Key Tronic Corporation

Good day and welcome to the Q2 fiscal 2022 Keytronic Corporation conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to 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 the latest 10-K, quarterly 10-Qs, and 8-Ks. 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 the results for our quarter ended January 1st, 2022. For the second quarter of fiscal 2022, we reported total revenue of $134.5 million compared to 128.3 million in the same period of fiscal year 2021. Revenue for the second quarter of fiscal year 2022 related to customer reimbursements for tooling equipment and other expenses increased approximately $10 million when compared to the previous year. For the first six months of fiscal 2022, total revenue was $267.2 million compared to $251.5 million in the same period of fiscal 2021. During the second quarter of fiscal year 2022, the global supply chain, pandemic, and transportation issues continued to disrupt production, including intermittent part supply factory downtime and overtime expenses. In addition, we had a seasonal closure for two weeks at the end of December in our Mexico facilities that limited production time available for the quarter. Legal costs related specifically to the SEC's review of last year's whistleblower complaint totaled approximately $0.7 million during the quarter. For the second quarter of 2022, our gross margin was 7.3% and operating margin was 1.2%. Compared to a gross margin of 8.3% and an operating margin of 2.1% in the same period of fiscal 2021. Note that revenue attributed to customer reimbursements during the second quarter of fiscal year 2022 did not contribute much to our gross margin. For the second quarter of fiscal year 2022, net income was $0.6 million or 5 cents per share compared to $1.6 million or 14 cents per share for the same period of fiscal year 2021. For the first six months of fiscal year 2022, net income was $1.4 million or 13 cents per share compared to $3.3 million worth 30 cents per share for the same period of fiscal year 2021. Turning to the balance sheet, we continue to maintain a strong financial position. As a result of supply chain related production delays in the second quarter of fiscal 2022 and the continued ramp and transfer of new programs, our inventory turns 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 to be more in line with expected revenue as efforts to mitigate the impact of supply chain issues begin to yield improvements and new production programs begin to ramp. At the end of the second quarter, trade receivables were down about $3 million from the prior quarter, reflecting the timing of shipments and improved collections. Our DSOs remained at about 83 days, same as in the first quarter, which reflects both timing of shipments during the quarter and some delays in payments from customers who were also impacted by the pandemic-related slowdowns and restarts in their respective markets. Overall, our balance sheet has total working capital of $176.4 million in a current ratio of two to one. This is down from the prior quarter, largely due to growing customer production requirements and onboarding new programs. Total capital expenditures were about $1 million for the second 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 $6 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 third quarter of fiscal 2022, we expect to report revenue of approximately $130 million to $140 million and earnings of approximately 5 to 10 cents per diluted share. 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. 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 improve our total backlog. However, supply chain Supply chain disruptions and the pandemic continue to impact our business during the second quarter and remain risks in future periods. However, 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 continue 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. While we continue to face the stiff headwinds from worldwide supply chain challenges in the pandemic, we're pleased with a successful ramp of new programs and our expanding customer base in the second quarter of fiscal 2022. During the second quarter, the industry continues to face persistent worldwide storage 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 second 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 industry-wide labor shortages. In the face of all these challenges, we continued winning new customers and ramping new programs. During the second quarter, we won new programs involving industrial robots, lighting control, disinfection, food production, and energy management systems. We also announced a significant new program win with one of the world's leading power equipment companies, for which we expect to begin manufacturing in the first quarter of fiscal year 2023 and, once fully ramped, could contribute approximately $80 million in annual revenue. We were selected in large part because of our design and manufacturing expertise to help then accelerate introduction of new products as well as to enhance their ability to increase product availability to fulfill demand. This new relationship represents an important expansion of our customer base. We would not have won this many new programs without our design capabilities and our multi-region footprint, which is designed to be the ideal solution to our customer supply chain issues. During the second quarter of fiscal 2022, we saw a significant increase in production across our UBS-based facilities. In fact, over the last three quarters, our Midwestern facilities have one business which we expect will result in an increase of over 35% in annual revenue generated by those facilities by this time next year. Moreover, production at our new Vietnam facility continues to grow, and we 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 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 overconcentration of Asian supply and for onshoring to North America, particularly for those companies with programs in the range of $5 million 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 the geographic markets for higher volume products. We also attract the companies that have been overly concentrated with an Asian source and hence are more likely to have lost engineering control. 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 a decade of developing custom processes for a staggering array of products, we can onboard just about any product imaginable. Moving into the third quarter of fiscal 2022, significant uncertainty still surrounds the continuing disruptions to global supply chains for key components and the threat of the 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, in the attractiveness of doing business with an outsource partner who can minimize their risk 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.

Thank you. If you would like to signal with questions, please press star 1. on your touch tone telephone if you're joining us today using a speakerphone please make sure your mute function is turned off to allow your signal to reach our equipment again that will be star one if you would like to signal with questions star one and our first question today comes from Bill Deslam with Titan Capital

Thank you. So in the release, you noted the six new program wins, one of which was $80 million annual revenue. Congratulations. The other five, how would you characterize the size of those, please? From $5 to $15 million per year. For all five of those? Yep. Great. Thank you. And then would you characterize the supply chain situation in more detail than you did in your opening remarks and maybe how it changed over the last quarter, where you're at today? And I'd love to ask kind of when you see this returning to normal, but maybe just what you see coming maybe is the more appropriate question. OK.

There's two sides to that question, and I want to be clear on that because it has important effects on our outcome. The side that many people don't think about, at least for our business, is our customers' understanding of the situation. In the last year to a year and a half, we've gone from denial and anger, it's almost like five steps a morning, I guess. But we've gone from denial and anger to acceptance to a willingness to plan and deal with the situation that we face today. So our customers, as an average now, are willing to give us much longer binding forecasts against which we purchase components are willing to much more quickly agree to short-term increases in component costs whenever we find some component on the gray market. It used to be probably two-thirds of that time that mining that we had done would go unfulfilled because it took our customers a long time to decide if they wanted to spend an extra you know, 5x the normal price of the component to get that component in. So that's going quite a bit better for us now. So that's kind of the one side of the teeter-totter is how the customers are reacting in dealing with the component shortages. Then actually there's another side of it, so it's a three-way teeter-totter. That is how the customers are dealing with ongoing price increases. We have been more successful in passing along price increases that are fair, but at the beginning of this, it was very hard to convince our customers they were fair. Now that this has become common knowledge and accepted, people have seen the inflation numbers People are themselves having a hard time hiring staff and keeping it. So that side of the equation too has gotten better, not because the situation has improved, but because our customers understand and accept the situation more than they used to. On the other side of the equation, the component availability, I'd say, is stabilized. It hasn't stabilized in a great place. Excuse me. But it has stabilized. So lead times are still a year to a year and a half. But they haven't continued to balloon like they were doing. And there are less, although still quite a few, surprises on a day-to-day basis when somebody calls us and says, hey, that shipment that was supposed to leave today isn't going to leave for six months. So I wouldn't say on the supply chain side things have gotten better, but I'd say that they've stopped getting worse. And as far as when I think this is going to turn around, I don't really know. Our politicians continue to do crazy stuff. I think the most, I don't know, the one that really gets under my skin is making all of the ships in LA Harbor go out and steam around the ocean so they can improve the way it looks from the air. But there's just a number of examples where I'm not sure what's going to happen because I can't see the logic behind a lot of what's going on. So that's my answer, Bill.

Thank you, Craig. Do you see in the next, let's say, three months between now and when we talk next, that this is going to continue in this stabilized mode, or do you feel like we're at a bit of a transition where we could see a modest improvement begin in the next three months?

I think you have to be optimistic to say it's not going to get any worse and it's going to be stable for a while. I certainly wouldn't predict that it's going to get better in the next three months.

And your guidance with seeing revenues increase from the 135 to the, gosh, let me make sure I get your guidance here correctly, the 130 to the 140, but the 135 or 134 you did this quarter did include some customer reimbursements. So that uptick that you're seeing, is that coming about because of components that were ordered many months ago and now is coming together? Or is this a function of products being built that don't have the same lead times?

It is more the combination of the three the three-sided teeter-totter. I wish I hadn't started with that analogy, but I'm stuck with it. Where we're at for this quarter is for the first time since all this began, the numbers we're projecting are all pretty much cleared in terms of parts showing up per plan. The last probably four or five quarters We were trying to get parts confirmed. We believed we were going to get them confirmed, and we didn't get them confirmed. Whereas right now, we're able to look out probably two quarters and see that if we miss our numbers, it will be only because we got a surprise phone call. Whereas in previous quarters, it could have been we got a surprise phone call or an anticipated confirmation did not come through. So is that clear to you, the difference?

It is. So if I'm hearing this right, your guidance is more conservative this quarter because you have been given, I'll call them promises, that the components will be there and the only reason you would miss the revenues is if those promises don't come through, whereas in prior quarters you had You had made some assumptions. Sometimes your assumptions were accurate, but if they weren't, then that was a revenue risk.

Yeah, and I don't know if I'd call it more conservative because we're trying to run the same path every time we give you a number, but the situation has changed, as I said previously. So maybe there's less... Less variability, the standard deviation has probably decreased a little bit, even though we're still in the confidence. I don't know. I don't know, whatever. That's why I tried to give you the long explanation, because I don't think just saying more or less conservative is the right word. But anyway, that's the situation.

I think I am understanding. Thank you. Let me switch, if I may, to the U.S. facilities. and you mentioned that they had a good sales increase. How much were their sales up in this quarter versus the year ago fiscal Q2?

Not much. They've been pretty flat for a long time, probably three years.

And so this increase that you are anticipating and the business that they are winning, that's a meaningful change. change in what's happening with those facilities.

Definitely.

I'll ask one more question and then get back in line. So what in your mind has changed leading to the, what I think, 35% or so anticipated revenue growth with the U.S. facilities?

Everything that we've talked about has come to fruition. So it took a year and a half for people to decide that this Asian supply chain risk wasn't going to go away. It took people the first year of the Biden administration to realize that the Asian political situation was not a administration-specific issue. It was more an awakening of the economic certainties that are operating now. And it just takes time for people, once they've made that realization, to survey the market, figure out that Keytronic is standing there with open arms saying, yeah, we figured this was coming. Welcome aboard. And then once they realize that, it takes another couple months for quoting and site tours and all that. So this is pretty much exactly what we hoped and thought would happen. The real question we're asking ourselves is, does it continue at this pace, or did we pick off a spike of people who were the most desperate to find an answer, and it'll go back to a more steady rate of growth. I think it's going to continue, but I'm biased.

Now, that's helpful. We appreciate your perspective. I'll get back in line.

Okay.

Once again, if you would like to signal with questions, that is star 1 on your touchtone telephone. Again, that is star 1 if you would like to ask questions. And our next question will come from Bill Deslam with Titan Capital.

All right, I guess I got in the back of a line of zero. So let me continue down the path if we could. In a normal environment, assuming that one day we do return to that and you have $130 million of revenues, Would you agree with this math that essentially your SG&A and R&D would be similar, except you would not be paying $700,000 to lawyers for the inventory SEC thing, and you'd have roughly 9% gross margins and 25% tax rate, and that would ultimately lead you to something like 23 cents a share as a pinpoint number, but let's just call it 20 to 25 cents a share of earnings in a quarter or working up between 80 cents and a dollar per share for a full year at the 130 level. Is that essentially a correct assessment of the business model or am I missing some important swing factors?

I'd say you've got that pretty well sussed out. It's not something that you can say is going to happen for sure because at 7% inflation, that means we have to be successful in passing all that through to our customers. If you continue to see McDonald's close down because they can't hire people, we're not going to be able to get enough people to do it. you assume all that away and say we're back to normal, then your model is correct.

I recognize there are some what used to be easy assumptions and they seem a little more lofty these days. Let me take this one step further. I think, Brett, you had commented that you're at unprecedented demand and you were at greater than $160 million of demand, which which would be meaningfully above the $130 million that I just used with my simple math. Is it a correct assessment that there are some economies of scale, meaning that the business model, again, assuming away all of those factors that are difficult at the moment to assume away, but that you would then have some leverage in the business model on the SG&A and and R&D side, and frankly, maybe even the gross margin side?

I'd say that probably, maybe, but I'd also say that you don't even need to assume any of that to come up with profit numbers that are pretty startling. If you can get to $160 million a year, I mean a quarter in revenue.

Understood. I'm totally in alignment. So I'll take the bait and ask, what is it going to take to reach that 160 quarterly revenue run rate? Do we just need to wait for some time to pass because you've already ordered parts at these levels, and so it's just simply a matter of time, or are there other factors that need to be taken into account?

Remember, it's not just parts, it's people.

Hard to order people.

Yeah, you can't order people ahead of time. So that's the big issue is what's going to happen with the labor supply in the states and in Mexico, as well as the componentry.

All right, thanks for the reminder. It's easy for me to be myopic on the one issue. Let me... Anything else that you would like to add to that? Nope. All right. Well, we will anxiously await you ordering the parts and finding the people to generate that $160 million of quarterly revenue.

Not quite as anxiously as I will be, but we'll be in this together.

I understand. Let's switch to Vietnam, if we could, please. I haven't paid attention to Vietnam and their COVID lockdowns. I know they in the past had been pretty strict. What's the update there and how are your existing and separately your new customers or new prospective customers viewing moving product into the Vietnamese facility?

Okay, I'm going to answer a question that you should have asked, too, along with this. The Vietnam situation is still tightly locked down, even though they have opened up the actual paperwork and testing and everything required to get in there is still really, really hard to get past. So it's going to be, I think, another quarter or so, depending on what happens with the next strain of COVID, before we can actually start to unlock all of the potential of Vietnam. The programs that are there are running great. We have won a couple of programs with our customers. actually giving us business there without ever actually seeing the site other than on video tours. So we continue to believe that Vietnam has a really good future. It's just that we can't get people in there yet to add new business. The question you didn't ask is the future of our Shanghai operation, which is also pretty encouraging. We have never really been able to crack the code of China business built in our Shanghai plant to stay in China. And over the last year, we've won a number of new pieces of business. One of them we announced in this sixth, this quarter, that are going to be built in Shanghai and shipped to a Chinese factory and were won The business development was performed by people in our Shanghai facility. So that's one of about four new business wins there over the last three quarters that are hugely encouraging to us for the future of the Shanghai plant too.

Craig, what has changed to lead to that? Because I have historically been under the assumption that China was producing for somewhere else in the world, not producing for China, or I should say your Shanghai facility.

Yeah, that's been the case. And we've had to make quite a few operational and... procedural, strategic, structural changes to the way we run Shanghai to make it a viable competitor for Chinese business. There are a lot of unique requirements for the Chinese market that you can't fulfill from the States. So we made those changes, took a risk, and it turned out to be successful.

Congratulations. Let me switch to a different angle on that that I haven't thought of before, so apologies for this question maybe not being well thought out. But given the amount of business that we hear about moving away from China, that seems as though it would lead to excess or at least additional capacity being available in China. With that in mind, why have you won... four different program wins with my theorized additional available capacity, probably by Chinese firms.

Well, I don't want to be flip. So I'll just say it's a very good facility. We've been running it for over 20 years. It's backed by the design team here at corporate. So there are some attributes that our Shanghai facility has that are not all that common on the competition in the competitive landscape in China.

That's helpful. And so are these four wins for Chinese companies selling in China, or are they for... companies outside of China that want to build in China to sell in China?

Both.

Excellent. I'm going to ask another question since the line didn't seem to be very long, or the queue, and you are welcome to kick me off if you would like here at any point. The customer reimbursements that you referenced, I think this is the first time that we've seen that called out in one of your press releases. Would you discuss kind of what the dynamics there are and what's different now?

Well, that's completely a result of new business wins that then require custom tooling to be made, designs to be completed, and custom equipment to be purchased. And all of that is reimbursed for us by our customers. So that's why there's not much profit on it, but it's a harbinger of production to come.

So we should view this as a very favorable indicator of the future.

Of the long-term future, yeah, because these programs, they're big. So the $80 million one won't start production until late summer, but tooling is already being purchased and equipment is already being purchased that will be used in the ramp of that program at the end of the summer. And that's not the only program that was in that bucket of reimbursed tooling and equipment.

And is it fair to say that any customer who is going to spend money on tooling ends up being pretty serious? I mean, they're moving forward. And I'm really trying to contrast this to, I think, what's pretty well known in the industry as more program wins than actual... new business that ramps, that somehow it just ends up disappearing?

Well, for sure, if somebody plunks down $5 million for tooling, it means that they have every intention of using that $5 million of tooling.

Right. All right. Stating the obvious, I guess. Thanks for being polite about that. Let me... Let me shift, if I could, to the customer 80 million.

Before you do that, Bill, there's kind of a poster child case that's going on that's another chunk of change in that it's actually 20 million of customer reimbursements last quarter in total. And this is a customer who had for years purchased their product out of China and actually had little to no manufacturing and engineering expertise. So that program will take us probably two years to move into our facility in Juarez. In that case, the customer is actually backstopped us for a lease on another 100,000 plus square feet. We'll be purchasing close to $10 million worth of specialized equipment to build that product. And we'll spend a year learning with us how to build that product since they the people who knew how to build it have kind of drifted off as their production was more and more in China. And this is kind of a poster child for a number of opportunities that we're in the midst of hopefully finalizing of companies like that who are in essence branding and ideation companies that need a partner to replace what has become too risky with their supply chain spread out across the world. So that's why I say it's a long-term upside when you see a big investment happening with us. It could be a two-year lag between the time they spend $10 million and the time we start cranking out product.

That's really helpful. Thank you. So you mentioned you're hoping this is... one of the first. And this sounds quite large. Like you say, if you're plucking down 10 million, that's no small number. Are the additional opportunities that you are pursuing of this same size? Or is that one unusually large?

I would say they tend towards that size.

So in essence, the ones that it's important enough to them to buy equipment on behalf of their contract manufacturer, those are the customers that tend to be larger. And it sounds or seems like they would also be stickier once they ramp.

Yeah, they're for sure stickier, and they're also what's the right word? It's very clear to them that what we've built here in the company starts to become their only answer when they're looking for somebody who's interested in an $80 million project, somebody who has experience learning how to build everything from toilet bowl cleaners to slot machines, somebody who has a decade and a half of pulling projects out of Asia and moving them into the States. Somebody who has a design team that can work with their ideation group to bring their designs into production. Somebody who has experience in working with the Asian soon-to-be X source in regathering the data and expertise required to make the product. When you start checking off all those boxes and looking across the competitive landscape, you come up with Keytronic, and that's about it.

And so if that's the case, as opposed to just a supplier, you become more of a partner? Is that a fair speculation?

You bet.

Well, we look forward to seeing that develop. And maybe that's a good segue to the $80 million win that you announced with the power equipment company this quarter. Would you walk us through how that developed and why you were the one who was ultimately chosen?

So that's a good poster child. That company originally hired a consultant firm to try to help them find somebody because they were not having any luck finding it on their own. They needed design skills in both metals and plastics. They needed tooling, acquisition, and design. and try-out skills. They needed commodity specialists that could deal in the worlds of metals and plastics and other things that I'm not going to mention because they'll give it away. And by the time, I mean, it took a year for us and them to get to know each other well enough that we could lay out a winning proposition both for them and their end customers. So that will be a sticky program because it's going to be rough to find somebody else like us to do that in the future.

And you said this one is going to begin in the summer?

Late summer.

So late in fiscal Q1?

Yep.

And how, as you currently envision the ramp to take place, how do you go, or what's the slope of going from starting late Q1 to one year at a full 20 million per quarter run rate?

Again, God is punishing us by answering our prayers, so it's a steep ramp.

So since I just sit behind a desk and don't actually do any real work, does a steep ramp mean that by the December quarter you're at $20 million, or is a steep ramp over the course of a year?

No, a steep ramp is over a quarter.

So literally, this September quarter, you could start producing and be at a $20 million rate. revenues from that customer in the December quarter?

That's what we're hoping.

Excellent. Well, I think I will leave it there because that takes us pretty darn close to that $160 million that we talked about earlier. Thanks for taking all my questions.

You bet. Thanks, Bill.

And our next question will come from George Malas with MKH Management.

Hey, guys. Hey, George. And thank you, Bill, also for all your great questions. They're always a pleasure to listen to. Just a quick question on CapEx. CapEx was relatively low this quarter, and I think that you said, you guys, Brett, I think you said you expect it to be $6 million this fiscal year, which I think is a slight dip down from the previous forecast. And on this strong revenue and revenue growth, it seems CapEx is coming down. So something is working right there. Can you sort of explain that?

Yeah, I think we've mentioned previously, George, that we've got capacity. And we're also, as Craig mentioned, being reimbursed for program-specific equipment. So the combination of those two things... We're monitoring it closely, but our intent is to have less CapEx this year and see some revenue growth.

Okay. And you expect that to continue in fiscal 23? Was it too early to tell?

That's too far. That's too far, George. I mean, you know, typically we're spending $8 to $10 million per fiscal year in CapEx and My expectation is that it would return to something close to that in the next fiscal year.

Okay. And then just to understand the reimbursement, the reimbursement this quarter, you think dollars, what have they been in the past few quarters, in the last three or four quarters?

Not that high. That was one of the reasons why we disclosed the year-over-year change is that this quarter in particular was significantly higher than even some of the sequential quarters that we've just gone through.

Is it right that it was roughly 20 million and it's roughly 10 million higher than a year ago?

Uh, I know, let me, it's roughly, um, it is 10 million higher than it was a year ago. And any one particular quarter we'll have five to 10 million.

Okay. Can you see just how much it was this quarter? Just so we can understand that.

Uh, just over 15.

Okay, so if we sort of normalize for that, it means that we can see sort of the production delays and issues with being able to produce as we pack that out. Yes. Okay, that's it for me. Thank you, guys. Thanks, George. Thanks, George.

Thank you. Our next question will come from Sheldon Grodsky with Grodsky and Associates.

Good afternoon, everybody. I have a few questions, but they'll be quickies. When do you expect your legal expenses to disappear, if they ever will, regarding the inventory issue?

We have no comment on that.

Okay. Okay. Great. Okay. I noticed that your average shares outstanding went down for the quarter. Is that just because the stock price went down, or did you buy back any shares?

We did not buy back any shares.

None? Okay. There was a big jump in inventories, I guess probably because you were able to get something, but are you hoarding any inventory at this point?

No. Do you want to buy some? Yeah. We are not hoarding. This is all a result of being able to get all but one part, and then we can't build a product, and all the rest of those parts sit there unused.

That is a bad reason for having that. And one more question. When your customer reimburses you for the equipment, is it going to be his equipment or your equipment when the project is done?

It will be his equipment when the project is done, but historically, by the time the project is done, the equipment is all used up anyway.

Okay. Okay, that'll be it for me. I just had a few quickies here.

Okay. Thank you. Thank you.

Thank you. And that does conclude the question and answer session. I'll now turn the conference back over to you.

Okay. Thanks again, everybody, for participating in today's call. Brett and I look forward to talking to you again next quarter. Bye.

Well, thank you. And that does conclude today's conference. We do thank you for your participation. Have an excellent day.