Key Tronic Corporation (NASDAQ:KTCC) Q2 2025 Earnings Call Transcript

Key Tronic Corporation (NASDAQ:KTCC) Q2 2025 Earnings Call Transcript February 4, 2025

Operator: Good day, and welcome to the Key Tronic 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.

Tony Voorhees : Good afternoon, everyone. I am Tony Voorhees, Chief Financial Officer of Key Tronic. 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 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 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 GAAP 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 $0.46 per share for the second quarter of fiscal 2025, compared to net income of $1.1 million or $0.10 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 $0.35 per share compared to net income of $1.4 million or $0.13 per share for the same period of fiscal 2024.

Our adjusted net loss was 4.1 million or $0.38 per share for the second quarter of fiscal 2025, compared to adjusted net income of $1.1 million or $0.10 per share for the same period of fiscal year 2024. The adjusted net loss was $2.9 million or $0.27 for the first six months of fiscal 2025 compared to adjusted net income of $1.2 million or $0.11 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 are expecting CapEx for the full year to be approximately $8 million to $10 million, a significant part of this year’s capital expenditures will be related to our planned expansions and 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, SMT 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, constant efficiency improvements from our recent overhead reductions taking hold.

At the same time, we face reduced demand from certain longstanding 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 for 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.

Brett Larsen: 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 its 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. Our strong pipeline of potential new business underscores the continued trend towards onshoring and dual sourcing of contract manufacturing. We expect that global logistics problems, China-US geopolitical tensions, and the recent threat of tariffs on Mexico and China will continue to drive OEMs to reexamine 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 logistic 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 nearshore 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 Key Tronic’s deep and broad design services, and once we have completed the design and ramped it into production, we believe our knowledge of program-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 blast — blow, 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 peso. 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.

Q&A Session

Operator: [Operator Instructions]. Your first question comes from the line of Bill Dezellem with Titan Capital.

Bill Dezellem: Thank you. Brett, may I please start with, kind of my normal first question with these two wins? What’s the size of I guess it would be one that you have not talked about in detail and the timing for its production ramping.

Brett Larsen: Sure, yeah. The aerospace opportunity is going to start out at a $5 million program Bill, but there is potential for that to grow over time. The other is, that that is expected to begin ramping in the latter half of this calendar year. So probably the September-October timeframe. The second one, of course, we shared the energy resiliency technology. Our plans are still to have that begin ramping as well in the latter half of this calendar year.

Bill Dezellem: That’s helpful. And then you referenced both in your pre-announcement and today, the component shortages. I guess I haven’t heard about components being short any longer. Can you talk about how component shortages actually, or a component shortage has taken place and the how or why that that is an issue now?

Brett Larsen: You bet. We intended to and we attempted to try to delineate that by saying it was a specific set of components. I don’t see any real component shortages across our market. But this was a real specific set that unfortunately was being driven by one of our larger customers. And unfortunately, that specific set of components became in high demand at a very quick pace, and it disrupted, kind of slid that production into this quarter rather than being able to build it last quarter.

Bill Dezellem: Okay. Back up there for me, did you just say that the, there was high demand that led to the shortage and if so, was that high demand from your customer or industry at large? And I guess, did I hear that right?

Brett Larsen: Yeah, it was industry at large. So, it’s a specific set of components that unfortunately was not available when they attempted to try to bring that in for our production. That has been since resolved and just began resuming production on that line again the last couple of weeks.

Bill Dezellem: Thanks, Brett. So, does that imply that this customer, I mean, even though they, created, a problem with your revenues this quarter that their business has either does have or has the potential for significant growth given what you just described about the industry that they’re in is strong?

Brett Larsen: Yeah, there is, there is some potential long-term growth. And might I mention as well, we have proposed going to a full turnkey procurement as well so that we can manage that supply chain and hope to avoid this type of hiccups in the future?

Bill Dezellem: Okay. Thank you. And then let’s talk tariffs for a moment if we could please. What has been the commentary or mindset of your customers that are currently in Mexico with you about that production there and just kind of walk through the dynamics there, if you would please?

Brett Larsen : I think, we — initially I think we all thought that this was some leverage, some attempt by the current administration to get some leverage with Mexico on specific things that they’re asking for. Then it became fairly evident and I think scared all of us over the weekend that this might become a real tariff that everyone needed to deal with. Since that time, of course, there’s been a pause for 30 days on this specific tariff to Mexico, but that really has frankly, freaked out a lot of our customers. I think a lot of them are reflecting on how at a stroke of a pin can change the cost dynamics from outsourcing to Mexico, which has been in the past, something that’s been fairly stable and predictable. So, I think that it’s not just the tariff, but I think it’s as well the mindset of our customers trying to figure out how much of a risk building thing in Mexico may cause on their own profitability.

As we look at that, we offer some solutions. I don’t think there’s any perfect solution in this type of scenario, but that’s one of the reasons why we wanted to share with the market our expansion into our domestic Arkansas facility. And then also the strategic direction of continuing to build Vietnam into a larger part of our of what it contributes each and every quarter. While there might not be any silver bullet to avoid all tariffs, I think each and every program has its nuances that one of those locations may be better than another in total cost set.

Bill Dezellem: And relative to your large win that you announced, would you talk around as much detail around that as you can please?

Brett Larsen : Yes, for now they’ve asked us to keep that to anonymous, but we’re sure excited about it and really has opened up a new industry for us. And since that time, we’ve actually even entered into a lot of different other quote opportunities within the power in technology and utility space. Super excited about this particular product. It’s out in the market today and we’re excited to be able to grow with this company as they’ve seen an increased demand.

Bill Dezellem: Okay. Brett, if you will please allow me to be pointed here with a question. You all in the past have had some other large wins that you have announced and ultimately haven’t had a permanently meaningful benefit to the company. I mean, if we add $60 million to revenues, that’s a pretty big number. What gives you confidence that this actually does lead to a real meaningful increase and essentially a game changer for you all rather than, having something go haywire with it as some of the others have?

Brett Larsen: Sure. I think it is, it really hinges on the fact that they are well financed for one. Two is the actual product is a market disruptor. And you know, from what we see and from our vantage point there’s going to be some significant demand for this particular product. And then three, it’s already out in the market and functioning as intended. So, I think with those three things, we feel more confident at this point that this will really be a great program for us.

Bill Dezellem: Great. Thank you for that perspective. I’ll step back in line and if there are others that have questions, I’ll wait for them. Thank you.

Brett Larsen: Thanks Bill.

Operator: Thank you. We’ll take our next question from George Melas with MKH Management.

George Melas: Thank you. Hello, Brett. Hello, Tony. Just a few, a few follow up on Bill’s question. With that new win in the energy resiliency space, was that, is that a product that is partly manufactured in-house by your customer and you are taking over that production or you becoming a second source of production? How does that work?

Tony Voorhees: Yeah, George, we need to be careful on how much we share with that, but they’re currently outsourcing it today and, looking for a larger contract manager or contract manufacturer with a global footprint.

George Melas: Okay, great. Good. I won’t ask much more there. Question on inventory. I think you noted quite correctly that the inventory over the last year has gone down, but I think that you had seven quarters of reduction and that in this particular quarter the trend was reversed. So, I imagine that’s partly because of product that you could not ship, but how do you see that trending in the second half of the fiscal year?

Tony Voorhees: Yeah, so absolutely, that’s exactly what happened. The reason that our trend of continued inventory reduction flipped this last quarter, the second quarter, of course we missed on roughly $15 million to $20 million in revenue and a large part of that, of those components were already in route. So that was the reason for the slight uptick in overall inventory. My expectation is that inventory turns from what they are today, will continue to improve. Now, my hope is the revenue continues to increase throughout the rest of the calendar year. So that inventory will flex with that, but our turn still should improve.

George Melas: Okay. And do you still have a fair amount of the inventory that’s not on the balance sheet that’s actually owned by customers?

Tony Voorhees: Yes, we do. There’s — as we spoke before at the point in time components age, so they’re in our warehouse for, let’s just say 90 days. Then contractually, we actually invoice our customer for those. So yes, we still have quite a bit of that.

George Melas: Okay. Great. Okay, try to understand the gross profit and the gross margin. And there was a drop in the gross profit that was $5.6 million. And I’m trying to do a calculation and help me if that makes sense. So, the last time that you reported your cost of material, it was roughly 62% of revenue. That was in 2018, 2019. So, I’m doing the same math and I’m basically saying on a revenue dropped sequentially of $18 million [Indiscernible] and then in order to get to that $6 million of decline in gross profit, it means your productivity and support went down roughly $1 million. So, it seems like the fixed part of the manufacturing costs hardly moved at all despite the big drop in revenue, and that very small drop in production and support what’s facilitated by a drop in the payload versus the dollar. So, I’m trying to understand how that moves forward, because first of all, maybe are those numbers what numbers makes it?

Brett Larsen : Yes, I think those are directionally correct, George, and unfortunately in a very short timeframe, most of that production and overhead cost is pretty fixed. Now we can make changes to that, and I think Tony mentioned that we actually, we made some additional headcount reductions in January. But from a short period or within a quarter’s time, most of that production cost is pretty fixed.

George Melas : Okay. So that’s reflected in those numbers. Very good. And then just looking at your revenue, you sort of our guidance, because of the uncertainty as you said, but two of the three factors that really impacted you in the December quarter, the production hiccups related to the holiday period and the component shortage. Both of those factors seem to be not recurring, at least for the entire month of March. Maybe the components for some of them. So, we should see a nice pickup. Is that — and are you guys not guiding because of concerns about getting the top line right or is it more about the cross the [Indiscernible].

Tony Voorhees : At this point, just coming off of a crazy weekend where many of our customers are still trying to digest, hey, we were going to have to pay a 25-point tariff on anything coming into Mexico. And there’s again, there’s currently a 10% on the table for additional 10% on things coming in from China. They’re still trying to digest that and, will there be any shifts in either bringing product in quicker or will there be some delays of asking us to delay some shipments? So, it’s kind of both. It’s really, will there be any real big shifts in our customers’ demands because of that or because of what results in 30-day time? There’s just a lot in the air right now. Contractually, if a tariff were to be enacted, that is a cost that we would pass on to our customer.

Now, does that still, are we still competitive with other, with other contract manufacturers and those types of things? On the surface, you’d say yeah, because everyone is impacted the same, but it could force, you know, some additional competition and or transfers of legacy products maybe in internal or to another CM. So, all of those things, like we just, we felt comfortable to go ahead and pull the guidance for top line and bottom line, as you saw in quarter two, the bottom line is so drastically impacted on your revenue because we have so much in fixed cost. So, we’ll readdress that in a quarter. But I’m hoping between now and then things settle back down to where we have a good and solid, predictable revenue stream and then we’ll get back to offering guidance.

George Melas: Very good. Okay. I’ll go back in the queue. Thank you.

Tony Voorhees: Thank you.

Operator: Thank you. [Operator Instructions]. And at this time we have no additional questions. I will now turn the call back to Mr. Larsen for any additional or closing remarks.

Brett Larsen: Thank you again for participating in today’s conference call. Tony and I look forward to speaking to you again in next quarter.

Operator: This does conclude today’s call. Thank you for your participation. You may now disconnect.