Key Tronic Corp 10-Q for FY2020 Q2

Key Tronic Corp (KTCC)

10-Q 2020-02-05 For: 2019-12-28

Added on April 06, 2026

About this 10-Q

Key Tronic Corp filed this 10-Q on February 5, 2020, covering the quarter ended December 28, 2019 (FY2020 Q2).

Headline figures

Quarter ended December 28, 2019, as reported in this filing, compared with the same period a year earlier where the filing states it.

Revenue: $116.72M; down 5.1% from $123.04M a year earlier
Net income: $824K; down 48.1% from net income of $1.59M a year earlier
Diluted EPS: $0.08; down 46.7% from $0.15 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	4

	Condensed Consolidated Statements of Comprehensive Income	5

	Condensed Consolidated Statements of Cash Flows	6

	Condensed Consolidated Statements of Shareholders’ Equity	7

	Notes to Condensed Consolidated Financial Statements	8-20

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21-33

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



	December 28, 2019		June 29, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	499	$	601
Trade receivables, net of allowance for doubtful accounts of $58 and $58	70,225		58,429
Contract assets	17,071		22,161
Inventories, net	110,144		100,431
Other	20,254		16,477
Total current assets	218,193		198,099
Property, plant and equipment, net	30,825		29,413
Operating lease right-of-use assets, net	14,876		—
Other assets:
Deferred income tax asset	8,207		7,840
Other intangible assets, net	—		657
Other	1,869		2,301
Total other assets	10,076		10,798
Total assets	$	273,970	$	238,310
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	80,448	$	73,571
Accrued compensation and vacation	6,954		6,759
Current portion of debt, net	7,508		5,841
Other	13,350		7,233
Total current liabilities	108,260		93,404
Long-term liabilities:
Term loans	7,087		7,091
Revolving loan	32,018		23,356
Operating lease liabilities	9,780		—
Other long-term obligations	18		—
Total long-term liabilities	48,903		30,447
Total liabilities	157,163		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	46,821		46,680
Retained earnings	67,729		65,353
Accumulated other comprehensive gain	2,257		2,426
Total shareholders’ equity	116,807		114,459
Total liabilities and shareholders’ equity	$	273,970	$	238,310



	Three Months Ended				Six Months Ended
	December 28, 2019		December 29, 2018		December 28, 2019		December 29, 2018
Net sales	$	116,722	$	123,037	$	222,007	$	250,509
Cost of sales	108,600		113,157		204,612		231,096
Gross profit	8,122		9,880		17,395		19,413
Research, development and engineering expenses	1,720		1,857		3,380		3,557
Selling, general and administrative expenses	4,904		5,399		9,978		10,687
Total operating expenses	6,624		7,256		13,358		14,244
Operating income	1,498		2,624		4,037		5,169
Interest expense, net	524		708		1,234		1,385
Income before income taxes	974		1,916		2,803		3,784
Income tax provision	150		327		427		602
Net income	$	824	$	1,589	$	2,376	$	3,182
Net income per share — Basic	$	0.08	$	0.15	$	0.22	$	0.30
Weighted average shares outstanding — Basic	10,760		10,760		10,760		10,760
Net income per share — Diluted	$	0.08	$	0.15	$	0.22	$	0.29
Weighted average shares outstanding — Diluted	10,877		10,881		10,811		10,986



	December 28, 2019		June 29, 2019
Finished goods	$	14,320	$	11,969
Work-in-process	20,638		11,705
Raw materials and supplies	75,186		76,757
	$	110,144	$	100,431



Fiscal Years Ending	Amount
2020 ⁽¹⁾	$	3,769
2021	7,537
2022	2,917
2023	417
2024	32,018
Total debt	$	46,658
Unamortized debt issuance costs	(45		)
Long-term debt, net of debt issuance costs	$	46,613



	Three Months Ended
	(in thousands, except share and per share information)
	December 28, 2019		December 29, 2018
Net income	$	824	$	1,589
Weighted average shares outstanding—basic	10,760		10,760
Effect of dilutive common stock awards	117		121
Weighted average shares outstanding—diluted	10,877		10,881
Net income per share—basic	$	0.08	$	0.15
Net income per share—diluted	$	0.08	$	0.15
Antidilutive SARs not included in diluted earnings per share	725		1,035



	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
March 28, 2020	$	146,613	$	6,553	$	1,177
June 27, 2020	$	138,213	$	6,257	$	929
September 26, 2020	$	141,173	$	6,729	$	516
December 26, 2020	$	132,773	$	6,241	$	488



		December 28, 2019			June 29, 2019
Derivatives Designated as Hedging Instruments	Balance Sheet Location	Fair Value			Fair Value
Foreign currency forward contracts & swaps	Other current assets	$	3,110		$	2,912
Foreign currency forward contracts & swaps	Other long-term assets	$	—		$	320
Interest rate swap	Other current assets	$	6		$	2
Interest rate swap	Other current liabilities	$	(83	)	$	—
Interest rate swap	Other long-term liabilities	$	(17	)	$	—



Derivatives Designated as Hedging Instruments	Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	AOCI Balance as of September 28, 2019		Effective Portion Recorded In AOCI			Effective Portion Reclassified From AOCI Into Income			AOCI Balance as of December 28, 2019
Forward contracts & swaps	Cost of sales	$	1,479	$	1,533		$	(683	)	$	2,329
Interest rate swap	Interest expense	—		(71		)	(1		)	(72		)
Total		$	1,479	$	1,462		$	(684	)	$	2,257

Derivatives Designated as Hedging Instruments	Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	AOCI Balance as of September 29, 2018		Effective Portion Recorded In AOCI			Effective Portion Reclassified From AOCI Into Income			AOCI Balance as of December 29, 2018
Forward contracts & swaps	Cost of sales	$	2,061	$	(1,266	)	$	383		$	1,178
Interest rate swap	Interest expense	19		(1		)	(5		)	13
Total		$	2,080	$	(1,267	)	$	378		$	1,191



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 December 28, 2019
Forward contracts & swaps	Cost of sales	$	2,424		$	1,492		$	(1,587	)	$	2,329
Interest rate swap	Interest expense	2			(71		)	(3		)	(72		)
Total		$	2,426		$	1,421		$	(1,590	)	$	2,257

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 December 29, 2018
Forward contracts & swaps	Cost of sales	$	(988	)	$	1,249		$	917		$	1,178
Interest rate swap	Interest expense	19			1			(7		)	13
Total		$	(969	)	$	1,250		$	910		$	1,191



	December 28, 2019
	Level 1		Level 2			Level 3		Total Fair Value
Financial Assets:
Interest rate swaps	$	—	$	6		$	—	$	6
Foreign currency forward contracts	$	—	$	3,110		$	—	$	3,110
Financial Liabilities:
Interest rate swap	$	—	$	(100	)	$	—	$	(100	)



	Six Months Ended
	December 28, 2019			December 29, 2018
Operating activities:
Net income	$	2,376		$	3,182
Adjustments to reconcile net income to cash used in operating activities:
Depreciation and amortization	3,143			3,767
Amortization of deferred loan costs	15			15
Provision for obsolete inventory	41			58
Provision for warranty	89			16
Loss on disposal of assets	206			—
Share-based compensation expense	141			274
Deferred income taxes	(318		)	(131		)
Changes in operating assets and liabilities:
Trade receivables	(13,514		)	(10,787		)
Contract assets	5,090			(7,212		)
Cash received from arbitration settlement	—			6,684
Inventories	(9,754		)	7,432
Other assets	(3,689		)	(4,963		)
Accounts payable	6,877			(3,104		)
Accrued compensation and vacation	195			(350		)
Other liabilities	664			23
Cash used in operating activities	(8,438		)	(5,096		)
Investing activities:
Purchase of property and equipment	(5,360		)	(3,586		)
Proceeds from sale of fixed assets	696			17
Cash receipts from deferred purchase price of factored receivables	2,695			3,302
Cash used in investing activities	(1,969		)	(267		)
Financing activities:
Payment of financing costs	(5		)	(8		)
Proceeds from issuance of long term debt	5,000			—
Repayments of long term debt	(3,352		)	(2,936		)
Borrowings under revolving credit agreement	91,216			94,468
Repayments of revolving credit agreement	(82,554		)	(86,312		)
Cash provided by financing activities	10,305			5,212
Net decrease in cash and cash equivalents	(102		)	(151		)
Cash and cash equivalents, beginning of period	601			343
Cash and cash equivalents, end of period	$	499		$	192
Non-cash investing activities:


1.	Basis of Presentation


2.	Significant Accounting Policies


3.	Inventories



	December 28, 2019
	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	219,144
Amounts collected or invoiced	(224,234		)
Ending balance, September 28, 2019	$	17,071



	EMS Revenue
Recognition	Three Months Ended				Six Months Ended
	December 28, 2019		December 29, 2018		December 28, 2019		December 29, 2018
Over-Time	$	115,118	$	122,137	$	219,144	$	248,518
Point-in-Time	1,604		900		2,863		1,991
Total	$	116,722	$	123,037	$	222,007	$	250,509



Lease cost	Classification	Three-Month Period Ended		Six-Month Period Ended
Operating lease cost	Cost of sales	$	1,161	$	2,319
Operating lease cost	Selling, general and administrative expenses	331		598
Total lease cost		$	1,492	$	2,917



	December 28, 2019
Operating Leases:
Operating lease right of use assets	$	14,876
Operating lease liabilities ⁽¹⁾	14,329

Weighted-average remaining lease term (in years)
Operating leases	6.29

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
	December 28, 2019			% of net sales		December 29, 2018			% of net sales		$ change			% point change
Net sales	$	116,722		100.0	%	$	123,037		100.0	%	$	(6,315	)	—	%
Cost of sales	108,600			93.0	%	113,157			92.0	%	(4,557		)	1.0	%
Gross profit	8,122			7.0	%	9,880			8.0	%	(1,758		)	(1.0	)%
Research, development and engineering	1,720			1.5	%	1,857			1.5	%	(137		)	—	%
Selling, general and administrative	4,904			4.2	%	5,399			4.4	%	(495		)	(0.2	)%
Total operating expenses	6,624			5.7	%	7,256			5.9	%	(632		)	(0.2	)%
Operating income	1,498			1.3	%	2,624			2.1	%	(1,126		)	(0.8	)%
Interest expense, net	524			0.4	%	708			0.6	%	(184		)	(0.2	)%
Income before income taxes	974			0.8	%	1,916			1.6	%	(942		)	(0.8	)%
Income tax provision	150			0.1	%	327			0.3	%	(177		)	(0.2	)%
Net income	$	824		0.7	%	$	1,589		1.3	%	$	(765	)	(0.6	)%
Effective income tax rate	15.4		%			17.1		%


•	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.



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:	February 5, 2020
President and Chief Executive Officer
(Principal Executive Officer)

/s/ Brett R. Larsen
Brett R. Larsen	Date:	February 5, 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;