Key Tronic Corp., the Spokane Valley-based contract manufacturer, expects its revenue this quarter to be lower than projected earlier, but company executives say the forecast could have been much gloomier if not for the addition of 18 new customers over the last two years.

That diversification effort, spanning a range of industries, is just beginning to translate into added revenues, since Key Tronic hasn't begun manufacturing products yet for about half of those mostly unnamed customers.

Nevertheless, the spate of new customers has the company's executives feeling relatively encouraged, considering that the current global economic turmoil has rendered them incapable of estimating likely revenue fluctuations much beyond the next quarter.

"It's really starting to come to fruition," asserts Chief Financial Officer Ron Klawitter.

Key Tronic last year derived about 75 percent of its revenue from its top 10 customers, down from 90 percent the previous several years, and Klawitter says it expects that percentage to continue to fall as the startup and expansion of new-customer programs dilute its revenue concentration further. That trend is a good sign, Key Tronic believes, because it shows the company is weaning itself away from being dependent on the fortunes of a select few customers or industries.

In the current economic climate, though, in which most industries are suffering, it's difficult for a company such as Key Tronic to avoid being dragged into darker waters by a receding tide.

"There's a lot of uncertainty out there, and it's hitting us as well," says CEO Jack Oehlke.

For its fiscal quarter ended Sept. 27, the publicly traded company reported net income of $408,000, or 4 cents a diluted share, up from $183,000, or 2 cents a share, in the year-earlier quarter. Its sales for the latest quarter were $48.2 million, up 8.3 percent from $44.6 million in the year-earlier period.

However, the company lowered its sales estimate for this quarter to a range of $42 million to $45 million, which would be down 10 percent or more from $49.8 million in the 2007 quarter and would equate to earnings in the range of break-even to 2 cents a share. It reported an order backlog of about $35.2 million as of the end of September, down from $40.4 million a year earlier. Additionally, it said revenue from new programs now is expected to grow at a slower rate than previously anticipated.

Key Tronic hasn't lost any of its new customers, though, as the economy has weakened further, and says it still expects to begin manufacturing products for the last 10 of them in its current fiscal year. All 18 new customers should account for about 40 percent of Key Tronic's revenues this year, up from about 13 percent from eight of those new customers last year, Klawitter says. That increase will help offset declining revenues from some of its established customers, he says.

Key Tronic announced this fall that it will begin making products in December for one of the larger of those new customers, Kaz Inc., a Southborough, Mass.-based maker of health, home, and garden products. It has estimated that Kaz eventually could contribute more than $25 million annually to its revenues.

It hasn't named any of the other new customers, most of which are projected to add $5 million to $15 million to Key Tronic's annual revenues.

Key Tronic's "flexible" business model—about one-quarter of the workers at its primary manufacturing facilities in Mexico are contract employees—will enable it to take immediate steps to reduce operating expenses as needed if sales continue to fall despite the offsetting revenue from the new customers, Oehlke and Klawitter say.

They say the company has maintained a strong balance sheet, with a current ratio—calculated by dividing current assets by current liabilities—of 1.76, which is considered healthy by industry and peer standards, and also has a strong long-term debt-to-equity ratio. Current ratio is a liquidity measure, with higher ratios indicating a more stable short-term financial position. Meanwhile, the debt-to-equity ratio measures how much money a company should be able to borrow safely over long periods of time.

Additionally, the company says it had a healthy 14 percent return on invested capital last year, which was about 4 percentage points higher than the industry average. Return on invested capital is a measure that shows how well a company is using such capital to generate returns.

The company's stock price, though, which had been at $4.45 a year ago, was hovering below $1.50 last week, appearing to have been swept downward mostly over the last two months by general economic turmoil and an anticipated manufacturing slowdown.

Klawitter says there was "a lot more inventory in the pipeline" of the manufacturing industry seven or eight years ago—the last time the industry saw a substantial downturn—than there is now, which means there could be a faster rebound this time.

Key Tronic is intent, he and Oehlke say, on providing an attractive outsourcing alternative to manufacturers that are looking at ways to trim costs, and the current economic climate could accelerate the move toward such outsourcing, though that would mean having to cut jobs at their plants.

Oehlke says, "A lot of companies now outsource first," rather than looking first at doing manufacturing in-house.

He and Klawitter say positive word-of-mouth communication has contributed to Key Tronic's recent success in attracting new customers. A new-product introduction facility that the company launched about a year and a half ago in a remodeled portion of its headquarters space, at 4424 N. Sullivan, and that employs about 30 people, also is proving popular with customers, they say. The company now builds product prototypes and does pre-production fine-tuning there, before sending larger-run new products off to Mexico for mass production.

"Customers love it because of the controlled environment in which it occurs," Klawitter says.

The company also does some limited full assembly there, and at space it leases in the Spokane Business & Industrial Park, of products that customers want to have manufactured in the U.S. It does about 85 percent of its manufacturing at a large plant it operates in Juarez, Mexico.

Key Tronic, which employs about 2,500 people, but only about 200 of them in the Spokane area, had total revenue of $204.1 million in its 2008 fiscal year, up from $201.7 million in 2007 and $187.7 million in 2006.

It claims to be one of few contract manufacturers with annual revenues of $100 million to $500 million that has primary manufacturing facilities in Mexico and China and that offers its mix of printed circuit board assembly, plastic molding, and final product assembly under one roof. The products it manufactures range from specialty printers and multimedia touch panels to gaming and medical devices.