Key Tronic Corporation Announces Results for the Second Quarter of Fiscal Year 2024
Key Tronic Corporation (KTCC) reported a 12% increase in revenue for the first six months of fiscal year 2024, driven by growth in US-based production and Vietnam-based facilities. The company's gross margin improved to 8.1%, reflecting a favorable product mix and improved operating efficiencies. However, increased labor costs, unfavorable foreign currency exchange rates, and higher interest rates on its line of credit negatively impacted profitability. Key Tronic expects a severance expense of $1.0 million to $2.5 million from headcount reductions in its Mexico-based operations for the third quarter of fiscal 2024.
Positive
12% increase in revenue for the first six months of fiscal year 2024
Gross margin improved to 8.1%
Expansion of customer base with new programs involving security products, medical devices, and military aerospace
Negative
Negatively impacted profitability due to increased labor costs, unfavorable foreign currency exchange rates, and higher interest rates on its line of credit
Expectation of a severance expense of $1.0 million to $2.5 million from headcount reductions in Mexico-based operations
The reported revenue growth of 18% year-over-year for Key Tronic Corporation signifies a positive trend in the electronic manufacturing services (EMS) industry, where demand is often a reflection of broader economic health. This growth, particularly stemming from increased production in US and Vietnam-based facilities, aligns with the current reshoring trend in manufacturing, as companies seek to mitigate risks associated with global supply chains. The sale of inventory from a discontinued program also contributed to the revenue, which can be a strategic move to streamline operations and focus on more profitable segments.
However, the reported decrease in net income for the first six months compared to the previous year raises questions about the sustainability of profit margins in the face of rising labor costs and unfavorable foreign exchange rates. Investors should closely monitor Key Tronic's ability to manage these challenges, as they could affect future profitability despite top-line growth.
The increase in gross margin from 7.2% to 8.1% suggests improved efficiency and a favorable product mix. This is a critical indicator of financial health for Key Tronic, as it implies that the company is not only increasing revenue but also becoming more profitable on a per-unit basis. The operating margin decrease is relatively minor and may be offset by the gross margin improvements. However, the mention of increased labor costs, unfavorable currency exchange rates and higher interest rates on credit lines indicates pressure on the company's operating expenses, which could dampen the positive impact of gross margin improvements.
Investors should also consider the one-time severance costs due to workforce restructuring in Mexico and evaluate the projected payback period of less than six months against industry benchmarks for such cost-saving initiatives. The company's strategic focus on higher-volume manufacturing in Juarez and shifting lower-volume, higher service level products to other sites could enhance long-term competitiveness but may involve short-term financial strain.
The context of Key Tronic's business performance must be considered within the broader macroeconomic environment. The company's mention of unfavorable foreign currency exchange rates and wage inflation, especially along the US-Mexico border, reflects current economic trends of currency volatility and labor market tightness. These factors are particularly relevant for companies with cross-border operations and can have significant implications for cost structures and pricing strategies.
Additionally, Key Tronic's expectation of revenue between $135 million and $145 million for the next quarter, coupled with the planned severance expense, indicates a cautious outlook that may reflect broader economic uncertainties. The effective tax rate assumption of 20% for the coming quarter will also play a role in the net income projections and should be noted by stakeholders as a potential variable in the company's financial planning.
02/06/2024 - 04:25 PM
Continued Growth in US-based Production; Improved Gross Margins; New Program Wins
SPOKANE VALLEY, Wash., Feb. 06, 2024 (GLOBE NEWSWIRE) -- Key Tronic Corporation (Nasdaq: KTCC), a provider of electronic manufacturing services (EMS), today announced its results for the quarter ended December 30, 2023.
For the second quarter of fiscal year 2024, Key Tronic reported total revenue of $145.4 million , up 18% from $123.7 million in the same period of fiscal year 2023. Revenue growth for the second quarter of fiscal year 2024 was driven by increased production at the Company’s US-based and Vietnam-based facilities, as well as by the sale of approximately $8.1 million of inventory from a discontinued program. For the first six months of fiscal year 2024, total revenue was $293.2 million , up 12% from $261.0 million in the same period of fiscal year 2023.
For the second quarter of fiscal year 2024, the Company’s gross margin was 8.1% and operating margin was 2.7% , compared to a gross margin of 7.2% and an operating margin of 2.9% in the same period of fiscal year 2023. The increase in gross margin in the second quarter of fiscal year 2024 reflects a favorable product mix for the quarter and improved operating efficiencies.
For the second quarter of fiscal year 2024, net income was $1.1 million or $0.10 per share, compared to $1.0 million or $0.09 per share for the same period of fiscal year 2023. For the first six months of fiscal year 2024, net income was $1.4 million or $0.13 per share, compared to $2.1 million or $0.20 per share for the same period of fiscal year 2023. The Company’s profitability in fiscal year 2024 continued to be negatively impacted by increased labor costs, unfavorable foreign currency exchange rates in Mexico and higher interest rates on its line of credit.
“We’re pleased with the successful ramp of new programs in the second quarter of fiscal 2024, driven by increased utilization of our US and Vietnam facilities,” said Craig Gates, President and Chief Executive Officer. “During the quarter, we continued to expand our customer base, winning new programs involving security products, medical devices and military aerospace. We also continued to make gradual improvements in our gross margins and continued to make significant reductions to inventory, as well as reducing our accounts payable, debt and other liabilities.”
“While we continue to see the favorable trend of contract manufacturing returning to North America, the strength of the Mexican peso and continued wage increases in Mexican wages, particularly along the US-Mexico border, have created a shift in the way we allocate our production across our US and Juarez locations. In order to remain competitive, our Juarez site will be restructured to focus on higher-volume manufacturing, while lower-volume products with higher service level requirements will migrate to our other sites.
Accordingly, we are currently reducing our workforce in Mexico and will incur $1.0 million to $2.5 million of severance in the third quarter. We currently expect the payback period for these severance costs to be less than six months and our US and Vietnam facilities to contribute a growing portion of our revenue in coming periods.”
The financial data presented for the second 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 third quarter of fiscal 2024, Key Tronic expects to report revenue in the range of $135 million to $145 million . The Company also expects to incur a severance expense in the range of $1.0 million to $2.5 million from headcount reductions in its Mexico-based operations, resulting in a net income in the range of $0.00 t o $0.15 per diluted share. These expected results assume an effective tax rate of 20% in the coming quarter.
Conference Call
About Key Tronic Keytronic 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 Keytronic 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, or will, 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, demand for certain products and the effectiveness of some of its programs, business from customers and programs, and impacts from operational streamlining. 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.
KEY TRONIC CORPORATION AND SUBSIDIARIES Three Months Ended Six Months Ended December 30, December 31, December 30, December 31, Net sales $ 145,417 $ 123,708 $ 293,180 $ 260,971 Cost of sales 133,654 114,788 270,555 241,672 Gross profit 11,763 8,920 22,625 19,299 Research, development and engineering expenses 1,758 2,287 3,999 4,583 Selling, general and administrative expenses 6,057 5,735 11,841 11,391 Gain on insurance proceeds, net of losses — (2,710 ) (431 ) (3,644 ) Total operating expenses 7,815 5,312 15,409 12,330 Operating income 3,948 3,608 7,216 6,969 Interest expense, net 2,961 2,507 5,972 4,394 Income before income taxes 987 1,101 1,244 2,575 Income tax (benefit) provision (97 ) 134 (175 ) 456 Net income $ 1,084 $ 967 $ 1,419 $ 2,119 Net income per share — Basic $ 0.10 $ 0.09 $ 0.13 $ 0.20 Weighted average shares outstanding — Basic 10,762 10,762 10,762 10,762 Net income per share — Diluted $ 0.10 $ 0.09 $ 0.13 $ 0.20 Weighted average shares outstanding — Diluted 10,889 10,832 10,889 10,832
KEY TRONIC CORPORATION AND SUBSIDIARIES December 30, 2023 July 1, 2023 ASSETS Current assets: Cash and cash equivalents 2,953 3,603 Trade receivables, net of allowance for doubtful accounts of $72 and $23 134,892 150,600 Contract assets 27,770 29,925 Inventories, net 124,054 137,911 Other 22,612 27,510 Total current assets 312,281 349,549 Property, plant and equipment, net 28,935 28,870 Operating lease right-of-use assets, net 18,104 16,202 Other assets: Deferred income tax asset 13,161 12,254 Other 6,243 11,397 Total other assets 19,404 23,651 Total assets 378,724 418,272 LIABILITIES AND SHAREHOLDERS ’ EQUITY Current liabilities: Accounts payable 91,358 115,899 Accrued compensation and vacation 5,677 13,351 Current portion of debt, net 5,610 7,849 Other 15,721 14,867 Total current liabilities 118,366 151,966 Long-term liabilities: Term loans 6,465 6,726 Revolving loan 108,429 114,805 Operating lease liabilities 12,380 10,317 Deferred income tax liability 22 274 Other long-term obligations 627 3,567 Total long-term liabilities 127,923 135,689 Total liabilities 246,289 287,655 Shareholders’ equity: Common stock, no par value—shares authorized 25,000; issued and outstanding 10,762 and 10,762 shares, respectively 47,839 47,728 Retained earnings 84,405 82,986 Accumulated other comprehensive income (loss) 191 (97 ) Total shareholders’ equity 132,435 130,617 Total liabilities and shareholders’ equity 378,724 418,272
CONTACTS: Brett Larsen Michael Newman Chief Financial Officer Investor Relations Key Tronic Corporation StreetConnect (509) 927-5500 (206) 729-3625
What was Key Tronic Corporation's (KTCC) total revenue for the second quarter of fiscal year 2024?
Key Tronic reported total revenue of $145.4 million for the second quarter of fiscal year 2024.
What was the increase in revenue for the first six months of fiscal year 2024 compared to the same period in fiscal year 2023?
The total revenue for the first six months of fiscal year 2024 was $293.2 million, up 12% from $261.0 million in the same period of fiscal year 2023.
What was Key Tronic Corporation's (KTCC) gross margin for the second quarter of fiscal year 2024?
The company's gross margin was 8.1% for the second quarter of fiscal year 2024.
What factors contributed to the increase in gross margin for the second quarter of fiscal year 2024?
The increase in gross margin reflects a favorable product mix for the quarter and improved operating efficiencies.
What is the expected range of revenue for the third quarter of fiscal 2024?
Key Tronic expects to report revenue in the range of $135 million to $145 million for the third quarter of fiscal 2024.
What is the expected severance expense for the third quarter of fiscal 2024?
The company expects to incur a severance expense in the range of $1.0 million to $2.5 million from headcount reductions in its Mexico-based operations for the third quarter of fiscal 2024.
