Key Tronic Corporation

Good day, ladies and gentlemen. Welcome to the Q1 Fiscal 2021 Keytronic Corporation Conference Call. This conference is being recorded. At this time, I would like to hand things over to Mr. Brett Larson. Please go ahead, sir.

Good afternoon, everyone. I am Brett Larson, Chief Financial Officer of Keytronic. I'd like to thank everyone for joining us today for our investor conference call. Joining me here in our 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 for 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 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 ended September 26, 2020. For the first quarter of fiscal 2021, we reported total revenue of $123.2 million, up 17% from $105.3 million in the same period of fiscal year 2020. The increase in revenue was due to successful ramp of new customer programs and increased demand from existing customers. However, partially offsetting the increase in revenue during the first quarter of fiscal year 2021, Our revenue was constrained by labor shortages at our facilities in Juarez due to COVID-19 pandemic and the cost of public health measures implemented as a result of the pandemic. During the first quarter of fiscal year 2021, we incurred additional costs caused by the COVID-19 crisis, totaling approximately $1.4 million, or 10 cents per share. These expenses are related to increased compensation At our warrants facility, in order to attract and retain employees, we need to manage our growth, as well as preventative measures and equipment for employees at all of our facilities in the U.S., Mexico, China, and Vietnam. The pandemic's adverse impact on revenue expenses also reduced our margin and earnings. For the first quarter of fiscal 2021, gross margin was 8.1%, and operating margin was 2.3%. compared to gross margin of 8.8% and operating margin of 2.4% in the same period of fiscal 2020. For the first quarter of fiscal year 2021, net income was $1.7 million or 16 cents per share, compared to $1.6 million or 14 cents per share for the same period of fiscal year 2020. Turning to the balance sheet, we continue to maintain a strong financial position. As a result of labor shortages in our waters facility, causing production delays in the first quarter of fiscal 2021, and a continued ramp in transfers of new programs, our inventory increased 4% from the prior quarter. In future quarters, we expect to see our net inventory terms increase to be more in line with expected revenue. At the end of the first quarter, trade receivables were up $5.4 million from the prior quarter, reflecting the increased revenue levels and the timing of shipments in the quarter. Overall, our DSOs increased to be about 64 days. Overall, we have a healthy balance sheet with total working capital of $154 million and a current ratio of 2.5 to 1. Nevertheless, we feel it is prudent to preserve cash where possible should the pandemic again disrupt operations for an extended period. In this light, we increased our total credit facility up to $98 million to manage pandemic risk and give us more flexibility to ramp up production in the coming months. Total capital expenditures in the first quarter of fiscal 2021 were approximately $3.2 million, and we expect CapEx to be about $8.5 million for the full fiscal year. While we are keeping a careful eye on expenditures during fiscal 2021, we plan to continue to invest in our production facilities, SMT equipment, and sheet metal and plastic molding capabilities as well as in efficiency improvements in our facilities as we prepare for growth. For the second quarter of fiscal year 2021, we currently expect to report revenue of approximately $125 million to $135 million, and earnings of approximately 15 to 25 cents per diluted share. That said, there's 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. While our facilities in the U.S., Mexico, China, and Vietnam are currently operating and rigorously following current health guidelines, uncertainty of the possibility of future temporary closures, customer fluctuations in demand and cost, and future supply chain disruptions during the rapidly changing COVID-19 environment could significantly impact operations in coming periods. Due to the heightened risk associated with this pandemic, we may issue updated guidance during the upcoming quarter. In summary, while the COVID-19 crisis continues to cause disruptions during the first quarter and remains a risk in future periods, we are encouraged by our continued growth as we move into the second quarter of fiscal 2021 and by our prospects for future growth. The overall financial health of the company is strong, and we believe that we are increasingly well positioned to win new EMS programs and continue to profitably expand our business over the longer term. That's it for me, Craig. Okay, thanks, Brett. We're pleased with the successful launch of new programs rebounding customer demand and a strong revenue growth in the first quarter of fiscal 2021. While some of our customers continue to reduce demand due to the pandemic and related economic slowdown, several customers significantly increased demand in the first quarter of fiscal 2021, including programs for healthcare, industrial controls, and telecommunications. During the quarter, we also won new programs involving audio and video editing systems indoor air quality systems, utility meters, warehouse management, and automation technologies. In spite of the trade disputes between the U.S. and China and the worldwide supply uncertainty for electronic components, our China facilities are fully operational again, and we saw increased demand from some China-based customers. Uncertainty over trade tensions between the U.S. and China combined with the disruptions caused by the pandemic have further intensified a growing consensus among many of our customers and potential customers as they see more clearly that the total costs and risks of over-reliance on manufacturing in China are actually higher than for a more balanced mix of China and localized supply chains. Shortened supply chains supported by localized vertical integration are becoming more widely understood and highly desirable. Moreover, our customers and potential customers increasingly want their IP maintained in the U.S. where there is more enforceable ownership. As we discussed before, Keytronic is ideally situated to benefit from these global trends of moving away from over-reliance on China manufacturing. We continue to invest in our Mexico and U.S. facilities. Furthermore, our new facility in Vietnam continues to ramp up with new business and new customers. These new customers are putting their business in our Vietnam facility without the normal prerequisite facility audits, which further demonstrates the demand for supply alternatives to China. A growing number of existing and new customers are transitioning from China facilities to our expanding facilities in Mexico, Vietnam, and the United States. Facilitated by our centralized command and control, we can drastically reduce the time and risk associated with such transfer. At the very least, diversifying the geographies of our customers' manufacturing sources allows some flexibility to respond to the rapidly changing political and health landscape. Moving into the second quarter of fiscal 2021, the COVID-19 crisis continues to present macroeconomic uncertainty and multiple business challenges. But we continue to see the favorable trend of contract manufacturing returning to North America. Potential customers who were concerned during the trade disputes last year have been further pushed in our direction by delays and uncertainties related to the virus. At the same time, we remain focused on protecting the health of all of our employees by adhering to current health guidelines as well as increasing retention of available employees. As Brent noted, we are incurring increased expenses related to the pandemic, including increased wages and bonuses at the Warris facility in order to attract and retain the employees that we need to meet our growing demand. as well as preventative measures and equipment for employees at all of our facilities in the U.S., Mexico, China, and Vietnam. While our supply chain remains vulnerable to temporary disruptions caused by a flare-up of the virus and associated lockdowns and regulations, we've previously been able to work around temporary disruptions or closures. We've also managed transportation complexities and disruptions to our supply chain via alternative sourcing, air freight, product redesigns, and alternate component qualifications. We're closely monitoring inventories and will continue to use safety stock as much as possible to ensure minimum interruptions. Nevertheless, while we've been able to find solutions for most of the COVID-related challenges to date, clearly none of us are out of the woods with respect to the global pandemic. In closing, I want to once again thank our great employees for their dedication during these challenging times and for adhering to our strict guidelines for social distancing, wearing of masks, and other recommended precautions during the pandemic. Because of their courage, hard work, and strategic foresight, we expect continued revenue and earnings growth in the second quarter, and we continue to invest in new capacity to prepare for long-term growth. Let me assure you that we will continue to make protecting the health of our employees our highest priority. I also want to wish you and your families good health and safe passage during the pandemic. This concludes the formal portion of our presentation. Brett and I will now be pleased to answer your questions.

Thank you. And ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute button is turned off to allow your signal to reach your equipment. Once again, everyone, please press star 1 if you have a question. We'll go to Bill DeZellum with Tyson Capital Management.