Key Tronic Corporation

Good afternoon, everyone. I am Tony Voorhees, Chief Financial Officer of Keytronic. I would like to thank everyone for joining us today on our investor conference call. Joining me here in our Spokane Valley headquarters is Brett Larson.

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 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. During this call, we will also reference slides that accompany our discussion. The slides can be viewed with the webcast and the link can be found on our investor relations website. In addition, the slides, together with the recorded version of this call, will be available on the investor relations section of our website. We will also discuss certain non-GAAP financial measures on this call. Additional information about these non-GAAP measures and reconciliations to the most directly comparable GAAP measures are provided in today's press release. which is posted to the investor relations section of our website. For the fourth quarter fiscal year 2024, we reported total revenue of $126.7 million, compared to $162.6 million in the same period of fiscal year 2023. For the full year of fiscal 2024, total revenue was $559.4 million, compared to $588.1 million for the fiscal year 2023. Also previously disclosed, a cybersecurity incident caused disruptions and limited access to portions of our business applications supporting operations and corporate functions at our Mexico and U.S. sites during the fourth quarter of fiscal 2024. During the disruption, we were unable to fulfill approximately $15 million of revenue during the fourth quarter of fiscal year 2024. Most of these orders are recoverable and are expected to be fulfilled in fiscal year 2025. During the cyber disruption, we continued to pay wages in accordance with statutory requirements. We also deployed new IT-related infrastructure and engaged cybersecurity experts to remediate the incident. As a result, we incurred additional expenses of approximately $2.3 million. Partially offsetting the additional cybersecurity-related expenses was a favorable weakening of the Mexican peso late in the period, decreasing expenses by approximately $600,000. We also had an insurance gain. relating to a previously disclosed weather event in our Arkansas facility in the amount of approximately $700,000 during the fourth quarter of fiscal year 2024. Despite the business disruption event, we improved our gross margin during Q4, primarily reflecting our workforce reductions in Mexico during the prior quarter and the weakening of the Mexican peso. Our gross margin was 9%, and our operating margin was 2.2% for the fourth quarter of fiscal year 2024, compared to a gross margin of 8.5% and an operating margin of 2.6% in the same period of fiscal year 2023. Our net income was breakeven for the fourth quarter of fiscal year 2024, compared to net income of $1.1 million, or 10 cents, per share for the same period of fiscal year 2023. For the full year of fiscal year 2024, the net loss was approximately $800,000 or a net loss of 7 cents per share compared to net income of $5.2 million or 47 cents per share for fiscal year 2023. Excluding adjustments for certain income and expenses to measure our core results adjusted net income was $1.1 million or 10 cents per share for the fourth quarter of fiscal year 2024 compared to just adjusted net income of 1 million or 9 cents per share for the same period of the fiscal year 2023. For the full year of fiscal year 2024, adjusted net income was $3.4 million, or $0.31 per share, compared to $2.2 million, or $0.20 per share, for fiscal year 2023. For more information on these non-GAAP measures, see the non-GAAP financial measures description and reconciliations in our earnings release. Turning to the balance sheet, we ended the fourth quarter of fiscal year 2024 by reducing inventory by approximately $29 million or 21% from the same time a year ago. These improvements in inventory levels primarily reflect increased component availability and our concerted effort to drive inventory reductions. We're pleased to see our inventory levels continue to become more in line with our current revenue. At the same time, the state of the worldwide supply chain still requires that we drive demand for parts differently than in historical periods. Our customers have revamped their forecasting methodologies and we have significantly modified and improved our materials resource planning algorithms. As a result, We should be better equipped for future disruptions in the supply chain, even as we continue to manage inventory more cost-effectively. During the third quarter, we also reduced our total liabilities by a combined amount of $56.1 million from a year ago. Our current ratio was 2.8 to 1, up from 2.3 a year ago. At the same time, accounts receivable DSOs was at 98 days. compared to 85 days a year ago, which we believe reflects the back-end loaded nature of the quarter caused by the cyber event. Total capital expenditures were about $1.2 million for the fourth quarter of fiscal year 2024 and $5.2 million for the full year. 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. Utilizing leasing facilities as well as make efficiency improvements to prepare for gross and add capacity, particularly in our US and Vietnam locations. For the first quarter of fiscal year 2025, we're seeing a rebound among our legacy customers relative to our fourth quarter. For the first quarter of fiscal 2025, we expect to report revenue in the range of $140 to $150 million. Moving into fiscal 2025, we are pleased to continue to see our new programs ramping. Cost efficiency improvements from our recent overhead reductions taking hold and a significant weakening of the Mexican peso. Taking all these factors into consideration, we expect net income in the range of 10 to 20 cents per diluted share. We expect to see growth in our U.S. and Vietnam production. We have a strong pipeline of potential new business, and we are focused on improving our balance sheet. Over the longer term, we believe that we are increasingly well-positioned to win new programs and profitably expand our business. That's it for me.

Brett? Thanks, Tony. Fiscal 2024 got off to a very promising start, though we faced some challenging headwinds. During the first half of the year, our revenue grew by 12% year over year, driven by increased production in our U.S. and Vietnam-based facilities. Despite the strong top-line growth, our margins and profitability were negatively impacted by increased labor costs, unfavorable foreign currency exchange rates in Mexico, and higher interest rates. During the second half of fiscal 2024, we faced major disruptions to our business, including severe winter weather events that took our facilities in Mississippi and Arkansas offline for approximately two weeks in the third quarter. And then the cybersecurity event that interrupted our operations and corporate functions in Mexico and the U.S. during our most recent fourth quarter. Together, these events disrupted production for approximately six weeks during the year. Despite these disruptions, we took the necessary steps to reduce our workforce in Mexico, which is expected to save more than $10 million annually in labor costs. In coming quarters, we expect sales from Mexico-based production to recover due to recently won new programs, but we do not anticipate needing to increase our headcount in coming periods. Moving into fiscal year 2025, we're very pleased to see overall improvements in our operating efficiencies, as well as reduced inventory levels and other improvements made on the balance sheet. During the year, we continue to expand our customer base, winning new programs involving security equipment, sporting goods, environmental solutions, security products, military aerospace, industrial control systems, energy management, telecommunications, consumer audio, industrial manufacturing, industrial moving equipment, industrial storage, medical devices, and consumer air filtration products. The strong pipeline of potential new business underscores the continued trend towards onshoring in a dual source and a dual sourcing of contract manufacturing. Global logistics problems and the China-U.S. geopolitical tension may continue to drive OEMs to re-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 and more widely accepted as a smart long-term strategy. As a result, we see opportunities for growth, and those opportunities are becoming more clearly defined. At the same time, we are seeing a sustained trend of continued wage increases in Mexico. As it has become clear that these changes in the base cost of Mexican production are longstanding, we are right-sizing our operations in order to remain cost-competitive. It has also become clear that customers nearshoring from China may have a different calculus for selecting a geographic location for business. For those customers who struggle with China production due to their flexibility requirements, we believe our U.S. sites offer the ultimate in flexibility, engineering support, and ease of communications. Over the past 12 months, revenue from our U.S. production facilities has increased approximately 7%. In the fourth quarter of 2024, production in the U.S. represented 29% of total revenue, up from 25% a year ago. Meanwhile, for those customers whose requirements had adapted to the China model of limited flexibility, challenging communications, and less engineering support, we expect that our Mexico facilities remain the answer. Therefore, we are reconfiguring our Mexico sites to endeavor to be a lower cost and provide more commodity level service while still maintaining high quality. While our Vietnam facility continues to be a modest contributor to our overall revenue, a growing number of potential customers are actively evaluating a migration of their China-based manufacturing to our facility in Vietnam. In coming years, we expect our Vietnam facility to play a major role in our growth. While China growth has slowed and many companies have decided to take risk mitigation steps with their China manufacturers, the fact remains that many components must still be sourced from China. Our procurement group in Shanghai, which serves the entire corporation, remains important for managing the China component supply chain on an ongoing basis. Additionally, our China production facility continues to be profitable and has found recent success in winning new programs with Chinese OEMs. 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 Keytronics' deep and broad design services. And once we have completed a design and ramped it into production, we believe our knowledge of a program's specific design challenges makes that business extremely sticky. We also continue to invest in vertical integration and manufacturing process knowledge, including a wide range of plastic molding injection, 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. We believe this expertise will increasingly set us apart from our competitors of similar size. We believe that the global logistics problems, China-US political tensions, and the 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. We continue to see improvement across the metrics associated with business development, including a significant increase in the number of active quotes with prospective customers. While the unfortunate combination of factors temporarily disrupted our growth and profitability in the second half of fiscal 2024, we move into fiscal 2025 with a strong pipeline of potential new business, and we're seeing significant improvements in our operating efficiencies and also a weakening peso. Moreover, we will continue to rebalance our manufacturing across our facilities in Mexico, the US, and Vietnam. We remain very encouraged by our progress and the potential for profitable growth over the long term. In closing, I want to emphasize the execution of our strategy was only made possible by our investments in plants and equipment, but even more so the skills, local knowledge, and talents of our people. I want to thank our exceptional employees for their dedication and hard work during this past year, and our shareholders for their continued support. This concludes the formal presentation. Tony and I will now be pleased to answer your questions.