Key Tronic Corporation

Good day, and welcome to the Keytronic 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 Larson, Chief Financial Officer. 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 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 , Corley 10 and 8 . 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 3rd, 20 of 21. 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 with logistics. For the fourth quarter of fiscal year 2021, net income was $200,000 or approximately two cents per share compared to $1.5 million or 14 cents per share 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 and financial control processes. We continue to cooperate with the SEC regarding this matter, which is expected to result in additional expenses in 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% an 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 39 cents per share. compared to 4.8 million or 44 cents 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 terms 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 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 to 1. Nevertheless, we feel it is prudent to preserve cash and expand liquidity where possible. In this light, we expect to increase our credit facility with our existing bank up to 120 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 risk 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 and backlog, we expect that 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 7 to 12 cents per diluted share. Nevertheless, 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, 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 demands 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 continue to impact our business during the fourth quarter and remain risk in future periods, we are encouraged by our growing backlog as we move into the first quarter of fiscal year 2022 and by our prospects 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?

Okay. Thanks, Brett. Despite the stiff headwinds during the past year, including the pandemic, multiple factory shutdowns, 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 continue 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 work hard to keep our employees safe. implementing a variety of procedures and stopgaps to address COVID-19 and mitigate its spread. We were also impacted by an unprecedented winter storm that shut down a Warris 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 U.S., endemic fears in Mexico, and government oversight in Asia. Now that we're sufficiently staffed up for 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 because of 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 this many programs without the opportunity to first ramp the programs in our U.S. 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 1 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've 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 Asian 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 Keytronic based on our North American footprint. And thirdly, new customers with both existing and new programs have also selected us based upon our footprint and 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 a customer seeks to recreate an existing supply chain, the risk and effort is multiplied by the number of new suppliers that must be identified, qualified, bid selected, ramped, and managed. We believe Keytronic is unique among our tier two competitors in that we offer a one-stop shop for molding, metals, print circuit boards, assembly, test, and distribution. Additionally, many of our new customers' products require a manufacturing process that is unique to their product. Keytronic 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 the 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 cede their design control to their outsourced partner. The macroeconomic events of the past year have forced many companies to more fully recognize the significant impacts an elongated supply chain can have on both costs and availability, the risks of IP appropriation, and the attractiveness of doing business with an outsource partner who can minimize their risks on all these factors. We structured Keytronic to be the clear answer to the true costs and risks of over-concentrated 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 tilted 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 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.