Key Tronic(KTCC) - 2025 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - For Q3 FY2025, total revenue was $112 million, down from $142.4 million in the same period of FY2024, reflecting a significant decline due to global economic disruptions and tariff fluctuations [5] - Gross margins improved to 7.7% from 5.7% year-over-year, while operating margins remained negative at -0.4% [5] - The net loss for Q3 FY2025 was $600,000 or $0.06 per share, compared to a net loss of $2.2 million or $0.20 per share in Q3 FY2024 [6] - For the first nine months of FY2025, total revenue was $357.4 million, down from $440.4 million in the same period of FY2024 [5] Business Line Data and Key Metrics Changes - The company reported a reduction in inventory by approximately $16 million or 14% year-over-year, aligning inventory levels with current revenue [9] - Total liabilities decreased by $34.3 million or 14% from a year ago, indicating improved financial health [10] Market Data and Key Metrics Changes - The company faced significant uncertainties due to tariffs on China and potential tariffs on Mexico and Vietnam, impacting costs and margin performance [6][12] - The operational adjustments and cost-cutting measures are expected to enhance productivity and streamline the supply chain, contributing to stronger financial performance in the future [6] Company Strategy and Development Direction - The company is expanding production capacity in Arkansas and Vietnam, investing over $28 million in the US facility, which is expected to create over 400 jobs [15][16] - The strategic focus includes adapting to tariff implications by diversifying manufacturing locations and enhancing design capabilities to capture new business opportunities [14][19] - The company anticipates that the new facilities will come online during FY2026, allowing it to benefit from customer demand for rebalancing contract manufacturing [17] Management's Comments on Operating Environment and Future Outlook - Management noted that the global tariff wars are creating significant challenges, but they remain optimistic about the potential for growth and profitability improvements [12][21] - The company has decided not to provide revenue or earnings guidance for Q4 FY2025 due to the unpredictable economic and political climate [12] - Despite the uncertainties, management expects to see growth in US and Vietnam production and a strong pipeline of potential new business [12][21] Other Important Information - The company has made significant progress in managing working capital, with operating cash flows increasing to $10.1 million for the first nine months of FY2025, up from $6.1 million in the same period of FY2024 [11] - The company is focused on vertical integration and enhancing manufacturing process knowledge to differentiate itself from competitors [20] Q&A Session Summary Question: Can you walk us through the five new business wins and their anticipated dollar amounts? - The first win is a $12 million telecommunications program in Mexico, with production expected to ramp up in Q2 FY2026 [26] - The second is a $6 million pest control device program in Vietnam [27] - The third is a $7 million energy program in Arkansas, currently in the design stage [28] - The fourth is a consumer product worth $2 to $5 million, also in Arkansas [29] - The fifth is a design contract starting at $1 million, potentially growing to $5 to $15 million [30] Question: What impact is the macro environment having on the $60 million program? - The program is expected to generate income in Q1 FY2026, with a ramp-up period of 12 to 18 months [34][35] Question: Can you clarify the unusual items flagged in the report? - The severance in Mexico is included in cost of goods sold, while the balance of $700,000 is split between operating expenses and cost of goods sold [41][42] Question: How do you see gross margins improving as revenue grows? - With incremental revenue, the expectation is to exceed 10% gross margin as fixed costs are covered [44] Question: What is the current state of customer demand? - There has been a significant reduction in demand from existing customers, but new program wins are helping to offset this decline [47][50] Question: How is the company managing working capital? - The company manages over 90% of its customers' bill of materials and aims for inventory turns of four [53]