Shares of Key Tronic Corporation KTCC have gained 3.3% since the company reported its earnings for the second quarter of fiscal 2025, outperforming the S&P 500 index’s 0.8% growth during the same period. However, the stock has fallen 13.3% over the past month, underperforming the S&P 500’s 2.6% growth. These mixed movements reflect investor sentiment amid challenges highlighted in the company’s quarterly report.
Financial Performance Overview
Key Tronic recorded a second-quarter fiscal 2025 loss of 46 cents per share against earnings of 10 cents per share for the same period a year earlier.
The company’s total quarterly revenues of $113.9 million declined 22.9% from $147.8 million in the prior-year quarter.
KTCC attributed this drop to component shortages affecting a large number of customers, reduced production during the holiday season and declining demand from certain customers. Collectively, these issues lowered revenues by approximately $15 million from initial expectations.
Key Tronic Corporation Price, Consensus and EPS Surprise
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Key Business Metrics
Inventory levels decreased by $23 million or 19% year over year in the second quarter of fiscal 2025, reflecting efforts to optimize inventory amid improved component availability.
The gross margin fell year over year to 6.8% from 8% and the operating margin was -1% against 2.7% in the second quarter of fiscal 2024. These declines were primarily due to lower revenue levels and fixed cost absorption.
Costs
Total operating expenses increased slightly to $8.8 million in the second quarter of fiscal 2025 from $7.8 million in the prior-year quarter, driven by higher research and development costs, which rose to $2.3 million from $1.8 million in the second quarter of fiscal 2024. Selling, general and administrative expenses were $6.5 million in the second quarter of fiscal 2025.
Cost of sales as a percentage of revenues increased to 93.2% from 92.0% in the second quarter of fiscal 2024, indicating increased pressure on production costs relative to declining sales.
Cash & Debt Position
As of Dec. 28, 2024, Key Tronic’s cash and cash equivalents stood at $4.2 million, a slight decrease from $4.8 million as of June 29, 2024. This reduction reflects lower operational cash flow amid declining revenues and increased expenses.
The company’s long-term debt was $106 million at the end of the second quarter of fiscal 2025, down from $116.4 million as of June 29, 2024, following the refinancing of its debt under a new $115-million asset-based financing agreement. This refinancing provides increased financial flexibility, though interest expenses, including a $1-million write-off for unamortized loan fees, weighed on the quarterly results.
Management Commentary
CEO Brett Larsen acknowledged the disappointing results but emphasized ongoing strategic measures. These include streamlining operations, reducing headcount and aligning inventory levels with current demand. Larsen expressed optimism about the company’s ability to improve profitability as these initiatives take effect.
Key Tronic also highlighted plans to expand production capacity in Arkansas and Vietnam. The expansions are expected to address growing customer demand for onshoring and help mitigate risks associated with tariffs on goods from China and Mexico. These facilities are set to significantly increase capacity by mid-2025.
Factors Influencing Results
Key Tronic’s underperformance during the quarter was driven by:
Component Shortages: A sudden shortage of specific high-demand components disrupted production, impacting revenues. The issue has since been resolved.
Seasonal Impacts: Reduced production during the holiday season constrained output.
Customer Demand: Weaker demand from some longstanding customers contributed to lower sales.
Strategic Initiatives & Outlook
Key Tronic secured new contracts in the quarter under review, including programs in aerospace systems and energy resiliency technologies. The energy program, once fully ramped by late 2025, is expected to generate annual revenues exceeding $60 million. Management remains optimistic that these initiatives, coupled with operational efficiency improvements, will drive a recovery starting in the third quarter of fiscal 2025.
Despite this optimism, the company declined to issue revenue or earnings guidance for the third quarter of fiscal 2025, citing uncertainties related to newly announced tariffs and potential shifts in customer demand. Management highlighted KTCC’s long-term focus on leveraging its global footprint to capitalize on onshoring trends and dual sourcing in contract manufacturing.
Other Developments
Key Tronic refinanced its long-term debt in the quarter under review, securing a $115-million asset-based financing agreement. This move provides increased liquidity and is expected to lower interest expenses, supporting the company’s growth initiatives.
Conclusion
KTCC’s second-quarter fiscal 2025 results reflect a challenging operating environment, but management is taking proactive steps to address these issues. While the near-term outlook remains uncertain due to tariff risks and fluctuating customer demand, Key Tronic’s strategic expansions and program wins position it for growth over the longer term. Investors will likely look for the execution of these initiatives as a key indicator of the company’s recovery trajectory.
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