Key Tronic Corporation (NASDAQ:KTCC) is a leading contract manufacturer offering value-added design and manufacturing services from its facilities in the United States, Mexico, China, and Vietnam. The company has a long history of providing its customers with full engineering services, materials management, worldwide manufacturing facilities, assembly services, in-house testing, and worldwide distribution.
Business Overview
Key Tronic's mission is to provide its customers with superior manufacturing and engineering services at the lowest total cost for the highest quality products, and create long-term mutually beneficial business relationships by employing its "Trust, Commitment, Results" philosophy. The company specializes in a range of services from product manufacturing to engineering and tooling services. Key Tronic's customers include some of the world's leading original equipment manufacturers across various industries.
The company's international production capability provides its customers with benefits of improved supply-chain management, reduced inventories, lower transportation costs, and reduced product fulfillment time. Key Tronic continues to make investments in all of its operating facilities to give it the production capacity, capabilities, and logistical advantages to continue winning new business.
Financials
For the fiscal year ended July 1, 2023, Key Tronic reported annual revenue of $588.1 million and a net income of $5.2 million. The company's annual operating cash flow was -$11.3 million, and its annual free cash flow was -$21.1 million.
In the third quarter of fiscal year 2024, the company reported total revenue of $140.5 million, down 14.6% from $164.6 million in the same period of fiscal year 2023. The decrease in revenue was partially due to Key Tronic's facilities in Mississippi and Arkansas being offline for approximately two weeks due to severe winter weather events, which the company estimates resulted in $5 million in lost net sales. Additionally, the results were partially due to softer demand from Mexico-based programs.
For the first nine months of fiscal year 2024, the company's total revenue was $433.7 million, up 1.9% from $425.5 million in the same period of fiscal year 2023. This increase was due to the successful ramp of new customer programs, increased production at the company's U.S.-based and Vietnam-based facilities, and the sale of approximately $8.1 million of inventory from a discontinued program.
Gross profit as a percentage of net sales for the third quarter of fiscal year 2024 was 5.8%, compared to 8.7% for the same quarter of the prior fiscal year. These results were adversely impacted by incurred severance costs of approximately $3.7 million, the severe winter weather events at the Mississippi and Arkansas facilities, and continued impacts of the strengthening Mexican Peso.
For the first nine months of fiscal year 2024, gross profit as a percentage of net sales was 7.1%, compared to 7.9% for the same period of fiscal year 2023. The 0.8% decrease was primarily a result of the severance charges recorded during the third quarter, partially offset by gains related to the temporary closure of the company's Juarez production facility in the second quarter.
The net loss for the third quarter of fiscal year 2024 was $2.2 million or $0.21 per diluted share, compared to net income of $2.0 million or $0.18 per diluted share for the third quarter of fiscal year 2023. The year-over-year decrease in earnings was a result of the factors discussed above, primarily the severance expenses associated with the workforce reduction in Mexico.
For the first nine months of fiscal year 2024, the net loss was $802,000 or $0.07 per share, compared to net income of $4.1 million or $0.38 per share for the same period of fiscal year 2023.
Liquidity
As of March 30, 2024, the company had approximately $7.1 million available under its asset-based revolving credit facility with Bank of America and an additional MXN 22.0 million ($1.3 million USD) available under its line of credit with Banorte Financial Group. The company also had $5.3 million of cash on hand.
Key Tronic's current ratio was 2.8 as of March 30, 2024, compared to 2.2 a year ago. The company's debt-to-equity ratio was 0.98 as of the same date.
During the third quarter of fiscal year 2024, the company reduced its accounts payable, leasing obligations, and overall debt by a combined amount of $57.1 million from a year ago.
Outlook
For the fourth quarter of fiscal year 2024, the company expects to report revenue in the range of $135 million to $145 million. While new programs continue to ramp in its Mexico facilities, efficiency improvements, a muted rebound to pre-COVID production levels amongst existing Mexico customers, and the continued pressure of a strengthening peso have prompted the company to reduce its overhead in its warehouse facilities.
In the fourth quarter, Key Tronic expects to incur additional severance expense of approximately $500,000 to $1 million from additional headcount reductions in its Mexico-based operations late in the fourth quarter. Taking all these factors into consideration, the company expects net income to be in the range of $0.03 to $0.10 per diluted share in the fourth quarter of fiscal year 2024.
Moving into fiscal year 2025, the company expects continued sales growth in the U.S. and Vietnam and has a strong pipeline of potential new business. Over the longer term, Key Tronic believes it is increasingly well-positioned to win new programs and continue to profitably expand its business.
Risks and Challenges
Key Tronic's operations may be subject to various risks, including difficulties in staffing and managing onshore and offshore operations, political and economic instability in certain regions, longer customer payment cycles and difficulty collecting accounts receivable, cash liquidity and capital constraints, export duties and trade barriers, and exposure to natural disasters and climate change.
The company also faces risks related to its customer concentration, with a significant portion of its sales coming from a small number of customers. The loss of one or more of its principal customers could materially and adversely affect its business, operating results, and financial condition.
Additionally, Key Tronic is exposed to the risk of fluctuating interest rates and foreign currency exchange rates, which can impact its financial results. The company uses derivative instruments to manage these risks, but there is no guarantee that these measures will be fully effective.
Conclusion
Despite the challenges faced in the third quarter of fiscal year 2024, including severance costs, weather-related disruptions, and the impact of a strengthening Mexican Peso, Key Tronic remains focused on positioning itself for long-term growth. The company's strategic restructuring of its Mexico operations, investments in its U.S. and Vietnam facilities, and strong pipeline of new business opportunities suggest that it is well-positioned to navigate the evolving contract manufacturing landscape and continue to deliver value to its customers and shareholders.