Annual President’s Letter Fiscal Year 2017

Dear Shareholders,

During fiscal 2017, our revenue and margins were impacted by declining demand from some longstanding customers, which we have not yet offset by the continued ramp up from new programs. Our total revenue was $467.8 million and net income was $5.6 million or $0.51 per share.

While most of our new customers are moving forward with us, it’s been at a slower pace than we’ve historically seen. Market uncertainty about new regulations and international relations seems to have caused delays in sourcing decisions. Additionally, as the EMS market has matured, many of our new customers are coming to us as they exit failed relationships with other EMS providers. In these cases, the transfer and ramp process is slow, causing a delay between our expenses required to win and transfer the program and the margin we will eventually enjoy.

Nevertheless, while the EMS business is very competitive, we won nine new programs during the year, involving transportation logistics, medical, personal safety, inventory automation, commercial lighting, electronic scheduling, pool controllers, gaming and seismic monitoring devices. Our broader and more diversified customer base significantly lowers the potential impact of a slowdown by any one customer.

We had particularly strong results from our U.S. production sites, acquired about two years ago. The combination of Key Tronic’s purchasing power, global footprint and vertical integration capabilities with these U.S. sites has proved as attractive to customers as we expected when we made the acquisition. Moreover, the current geopolitical uncertainty has added to the attractiveness of our multiple country footprint as risk mitigation for our customers.

The addition of the U.S. manufacturing sites, with their geographic advantage in launching new products into production, has also resulted in more projects for our design team. This combination of manufacturing and design is particularly advantageous as customers value the improved time to market that is possible when the design team and manufacturing teams are intertwined. This is also a benefit for Key Tronic, as an earlier look at a new product greatly increases our chance of winning the long term manufacturing business.

To continue to capitalize on our competitive advantages, however, has required significant capital expenditure, training expense and management attention. Over the past three years, we’ve made significant investments in expanding our SMT, sheet metal and plastic molding technology and capacity. This was key in both enabling the sales process and providing capacity for smooth ramps. We expect to see increasing utilization of this new capacity in coming periods, which will enable us to grow with lower levels of capital expenditures in coming years.

Moving into fiscal 2018, we continue to see a strong pipeline of potential new business and our new programs continue to ramp. We believe we’re well positioned to see growth in revenue and increasing profitability in the second half of fiscal 2018 and beyond.

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.

Sincerely,

Craig D. Gates
President and Chief Executive Officer

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