Annual President’s Letter Fiscal Year 2016

Dear Shareholders,

While fiscal 2016 was a challenging year for us, we’re pleased with how our business rebounded, resulting in 12% revenue growth and 52% earnings growth for the year.

As we worked our way through the first half of the year, it became clear that the rate of decline in the viability of our largest customer had moved from chronic to acute. In fact, that customer is in the process of being acquired. This abrupt acceleration in their decline forced us to manage a very tough Q1 and Q2.

Meanwhile, our investments in Ayrshire, vertical integration, design services, multi-country footprint, and manufacturing excellence continued to power a robust new business funnel. New business had been replacing the chronic decline of our largest customer, but we were challenged to fill the hole left by the sudden, un-forecasted, acute decline.

By the end of the fiscal year, I am proud to say that we had replaced the lost business with new programs from existing customers and with programs from new customers. We enter 2017 with optimism that is fueled by our proven ability to add this new business while managing tough quarters.

While the revenue from the new programs was very welcome, replacing one large customer with many smaller and growing programs was very challenging. We needed to retool some of our processes, procedures and training, as well as make significant capital expenditures. For example, most of the new programs are initially PCB intensive and then foster a broader range of services. We now have 13 SMT lines in Juarez, an increase of 50% from a year ago, and we’re continuing to invest in expanding our SMT capabilities in anticipation of increasing demand.

Getting this new business up and running also impacts our expense line in advance of revenue. Several of our new programs were new products, which utilized our design, prototype and tooling services before going into production. A number of new programs were launched in the factory with very steep ramps, driven by market demand, which were far above the optimum rate. While successfully fulfilling our customers’ needs, we incurred significant excess costs throughout the year in terms of scrap, rework, overtime, air freight and inventory.

Going forward, however, our broader and more diversified customer base significantly lowers the potential risk and impact of a slowdown by any one customer. Moreover, we continue to see a robust pipeline of potential new business.

Moving into fiscal 2017, we expect to see many of our new programs continue to ramp up, along with the continued onboarding of several new customers and a robust pipeline of potential new business. Over the long term, we anticipate our new programs and customers will continue to grow far beyond their revenue levels today. In preparation, we continue to invest in increasing our capacity and improving our operations to accommodate a more diversified customer base. Overall, we remain encouraged by our growth opportunities and our competitive strengths.

I want to take this opportunity to express my gratitude to our employees for their dedication and hard work during this past year, to our valued customers who continue to honor us with their trust, and to our shareholders for your continuing support.


Craig D. Gates
President and Chief Executive Officer

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