Key Tronic lays off over 100 workers companywide
Lapse viewed as short term by manufacturer, analystNovember 9th, 2023
Spokane Valley-based Key Tronic Corp. has reported a reduction in workforce of over 100 employees in the U.S. and Mexico in its recently released earnings report for the first quarter of its 2024 fiscal year, which ended Sept. 30.
About 25% of the layoffs were at the company’s U.S. sites, says Craig D. Gates, president and CEO of the electronic manufacturing services company.
The company declines to disclose how many people were laid off at its Spokane Valley operation but characterized it as “a very small number.” Most of the layoffs occurred at the company’s Juarez, Mexico, plant.
The sudden workforce reduction was due to a customer’s need to redesign an outdoor power equipment program, which delayed production for a few quarters, says Gates.
“The big trends are still in place,” says Gates about manufacturing jobs leaving China. “I think that a set of just individual circumstances is the driver (for downsizing) rather than any kind of market or business overarching trend.”
Matt Dhane, a portfolio manager for Yakima, Washington-based Tieton Capital Management LLC, says he views the layoffs as a near-term tweak for the company to remain financially flexible, as opposed to a concerning indicator. Dhane keeps a close watch on Key Tronic as it is a portfolio holding for Tieton.
“It’s always unfortunate when these things happen,” he says. “But … the company is planning to bring that contract back in a few quarters.”
Gates says that the large program with a leading power equipment company is anticipated to resume in fiscal year 2025 rather than 2024.
Despite the setback, Key Tronic’s U.S. sites added over $60 million in new contracts over the past 12-month period due to offshoring, he adds.
“During the first quarter of fiscal year 2024, we continue to ramp new programs produced in our U.S. facilities and remain profitable despite a temporary softening of our customer demand for our Mexico-based programs,” he says.
During the first quarter, the company won new contracts involving security equipment, sporting goods, environmental solutions, and industrial systems, says Gates.
An underlying strength of the company’s programs is having a larger share of customers with smaller contracts, as opposed to few customers with large contracts, he says. During fiscal year 2023, the company had only one customer that represented over 10% of Key Tronic’s revenue, and revenue from that customer totaled 12%, he says.
For the first quarter that ended Sept. 30, Key Tronic reported revenue of about $147.8 million, up 8% from $137.3 million for the year-earlier quarter, but a 9% decline from $162.6 million from the previous quarter ended July 1.
First-quarter, net income was $300,000, or 3 cents per share, compared with $1.2 million, or 11 cents per share, for the year-earlier quarter.
The year-over-year decline in earnings was due primarily to unanticipated severance costs of $600,000 from the layoffs in Mexico and the U.S.
Gates adds that other factors that impacted the first quarter included high interest rates and an increasingly strong Mexican peso.
According to a report by Bloomberg.com, Mexico’s nearshoring boom is one factor that has aided in the Mexican peso’s growing strength. In 2023, the peso has appreciated 14% against the U.S. dollar, the report states.
Dhane says several manufacturers are moving to Mexico. He notes that Key Tronic can increase pricing within its contracts depending on the strength of the Mexican peso.
“However, it’s a different economic environment than it was a year ago,” he says.
As of end of trading on Nov. 6, 2023, the share price for Key Tronic stock (Nasdaq: KTCC) closed at $3.98, up from a 52-week low of $3.72, but below its 52-week high of $7.53.
Key Tronic is headquartered at 4424 N. Sullivan Road, in Spokane Valley. Founded in 1969 as a keyboard manufacturer, it has evolved into a design and manufacturing service provider with factories in the Spokane area, Arkansas, Minnesota, Mississippi, Mexico, Vietnam, and China. As of April, the company employed 289 people in Spokane Valley, according to the Journal’s most recent list of Leading Spokane-Area Manufacturers, up from its pre-pandemic employment level of 264 in April 2019. According to the company’s most recent annual report, Key Tronic has about 5,500 employees worldwide.
As earlier reported by the Journal, Key Tronic has been on the receiving end of a tenfold increase in contract bidding opportunities as many companies—prompted by production delays, rising costs, and tensions with China—are pulling business out of the country.
Key Tronic foresaw this trend of customers leaving China years ago and has positioned itself to accept the growing number of customers looking to offshore, Gates has said.
During an Oct. 31 conference call regarding the first quarter earnings report, Gates stated that global logistics problems and China-U.S. geopolitical tensions continue to drive customers out of their traditional sourcing strategies, increasingly realizing that they’ve become too dependent on their China-based contract manufacturers for product, design, and logistics services.
A growing number of potential customers are evaluating the migration of their China-based manufacturing, to Key Tronic’s Vietnam facility, he says.
“Customers looking to leave their contract manufacturer will find a one-stop shop at Key Tronic, which is expected to make the transition to our facilities much less risky than cobbling together a group of providers, each limited to a portion of the value chain,” he says. “In fact, most of the new customers we have onboarded take advantage of this one-stop shop capability that we provide.”