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.