Key Tronic Corporation

Good day and welcome to the third quarter fiscal 2023 Keytronic Corporation 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.

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 10K, quarterly 10Qs and 8Ks. Please note 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 1st, 2023. For the third quarter of fiscal 2023, we reported record quarterly total revenue of $164.6 million, up 19% from $138.4 million in the same period of fiscal 2022. As expected, the significant increase in revenue for the third quarter of fiscal 2023 included approximately $20 million in production, for the large program with a leading power equipment company, as well as increased demand from a number of other customers. For the first nine months of fiscal 2023, our total revenue was $425.5 million, up 5% from $405.6 million in the same period of fiscal 2022. For the third quarter of fiscal 2023, our gross margin was 8.7%, and operating margin was 3.1%, up from a gross margin of 8.3% and an operating margin of 2.0% in the same period of fiscal 2022. Our gross margin in the third quarter of fiscal 2023 benefited from increased revenue levels and some stabilization in the labor market, but it was adversely impacted by a strengthening of the Mexican peso relative to the U.S. dollar. For the third quarter of fiscal 2023, our net income was $2 million, or 18 cents per share, up 100% from 1 million, or 9 cents per share, for the same period of fiscal year 2022. Our results for the third quarter of fiscal 2023 include a gain on insurance proceeds of roughly $400,000 or approximately 3 cents per share related to equipment damage in the storm at our Arkansas facility earlier in the year. For the first nine months of fiscal 2023, net income was $4.1 million or 38 cents per share, up 73% from $2.4 million or 22 cents per share for the same period of fiscal 2022. Turning to the balance sheet, we ended the third quarter with total working capital of $199 million in a current ratio of 2.2 to 1. Our receivables increased by $14.1 million from a year ago, reflecting the growth in our revenue levels. At the same time, our DSOs were at 79 days, down from 92 days a year ago, which we believe reflects improvement among certain customers with respect to disruptions from COVID-19 and supply chain issues. At the end of the third quarter of fiscal 2023, our inventory decreased by approximately $17.4 million, or roughly 10% from the prior period, primarily reflecting increased shipments during the quarter. While the state of the worldwide supply chain still requires that we look out much further in the future than in historical periods, We attempt to carefully balance customer demand and the likelihood of successfully bringing in parts in time for planned production. In coming quarters, we expect to see our inventory levels continue to decrease and inventory turns to continue to improve. Total capital expenditures were about $1.1 million for the third quarter of fiscal 2023, and we expect total capex for the year to be around $9 million. We've also utilized the insurance proceeds from the storm damage to modernize our operations, which should increase efficiencies in our Arkansas facility. While we're keeping a careful eye on capital expenditures, we plan to continue to invest selectively in our production equipment, SMT equipment and plastic molding capabilities. Utilize leasing facilities as well as make efficiency improvements to prepare for growth and add capacity. Despite disruptions from the global supply chain that have continued to limit production and adversely impact operating efficiencies, we are expecting significant growth in fiscal 2023. For the fourth quarter of fiscal 2023, we expect to report revenue in the range of $150 million to $160 million and earnings in the range of 10 cents to 20 cents per diluted share. While profitability has improved with increasing revenue, higher interest rates on our line of credit and the strong Mexican peso will continue to limit a portion of that expected improvement. In summary, we continue to grow our pipeline of new sales prospects and continue to increase our customer demand to unprecedented levels for Keytronic. We believe that we are increasingly well-positioned to win new EMS programs and to continue profitably expand our business over the longer term. That's it for me, Craig.

Okay, thanks, Brett. We're pleased with the significant growth in our revenue and earnings in the third quarter of fiscal 2023, driven by our successful ramp of new programs, including major contributions from the large power equipment program. Production for that program is now fully on track. During the third quarter of fiscal 2023, we continue to see the favorable trend of contract manufacturing returning to North America. Currently awarded new business has created backlog that will support over 20% growth in the U.S. sites over the next fiscal year. We have continued to expand our customer base and won new programs involving security equipment, video, pinball machines, mining safety, and productivity products, as well as communication devices. Global logistics problems, war in Europe, and China-U.S. geopolitical tensions continue to drive OEMs to examine their traditional outsourcing strategies. We believe these customers increasingly realize that they have become overly dependent on their China-based contract manufacturers for not only product, but also for design and logistics services. Over time, the decision to onshore or nearshore production is becoming more widely accepted as a smart long-term strategy. As a result, we see opportunities for continued growth. As we discussed in prior calls, we built Keytronic to offer the ideal solution for customers as they move to respond to geopolitical pressures. Our facilities in Mexico represent a campus of a million point one square feet in Juarez, most of which is contiguously located in nine facilities acquired over time. Our three U.S.-based manufacturing sites have also benefited greatly from the macro forces driving business back to North America. Moreover, a growing number of potential customers are actively evaluating a migration of their China-based manufacturing to our facilities in Vietnam. Our Shanghai plant has added capability and management staff and systems that allow it to serve Chinese customers directly. Shanghai has replaced the business that we moved to Vietnam and our procurement group in Shanghai, which serves the entire corporation, is important for managing the supply issues that cripple many of our competitors without boots on the ground in China. The combination of our global footprint and our expansive design capabilities is proving to be extremely effective in capturing new business. Many of our large and medium-sized manufacturing program wins are predicated on Keytronic's deep and broad design services. Once we have completed a design and wrapped it into production, we believe our knowledge of a program's specific design challenges makes that business extremely sticky. We also invest in vertical integration and manufacturing process knowledge, including a wide range of plastic molding, injection molding, blow, gas assist, multi-shot, as well as PCB assembly, metal forming, painting, and coating. complex high-volume automated assembly, and the design, construction, and operation of complicated test equipment. This expertise may set us apart from our competitors of similar size. As a result, a customer looking to leave their contract manufacturer will find a one-stop shop in Keytronic, which is expected to make the transition to our facilities much less risky than cobbling together a group of providers, each limited to a portion of the value chain. We believe global logistics problems China-U.S. political tensions and heightened concerns about supply chains will continue to drive the favorable trend of contract manufacturing returning to North America, as well as our expanding Vietnam facilities. The fact that we are continuing to see significant backlog levels in the fourth quarter indicates our growing momentum. Along with the records we are setting for revenue, we see a noteworthy improvement in all metrics associated with business development. For example, over the past year, the number of active quotes with prospective customers has increased significantly. This unprecedented increase in demand for a unique mix of skills, location, and people has powerful implications beyond the obvious revenue growth potential. In particular, we have been able to negotiate more favorable pricing terms and business parameters than in the past, as well as to be much more selective in the new customers we bring on. While this shift and leverage will not manifest in the short term, its effect on our long-term performance should be profound. We move into the fourth quarter with significant backlog levels and a strong pipeline of potential new business. And we're seeing improvement in the global supply issues and lower labor turnover, which severely limited our production in prior periods. We're very encouraged by our progress and potential for growth. This includes a formal portion of our presentation. Brett and I will now be pleased to answer your questions.