Key Tronic Corporation

Good day and welcome to the Keytronic Q4 fiscal year 25 investor call. Today's conference is being recorded. After the presentation, there will be a question and answer session. 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. We are excited to be calling in from our new Springdale, Arkansas facility this week. Joining me here 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 a 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 GAAP measure are provided in today's press release, which is posted to the investor relations section of our website. For the fourth quarter of fiscal 2025, we reported total revenue of $110.5 million, compared to $126.6 million in the same period of fiscal 2024. The revenue for the fourth quarter of fiscal 2025 was adversely impacted by decreased demand from two large long-standing customers. In addition, the recent escalation and fluctuations in global tariffs caused uncertainty that contributed to delays to new program launches as customers stalled orders. For the full fiscal year 2025, total revenue was $467.9 million compared to $566.9 million in fiscal year 2024. Our gross margin was 6.2% and operating margin was negative 2.1% in the fourth quarter of fiscal 2025 compared to 7.2% and 0.1% respectively in the same period of fiscal 2024. These decreases largely relate to continued reductions in demand from two large long-standing customers during the period. Gross margin and operating margin for the full fiscal year 2025 was 7.8% and 0.1% compared to 7.0% and 1.2% for the full year fiscal 2024. Despite the revenue reduction of approximately $100 million in fiscal year 2025, we were still able to increase gross margins year over year. This is largely related to operational efficiencies gained from reductions in workforce and other cost savings initiatives over the last two years. In order to better align costs with current customer demand and boost automation, we cut approximately 300 more jobs during the fourth quarter of fiscal year 2025 for a total headcount reduction during fiscal year 2025 of approximately 800. The negative impact of severance expense on our income statement was approximately $0.1 million during the fourth quarter of fiscal 2025 and $2.9 million for the entire fiscal year 2025. As top line growth returns, we anticipate margins to be strengthened by improvements in our operating efficiencies and the continued and increasing benefits of our strategic cost savings initiatives. We also believe the cost savings initiatives had allowed us to be more competitive in quoting new program opportunities. As production volumes increase and our 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. Our net loss was 3.9 million, or 36 cents per share, for the fourth quarter of fiscal year 2025, compared to a net loss of 2 million, or 18 cents per share, for the same period of fiscal year 2024. For the full fiscal year 2025, our net loss was 8.3 million, or 77 cents per share, compared to a net loss of $2.8 million or 26 cents per share for fiscal year 2024. The increase in year-over-year net loss is primarily related to the large reductions in revenue as well as adjustments for estimated collections from customers of approximately $1.1 million for the fourth quarter of fiscal year 2025. and 1.8 million for the full year of fiscal year 2025. Our adjusted net loss was 3.8 million or 35 cents per share for the fourth quarter of fiscal year 2025 compared to an adjusted net loss of 0.7 million or six cents per share for the same period of fiscal year 2024. The adjusted net loss was 5 million or $0.47 per share for the full fiscal year 2025 compared to adjusted net loss of $0.2 million or $0.02 per share for the same period of fiscal year 2024. See non-GAAP financial measures below for additional information about adjusted net loss and adjusted net loss per share. Turning to the balance sheet, we ended fiscal 2025 by reducing inventory by approximately $8 million, or 7%, from the same time a year ago. These improvements in inventory levels primarily reflect our strategic initiatives designed to better align our inventory 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 made significant enhancements to our materials resource planning algorithms. As a result, we are now more prepared to address potential future disruptions in supply chain and more able to respond effectively to evolving tariff implications as we continue to manage inventory more cost-effectively. For fiscal 2025, we also reduced our total liabilities by a combined amount of $32.7 million, or 14% from a year ago. Our current ratio was 2.5 to 1 compared to 2.8 to 1 from a year ago. At the same time, accounts receivable DSOs were at 86 days compared to 95 days a year ago, reflecting stronger collection on receivables. For the full fiscal year 2025, cash flow provided by operations was 18.9 million up from 13.8 million for fiscal 2024. This represents two fiscal years in a row of positive cash from operations. Total capital expenditures in fiscal year 2025 are about 4.1 million, an increase of approximately 3% from a year ago. In addition, we entered into financing arrangements which will provide up to $9 million in available funding to be used in 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. We expect to spend about $8 million in capital expenditures during fiscal year 2026, largely on new and innovative production equipment and automation. As we move into fiscal year 2026, we are pleased to continue to see our new programs ramping, and cost and efficiency improvements from our recent overhead reductions take hold. 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 our profitability. Over the longer term, we believe that we are increasingly well positioned to win new programs and profitably expand our business. We will not be providing forward-looking guidance due to uncertainty of timing of new products ramping over fiscal year 2026. That's it for me, Brett.

Thanks, Tony. Fiscal 2025 was a year of transition and uncertainty. We anticipated a reduction of demand from two long-standing customers, but we had fully expected to fill that void with recently won new programs. However, with the uncertainty of recent varying tariffs, most of these launches were delayed into fiscal 2026. The reduction in overall revenue had a significant impact on our bottom line financial results. Nevertheless, during the fiscal year, we were able to right-size our cost structure in Mexico and introduce new production efficiencies and automation that have allowed us to become more cost competitive. Additionally, we transitioned our manufacturing footprint by investing in a new facility here in the U.S., and investing in new production equipment in Vietnam that increases our capacity and capability. The sudden increases and decreases in tariffs have unfortunately impacted new program launches across all of our facilities. We are doing our best to work with suppliers and with our customers on options for manufacturing their products from different locations in best mitigating the impact of tariffs. Our changes made to our manufacturing footprint and our cost reductions enable us to offer improved mitigation options, particularly when our customers consider the varying implications of current and future potential tariffs. We're moving full speed ahead with adding capacity in key regions. In the U.S., we're expanding our clean tech, cutting edge manufacturing operations here in Arkansas. We expect to invest more than $28 million in our new flagship manufacturing and research and development location here in Arkansas, which we fully believe should create over 400 new jobs over the next five years. We're delighted to be enhancing our operations in a region where we have maintained a long-standing presence and 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 communications. In Vietnam, we have ample space in our current facility to double our manufacturing capacity. We're also putting the finishing touches on a major production capability in Vietnam that will support future medical device manufacturing. Our Vietnam-based production offers the high quality, low cost choice that was often 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 these new facilities in the US and Vietnam will come online during the first quarter of 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. By the end of fiscal 2026, we expect to approximately have half of our manufacturing take place in our U.S. and Vietnam facilities. These initiatives reflect both the longstanding trends to near shore and move more of their production away from China, as well as de-risk the potential adverse impact of tariff increases and geopolitical tensions. Our Mexico facility also offers a unique solution for tariff mitigation under the existing USMCA tariff agreement. but there is 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 have streamlined our operations, increased efficiencies, and invested in automation in order to become more cost competitive in the market. During fiscal 2025, we reduced our total headcount by approximately 800 individuals, or roughly 30% during the year, which was mostly done in Mexico. Our improved cost structure in Mexico is anticipated to lead to new programs and growth over the longer term. During fiscal 2025, we continued to win new programs in manufacturing equipment, vehicle lighting, aerospace systems, energy resiliency, telecommunications, pest control, energy storage, medical technology, temperature-controlled shipping, personal protection equipment, air purification, automotive, and utilities inspection equipment. In addition, we executed a manufacturing services contract with a data processing equipment, OEM, that will consign its materials to our Corinth, Mississippi, manufacturing facilities. The consigned materials model is new for us at this scale, and if successful, will considerably improve our profitability in the coming quarters. It has the potential to ramp significantly during fiscal year 2026 and is estimated to grow eventually to over $20 million in annual revenue. 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 the global tariff wars and geopolitical tensions will continue to drive OEMs to re-examine their traditional outsourcing strategies. Over time, the decision to onshore production is becoming more widely accepted as a smart long-term strategy. We believe our manufacturing footprint and cost competitiveness will allow us to take advantage of these opportunities. The combination of our flexible global footprint and our expansive design capabilities continues to be extremely effective in capturing new business. Many of our manufacturing program wins are predicated upon Keytronic's 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 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, coating, complex high-volume automated assembly, and the design, construction, and operation of complicated test equipment. We believe that this expertise will increasingly set us apart from our competitors of similar size. While the global tariff policies are creating delays to new product launches for us, our suppliers, and our customers, we believe due to 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. These tariff challenges were a significant factor in replacing reduced demand in both longstanding and recently awarded programs, which hammered our growth and profitability in fiscal 2025. Nevertheless, we continue to rebalance our manufacturing across our facilities in the U.S., Mexico, and Vietnam. We will move 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 two years to become more cost competitive, our increasing cash flow generated from operations, enhanced global manufacturing footprint, and the innovations from our design engineering. All these initiatives have increased our potential for future profitable growth. In closing, I want to emphasize that this was a challenging year for our industry and for Keytronic specifically. In these circumstances, the execution of our strategy was made possible not only by our investments in plants and equipment, but even more so because of 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. This concludes the formal portion of our presentation. Tony and I will now be pleased to answer your questions.