Key Tronic Corporation Announces Results For the Third Quarter of Fiscal Year 2024

Rhea-AI Summary

Key Tronic reported total revenue of $140.5 million for the third quarter of fiscal year 2024, compared to $164.6 million in the same period of fiscal year 2023, impacted by severe weather events and softening demand in Mexico.

The Company's margins and profitability were significantly impacted by severance costs, high labor costs, and interest expense, resulting in a gross margin of 5.8% and an operating margin loss of (0.4)%.

Net loss was $(2.2) million or $(0.21) per share for the quarter, compared to net income of $2.0 million or $0.18 per share in 2023.

Key Tronic expects fourth-quarter revenue in the range of $135 million to $145 million, with earnings between $0.03 to $0.10 per diluted share.

Positive

• Key Tronic continued to win new programs in the third quarter of fiscal 2024, with increased utilization of US and Vietnam facilities.

  The Company expanded its customer base, winning new programs in energy management, telecommunications, consumer audio, and industrial manufacturing.

  Key Tronic made significant reductions in inventory, down by approximately $39 million from the previous year.

Negative

• Key Tronic 's financial performance in the third quarter of fiscal year 2024 was impacted by severe weather events, softening demand in Mexico, and high labor costs.

  The Company's gross margin was 5.8% and operating margin was a loss of (0.4)%, with a net loss of $(2.2) million for the quarter.

  Key Tronic incurred severance costs of approximately $3.7 million, limiting anticipated payroll expense reductions.

Insights

Financial Analyst

The earnings report from Key Tronic Corporation reflects a challenging quarter, with a decline in total revenue from $164.6 million to $140.5 million year-over-year. The report attributes some of this decline to severe weather events, which is a reminder of the vulnerability of production facilities to unforeseen environmental factors. The company also faced a softening demand in Mexico, leading to a workforce reduction of over 450 employees and severance costs of approximately $3.7 million. While the reduction in force incurs immediate costs, it is expected to save over $10 million annually, suggesting an effort to streamline operations and improve future margins. However, investors should be cautious as the company's gross margin and operating margin have significantly decreased from the previous year, signaling that cost reduction measures may not yet be enough to counteract the revenue reduction. The amendment to the credit facility agreement indicates a level of financial distress, with the company needing to cure a breach of covenant and accept higher interest rates. Looking ahead, the company's guidance for the fourth quarter with earnings between $0.03 to $0.10 per share is cautiously optimistic, relying on the success of newly won programs and the continued trend towards on-shoring and dual sourcing. This outlook seems to hinge on the company's ability to efficiently restructure and realize cost savings from its recent workforce reduction.

Market Research Analyst

The context surrounding Key Tronic's fiscal results is particularly important for potential long-term strategies. The company's emphasis on on-shoring and dual sourcing in manufacturing is indicative of broader industry trends, influenced by geopolitical and supply chain concerns. Key Tronic's efforts to expand their customer base in various sectors such as energy management and telecommunications and the increased utilization of US and Vietnam facilities, showcase a strategic pivot to diversify and potentially stabilize revenue streams. The reduction in inventory by approximately $39 million and the reduction in payables suggests active management of their balance sheet, which could be a positive sign for operational efficiency. Furthermore, the restructuring towards high-volume manufacturing at their Juarez site reflects an adjustment to market demands. However, these strategic shifts need to be closely monitored as their success will be critical in recovering from current financial challenges and regaining investor confidence. Investors should consider the company's ability to execute on its stated strategies and their potential impact on future performance.

New Program Wins Driven by Continued On-Shoring and Dual Sourcing of Manufacturing

SPOKANE VALLEY, Wash., May 07, 2024 (GLOBE NEWSWIRE) -- Key Tronic Corporation (Nasdaq: KTCC), a provider of electronic manufacturing services (EMS), today announced its results for the quarter ended March 30, 2024.

For the third quarter of fiscal year 2024, Key Tronic reported total revenue of $140.5 million, compared to $164.6 million in the same period of fiscal year 2023. As previously announced, revenue for the third quarter of fiscal year 2024 was constrained by approximately $5 million due to severe winter weather events that took Key Tronic’s facilities in Mississippi and Arkansas offline for approximately two weeks. In addition, the Company saw softening demand for a number of different programs produced in Mexico. For the first nine months of fiscal year 2024, total revenue was $433.7 million, compared to $425.5 million in the same period of fiscal year 2023.

For the third quarter of fiscal year 2024, the Company’s margins and profitability were significantly impacted by severance costs of approximately $3.7 million, or $0.27 per diluted share, as Key Tronic reduced its workforce by over 450 employees in Mexico. The severance costs were incurred late in the third quarter, which limited the previously planned payroll expense reductions anticipated in the third quarter.

The Company also continued to be adversely impacted by high labor costs and interest expense, and the continued strengthening of the Mexican Peso by approximately 5%, increasing expenses by approximately $1.5 million or $0.11 per diluted share. The temporary facilities closures in the US due to severe winter weather discussed above, also resulted in a loss of contribution margin of approximately $1 million or $0.07 per diluted share.

As a result of the combination of factors described above, the Company’s gross margin was 5.8% and operating margin was a loss of (0.4)% for the third quarter of fiscal year 2024, compared to a gross margin of 8.7% and an operating margin of 3.1% in the same period of fiscal year 2023.
  
Net loss was $(2.2) million or $(0.21) per share for the third quarter of fiscal year 2024, compared to net income of $2.0 million or $0.18 per share for the same period of fiscal year 2023. For the first nine months of fiscal year 2024, net loss was $(0.8) million or $(0.07) per share, compared to $4.1 million or $0.38 per share for the same period of fiscal year 2023.

Additionally, as of the end of the quarter, the Company cured a breach of the fixed charge coverage ratio covenant in its asset-based revolving credit facility by executing a fourth amendment to the agreement on May 7, 2024. This amendment will provide relief on the financial covenant for twelve months, increase the interest rate by 100 basis points and advance the maturity date of the agreement to September 2025.

“During the third quarter, we took the necessary steps to reduce our workforce in Mexico due to softening demand for a number of different programs with high labor content, which is expected to save us more than $10 million annually,” said Craig Gates, President and Chief Executive Officer. “We expect sales from Mexico-based production to recover in coming quarters due to recently won programs and we do not anticipate needing to increase our net headcount in coming periods, which would reflect significant improvements to our operating efficiencies. At the same time, our Juarez site is being restructured to focus on higher-volume manufacturing, while lower-volume products with higher service level requirements will migrate to our other sites.”

“We’re pleased with the continued ramp of new programs in the third quarter of fiscal 2024 and by increased utilization of our US and Vietnam facilities. During the quarter, we continued to expand our customer base, winning new programs involving energy management, telecommunications, consumer audio and industrial manufacturing. The strong pipeline of new business underscores the continued trend towards on-shoring and dual sourcing of contract manufacturing. We also continued to make significant reductions to our inventory, down by approximately $39 million from a year ago, as well as reducing our accounts payable and other liabilities.”

The financial data presented for the third quarter of fiscal year 2024 should be considered preliminary and could be subject to change, as the Company’s independent auditor has not completed their review procedures.

Business Outlook

For the fourth quarter of fiscal 2024, Key Tronic expects to report revenue in the range of $135 million to $145 million and earnings in the range $0.03 to $0.10 per diluted share. These expected results assume an effective tax rate of 20% in the coming quarter.

Conference Call

Key Tronic will host a conference call to discuss its financial results at 2:00 PM Pacific (5:00 PM Eastern) today. A broadcast of the conference call will be available at www.keytronic.com under “Investor Relations” or by calling 866-400-0049 or +1-313-209-4906 (Access Code: 8579827).   A replay will be available at www.keytronic.com under “Investor Relations”.

About Key Tronic

Key Tronic 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 provides its customers with full engineering services, materials management, worldwide manufacturing facilities, assembly services, in-house testing, and worldwide distribution. Its customers include some of the world’s leading original equipment manufacturers. For more information about Key Tronic visit: www.keytronic.com 

Forward-Looking Statements

Some of the statements in this press release are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to those including such words as aims, anticipates, believes, continues, estimates, expects, hopes, intends, plans, predicts, projects, targets, will, or would, similar verbs, or nouns corresponding to such verbs, which may be forward looking. Forward-looking statements also include other passages that are relevant to expected future events, performances, and actions or that can only be fully evaluated by events that will occur in the future. Forward-looking statements in this release include, without limitation, the Company’s statements regarding its expectations with respect to financial conditions and results, including revenue and earnings, cost savings from workforce reduction, demand for certain products and the effectiveness of some of its programs, business from customers and programs, impacts from operational streamlining, efficiencies, and the amendment to the Loan Agreement. There are many factors, risks and uncertainties that could cause actual results to differ materially from those predicted or projected in forward-looking statements, including but not limited to: the future of the global economic environment and its impact on our customers and suppliers; the availability of components from the supply chain; the availability of a healthy workforce; the accuracy of suppliers’ and customers’ forecasts; development and success of customers’ programs and products; timing and effectiveness of ramping of new programs; success of new-product introductions; the risk of legal proceedings or governmental investigations relating to the subject of the internal investigation by the Company’s Audit Committee and related or other unrelated matters; acquisitions or divestitures of operations or facilities; technology advances; changes in pricing policies by the Company, its competitors, customers or suppliers; impact of new governmental legislation and regulation, including tax reform, tariffs and related activities, such trade negotiations and other risks; and other factors, risks, and uncertainties detailed from time to time in the Company’s SEC filings.

CONTACTS:		Brett Larsen		Michael Newman
		Chief Financial Officer		Investor Relations
		Key Tronic Corporation		StreetConnect
		(509) 927-5500		(206) 729-3625

KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)

	Three Months Ended							Nine Months Ended
	March 30, 2024				April 1, 2023			March 30, 2024				April 1, 2023
Net sales	$	140,527			$	164,553		$	433,707			$	425,524
Cost of sales		132,446				150,277			403,001				391,950
Gross profit		8,081				14,276			30,706				33,574
Research, development and engineering expenses		2,234				2,580			6,233				7,162
Selling, general and administrative expenses		6,422				6,961			18,263				18,353
Gain on insurance proceeds, net of losses		—				(396	)		(431	)			(4,040	)
Total operating expenses		8,656				9,145			24,065				21,475
Operating income		(575	)			5,131			6,641				12,099
Interest expense, net		2,800				2,688			8,772				7,081
Income before income taxes		(3,375	)			2,443			(2,131	)			5,018
Income tax (benefit) provision		(1,154	)			467			(1,329	)			924
Net income	$	(2,221	)		$	1,976		$	(802	)		$	4,094
Net income per share — Basic	$	(0.21	)		$	0.18		$	(0.07	)		$	0.38
Weighted average shares outstanding — Basic		10,762				10,762			10,762				10,762
Net income per share — Diluted	$	(0.21	)		$	0.18		$	(0.07	)		$	0.38
Weighted average shares outstanding — Diluted		10,762				10,865			10,762				10,892

KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

		March 30, 2024			July 1, 2023
ASSETS
Current assets:
Cash and cash equivalents		$	5,255		$	3,603
Trade receivables, net of allowance for doubtful accounts of $85 and $23			135,642			150,600
Contract assets			28,619			29,925
Inventories, net			115,115			137,911
Other			22,224			27,510
Total current assets			306,855			349,549
Property, plant and equipment, net			29,046			28,870
Operating lease right-of-use assets, net			16,790			16,202
Other assets:
Deferred income tax asset			14,577			12,254
Other			6,109			11,397
Total other assets			20,686			23,651
Total assets		$	373,377		$	418,272
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	82,198		$	115,899
Accrued compensation and vacation			7,071			13,351
Current portion of debt, net			5,928			7,849
Other			14,206			14,867
Total current liabilities			109,403			151,966
Long-term liabilities:
Term loans			5,681			6,726
Revolving loan			116,512			114,805
Operating lease liabilities			11,351			10,317
Deferred income tax liability			19			274
Other long-term obligations			336			3,567
Total long-term liabilities			133,899			135,689
Total liabilities			243,302			287,655
Shareholders’ equity:
Common stock, no par value—shares authorized 25,000; issued and outstanding 10,762 and 10,762 shares, respectively			47,891			47,728
Retained earnings			82,184			82,986
Accumulated other comprehensive income (loss)			—			(97	)
Total shareholders’ equity			130,075			130,617
Total liabilities and shareholders’ equity		$	373,377		$	418,272

FAQ

What was Key Tronic 's total revenue for the third quarter of fiscal year 2024?

Key Tronic reported total revenue of $140.5 million for the third quarter of fiscal year 2024.

What were the factors impacting Key Tronic 's margins and profitability in the third quarter of fiscal year 2024?

Key Tronic 's margins and profitability were impacted by severance costs, high labor costs, and interest expense.

What was Key Tronic 's net loss for the third quarter of fiscal year 2024?

Key Tronic reported a net loss of $(2.2) million or $(0.21) per share for the third quarter of fiscal year 2024.

What are the expected revenue and earnings range for Key Tronic in the fourth quarter of fiscal year 2024?

Key Tronic expects revenue in the range of $135 million to $145 million and earnings between $0.03 to $0.10 per diluted share for the fourth quarter of fiscal year 2024.