Key Tronic Corporation

Good day and welcome to the Keytronic Corporation first quarter fiscal 2022 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brett Larson. Please go ahead, sir.

Thank you. Good afternoon, everyone. I am Brett Larson, Chief Financial Officer of Keytronic. I would 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 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 10Q, 10K, and 8Ks. 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 ended October 2, 2021. For the first quarter of fiscal 2022, we reported total revenue of $132.8 million, up 8% from $123.2 million in the same period of fiscal 2021. We are excited to see measured success in revenue growth in new and existing customer programs. While demand has remained strong for both new and existing customers, revenue for the first quarter of fiscal 2022 continued to be significantly constrained by challenges related to the global materials supply chain, transportation, logistics, and the pandemic. The global supply chain issues and pandemic continued to cause factory downtime, overtime expense, and increased transportation costs, which had an adverse impact on our margin in earnings. In the first quarter of fiscal 2022, gross margin was 7.6%, an operating margin was 1.6% compared to a gross margin of 8.1% and operating margin of 2.3% for the same period of fiscal 2021. For the first quarter of fiscal 2022, net income was $800,000 or 0.8 million or 7 cents per share compared to $1.7 million or 16 cents per share for the same period of fiscal 2021. Earnings for the first quarter of fiscal 2022 were also impacted by legal and other professional services expense related to the previously disclosed internal financial reporting investigation of approximately $0.4 million during the quarter. Turning to the balance sheet, we continue to maintain a strong financial position. As a result of supply chain related production delays in the first quarter of fiscal 2022 and the continued ramp and transfer of new programs, our inventory terms decreased from the prior quarter. We are carefully balancing customer demand and the likelihood of successfully bringing in parts in time for planned production. The production planning now requires that we look out much further in the future than in historical periods. In future quarters, we expect to see our net inventory turns increase to be more in line with the expected revenue. At the end of the first quarter, trade receivables were up $16.1 million from the prior quarter, reflecting the timing of shipments later in the quarter. Our DSO increased to about 83 days. up from 65 days a year ago, which of course reflects both the timing of shipments during the quarter and some delays in payments from customers who were also impacted by pandemic-related slowdowns and restarts in their respective markets. Overall, our balance sheet has total working capital of $184 million and a current ratio of 2.3 to 1. This is largely due to growing customer production requirements and onboarding new programs. Nevertheless, we feel it is prudent to preserve cash and expand liquidity where possible. To this light, you will recall that we increased our credit facility with our existing bank up to $120 million of total availability subject to our borrowing base. This gives 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 $1.8 million for the first quarter of fiscal 2022. We're keeping a careful eye on expenditures during fiscal 2022 and expect our capital expenditures for the full year will be around $8 million. We plan to continue to invest selectively 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 new program launches, we expect that delays in the supply of key components will continue to limit production and adversely impact operating efficiencies. For the second quarter of fiscal 2022, we currently expect to report revenue of approximately $125 million to $135 million and earnings of approximately 3 to 8 cents per diluted share, which includes an estimated 3 to 5 cents of legal support expenses from the previously disclosed financial review in a week of holiday shutdown later in the quarter. That said, we cannot predict the outcome of any regulatory actions related to the subject of the internal investigation. We're also 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. 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, we continue to see increased demand and new customer wins. However, supply chain disruptions and the pandemic continue to impact our business during the first quarter, and remain risks in future periods. But we are encouraged by our growing backlog and by our prospects for future growth. New sales prospects and recently won programs continue to increase our customer demand to unprecedented levels for Keytronic. The overall financial health of the company appears 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. While we continue to face the stiff headwinds from worldwide supply chain challenges and the pandemic, we're pleased with our positive momentum moving into fiscal 2022. We reported 8% year-over-year growth for the quarter and continue to ramp up new programs and win new business. During the first quarter, the industry continues to face 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 first quarter in excess of $160 million. Unfortunately, we do not expect the supply chain disruptions to improve significantly in the near term. We also struggled with increasing labor costs and shortages of production staff at some of our sites as a part of the broad-based labor shortages. In the face of all these challenges, we continued winning new customers and ramping new programs. During the first quarter, we won new programs involving industrial testing equipment, medical diagnostic products, and pharmaceutical water treatment. 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 offshore. You will recall that last year we increased our capacity to over a million square feet in Mexico. Moreover, production in our new Vietnam facility continues to grow, doubling its workforce from a year ago and generating profits. We continue to expect big things from our Da Nang facility in the future. 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, intensifying political tensions between China and the U.S., increasing Asian production costs and time to market, and a weakening U.S. dollar. These factors have driven a significant increase in our business. Keytronic has emerged as the ideal answer to over concentration of Asian supply and for onshoring to North America, particularly for those companies with programs in the range of $5 to $100 million. We provide everything needed to make supply chain diversification easy, less risky, and less costly. Our solution set provides companies with both local sources for low volume products and low cost sources close to geographic markets for higher volume products. We also attract the companies that have been overly concentrated with an Asian source and hence have lost engineering control of their product. We can facilitate the move of production from a competitor to our site, enabling the smooth transfer by providing design and production engineering services to those companies who no longer have that capability. Our vertical integration can lessen the risk, time, and cost involved in a transfer. Moreover, after decades of developing custom processes for a staggering array of products, we can onboard just about any product imaginable. Moving further into fiscal 2022, significant uncertainty still surrounds the continuing disruptions to global supply chains for key components and the threat of a pandemic. 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 recent Macroeconomic events continue to force 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 of these factors. These market trends and our capabilities should continue to power our growth over the long term. This concludes the formal portion of our presentation. Brent and I will now be pleased to answer your questions.