Earnings Call Transcript
KEY TRONIC CORP (KTCC)
Earnings Call Transcript - KTCC Q4 2021
Operator, Operator
Good day and welcome to the Key Tronic Corporation Fourth Quarter and Year-End Fiscal 2021 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brett Larsen, Chief Financial Officer. Please go ahead, sir.
Brett Larsen, CFO
Good afternoon everyone. I am Brett Larsen, Chief Financial Officer of Key Tronic. I'd like to thank everyone for joining us today for our investor conference call. Joining me here in the Spokane Valley headquarters is Craig Gates, our President and Chief Executive Officer. As always, I would like to remind you that during the course of this call, we might make projections or other forward-looking statements regarding future events or the company's future financial performance. Please remember that such statements are only predictions. Actual events or results may differ materially. For more information, you may review the risk factors outlined in the documents the company has filed with the SEC specifically our latest 10-K quarterly 10-Qs and 8-Ks. Please note that on this call we will discuss historical financial and other statistical information regarding our business and operations. Some of this information is included in today's press release and a recorded version of this call will be available on our website. Today we released our results for the quarter and full year ended July 3, 2021. For the fourth quarter of fiscal year 2021, we reported revenue of approximately $132.6 million, up 14% from $116 million in the same period of fiscal year 2020. For the full fiscal year of 2021, total revenue was $518.7 million, the highest annual revenue in the company's history and up 15% from $449.5 million for fiscal year 2020. While demand has remained strong for both new and existing customers, revenue for the fourth quarter and for the full fiscal year 2021 was significantly restrained by issues related to worldwide supply chain, transportation, and logistics. For the fourth quarter of fiscal year 2021, net income was $200,000 or approximately $0.02 per share compared to $1.5 million or $0.14 per share in the same period of fiscal year 2020. During the fourth quarter of fiscal year 2021, we again incurred additional costs due to supply chain issues causing both factory downtime and overtime expenses, as well as continued but lessening expenses related to COVID-19. In addition, we incurred legal and other professional expenses related to the previously disclosed internal investigation of approximately $1 million in the fourth quarter. You will recall that this internal investigation also resulted in legal and other professional expenses in the third quarter and delayed our reporting of the results of that quarter. Our Audit Committee, independent legal counsel, and forensic accounting firm conducted an investigation related to a notification from an employee regarding the classification of inventory at our production facility in Minnesota. Although the investigation and management's related review identified improper recording of inventory and related accounting errors, the financial impact did not result in a restatement of audited or unaudited financial statements. However, as we recently reported, we are also taking related remedial actions to correct certain deficiencies in our accounting and financial control processes. We continue to cooperate with the SEC regarding this matter which is expected to result in additional expenses in the coming periods. Despite the increased expenses related to the pandemic, the global supply chain disruptions, and expenses related to the independent investigation, our annual margins improved in fiscal year 2021. Gross margin was 8.1% and operating margin was 1.8%, up from a gross margin of 7.8% and an operating margin of 1.5% for the fiscal year 2020. For the full fiscal year of 2021, operating income was $9.5 million, up 40% from the prior year. Net income was $4.3 million or $0.39 per share compared to $4.8 million or $0.44 per share for the fiscal year 2020. Turning to the balance sheet, we continue to maintain a strong financial position. As a result of supply chain-related production delays in the fourth quarter of fiscal 2021, the continued ramp and transfer of new programs, our inventory turns decreased slightly from the prior quarter. In future quarters, we expect to see our net inventory turns increase to be more in line with expected revenue. At the end of the fourth quarter, trade receivables were down $2.6 million from the prior quarter, reflecting the timing of shipments later in the quarter. Our Days Sales Outstanding (DSOs) increased to about 76 days, which reflects both timing of shipments during the quarter and some delays in payments from customers who have also been impacted by the pandemic-related shutdowns and restarts in their respective markets. Overall, our balance sheet has total working capital of $172 million and a current ratio of 2.4:1. Nevertheless, we feel it is prudent to preserve cash and expand liquidity where possible. In this regard, we expect to increase our credit facility with our existing bank up to $120 million of total availability subject to our borrowing base. This should give us more flexibility to potentially ramp up production and to manage potential pandemic-related risks and other risks in coming periods. Total capital expenditures were about $10.6 million for the full fiscal year. While we are keeping a careful eye on expenditures during fiscal year 2022, we plan to continue to invest in our production equipment, SMT equipment, and plastic molding capabilities, as well as make efficiency improvements in our facilities to prepare for growth and add capacity. Despite growing customer demand in backlog, we expect the delays in the supply of key components will continue to significantly limit production and adversely impact operating efficiencies. For the first quarter of fiscal year 2022, we currently expect to report revenue of approximately $125 million to $135 million and earnings of approximately $0.07 to $0.12 per diluted share. Nevertheless, there is a lot of uncertainty surrounding these current estimates. We're working closely with our customers, key suppliers, and employees to minimize the effects of delays attributable to the continued global pandemic, increased global freight and logistics costs, and limited availability of key components. We also cannot predict the outcome of any regulatory actions related to the subject of the internal investigation. While our facilities in the US, Mexico, China, and Vietnam are currently operating while following current health guidelines, uncertainty as to the possibility of future temporary closures, customer fluctuations in demand and costs, future supply chain disruptions during the rapidly changing COVID-19 environment, and other potential factors could significantly impact operations in coming periods. In summary, while the supply chain disruptions and the COVID-19 crisis continued to impact our business during the fourth quarter and remain risks in future periods, we are encouraged by our growing backlog as we move into the first quarter of fiscal year 2022 and by a prospect for future growth. The overall financial health of the company appears strong and we believe that we are increasingly well positioned to win new EMS programs and to continue to profitably expand our business over the longer term. That's it for me. Craig?
Craig Gates, CEO
Okay. Thanks, Brett. Despite the stiff headwinds during the past year, including the pandemic, multiple factory shutdowns, and worldwide supply chain challenges, we're very pleased with our strong positive momentum. We reported 15% year-over-year growth and record revenue for the year and generated a 40% increase in operating income. We also continued to ramp up new programs and win new business. While the COVID crisis is not behind us, we survived the waves of pandemic challenges over the past year. Along with forced government shutdowns, we worked hard to keep our employees safe, implementing a variety of procedures and stop gaps to address COVID-19 and mitigate its spread. We are also impacted by an unprecedented winter storm that shut down our Juarez facility for one week during critical times for several new program ramps. During the year, we struggled to get enough labor in our production facilities as production staff were deterred by a variety of factors, including COVID-related unemployment benefits, which at times exceeded payroll in the US, endemic fears in Mexico, and government oversight in Asia. Now that we're sufficiently staffed up, production for the time being anyway, the industry faces persistent worldwide shortages in the supply of key components, particularly for electronic parts. These shortages have extended production timing and caused transportation costs to triple. Had it not been for the supply chain issues, we believe burgeoning customer demand would have driven revenue for the year in excess of $700 million. Unfortunately, moving into fiscal 2022, supply chain disruptions have not improved. In the face of all these challenges, we continued winning new customers and ramping new programs, more than offsetting the drop in some programs due to the pandemic. During the year, we won new programs involving audio and video editing systems, indoor air quality, utility meters, warehouse management, security and automation technologies, industrial products, consumer products, medical, exercise equipment, and residential building products. We also continued working with local government agencies to build medical products assisting in combating the pandemic. We would not have won as many programs without the opportunity to first ramp the programs in our US plants and subsequently transfer to our lower-cost plants in Mexico. Recently we leased two new buildings in our Mexico campus, increasing our capacity to over one million square feet in Mexico. Moreover, production at our new Vietnam facility continues to grow, doubling its workforce and generating profits for the year. We expect big things from our Da Nang facility in the future. That said, as we discussed on previous calls, the pressures on our customer base to lessen their Asian supply concentration remain very powerful. Demand for North American production continues to grow, with no foreseeable end to tariffs, increasing agent production costs, and time to market and a weakening US dollar. These tailwinds have driven a significant increase in our business, and that increase has been along multiple vectors. Firstly, current customers with programs in Asia outsourced to other providers have awarded some of that business to us. Secondly, current customers with new programs that were in the process of being awarded have eliminated Asia from their selection process and selected Key Tronic based on our North American footprint. And thirdly, new customers with both existing and new programs have also selected us based upon our footprint experience. Another factor in many of our recent wins has been the realization by many companies in our target market that they have lost design control of their products in the process of outsourcing them. Our strength in engineering has proven to be a powerful asset as these companies work to regain design control, and several of the new project wins are due in part to our design services. Yet another factor in many of our recent wins has been our unusually high level of vertical integration. As the customer seeks to recreate an existing supply chain, the risk and effort are multiplied by the number of new suppliers that must be identified, qualified, bid, selected, ramped, and managed. We believe Key Tronic is unique among our Tier 2 competitors in that we offer a one-stop shop for molding, metals, printed circuit boards, assembly, test, and distribution. Additionally, many of our new customers' products require a manufacturing process that is unique to their product. Key Tronic has a long history of developing and optimizing such processes as we onboard a new customer, and this development is aided by our vertical integration. Moving into fiscal 2022, significant uncertainty still surrounds a continuing threat of the pandemic and the disruptions to global supply chains for key components. At the same time, we believe that these challenges will continue to force our customers to weigh carefully the degree to which they concentrate their supply chain on any one region and lose their design control to their outsourced partner. The macroeconomic events for the past year have forced many companies to more fully recognize the significant impacts any long-gated supply chain can handle in both costs and availability, the risk of IP appropriation, and the attractiveness of doing business with an outsourced partner who can minimize the risk on all of these factors. We structured Key Tronic to be the clear answer to the true cost and risk of overconcentrated outsourcing. The advent of trade wars with China and the pandemic, and global supply chain disruptions have only served to accelerate the effectiveness of our strategy. Even if these challenges gradually abate, we expect that our market will still have been filtered in our favor. In closing, I want to once again thank our great employees for their dedication during these challenging times. Because of their courage, hard work, and strategic foresight, we expect continued revenue and earnings growth in coming periods and we will continue to invest in new capacity to prepare for long-term growth. Let me assure you also that we will continue to make protecting the health of our employees our highest priority. This concludes the formal portion of our presentation. Brett and I will now be pleased to answer your questions.
Operator, Operator
Thank you. Our first question comes from Bill Dezellem with Tieton Capital.
Bill Dezellem, Analyst
I'd like to actually start since we didn't have a third quarter conference call to have you discuss the new program that you won in the Q3 that led to adding an additional 145,000 square feet down in Juarez please.
Craig Gates, CEO
I'm trying to figure out what I can say about that. It's a program that's being partially moved from China and partially new business. It is based upon response time to customization from that program's customers. And it's the first time in our history that we've done this depth of commitment to square feet and commitments to equipment that is being built and moved into our facility.
Brett Larsen, CFO
Bill, I believe we also mentioned last quarter that it is highly automated and, as Craig indicated, it really represents a true partnership with this customer.
Bill Dezellem, Analyst
Thank you. And given the amount of square footage that you're adding, presumably this is rather large in terms of revenue potential, would you share with us the revenue kind of as you have in prior quarters for the wins, specifically thinking about this one in the third quarter? My next question will be the three new ones this quarter.
Craig Gates, CEO
So, the third quarter the big one there was between $20 million and $50 million a year. And for Q4, all of those were between $5 million and $15 million.
Bill Dezellem, Analyst
And were those for existing or new customers each of those? And if there was anything interesting about any of them that you would like to highlight, please take the opportunity to dive in.
Craig Gates, CEO
Well, the big one in Q3 was for a different division of an existing customer. And the largest of the wins in Q4 was for an existing customer. Then the other three were new customers. Actually, one of the other three was a new division of an existing customer.
Bill Dezellem, Analyst
Congratulations. Could you share some insights into what influenced your revenue guidance? In early May, you projected the fourth-quarter revenue to be between $130 million and $140 million. Then in early July, you revised that estimate down to $120 million to $125 million, and ultimately you achieved around $133 million, which was quite close to the third-quarter revenue. Can you help us understand what factors contributed to these changes?
Craig Gates, CEO
Sure. It's all basically related to component availability and new program ramps. The day-to-day life in manufacturing now is to sit at your desk and wait for the phone to ring from the supplier who's decided he has to de-commit today and then scramble around to find a replacement part, see if you can find those parts in the gray market and the black market, and find a way to get those parts certified to make sure they're not counterfeit, talk with your customers, see if you can find a way to convince that customer to pay anywhere from 10% to 2000% purchase price variance to get these parts out of the black or gray market. And when that one is behind you, wait for the phone to ring again. And basically, I'd say on any given day, we have two or three new de-commits from a supplier somewhere around the world or a logistics snafu where parts didn't get on a boat or didn't get offloaded or stuck at port. So we really don't know from day to day what we're going to be able to build, which causes us to have a really hard time giving you folks an accurate prediction of how much we're going to sell. At the same time, the customers need the parts, need the products. So when we get the parts in the door finally, we end up working a lot of overtime to try to get the products built, and we end up having a lot of people sitting around with nothing to do when the parts don't show up on time. So that's why we can't be more accurate on what we're going to build, when we're going to build it, and how much it's going to cost us to build it?
Bill Dezellem, Analyst
So that's actually quite helpful and kind of helps frame up what seems like conflicting statements in the press release of costs due to downtime and costs due to overtime; those two generally don't go hand in hand. But relative to the most recent guidance of $120 million to $125 million and then actually doing $133 million, that's a great surprise. What happened to allow that positive surprise to take place?
Craig Gates, CEO
Parts came in that we were thinking were not going to come in; products got built that we didn't know if we were going to get done by the end of the quarter. The product got shipped that we didn't think was going to get done by the end of the quarter.
Bill Dezellem, Analyst
From what you’ve described, it’s possible that the opposite could occur in any future quarter, so we shouldn’t overstate our excitement about what was achieved this quarter. We should feel enthusiastic, but we shouldn’t assume that it will happen consistently every quarter.
Craig Gates, CEO
We sit together every morning to talk with our staff. Every day we all have a pretty good idea of which suppliers are in trouble, which shipments are held up, how far lead times are being pushed out. Lead times, for example, for some of the hot components like integrated circuits that we use in one of our larger product revenue lines is also used in the automotive industry. When that chip is holding up the shipment of an $80,000 truck versus holding up the shipment of our $800 product, GM or Ford are a lot more willing to pay a $150 premium for a $10 chip than our customer is. So, as we look over this landscape of logistics, and which fabs are coming online and which countries are pulling their people out of the factories or restricting how many people are being allowed to go into the factories, and how far lead times are being pushed; last time we talked to a given supplier, we've convinced ourselves over the last probably three weeks that things have stopped getting dramatically worse every day. We are not convinced we've turned a corner and things are getting better. But at least, we don't think every day is worse than the last. And there are a lot of factors that go into that too, because when this first started, there was always a secondary market for parts that has parts that have ended up in excess for some reason, and brokers are looking to move those parts to somebody at a higher price. And as this first began, that whole market was still pretty full of parts. As it got worse and worse and worse, that market got drained down to where there are no secondary gray or black market to speak of with reputable parts in it. So as a result, I'm not sure the last two or three months was actually the failure of manufacturers to keep up as much as it was. We had finally drained the last pool we had of parts, and by we I mean the entire industry. So that's what's confusing us as we try to figure out, is this the worst it's going to get? Is it going to get worse? Have we turned the corner? And as I said right now, we think we've hit the bottom and are bouncing along the bottom. So whether you should celebrate or be in despair or bank on us beating our projection or banking on us missing it, I can't tell you. I can tell you a lot of people are working really hard and a lot of time and energy and money is being spent to keep our customers as happy as we can, because I can assure you, we're going to remember the suppliers that didn't do us right during this time and I don't want any of our customers to remember us for not doing them right during this time. But that's about all I can give you.
Bill Dezellem, Analyst
Great. That's more than I asked for and very helpful. Thank you. So let me just be clear here, you are not experiencing any sort of a demand issue? It is all on the supply front, correct?
Craig Gates, CEO
We see the highest demand we have ever seen in the company's history.
Bill Dezellem, Analyst
And so, for this quarter that you've just guided, $125 million to $135 million, the September quarter, what's your current guess of what end customer demand is?
Craig Gates, CEO
If we could get all the parts we wanted and if all the employees were available to us, we could be doing in excess of $160 million this quarter.
Bill Dezellem, Analyst
So that's up from, I think, what you've put in prior press releases of $150 million?
Craig Gates, CEO
Yes.
Bill Dezellem, Analyst
Well, congratulations on that front. So let me ask one additional question and I will step back in queue. What's getting in the way of hitting a 10% return on equity? And let's start with the long term. I think you may have just answered in the short term. But long term, what's going to preclude you from accomplishing that?
Craig Gates, CEO
I don't know how long all the pandemic and supply issues are going to be. I don't know if you could take long-term as a quarter or a year or what. Certainly, if we were running $150 million, $160 million in revenue, our profitability and everything else that you wanted to measure would be a whole different world of improvement.
Bill Dezellem, Analyst
Let me break my own promise and ask an additional question. In the release, you mentioned around $700 million in demand for the past year. Were you able to meet that demand? If the internal investigation costs had not been incurred, what would earnings have looked like?
Craig Gates, CEO
That's like saying what would happen if I hadn't hit the buoy at football. There's no...
Brett Larsen, CFO
That would require a lot of speculation.
Craig Gates, CEO
Yeah, there's no use in really thinking about it. You can just say that the arrow would point way up and leave it at that.
Bill Dezellem, Analyst
All right. That's fair. Thank you very much for answering all my questions.
Craig Gates, CEO
You bet.
Brett Larsen, CFO
Thanks, Bill.
Operator, Operator
We'll take our next question from Sheldon Grodsky with Grodsky Associates.
Sheldon Grodsky, Analyst
Good afternoon everybody. I have a few quick questions. Have you tallied up how much the internal investigation and all related items cost you for the year?
Brett Larsen, CFO
Yes, we have. It's in excess of $1.5 million.
Sheldon Grodsky, Analyst
Was anybody fired as a result of the investigation?
Brett Larsen, CFO
We have taken remediation including control design enhancements, maintenance of and control, system upgrades, training, just a whole variety of things that we've already publicly disclosed.
Sheldon Grodsky, Analyst
Okay. And going to the components problem that you're having. Is this primarily emanating from Chinese suppliers, or is this across the board around the world?
Craig Gates, CEO
It's across the board around the world.
Sheldon Grodsky, Analyst
Okay. Thank you.
Craig Gates, CEO
Yeah.
Operator, Operator
We'll take our next question from George Melas with MKH Management.
George Melas, Analyst
Hi. Good morning, good afternoon guys.
Craig Gates, CEO
Hey, George.
George Melas, Analyst
If you take that $700 million of demand in fiscal 2021, how much of that was related to COVID-related products? So what I'm trying to figure out is if you didn't have COVID would specific programs related to COVID like some sort of handheld thermometers and things like that, how much would that $700 million have been?
Craig Gates, CEO
That's kind of hard to answer because COVID hurt some customers really badly and helped other customers a lot. Some of the customers that it helped, obviously we weren't able to get parts from. The question is would that demand have been there? Would it stay there if COVID goes away? I have a hard time answering that question. I don't want...
Brett Larsen, CFO
Or the correlation too.
Craig Gates, CEO
I'm not sure I can provide a definite answer. My intuition suggests that the $700 million might decrease to around $600 million.
George Melas, Analyst
Okay. Okay. That helps a little bit. A quick question for Brett. How much in your guidance for the September quarter did you bake in for internal investigation fees?
Brett Larsen, CFO
We're expecting somewhere in the neighborhood of $300,000 to $400,000.
George Melas, Analyst
Okay.
Brett Larsen, CFO
And again, a broad estimate and that's our best guess at this point.
George Melas, Analyst
Okay. Great. Thanks. And do you think of that you've added, how do you think about what is your revenue capacity right now in your plants?
Craig Gates, CEO
We don't. Because every new win is a new adventure. Some wins are highly square footage intense, and other wins are low square footage intense. So we don't think about it that way.
George Melas, Analyst
Okay. And given constraints that you have, that may be equipment, space, slope when you bid for work, when you choose work that you bid on, is there some emphasis that you have now? Are you trying to bring a certain kind of business to complement what you have?
Craig Gates, CEO
I don't think you'll appreciate the answer to your question, but we look for a business that has a unique process. Would you like me to explain that further, or do you want to move on?
George Melas, Analyst
No, I'm willing to understand. I think it's try to use your design capabilities and add value through that process right?
Craig Gates, CEO
Yeah.
George Melas, Analyst
What percentage of your business has that characteristic?
Craig Gates, CEO
I'd say at least two-thirds.
George Melas, Analyst
Okay. And if you take that two-thirds, Craig, does it have a higher margin than the rest of the business?
Craig Gates, CEO
It appears that the situation varies significantly among different customers and scenarios. It's not entirely accurate to say it always seems this way because there are instances where increased volume leads to tighter margins.
George Melas, Analyst
Okay. That sounds not imputed to me, because it looks like if you have a bigger program the margins would benefit from that.
Craig Gates, CEO
If you have a bigger program your customer gets more interest from people around the world gets a lot of unsolicited bids. And so the competition becomes stiffer…
George Melas, Analyst
Okay.
Craig Gates, CEO
Sometimes. It depends on how unique the process is.
George Melas, Analyst
Right. And that's why you really want the unique process where you add value when you help design?
Craig Gates, CEO
Yeah. It takes us out of the commodity contract manufacturing world and puts us into a different space.
George Melas, Analyst
Okay. So if you look at the wins that you were describing to Bill and maybe you look at your wins in the last 12 months, have they been the bids or wins that you really wanted? I mean, have they been these unique processes where you have certain unique capabilities?
Craig Gates, CEO
Yes. A lot of them have been.
George Melas, Analyst
It's challenging to discuss margins due to supply chain issues, but can you clarify what gross margin you are aiming for since it appears to be above 8%? Also, what do you anticipate for gross margins in the second half of fiscal 2022?
Brett Larsen, CFO
Our goal has always been to maintain a gross margin of over 9%, which is our long-term target. However, we are not currently in a position to provide an estimate for achieving that by the end of 2022.
Craig Gates, CEO
Okay. You can look at it another way and say if we didn't have to deal with all of the supply chain issues we have right now, that number would be easy to hit.
George Melas, Analyst
Meaning if you don't have a supply chain, your gross margin would exceed 9% now, right?
Brett Larsen, CFO
Yes.
Craig Gates, CEO
Yeah.
George Melas, Analyst
Are you able internally to quantify how much freight is costing you more? You can probably do that internal analysis over time.
Craig Gates, CEO
Yeah.
Brett Larsen, CFO
Yeah.
George Melas, Analyst
Okay. Now on freight, your incoming freight is probably in your cost of goods sold and your outgoing freight is in SG&A. Can you talk a little bit about the FX rate?
Brett Larsen, CFO
Let me correct you. Actually, both sides, any freight would be through cost of goods sold.
George Melas, Analyst
Okay.
Brett Larsen, CFO
But often the customer pays freight usually picked up at our facility, and then they would pay freight outgoing to their own distribution center.
Craig Gates, CEO
Of our finished goods.
Brett Larsen, CFO
So typically, we're paying the freight to get components and raw material to our facilities. And then back northbound in Mexico up to El Paso for our customers for them to pick up.
George Melas, Analyst
Okay.
Craig Gates, CEO
The big jump there is – go ahead.
George Melas, Analyst
No, you go ahead Craig. Please?
Craig Gates, CEO
The big jump there is if you're interested in a Board look at how the shipping companies are doing in terms of revenue and profits, and you'll be amazed. A container used to cost somewhere around $3,000 to $4,000 to transport and ship parts from China to the states. That's now up to $16,000 to $18,000 per container.
George Melas, Analyst
Yeah. Yeah, it's amazing. Yeah.
Craig Gates, CEO
And that's when you can get one. And that's when you can get somebody to put it on a boat, and that's when you can get somebody to take it off of a boat and load it onto a train.
George Melas, Analyst
Yes. How much freight cost did you have that you were not able to pass along to customers in this quarter?
Brett Larsen, CFO
We're going to try to recover as much as possible. Many of our manufacturing agreements, in fact, most of them allow us to seek cost reimbursement. At the point in time, there are cost increases that we can't control. Most of that is always a battle. I would just rough guess, I'd say more than half has been reimbursed, and we're seeking for additional reimbursements as we go.
George Melas, Analyst
Just to understand, what you said, 1.5 numbers – you mean $1.5 million?
Brett Larsen, CFO
Sorry, more than 50%.
George Melas, Analyst
More than 50%?
Brett Larsen, CFO
More than 50% of our cost increases related to freight have been reimbursed by our customers.
George Melas, Analyst
And how much would that 50% be? What would be a number for that?
Brett Larsen, CFO
That would be difficult to quantify.
George Melas, Analyst
Okay. Okay. Great. Okay. And – so if your gross margin could be in normal circumstances with your current demand north of 9%, what would be the main factor that would make that difference?
Craig Gates, CEO
It would be the ability to actually build revenue that we could sell. It would be the ability to build it without a bunch of overtime and downtime. And it would be the ability to pay normal shipping costs, and it would be the ability to not have so many increases coming at us at once that we could efficiently negotiate with our customers and pass along those costs that are actually or seen in our contracts, but just because it's in the contract doesn't mean you don't have to go negotiate it and prove it.
George Melas, Analyst
Okay. And then just one final question for me. I mean this has been amazing to track times from an operational perspective. Are you a stronger organization now than 18 months ago because of all that you've had to do? And sort of, what have you learned that will help you become even better in the future?
Craig Gates, CEO
We've significantly improved our ability to forecast and manage uncertainty in the supply chain and mitigate risk. As a result, we're looking to reduce inventories. We've enhanced our flexibility in the factory and improved our communication with customers, emphasizing that collaboration is essential. It's not solely Key Tronic's responsibility to absorb the impact. We've also become more adept at conveying this to customers who face challenges due to past decisions to overly centralize their outsourcing. Navigating these conversations can be difficult, but we have made considerable progress as these situations have become more frequent.
George Melas, Analyst
Okay. Great. Thank you very much.
Craig Gates, CEO
Yes. Thanks, George.
Operator, Operator
We'll take our next question from Bill Dezellem with Tieton Capital.
Bill Dezellem, Analyst
Thank you. Two additional questions. First of all, what's the backlog at the end of June compared to March?
Craig Gates, CEO
We gave up looking at backlog because our customers do it so many different ways depending on the contract we have.
Brett Larsen, CFO
I don't have that readily available Bill. It doesn't mean a lot to us just based on timing of when we actually get purchase orders and forecasts and the likes.
Bill Dezellem, Analyst
So I was under the impression that say two years ago backlog really wasn't that relevant. But as the logistics and supply component issue tightened up then it did become more representative. Is that now changing? And so when the 10-K comes out we shouldn't focus on that like we would have in the past couple of quarters?
Craig Gates, CEO
We've been pretty clear all along, I think is we don't want you to focus on backlog.
Brett Larsen, CFO
You of course can look at it directionally, but definitely not to define how much future growth Key Tronic will have.
Bill Dezellem, Analyst
Great. Okay. Thank you. And then secondarily, with the COVID Delta variant starting to pick up are you seeing any increase in demand from your customers that have products that would benefit from health emergencies?
Craig Gates, CEO
No, we don't see that. I'm trying to think about how to answer because some of the products that experienced a significant increase in demand were over forecasted and are now depleting their inventory. So, I can't confirm if that inventory is being used up more quickly due to Delta or not. We are noticing quite a significant fluctuation between where we were six months ago and where we are now, along with the forecast for the next quarter regarding some of those healthcare products. There was a quick rise followed by a sudden drop as everyone thought COVID was over and inventory needed to be used up, and now there's a potential increase again that might be stronger than what was originally predicted for our Q2, but I can't be certain about that.
Bill Dezellem, Analyst
Thank you. So these customers that do have health care-related products, do they tend to sell them domestically or are they selling them globally? So if Indonesia, for example, has a pickup in COVID, that becomes real problematic; they just shift sales in that direction?
Craig Gates, CEO
Tends towards being global and it's shiftable if that's a word in many cases, but not all, because sometimes packaging and certain features are specific to the location.
Bill Dezellem, Analyst
And would it be fair to guess that the shiftable, I like that term, is really between countries that have the economic wherewithal, and some of these countries that are less economically vibrant just aren't going to be getting the products?
Craig Gates, CEO
No, that doesn't seem to be the factor there that drives it. It seems to be more the demand need for the product.
Bill Dezellem, Analyst
All right. Thank you for taking additional questions.
Craig Gates, CEO
You bet.
Operator, Operator
We'll take our next question from George Melas with MKH Management.
George Melas, Analyst
Thank you guys. Just two quick follow-ups. The customer that you got in the third quarter that you were talking about earlier that required a lot of new square footage; has that customer ramped up in the fourth quarter?
Brett Larsen, CFO
No. We don't expect to have revenue from that customer. I think we've disclosed until the latter half of fiscal year 2022.
George Melas, Analyst
Okay. So that means for that customer you have some cost right now, but you have no real revenue?
Brett Larsen, CFO
Correct.
George Melas, Analyst
Okay. Great. And then just a question about concentration, do you have more than one 10% customer in this quarter or just one?
Craig Gates, CEO
We do not, just one.
George Melas, Analyst
So just one? Right. Thank you very much guys.
Craig Gates, CEO
Thanks, George.
Operator, Operator
At this time, we have no further questions in the queue. Mr. Craig Gates, at this time, I will turn the conference back to you for any additional or closing remarks.
Craig Gates, CEO
All right. Thanks everybody for participating in today's conference call. Brett and I look forward to speaking with you again next quarter.
Operator, Operator
This concludes today's call. Thank you for your participation. You may now disconnect.