Key Tronic Corporation

Good day and welcome to the Keytronic FY2027 Q1 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 at our Spokane, Washington headquarters is Brett Larsen, 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 the future events of 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 reconciliation 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. Our financial performance in Q1 was clearly below where we expect to operate. Revenue remained constrained, margins were pressured, and we reported another quarterly loss. At the same time, customer demand remained strong, our backlog has grown significantly, and we are taking decisive actions to improve our cost structure and address the constraints that limited our performance during the quarter. We believe those actions, together with the new business we are winning, provide a clear path towards improved financial performance as we move through fiscal 2027. For the first quarter of fiscal 2027, we reported total revenue of 98.7 million. compared to 98.8 million in the same period of fiscal 2026. Revenue for the first quarter of fiscal year 2027 continued to be constrained by tightening credit availability and liquidity pressures across the global supply chain. These supply chain financing constraints delayed approximately 18 million of our shipments during the quarter, mostly involving programs manufactured in Mexico and the US. Importantly, we view these delays as primarily a constraint on our ability to convert demand into revenue rather than a lack of customer demand. Our backlog was $245.9 million in the first quarter of fiscal year 2027, up 76% from the same period in fiscal year 2026. Revenue from our Vietnam-based production continued to grow, driven by medical device and consumer products programs. We're actively working with our customers and suppliers and exploring new sources of capital to support growth and to ease supply chain financing constraints in future periods. Gross margin was 2.5% in the first quarter of fiscal year 2027 compared to 8.4% in the same period of fiscal year 2026. There were several significant pressures on Q1 profitability. Production delays caused by supply chain financing challenges resulted in excess labor costs and operating inefficiencies at our Mexico and U.S. facilities. Gross margin in the first quarter of fiscal 2027 were further reduced by approximately $6 million of inventory sales with no margin contribution. 4.7 million of manufacturing cost variances that were recognized in cost of goods sold rather than reflected in inventory due to US GAAP inventory valuation requirements. Our operating margin was negative 4.2% in the first quarter of fiscal year 2027 compared to negative 0.6% in the same period of fiscal year 2026. The decline in operating margin for the first quarter of fiscal year 2027 reflects the drop in gross margin, as well as by approximately $0.5 million in write-offs of bad debt. These adverse impacts were partially offset by $3.2 million insurance recovery related to a roof replacement in our Mississippi facility. The important point looking forward is that we are actively addressing the cost structure behind these results. We are streamlining our US-based workforce, which is expected to reduce labor costs by approximately $8 million annually. As revenue improves and these cost actions take hold, we expect margins to improve in the coming quarters. The delayed shipments and associated drop in our revenue and margins had a big impact on our bottom line. Our net loss was $7.5 million or 69 cents per share for the first quarter of fiscal year 2027, compared to a net loss of 2.3 million or 21 cents per share for the same period of fiscal year 2026. Our adjusted net loss was $7.9 million or 72 cents per diluted share for the first quarter of fiscal year 2027. Thank you. Thank you. Our current ratio was 1.9 to 1 compared to 2.4 to 1 from a year ago. At the same time, accounts receivable DSOs were at 75 days compared to 81 days a year ago, reflecting stronger collection on receivables. Capital expenditures in the first quarter of fiscal 2027 were $1.6 million, and we expect total capital expenditures for the full year of approximately seven to 10 million, reflecting investments in facilities and new innovative production equipment and automation. Given the current environment, capital allocation and working capital discipline remain important priorities for us. We intend to be selective with investment while continuing to support the programs and capabilities that we believe will drive future returns. As we move further into fiscal 2027, there are several reasons we remain positive about the remainder of the fiscal year. First, demand remains strong. Activity with several longstanding customers is improving and new programs are ramping. Our backlog reached 245.9 million, up 76% year over year. Second, we continue to win meaningful new business and our expanded US and Vietnam capacity is generating increased customer interest. Third, our manufacturing footprint is increasingly aligned with where our customers want to produce. Our Vietnam operations continue to grow while our investments we have made in the United States and Vietnam provide additional capacity as programs ramp. And fourth, The cost actions underway are designed to create greater operating leverage as revenue recovers. Because the timing of new program ramps remains uncertain and we continue to operate in a challenging macroeconomic and capital environment, we are not providing revenue or earnings guidance for the second quarter. So while Q1 was a difficult quarter financially, We believe the underlying demand for our capabilities is stronger than the headline results suggest. Our focus is straightforward, convert that demand into revenue, improve margins, strengthen liquidity, and return the business to profitability. With that, I'll turn the call over to Brett.

Thanks, Tony. While we continue to see robust customer demand reflected in our growing backlog, The near-term liquidity challenges across the global supply chain have markedly constrained our revenue in recent quarters. Nevertheless, we believe our operational discipline, strengthened manufacturing footprint, and longstanding customer relationships have positioned us better than many of our competitors. As a result, we continue to win new business and see new programs continue to ramp. As part of our long-term strategy, To improve competitiveness and better align our manufacturing footprint with evolving customer needs, we are currently streamlining our U.S.-based workforce. As Tony noted, this is expected to reduce labor costs by approximately $8 million annually. As you will recall, we previously undertook a significant transformation of our Mexico operations. reduced headcount, streamlined production processes, increased automation, and improved operating efficiencies. These actions have enhanced our cost competitiveness while preserving the strategic advantages of our Juarez campus, which continues to offer customers an attractive tariff mitigation solution under the USMCA framework. These benefits of these actions are now becoming evident in the marketplace. As our cost structure has improved, we have seen a meaningful increase in customer engagement, quoting activity, and new business opportunities. Our Mexico operations have recently experienced a notable increase in customer visits and qualification audits, reflecting growing confidence in our capabilities and competitiveness. At a time when many EMS providers continue to face liquidity and capital constraints, Our competitive manufacturing footprint is enabling us to compete for a broader range of programs. We're encouraged by the progress we have made expanding our manufacturing capabilities in both the United States and Vietnam. These investments are a direct response to evolving customer requirements and position Keytronic to capitalize on long-term industry trends towards supply chain diversification Tariff mitigation and operational resilience. This investment strengthens our ability to provide U.S. customers with enhanced engineering support, faster collaboration, and increased manufacturing flexibility through a U.S.-based solution. Customer interest in our U.S. operations continues to grow, and we expect new programs to continue to ramp and existing customers to expand their engagement with us. In Vietnam, we completed a significant capacity expansion during fiscal 2026, doubling our manufacturing footprint to support anticipated growth in medical device and other high value programs. Vietnam has now emerged as an increasingly important part of our global manufacturing strategy, providing customers with a highly competitive combination of quality, cost, and regional supply chain. As Tony mentioned, revenues from our Vietnam operations continue to grow sequentially during the first quarter, driven primarily by strong demand in medical devices and consumer-focused programs. We believe Vietnam will be a major contributor to our future growth and an increasingly important differentiator in the marketplace. In an environment where geopolitical tensions, tariff uncertainty, and supply chain risk continues to influence decision making, we believe Keytronic is exceptionally well positioned to benefit from customers seeking to near shore production, diversify manufacturing locations, and reduce overall supply chain risk. During the first quarter of fiscal 2027, we secured new program awards in utilities power management, Sustainable Waste Management, Data Centers, Construction, and Defense Technology. Together, these awards represent more than $60 million in potential annual revenue. We also recently announced plans to partner with TP-Link Systems, a global leader in networking and smart home solutions, to assemble its next generation technologies in the United States. These wins reflect growing recognition of Keytron's ability to deliver high-quality manufacturing at a globally competitive cost. As liquidity and capital constraints continue to affect the entire EMS industry, customers are increasingly looking for stable, operationally disciplined partners that can support long-term growth. Many of these programs incorporate partnership models in which customers share the upfront investment, helping us balance ramp-up capital requirements, accelerate growth, and improve returns on invested capital. TP-Link Systems is one such good example of this approach. The customer is providing most of the upfront capital needed for production and plans to supply components on a consignment basis. Our strong pipeline of potential new business also underscores the continued trend towards onshoring and dual sourcing of contract manufacturing. As we look beyond the significant transformation initiatives and operational improvements, we believe Keytronic is emerging as a stronger, more competitive company with several distinct advantages that position us well for sustained growth. The combination of our optimized global manufacturing footprint, robust engineering capabilities, and vertically integrated manufacturing expertise continues to resonate with both existing and prospective customers and is increasingly translating into new business opportunities. First, we have significantly enhanced the flexibility, competitiveness, and resilience of our global manufacturing network. Through the actions we have taken to optimize operations in China and Mexico while expanding capacity in the United States and Vietnam, we now offer customers a broader range of manufacturing solutions aligned with evolving supply chain strategies. As geopolitical tensions, trade policy uncertainty, and tariff considerations continue to influence sourcing decisions, We believe OEMs will increasingly seek manufacturing partners capable of providing geographic flexibility, supply chain resilience, and cost-effective production alternatives. Our investments over the past several years have positioned us exceptionally well to capitalize on these trends. Second, our engineering and design services remain one of the most powerful differentiators in our business model. Many of the programs we win belong long before production, with customers engaging our engineering teams to help develop, optimize, and prepare products for manufacturing. Once a program has progressed from design through commercialization and into production, our deep understanding of the product, the manufacturing process, and customer requirements creates substantial value and fosters long-term customer relationships. As a result, these programs tend to be highly durable and generate opportunities for future expansion. Given the increasing complexity of many of the products we support, we continue to invest in expanding the capabilities of our engineering organization and expect our design service businesses to remain an important driver of future growth. We continue to differentiate ourselves through the broad range of vertically integrated manufacturing capabilities and decades of process expertise. These capabilities span across plastic technologies, including injection, blow, gas assist, and multi-shot molding, as well as printed circuit board assembly, metal fabrication, painting and coating, automated high-volume assembly, and the design, construction, and operation of sophisticated test systems. By providing customers with a highly integrated manufacturing solution under one roof, we help reduce supply chain complexity, lower total landed costs, improve quality, and accelerate the time to market. We believe this combination of technical expertise and manufacturing breadth remains difficult to replicate and will continue to distinguish Keytronic from many of our competitors. Most importantly, these competitive advantages are becoming increasingly meaningful in today's EMS market. While many providers, including Keytronic, continue to face liquidity constraints, limited capital availability and operational challenges, Keytronic has strengthened its competitive position through disciplined execution, strategic investment, and operational transformation. As customer demand continues to shift Thank you for joining us. underscores our fundamentally strong competitive position. While we must navigate the ongoing near-term liquidity challenges, we continue to expect revenue growth and a return to profitability in the second half of fiscal 2027. The global market uncertainties continue to create some delays to new product launches for us, our suppliers, and our customers. However, we believe geopolitical tensions and heightened concerns 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. Significant improvements in our operating efficiencies are also creating a stronger pipeline of potential new business. Over the long term, we remain very encouraged that our cost reductions, increased customer supported capital and transformation of our global footprint have made us more competitive and increased our potential profitable growth. This concludes the formal portion of our presentation. Tony and I will now be pleased to answer your questions.