Key Tronic Corporation

and welcome to the Keytronic Q3 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'd like to turn the call over to Tony Voorhees. Please go ahead.

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 and quarterly 10-Qs. 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 the 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 third quarter of fiscal 2025, we reported total revenue of $112 million, compared to $142.4 million in the same period of fiscal 2024. The revenue for the third quarter of fiscal 2025 was adversely impacted by the worldwide economic disruptions and uncertainty caused by the recent escalation and fluctuations in global tariffs, which resulted in delays, increased costs, and reduced demand from many customers. For the first nine months of fiscal 2025, Total revenue was $357.4 million compared to $440.4 million in the same period of fiscal 2024. Gross margins were 7.7% and operating margins were a negative 0.4% in the third quarter of fiscal 2025 compared to 5.7% and a negative 0.4% respectively in the same period of fiscal 2024. The year-over-year improvement in gross margins for the third quarter of fiscal 2025 reflects cost cutting and headcount reductions over the past three quarters. The results of the third quarter of fiscal 2025 also included government-mandated severance expenses in Mexico during the quarter of approximately $0.8 million and approximately $0.7 million in balance sheet adjustments for inventory and estimated collections from customers. In the coming quarters, we anticipate margins to be strengthened by additional cost reductions and improvements in operating efficiencies, resulting from 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 significant tariffs on China and potential tariffs on Mexico and Vietnam create significant uncertainties about costs and our margin performance in coming quarters. Our net loss was 0.6 million or six cents per share for the third quarter of fiscal 2025 compared to a net loss of 2.2 million or 21 cents per share for the same period of fiscal 2024. For the first nine months of fiscal 2025, our net loss was $4.4 million or 41 cents per share compared to a net loss of 0.8 million or seven cents per share for the same period of fiscal 2024. The increase in year-to-date net loss is primarily related to the large reduction in revenue, partially offset by the reduction in costs made during the fiscal year. Our adjusted net loss was $0.6 million, or 5 cents per share, for the third quarter of fiscal 2025, compared to adjusted net loss of $2.2 million, or $0.20 per share for the same period of fiscal 2024. The adjusted net loss was $3.5 million, or $0.32 per share for the first nine months of fiscal 2025, compared to adjusted net loss of $1 million, or $0.09 per share for the same period of fiscal 2024. See non-GAAP financial measures in our earnings release and the appendix to the slide deck for additional information about adjusted net loss and adjusted net loss per share. Turning to the balance sheet, we ended the third quarter of fiscal 2025 by reducing inventory by approximately $16 million, or 14%, from the same time a year ago. These improvements in inventory levels primarily reflect our strategic initiatives aimed at 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. Many of 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 and more able to react to changes that may occur with current and future tariff implications as we continue to manage inventory more cost-effectively. During the third quarter, we also reduced our total liabilities by a combined amount of $34.3 million or 14% from a year ago. Our current ratio has remained relatively flat and was 2.7 to 1 compared to 2.8 to 1 from a year ago. At the same time, our accounts receivable DSOs were at 92 days compared to 85 days a year ago, reflecting reductions in net sales at higher rates than reductions in receivables. Operating cash flows were $10.1 million for the first nine months of fiscal year 2025, up from $6.1 million for the same period in fiscal 2024. This reflects our ongoing efforts to manage working capital. Total capital expenditures to date in fiscal year 2025 are about $3 million, and we are expecting CapEx for the full year to be approximately six to eight million. A significant part of this year and early next year's capital expenditures will be related to our planned expansions in Arkansas and Vietnam. 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, particularly in our Vietnam and U.S. locations. Moving further into fiscal 2025, we are pleased to continue to see our new programs ramping and cost and efficiency improvements from our recent overhead reductions taking hold. At the same time, we face great uncertainties related to tariffs. which we believe are causing increased costs, production disruptions, and reduced demand for many customers. Although we expect the new tariffs to increase costs for both Keytronic and our customers, the current economic and political climates are too unpredictable to provide an accurate estimate at this time. After careful consideration of all relevant factors, we have decided not to provide revenue or earnings guidance for the fourth quarter of fiscal 2025. We expect to see growth in our U.S. and Vietnam production, have a strong pipeline of potential new business, and remain focused on improving 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. The rapid unprecedented increases and decreases in tariffs have significantly impacted both our business and our customers. As previously announced, we're underway with the buildup of new production capacity in both Arkansas and Vietnam. At the same time, we have continued to streamline our Mexico operations with further headcount reductions to enhance efficiency, building on similar actions in recent periods. The sudden increases and decreases in tariffs have unfortunately impacted production across all of our facilities, especially the tariffs on Chinese components. Clearly, these global tariff wars are outside of our control and will similarly impact all other manufacturers as well. We are doing our best to work with suppliers and with our customers on options for manufacturing their products from different locations. To manage this process efficiently, we have been proactively expanding our production footprint in strategic locations to better serve our customers and improve flexibility offered to our customers in choosing which locations to build their product. Our expanding footprint enables us to offer improved mitigation options, particularly when our customers consider the varying implications of current and future potential tariffs. We're excited to announce plans to that to add, as previously discussed, additional capacity and key in key regions. In the US, we're expanding our clean tech cutting edge manufacturing operations in in Arkansas. We expect to invest more than $28 million in our new flagship manufacturing and research and development location, which we believe should create over 400 new jobs in the next five years. We're delighted to be enhancing also our operations in a region where we have maintained a long-standing presence in a strong team and can benefit from a business-friendly environment. Our U.S.-based production provides customers with outstanding flexibility, engineering support, and ease of communication. In Vietnam, we have ample space in our current facility to more than double our manufacturing capacity. Our Vietnam-based production offers the high quality, low cost choice that was associated with China and Mexico in the past. In coming years, we expect our Vietnam facility to play a major role in our growth. We anticipate that these new facilities in the US and Vietnam will come online during fiscal 2026 and enable us to benefit from customer demand for rebalancing their contract manufacturing and mitigate the severe impact and uncertainties surrounding the tariffs on goods and critical components manufactured in China and in other locations. Our 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 to move more of their production away from China, as well as de-risk the potential adverse impact of tariff increases and geopolitical tension. At the same time, we are seeing a sustained trend of wage increases in Mexico. As it has become clear that these changes in the base cost of Mexican production are long-standing, we have continued to streamline our operations in order to be more cost-competitive in the market. Our improved cost structure in Mexico is anticipated to lead to new programs and growth over the longer term. During the third quarter of fiscal 2025, we continued to win new programs in telecommunications, pest control, energy storage, medical technology, and temperature-controlled shipping solutions. Despite the many uncertainties and disruptions in global markets, our strong pipeline of potential new business underscores the continued trend towards onshoring and dual sourcing of contract manufacturing. We expect that global tariff wars and geopolitical tensions will continue to drive OEMs to reexamine their traditional outsourcing strategies. Over time, the decision-making to onshore production is becoming more widely accepted as a smart long-term strategy. The combination of our flexible global footprint and our expansive design capabilities continues to be extremely effective in capturing new programs. Many of our large and medium-sized manufacturing program wins are predicated on Teetronic's deep and broad design services. And once we have completed a design, and ramped it into production, we believe our knowledge of the program's specific design challenges makes that business extremely sticky. We anticipate a 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 similar size. While the global tariff policies are creating major logistical challenges for us, our suppliers, and our customers, We believe geopolitical tensions and heightened concern about tariff 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 believe these tariff challenges were a significant factor in component delays and reduced demand for many of our customers, which hammered our growth and profitability in the third quarter of fiscal 2025. and continue to disrupt our business even in the fourth quarter. Nevertheless, we continue to rebalance our manufacturing across our facilities in the U.S. and Vietnam. We are, however, excited to see the results of right-sizing our operations and the increased generation of cash flow over recent quarters. We're moving forward with a strong pipeline of potential new business, and we're seeing significant improvements in our operating efficiencies. Over the long term, we remain very encouraged by our cost reductions made over the past 18 months. To become more market competitive, our increasing cash flow generated from operations, enhanced global manufacturing footprint, and the innovation from our design engineering team. All of these initiatives have increased our potential for profitable growth. This concludes the formal portion of our presentation. Tony and I will now be pleased to answer your questions.