Key Tronic ramps up as customers leave China
Contract manufacturer hires 500 in Mexico, projects higher sales
Karina EliasFebruary 16th, 2023
Key Tronic Corp. is 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 that country and bringing it back to North American shores.
Craig D. Gates, Key Tronic president and CEO, says that before the pandemic and current political tensions between the U.S. and China, the Spokane Valley-based contract manufacturer normally would be working on about 10 different quotes to secure a contract. Now the company is working on close to 100 quotes and in a position to choose contracts company officials are confident they can win.
“We’re actually overwhelmed by new business opportunities, and we’ve had to start kind of culling the people that want to do business with us and quoting on (contracts) we’re sure we’re going to win,” he says. “Previous to this, we would quote on ones that we thought we might win.”
In the last two months, Key Tronic has hired 500 workers at its manufacturing facility in Juarez, Mexico, much of which is a replenishing of staff after layoffs that occurred during the pandemic, when production stalled due to supply-chain problems, says Gates. Prior to the pandemic, the company hired about 100 workers a month.
According to Key Tronic’s website, the Juarez facility employs 4,600 people.
Bill Dezellem, chief investment officer and president of Yakima, Washington-based Tieton Capital Management LLC, says Key Tronic is benefitting strongly from the global movement of production leaving China and returning to North America. Dezellem keeps a close watch on Key Tronic as it is a portfolio holding for Tieton.
“You are seeing this wholesale adjustment around the world where companies want to be less reliant on China and the risks that come with the concentration (of production) being in a single, dictatorial, communist country,” says Dezellem.
Key Tronic, founded in 1969 as a keyboard manufacturer, has evolved into a design and manufacturing service provider with factories in the Spokane area, Arkansas, Minnesota, Mississippi, Mexico, Vietnam, and China. The company employed 273 people in Spokane Valley as of last April, according to the Journal’s most recent list of Leading Spokane-Area Manufacturers. That’s up from its pre-pandemic employment level of 234 in April 2019.
The company reported net income of $967,000, or 9 cents per diluted share, for its fiscal year 2023 second quarter, which ended Dec. 31. That’s up from income of $587,000, or 5 cents a share, in the year-earlier quarter.
Total reported second-quarter revenue was $123.7 million, down from $134.5 million compared with the year-earlier quarter.
During a Jan. 31 conference call regarding the second-quarter earnings report, Gates explains the dip in revenue was a result of a six-week delay in starting production for a large program with a leading power equipment company. He says projected revenue for the third quarter is between $160 million and $170 million, compared with $138.4 million in the third quarter of fiscal 2022.
As of Feb. 13, the price for Key Tronic stock (Nasdaq: KTCC) closed at $7.13 a share, up from a 52-week low of $4 but below its $7.39-a-share, 52-week high.
Gates says Key Tronic began preparing for this exodus from China about 10 years ago as he and others noticed labor costs rising there.
“We doubled down, tripled down on our facilities in Vietnam and Juarez and in the states,” he says. “We bought our three sites in the states almost 5 1/2 years ago because we thought it (the move away from manufacturing in China) would happen, and it did.”
Those factories are located in Fayetteville, Arkansas; Oakdale, Minnesota; and Corinth, Mississippi. According to the company’s website, the three facilities have a combined workforce of 655.
In addition to rising labor costs, Gates says he foresaw how doing business with offshore contract manufacturers, which often requires 12 weeks of lead time just to transport products across the Pacific Ocean, would become more of a problem for business owners. With the onset of the pandemic, some companies had no access to their finished products, he says.
Dezellem says, “The pandemic really highlighted the concentration risk that companies have set themselves up with by moving so much of their production to China.”
Key Tronic also built and trained an engineering group to be ready to help customers move their production out of China, says Gates. He notes that many companies let go of their engineers after they moved their manufacturing to China and are now left without a way to move their assets out of the country.
“That’s another reason why we have all this overwhelming new business,” he says. “We have the engineers to help our customers move their product from someplace over there, to someplace closer.”
Gates adds that many of those companies have lost manufacturing expertise and now are facing challenges to reverse-engineer production processes as they return their manufacturing to North America from China.
“To me, it’s a really amazing circle of life where we de-industrialized, and now we are having to re-industrialize,” he says.