5,129	$	328



		March 28, 2020			June 29, 2019
Derivatives Designated as Hedging Instruments	Balance Sheet Location	Fair Value			Fair Value
Foreign currency forward contracts & swaps	Other current assets	$	—		$	2,912
Foreign currency forward contracts & swaps	Other long-term assets	$	687		$	320
Foreign currency forward contracts & swaps	Other current liabilities	$	(2,478	)	$	—
Foreign currency forward contracts & swaps	Other long-term liabilities	$	(576	)	$	—
Interest rate swap	Other current assets	$	3		$	2
Interest rate swap	Other current liabilities	$	(326	)	$	—
Interest rate swap	Other long-term liabilities	$	(541	)	$	—



Derivatives Designated as Hedging Instruments	Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	AOCI Balance as of December 28, 2019			Effective Portion Recorded In AOCI			Effective Portion Reclassified From AOCI Into Income			AOCI Balance as of March 28, 2020
Forward contracts & swaps	Cost of sales	$	2,329		$	(3,163	)	$	(1,077	)	$	(1,911	)
Interest rate swap	Interest expense	(72		)	(591		)	(5		)	(668		)
Total		$	2,257		$	(3,754	)	$	(1,082	)	$	(2,579	)

Derivatives Designated as Hedging Instruments	Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	AOCI Balance as of December 29, 2018			Effective Portion Recorded In AOCI			Effective Portion Reclassified From AOCI Into Income			AOCI Balance as of March 30, 2019
Forward contracts & swaps	Cost of sales	$	1,178		$	1,059		$	(194	)	$	2,043
Interest rate swap	Interest expense	13			1			(7		)	7
Total		$	1,191		$	1,060		$	(201	)	$	2,050



Derivatives Designated as Hedging Instruments	Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	AOCI Balance as of June 29, 2019			Effective Portion Recorded In AOCI			Effective Portion Reclassified From AOCI Into Income			AOCI Balance as of March 28, 2020
Forward contracts & swaps	Cost of sales	$	2,424		$	(1,671	)	$	(2,664	)	$	(1,911	)
Interest rate swap	Interest expense	2			(662		)	(8		)	(668		)
Total		$	2,426		$	(2,333	)	$	(2,672	)	$	(2,579	)

Derivatives Designated as Hedging Instruments	Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	AOCI Balance as of June 30, 2018			Effective Portion Recorded In AOCI			Effective Portion Reclassified From AOCI Into Income			AOCI Balance as of March 30, 2019
Forward contracts & swaps	Cost of sales	$	(988	)	$	2,308		$	723		$	2,043
Interest rate swap	Interest expense	19			2			(14		)	7
Total		$	(969	)	$	2,310		$	709		$	2,050



	March 28, 2020
	Level 1		Level 2			Level 3		Total Fair Value
Financial Assets:
Interest rate swaps	$	—	$	3		$	—	$	3
Foreign currency forward contracts	$	—	$	687		$	—	$	687
Financial Liabilities:
Interest rate swap	$	—	$	(867	)	$	—	$	(867	)
Foreign currency forward contracts & swaps	$	—	$	(3,054	)	$	—	$	(3,054	)



	Nine Months Ended
	March 28, 2020			March 30, 2019
Operating activities:
Net income (loss)	$	3,286		$	(8,799	)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
Goodwill and intangible assets impairment	—			12,448
Depreciation and amortization	3,996			5,520
Amortization of deferred loan costs	22			22
Provision for obsolete inventory	76			70
Provision for warranty	125			67
Provision for doubtful accounts	551			58
Loss on disposal of assets	207			—
Share-based compensation expense	200			354
Deferred income taxes	(525		)	(936		)
Changes in operating assets and liabilities:
Trade receivables	(19,456		)	5,534
Contract assets	4,480			(8,232		)
Cash received from arbitration settlement	—			6,684
Inventories	(13,697		)	3,639
Other assets	(9,068		)	(3,648		)
Accounts payable	(1,679		)	(7,439		)
Accrued compensation and vacation	(57		)	(1,769		)
Other liabilities	(522		)	(185		)
Cash (used in) provided by operating activities	(32,061		)	3,388
Investing activities:
Purchase of property and equipment	(5,921		)	(5,841		)
Proceeds from sale of fixed assets	696			17
Cash receipts from deferred purchase price of factored receivables	4,350			4,768
Cash used in investing activities	(875		)	(1,056		)
Financing activities:
Payment of financing costs	(7		)	(11		)
Proceeds from issuance of long term debt	5,000			—
Repayments of long term debt	(5,236		)	(4,403		)
Borrowings under revolving credit agreement	148,303			140,047
Repayments of revolving credit agreement	(114,423		)	(138,143		)
Cash provided by (used in) financing activities	33,637			(2,510		)
Net increase (decrease) in cash and cash equivalents	701			(178		)
Cash and cash equivalents, beginning of period	601			343


1.	Basis of Presentation


2.	Significant Accounting Policies


3.	Inventories



	March 28, 2020
	Amortization Period in Years	Gross Carrying Amount		Accumulated Amortization			Impairment Recognized		Derecognition Favorable Lease per ASC 842			Net Carrying Amount
Intangible assets:
Favorable Lease Agreements	4 - 7	2,941		(2,284		)	—		(657		)	—
Total		$	2,941	$	(2,284	)	$	—	$	(657	)	$	—



	Contract Assets
Beginning balance, June 29, 2019	$	22,161
Revenue recognized	329,192
Amounts collected or invoiced	(333,672		)
Ending balance, March 28, 2020	$	17,681



	EMS Revenue
Recognition	Three Months Ended				Nine Months Ended
	March 28, 2020		March 30, 2019		March 28, 2020		March 30, 2019
Over-Time	$	110,048	$	106,859	$	329,192	$	350,512
Point-in-Time	1,407		1,095		4,270		7,951
Total	$	111,455	$	107,954	$	333,462	$	358,463



Lease cost	Classification	Three-Month Period Ended		Nine-Month Period Ended
Operating lease cost	Cost of sales	$	1,162	$	3,481
Operating lease cost	Selling, general and administrative expenses	338		935
Total lease cost		$	1,500	$	4,416



	March 28, 2020
Operating Leases:
Operating lease right of use assets	$	15,347
Operating lease liabilities ⁽¹⁾	14,875

Weighted-average remaining lease term (in years)
Operating leases	6.24

Weighted-average discount rate
Operating leases	4.1		%



Fiscal Years Ending	Operating Leases
2020	$	4,777
2021	3,563
2022	2,641
2023	1,866
2024	1,271
Thereafter	4,121
Total minimum lease payments	$	18,239



	Three Months Ended
	March 28, 2020			% of net sales		March 30, 2019			% of net sales		$ change			% point change
Net sales	$	111,455		100.0	%	$	107,954		100.0	%	$	3,501		—	%
Cost of sales	102,207			91.7	%	101,147			93.7	%	1,060			(2.0	)%
Gross profit	9,248			8.3	%	6,807			6.3	%	2,441			2.0	%
Research, development and engineering	1,749			1.6	%	1,398			1.3	%	351			0.3	%
Selling, general and administrative	5,735			5.1	%	5,497			5.1	%	238			—	%
Impairment of goodwill and intangibles	—			—	%	12,448			11.5	%	(12,448		)	(11.5	)%
Total operating expenses	7,484			6.7	%	19,343			17.9	%	(11,859		)	(11.2	)%
Operating income (loss)	1,764			1.6	%	(12,536		)	(11.6	)%	14,300			13.2	%
Interest expense, net	754			0.7	%	720			0.7	%	34			—	%
Income (loss) before income taxes	1,010			0.9	%	(13,256		)	(12.3	)%	14,266			13.2	%
Income tax provision (benefit)	100			0.1	%	(1,275		)	(1.2	)%	1,375			1.3	%
Net income (loss)	$	910		0.8	%	$	(11,981	)	(11.1	)%	$	12,891		11.9	%
Effective income tax rate	9.9		%			9.6		%


•	difficulties in staffing, turnover and managing onshore and offshore operations;


•	political and economic instability (including acts of terrorism, pandemics, civil unrest, forms of violence and outbreaks of war), which could impact our ability to ship, manufacture, and/or receive product;


•	longer customer payment cycles and difficulty collecting accounts receivable;


•	export duties, import controls and trade barriers (including quotas);


•	burdens of complying with a wide variety of foreign laws and labor practices;


•	our locations may be impacted by hurricanes, tornadoes, earthquakes, water shortages, tsunamis, floods, typhoons, fires, extreme weather conditions and other natural or man-made disasters. Our locations may also by impacted by future temporary closures as a result of COVID-19.



Item 6.	Exhibits

	31.1	Certification of Chief Executive Officer (Exchange Act Rules 13(a)-14 and 15(d)-14)

	31.2	Certification of Chief Financial Officer (Exchange Act Rules 13(a)-14 and 15(d)-14)

	32.1	Certification of Chief Executive Officer (18 U.S.C. 1350)

	32.2	Certification of Chief Financial Officer (18 U.S.C. 1350)

	101.INS	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

	101.SCH	XBRL Taxonomy Extension Schema Document *

	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document *

	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document *

	101.LAB	XBRL Taxonomy Extension Label Linkbase Document *

	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document *

	104	Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extention information contained in Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB and 101.PRE)



KEY TRONIC CORPORATION

/s/ CRAIG D. GATES
Craig D. Gates	Date:	May 6, 2020
President and Chief Executive Officer
(Principal Executive Officer)

/s/ Brett R. Larsen
Brett R. Larsen	Date:	May 6, 2020
Executive Vice President of Administration, Chief Financial Officer and Treasurer
(Principal Financial Officer)


1.	I have reviewed this quarterly report on Form 10-Q of Key Tronic Corporation;


2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;


3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;


4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d – 15(f)) for the registrant and have:


a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;