Key Tronic Corporation

Good day and welcome to the Q3 fiscal 2022 Keytronic Corporation conference call. Today's conference is being recorded. At this time, I would 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 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 10Q, quarterly 10K, quarterly 10Qs, 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 April 2, 2022. For the third quarter of fiscal 2022, we reported total revenue of $138.4 million, up 3% from $134.6 million in the same period of fiscal year 2021. For the first nine months of the fiscal year 2022, total revenue was $405.6 million, up 5% from $386.1 million in the same period of fiscal year 2021. Our year-over-year sales have increased, and customer demand has even been higher, but production continues to be constrained by global supply chain and transportation issues. In the coming quarters, we expect a ramp of a number of new programs, including the previously announced program with a leading power equipment company in our Mexico facility in the first half of next fiscal year. During the third quarter of fiscal year 2022, our results were again impacted by intermittent parts supplies, factory downtime, and overtime expenses. In addition, our facilities in Shanghai, China, have been closed for government-mandated COVID closures for six weeks since mid-March. However, we expect operations to resume shortly. Additionally, our legal costs related specifically to the SEC's review of last year's whistleblower complaint totaled approximately six cents per share during the quarter, and we expect legal costs to potentially continue at a similar pace in coming periods. Despite these headwinds, we slightly improved our margins For third quarter of fiscal year 2022 our gross margin was 8.3% and operating margin was 2% up from a gross margin of 8.2% and operating margin of 1.9% in the same period of fiscal year 2021. For the third quarter of fiscal year 2022 net income was $1 million or 9 cents per share up 16% from $0.9 million or $0.08 per share for the same period of fiscal year 2021. For the first nine months of fiscal year 2022, net income was $2.4 million or $0.22 per share compared to $4.2 million or $0.38 per share for the same period of fiscal year 2021. The year-over-year change is predominantly a result of increased legal expenses and higher interest expense. Turning to the balance sheet, we continue to maintain a strong financial position. Despite supply chain and COVID-related production delays in the third quarter of fiscal year 2022 and the continued rampant transfer of new programs, we managed to lower our inventory by approximately $3 million from the prior quarter. We are carefully balancing customer demand and the likelihood of successfully bringing in parts in time for planned production. The state of the worldwide supply chain 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 returns slowly improve to more historical levels. At the end of the third quarter, trade receivables were up about $14.4 million from the prior quarter reflecting the timing of shipments late in the quarter. Our DSOs also increased to about 92 days, which reflects both 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 had total working capital of $179.8 million and a current ratio of 2.1 to 1 up slightly from the prior quarter. Total capital expenditures were about $4.1 million for the first nine months of fiscal year 2022. We're keeping a careful eye on expenditures during fiscal 2022 and we expect our capital expenditures for the full year to 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 some efficiency improvements in our facilities to prepare for growth and add capacity. Despite growing customer demand and backlog, we expect that the ongoing disruptions from the global supply chain and COVID-19 issues will continue to significantly limit production and adversely impact operating efficiencies, particularly for our China-based facilities. For the fourth quarter of fiscal 2022, we expect to report revenue of approximately $125 million to $135 million and earnings per share of approximately 4 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 a limited availability of key components. While our facilities in the US, Mexico, and Vietnam are currently operating, and our China facility is expected to reopen soon, uncertainty still exists 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 that could significantly impact operations in coming periods. In summary, we continue to grow our pipeline of new sales prospects and continue to increase our customer demand to unprecedented levels for Keytronic. Despite the fact that supply chain disruptions and the pandemic continue to impact our business during the third quarter and remain risks in future periods, we are encouraged by our prospects for the growth for the coming fiscal year and beyond. 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. While we continue to face the stiff headwinds from worldwide supply chain challenges and pandemic-related shutdowns, We're pleased with a successful ramp of new programs and our expanding customer base in the third quarter of fiscal 2022. During the third quarter, the industry continued 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 third quarter in excess of $160 million. Unfortunately, we do not expect the supply chain disruptions to improve significantly in the short term. We also struggled with increasing labor costs and shortages of production staff at some of our sites as a part of industry-wide labor shortages. At the same time, concerns about global logistics problems, the war in Ukraine, and China-US geopolitical tensions continue to drive heightened supply concerns and the favorable trend of contract manufacturing returning to North America. During the third quarter of fiscal year 2022, we won new programs involving outdoor recreation, RFID, industrial connectivity, and electric mobility products. As you will recall from Q2, we previously 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 would not have won this many 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 third quarter of fiscal 2022, we saw an increase in production across both our U.S.-based and Mexico-based facilities. 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 discussed on previous calls, the pressures on our customer base to lessen their Asian supply concentration remained 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 in 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 markets of Asian supply and for onshore North America, particularly for those companies with programs in the range of $5 million to $100 million. We believe 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 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 process for a staggering array of products, we can onboard just about any product imaginable. Moving into the fourth quarter of fiscal 2022, significant uncertainty still surrounds the continuing disruptions to the 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. 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 outsourced partner who can minimize the risk on all 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. Brett and I will now be pleased to answer your questions.