Dear Shareholders,  

Fiscal 2011 was a year of strong growth and continued profitability for Key Tronic.  Despite confronting a number of tough challenges, our hard work and sound strategy paid off.

We grew faster than many of our competitors and steadily captured market share.  Our record revenue was $253.8 million, up 27% from the previous year.  Our rapid growth was largely powered by new programs involving both our longstanding and new customers.  At the end of fiscal 2011, we were generating revenue from 30 EMS customers compared to 20 at the end of the previous year.

As we brought new programs into production and grew our business, we faced some difficult obstacles, including industry-wide component shortages, material cost increases and costs associated with mix changes in our program portfolio.   In some cases, our newest programs initially have lower margins than our historic target range.  Together, these factors did constrain our operating performance throughout much of the year. 

By the fourth quarter, the component shortages were behind us and we continued to optimize the product design, production process and supply chain for our new programs.  As a result, we saw marked improvement in our margins in the fourth quarter and achieved another year of solid profitability.  Our annual gross margin was 8% and operating margin was 3%, and our net income was $5.7 million or $0.55 per diluted share. 

During the year, we continued to extend our customer portfolio across a wide range of industries. We won new programs involving electric motor controllers, innovative display devices, fire safety devices, military power supply equipment, mobile device accessories, aerospace, household products, solar power controllers, energy monitors and electronic whiteboards.

As part of our long term strategy, we’re doing more design work for our customers.  Optimizing the new product designs, production processes, supply chains and communication channels is complex.  While most of our new program wins will take many months to move into production, these pre-production engagements help demonstrate our unique expertise and our commitment to quality and service excellence, helping to cement and deepen our customer relationships.

Moving into fiscal 2012, we believe our fundamental strategies remain sound.  While mix changes in our program portfolio and costs associated with ramping up new programs will continue to be part of our business, we expect our sustained focus on controlling costs, augmenting production processes and enhancing our production capabilities will continue to result in profitable growth and to set us apart from many of our peers. 

Despite the current macroeconomic uncertainty, we’ve got strong business momentum and a well diversified customer base, and we expect a number of our new programs to move into production and gradually ramp up.  Recent studies continue to forecast double-digit growth for the EMS market in the coming years.  We believe we’re increasingly well positioned to continue to capture market share and capitalize on emerging opportunities.

I want to express my gratitude to our employees for their unwavering dedication and hard work.  Our valued customers continue to place their trust in us and we feel honored by that trust.  Finally, I want to thank our shareholders for your continuing support.

Craig D. Gates

President and Chief Executive Officer