So those people were either in China or were headed to China and they were going — China driven mainly by costs and we’re willing to accept a lack of flexibility in moving orders in and out, lack of ability to send their engineers into the factory of short term lack of ability to get their parts here and a week rather than a month and a half back of ability to do business in English versus the mix. So they had companies had become used to all that or were ready to endure all that in return for the lowest possible price they could get. A lot of those people are being told it’s too risky, you’re not going to go to China and figure something else out. So they end up knocking on our door, but they had sticker shock when they saw the cost that we were proposing out of rewards plan because the war has planned was configured for a different set of people.
And those set of people were the ones who didn’t want to go to China, knew that they couldn’t live with all the disadvantages I just listed and were willing to pay a little more to be in Mexico and enjoy all the near shore advantages Mexico has to offer, so those people used to make up the majority of our available market share. Now the majority of our available market share on average is made up by the people on the other side of the fence who want to be in China or are not being allowed to go there. So that means that all of the overhead in our factory in Mexico, people overhead, the quality, technicians, the engineers, the folks who worked in scheduling and on the plant for material handlers, program managers all those people that we had built up over the years to provide US-based service levels when added costs were not willing to be paid for by this new set of customers.
And so those are the folks that made up the majority of this layoff, which has never happened before in our history. So those folks are long-term employees of Key Tronic. The wage structure and the laws of Mexico require a significant severance pay off for folks in that category. And you’re exactly right. This is nowhere near the normal type of layoff, but it’s strategically positions the Mexican facility can compete and win as we’ve seen in the last six months, a new breed of customer that represents a very big available market. So that’s why it took longer than normal. That’s why the severance was much higher than normal and that’s why you’re sensing that it was different than normal.
Bill Dezellem: That’s a really insightful. Thank you Craig. And so these — because these are not your standard line workers that you’ll bring back with higher production rates, your cost structure is permanently being lower than is what you’re saying?
Craig Gates: Yes.
Bill Dezellem: Does it somehow also affect the capacity of the facility. And I’m not — not necessarily the layoffs Craig, but the restructuring to have essentially less flexibility. That sounds to me like you’ll have more hours of lines up and running and fewer and less time down with the customer noodling over whether they ought to do something a little different or whatever. Is that correct interpretation or not?
Craig Gates: It is. And in fact we have groomed a very small number of customers who no longer fit into the model that you just described. So it will result in more product being made with less line workers because every time you have to shut a line down and change it over, not only did you have to have a bunch of engineers and quality folks and material handlers out there swapping line over, inevitably, you couldn’t time it perfectly. So you had line workers who were milling around waiting for some part or some process to come up the way it should. So it’s going to turn much more into a bang, bang, slapping parts together. And I don’t want to say that in a low quality news. But it’s going to be a lot more of just run something at high volume than it is switch over every 10 minutes because the customer called up and it’s freaking out.
Bill Dezellem: I’m sorry, go ahead.
Craig Gates: That type of work is migrating back to the states because people are willing to pay even more to get that level of service than they have been in the past.
Bill Dezellem: Fascinating. Okay. Thank you. And then lastly, if we exclude the severance and the winter weather shutdown, then we’re looking at $0.13 of earnings is what would have happened had you not had the one intended event and then the weather that surprised you?
Craig Gates: Yeah.
Bill Dezellem: Okay, great. Well, thank you. And I’ll let others ask additional questions. But thank you for all the time you have given me on these conference calls to ask questions over the last maybe even 60 calls. So thank you. Appreciate it. And Brett, we look forward to working more with you in the future.
Brett Larsen: Thank you, Bill. You’re more than welcome. And we’ve appreciated your insightful questions also.
Bill Dezellem: Thank you.
Operator: [Operator Instructions] Your next question comes from the line of Bob Poole with Bricoleur Capital.
Bob Poole: Hi, guys. So I’d like to apologize in advance, because I’m going to ask some tough questions and make some tough comments. And I hope you’ll — I think they need to be asked and the comments need to be made. So but I do apologize in advance, because this usually a pretty friendly forum. So first of all, I want to sort of wage a protest that the way you present your financial results is totally out of line with — I follow hundreds of companies. And you’re the only one who presents your results the way you do, without making adjustments for things like severance and so forth and presenting your results and your guidance. After things like severance, nobody else does that. And I don’t think that there’s any special pass to financial heaven for being so puritanical in that presentation. Brett, you and I’ve discussed this a little bit. How do you feel about this going forward?
Brett Larsen: Your comments are noted next.
Bob Poole: Okay. So the guidance is very hard to understand. And I’ll tell you why. You have you’re basically projecting flat revenues from the third quarter to the fourth quarter. And on 140 million of revenues, you had a $575,000 loss in Q3. That included 3.7 million of Mexican severance. So that should not exist in the fourth quarter. You’re taking out 10 million a year or 2.5 million of per quarter in Mexican labor that should not be there in fourth quarter. I think the impact of the peso is likely to be — you’ve probably taken out half of your expenses in Mexico. The — if the impact of the peso, assuming it stays around the same level, there hasn’t been a significant, it seems to be pretty flat so far this quarter, that that should be 750 better in the fourth quarter.
