Key Tronic Corporation

Good day and welcome to the Keytronic Q2 Fiscal Year 25 investor call. Today's conference is being recorded. After the presentation, we will begin the question and answer period. At this time, I would like to turn the conference over to Tony Voorhees.

Good afternoon, everyone. I am Tony Voorhees, 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 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. These 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 gap measures are provided in today's press release, which is posted to the investor relations section of our website. For the second quarter of fiscal year 2025, we reported total revenue of $113.9 million, compared to $147.8 million in the same period of fiscal year 2024. The lower than anticipated revenue and earnings for the second quarter of fiscal year 2025 are primarily due to the impact from unexpected shortages from specific components managed by a large customer. Lower than expected production during the holiday season and reduced demand from certain customers, which together lowered revenue by approximately $15 million for the quarter. For the first six months of fiscal 2025, our total revenue was $245.4 million compared to $298 million in the same period of fiscal 2024. Subsequent to the end of the second quarter, we resolved the component shortages allowing production to resume. Gross margins were 6.8% and operating margins were negative 1%. in the second quarter of fiscal 2025, compared to 8% and 2.7% respectively in the same period of fiscal 2024. The decline in margins for the second quarter of fiscal 2025 primarily reflects the unexpected reduction of revenue. In coming quarters, we anticipate margins to be strengthened by higher revenue levels, improved operating efficiencies, and the continued benefits of our strategic cost savings initiatives. As production volumes increase and our recent operational adjustments take full effect, we expect to see greater leverage on fixed costs, enhanced productivity, and a more streamlined supply chain, all contributing to stronger financial performance. That said, the recently announced tariffs on China and potential tariffs on Mexico create significant uncertainties about costs and our margin performance in coming quarters. As previously announced, our interest expense also included approximately $1 million in write-offs of unamortized loan fees related to refinancing our debt with a new lender. The new asset-based financing agreement provides up to $115 million of available credit of which $76 million was borrowed at the end of the second quarter of fiscal year 2025. This new financing arrangement will position us for growth by providing increased access to working capital over the next five years and ensuring the liquidity needed to support our long-term growth plans. Additionally, We anticipate these new facilities will lower our interest expense and provide greater financial flexibility moving forward. Our net loss was $4.9 million or 46 cents per share for the second quarter of fiscal 2025 compared to net income of $1.1 million or 10 cents per share for the same period of fiscal 2024. For the first six months of fiscal 2025, our net loss was $33.8 million, or 35 cents per share, compared to net income of $1.4 million, or 13 cents per share, for the same period of fiscal 2024. Our adjusted net loss was $4.1 million, or 38 cents per share, for the second quarter of fiscal 2025. compared to adjusted net income of $1.1 million or 10 cents per share for the same period of fiscal year 2024. The adjusted net loss was 2.9 million or 27 cents for the first six months of fiscal 2025, compared to adjusted net income of 1.2 million or 11 cents per share for the same period of fiscal year 2024. See the non-GAAP financial measures in our earnings release and the appendix to the slide deck for additional information about adjusted net income and adjusted net income per share. Turning to the balance sheet, we ended the second quarter of fiscal year 2025 by reducing inventory by approximately $23 million, or 19%, from the same time a year ago. These improvements in inventory levels primarily reflect our concerted effort to drive inventory reductions and increased industry-wide component availability. We're pleased to see our inventory levels continue to become more in line with 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 second quarter, we also reduced our total liabilities by a combined amount of $38 million or 15% from a year ago. Our current ratio was 2.8 to 1 compared to 2.6 to 1 a year ago. At the same time, accounts receivable DSOs were at 99 days compared to 83 days a year ago, reflecting reductions in net sales at higher rates than reductions in receivables. Total capital expenditures were about $800,000 for the second quarter of fiscal year 2025, and we're expecting CapEx for the full year to be approximately $8 to $10 million. A significant part of this year's capital expenditures will be related to our planned expansions in capacity and capabilities of our Arkansas and Vietnam locations. While we're keeping a careful eye on CapEx, we plan to continue to invest selectively in our production equipment, S&T equipment, and plastic molding capabilities, utilize leasing facilities, as well as make efficiency improvements to prepare for growth. Moving further into fiscal 2025, we are pleased to continue to see our new programs ramping, costing efficiency improvements from our recent overhead reductions taking hold, At the same time, we face reduced demand from certain long-standing customers. Our industry also faces great uncertainties related to the new tariff increases for China and the potential increases for tariffs in Mexico. While we do anticipate new tariffs to increase costs for both us and our customers, the current economic and political uncertainty makes it difficult to accurately quantify the full impact at this time. Taking all these factors into consideration, we will not be issuing revenue or earnings guidance for the third quarter of fiscal 2025. We expect to see growth in our US and Vietnam production, have a strong pipeline of potential new business, and remain focused on improving our profitability. 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. While we're disappointed with the unexpected decline in revenue in the second quarter of fiscal 2025, we expect our revenue and earnings to recover in the third quarter of fiscal year 2025 as strategic initiatives undertaken in previous quarters come to fruition. We're actively streamlining our international and domestic operations with further headcount reductions to enhance efficiency, building on similar actions a year ago. We're also pleased to see our inventory levels being more in line with current revenue levels and expect that these strategic changes will improve our overall profitability. Moreover, we're significantly increasing our production capacity in Arkansas and Vietnam, in order to continue to benefit from the growing customer demand for onshoring their contract manufacturing and is also expected to help mitigate the adverse impact and uncertainties surrounding the recently announced potential tariffs on goods manufactured in China and Mexico. During the second quarter, we continue to win new programs involving aerospace systems, and energy resiliency technology, which was recently announced. The program is expected to begin manufacturing in the second half of 2025. Once fully ramped, we believe that the annual revenue could exceed $60 million. This important new strategic relationship represents an expansion of our customer base, and we expect it will contribute to profitable long-term growth. pipeline of potential new business underscores the continued trend towards onshoring and dual sourcing of contract manufacturing. We expect that global logistics problems, China-U.S. geopolitical tensions, and the recent threat of tariffs on Mexico and China will continue to drive OEMs to re-examine their traditional outsource 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 production is becoming more widely accepted as a smart long-term strategy. At the same time, we're seeing a sustained trend of continued wage increases in Mexico. As it has become clear that these changes in the base cost of Mexico are longstanding, we have right-sized our operations in order to remain cost competitive. As a result, we see opportunities for growth, and those opportunities are becoming more clearly defined. As customers are very excited about our plans to increase our production capabilities in the U.S. and in Vietnam, these initiatives reflect both the longstanding trends in near-shore production away from China and may also help address potential adverse impact of tariff increases. Our U.S.-based production provides customers with outstanding flexibility, engineering support, and ease of communications. In Arkansas, the company has signed a new lease to significantly increase the size of its current manufacturing footprint by June 2025. Our Vietnam-based production offers the high-quality, low-cost choice that was associated with China in the past. In Vietnam, we have ample space in our current facility to double our manufacturing capacity by September 2025 with a significant investment in capital equipment. In coming years, we expect our Vietnam facility to play a major role in our growth. In the coming months, we look forward to sharing more details about these two specific expansions. 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. And once we have completed the design and ramped it into production, we believe our knowledge of a program's specific design challenges makes that business extremely sticky. We anticipate continued increase in the number and capability of our design engineers in coming quarters. 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 a similar size. We believe that the global logistics problems, China-U.S. political tensions, and heightened concerns about tariffs and supply chains will continue to drive the favorable trend of contract manufacturing returning to North America, as well as to 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 unexpected component shortages Lower than expected production during the holiday season and reduced demand from certain customers hammered our revenues and profitability in the second quarter of fiscal 2025. We move further into fiscal 2025 with a strong pipeline of potential new business, and we're seeing significant improvements in our operating efficiencies and a continued weakening pay flow. Moreover, we will continue to rebalance our manufacturing across our facilities in Mexico. the U.S. and Vietnam. We remain very encouraged by our strategic direction and potential for profitable growth over the longer term. This concludes the formal portion of our presentation, and Tony and I will now be pleased to answer your questions.