Key Tronic Corporation Faces Challenges Despite Recent Earnings Report
Shares of Key Tronic Corporation (KTCC) have risen 3.3% since the firm announced its second-quarter earnings for fiscal 2025, surpassing the S&P 500 index’s modest growth of 0.8% during the same timeframe. Yet, the stock has seen a 13.3% decline over the past month, trailing the S&P 500’s 2.6% growth. This mix of fluctuations highlights lingering investor concerns based on the challenges outlined in the company’s latest quarterly report.
Understanding Financial Performance
In the second quarter of fiscal 2025, Key Tronic faced a loss of 46 cents per share, a stark contrast to earnings of 10 cents per share recorded during the same period last year.
Total revenues for the quarter totaled $113.9 million, which marked a steep 22.9% decline from the $147.8 million earned in the previous year. The company attributed this downturn to supply shortages affecting numerous customers, a decrease in production during the holiday season, and reduced demand from specific clients. Collectively, these issues slashed expected revenues by around $15 million.
Analyzing Price, Consensus, and EPS Surprise
Key Tronic Corporation price-consensus-eps-surprise-chart | Key Tronic Corporation Quote
Examining Key Business Metrics
Inventory fell by $23 million, or 19%, year-over-year in the second quarter of fiscal 2025, reflecting the company’s attempts to optimize inventory levels as component availability improved.
The gross margin slid to 6.8%, down from 8%, while the operating margin dropped to -1% compared to 2.7% in the second quarter of fiscal 2024. These declines can be primarily attributed to reduced revenue and fixed cost challenges.
Examining Costs
Operating expenses slightly increased to $8.8 million in the second quarter of fiscal 2025 from $7.8 million in the same period last year. This rise was mainly attributed to heightened research and development costs, which increased to $2.3 million from $1.8 million in the previous year. Additionally, selling, general, and administrative expenses totaled $6.5 million.
The cost of sales as a percentage of revenues rose to 93.2% from 92.0% in the second quarter of fiscal 2024, highlighting the increased strain production costs are placing on the company as sales decline.
Cash & Debt Position Analysis
As of December 28, 2024, Key Tronic’s cash and cash equivalents stood at $4.2 million, down from $4.8 million as of June 29, 2024. This decrease indicates challenges in operational cash flow related to lower revenues and increased costs.
By the end of the second quarter of fiscal 2025, long-term debt was reported at $106 million, down from $116.4 million as of June 29, 2024. This reduction follows the company’s successful refinancing under a new $115-million asset-based financing agreement, which enhances financial flexibility despite interest expenses negatively impacting quarterly results.
Insights from Management
CEO Brett Larsen acknowledged the disappointing financial results, but also underscored ongoing strategic initiatives aimed at streamlining operations, reducing workforce levels, and better aligning inventory with current market demand. He remains optimistic about the potential for improved profitability through these measures.
Additionally, Key Tronic plans to expand its production facilities in Arkansas and Vietnam to meet rising customer demand for onshoring while mitigating risks associated with tariffs on imports from China and Mexico. These expansions are projected to significantly enhance production capacity by mid-2025.
Factors Impacting Results
The company’s challenges this quarter stemmed from:
Component Shortages: A sudden lack of certain high-demand components disrupted production, affecting revenue. However, this issue has since been rectified.
Seasonal Impacts: Limited production during the holiday season affected overall output.
Customer Demand: There was weaker demand from some long-standing clients that contributed to lower sales figures.
Strategic Plans & Outlook
Key Tronic secured new contracts in the identified quarter, including projects related to aerospace systems and energy resilience technologies. Once fully operational, the energy resilience program is projected to generate over $60 million annually by late 2025. Management aims to drive a recovery beginning in the third quarter of fiscal 2025 through these initiatives and operational improvements.
Despite this positive outlook, the company refrained from issuing revenue or earnings guidance for the third quarter of fiscal 2025, citing concerns over new tariffs and potential shifts in customer needs. Management reiterated the long-term focus on utilizing its global presence to capitalize on onshoring trends and dual sourcing in contract manufacturing.
Recent Developments
Key Tronic recently refinanced its long-term debt, obtaining a $115-million asset-based financing arrangement. This strategic move is expected to enhance liquidity and lower interest costs, supporting future growth initiatives.
Final Thoughts
KTCC’s second-quarter results for fiscal 2025 reveal a challenging business environment, yet management is actively working to navigate these hurdles. While short-term forecasts remain clouded by tariff uncertainties and fluctuating demand, the company’s strategic expansions and newly secured contracts could foster growth in the long run. Investors will be keenly observing the implementation and outcomes of these strategies as indicators of the company’s future recovery.
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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
