Release Date: August 13, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Key Tronic Corp (KTCC, Financial) reported a significant reduction in inventory by approximately $29 million or 21% from the same time a year ago, reflecting increased component availability and efforts to drive inventory reductions.
- The company improved its gross margin to 9% in Q4 FY2024, up from 8.5% in the same period of FY2023, primarily due to workforce reductions in Mexico and the weakening of the Mexican peso.
- Key Tronic Corp (KTCC) secured new business wins, including a $15 million program in Arkansas and another $15 million metals fabrication program in Mexico, indicating strong potential for future revenue growth.
- The company expects a rebound in revenue for Q1 FY2025, forecasting a range of $140 million to $150 million, driven by legacy customers and new programs ramping up.
- Key Tronic Corp (KTCC) has a strong pipeline of potential new business, with opportunities in various sectors such as security equipment, sporting goods, environmental solutions, and medical devices, highlighting its diversified growth prospects.
Negative Points
- Total revenue for Q4 FY2024 was $126.7 million, a decrease from $162.6 million in the same period of FY2023, indicating a significant year-over-year decline.
- The company experienced a cybersecurity incident that disrupted operations and led to approximately $15 million in unfulfilled revenue during Q4 FY2024, which will take time to recover.
- Net income was breakeven for Q4 FY2024, compared to $1.1 million or $0.1 per share in the same period of FY2023, reflecting a decline in profitability.
- For the full year of FY2024, Key Tronic Corp (KTCC) reported a net loss of approximately $800,000 or $0.07 per share, compared to net income of $5.2 million or $0.47 per share for FY2023.
- The company incurred additional cybersecurity-related expenses of approximately $2.3 million during Q4 FY2024, impacting its overall financial performance.
Q & A Highlights
Q: Brett, would you please start by sharing with us what proportion of $10 million of annual savings, or acquired roughly $0.7 per year. How much of that will be achieved in fiscal '25?
A: Through the fiscal year 2025 most of it, if not all of it, Bill, we're expecting that those cost savings to occur in the year.
Q: And some did fall into the Q4, how about just falls into fiscal '25?
A: I would say the majority of it fell into our fourth quarter since most of that severance occurred during our third quarter, there was some limited amount but the majority of it was felt in our fourth quarter.
Q: In the restructuring activities, I think that you mentioned on the last conference call that there may be more that needed to be done and I wasn't sure if that was all incorporated in this savings, if that additional activity took place in Q4 or if there is additional cost savings that you anticipate that could develop in the remainder of this year?
A: So, Bill, I think to that end, I think we are continuing, looking at our operating efficiencies. There is some potential additional restructuring in fiscal 2025. It's been great to see even after the reductions in force, there really has not been any concerns, issues, problems, delays in our production. So we're continuing to look to see is there some additional restructuring that could be done during fiscal '25. We're really not doing that right out of the gate, just because of the cyber event. We're on all cylinders trying to get through some of our orders backlog, but I could foresee possibly some restructuring to occur during the year.
Q: I do want to make sure I have you touch on the four new wins this quarter. What is the size of each of those and quite interesting stories might happen with each event?
A: Yes, one one is within our Arkansas facility. It's a fairly large program for Arkansas, it's predominantly electronics. That one is roughly about $15 million win. The other large one was a metals, predominantly metals fabrication, which will go down into our Mexico facility and then the two others were also for Mexico, roughly between $5 million and $10 million each.
Q: And the metal fab is how much?
A: Sorry, that too is about $15 million.
Q: The two $15 million wins this quarter?
A: Yes, Good quarter.
Q: Do you foresee any of these ramping either more or less slowly than the typical wins?
A: (Laughter) Out of the gate, they all great. There can be some delays. We don't know, my expectation is that by this time next year that will be fully ramped.
Q: I did want to key in on the medical device win. Sometimes medical devices have special requirements, whether it be clean room certifications, et cetera, et cetera. Is there anything around that idea to this specific win, and the spirit of this question is to understand if this could be the beginning of a new category for you?
A: Bill, we've always had some medical production. We're extremely interested in pursuing that industry. This was a good win for us. I don't think it's any more complex than what we've built today. We are certified in two of our locations to manufacturing of medical devices. This one isn't isn't much more, as mentioned isn't any more complex than what we're building today.
Q: In the release, one thing that I was surprised to read Brett was that Vietnam is being used for lower production, I would have thought that would have been your lowest cost facility. And therefore, for those who can have the longer lead time that they would, that you find some much bigger runs potentially coming there. Did I misread what you were trying to communicate? Or if I have some learning I need to do here?
A: No. That really is our our intent of Vietnam is to be our lowest cost facility. I think to your point, they need to have some ability to have increased transportation time. There are a few smaller programs in Vietnam, but longer term, my expectation is as that grows, those will really be more higher volume, less mix type products that are better suited for our lowest cost site. Did that answer it, Bill?
Q: The $2.3 billion cost, where did that fall within the P&L?
A: Predominantly in cost of goods. So I would say two-thirds of it is in cost of goods, one-third of it is in G&A. So, the outside advisory firm falls into the general, the operating expenses, whereas the required wages that we paid to keep workers was captured in cost of goods.
Q: It seems that you referenced in the release that you would anticipate that the $15 million of revenues that you believe that you missed out on, those will be it recaptured over the course of fiscal '25. Is that correct? Or should you be able to recapture the vast majority of that here in the first fiscal quarter?
A: No, it's going to take us more than just a quarter to get caught up. So, granted those specific orders will be made up in the first quarter, but then there is a delay possibly of things that our customer wanted then in the first quarter. So, to get completely caught up on that $15 million of lost orders, it may take us the better part of the year.
Q: There was a restructuring cost reversal that was, if I read it correctly, severance expense reversal of $223,000. Are we reading that right? And what led to that reversal that's not often that we see that?
A: Sure. No, that is correct. That was a reversal of expected severance expense. So, due to the cyber event and then also to the recovery of some of our legacy customers in Mexico, planned reductions in force of a few of our people did not occur. So, that is actually a recovery to the income statement. So included in the fourth quarter is that rough $200,000 worth of benefit because we didn't go through severance that was anticipated.
Q: Talking about the legacy customers rebounding. Provide a little more detail and perspective on that. And the spirit of this question, of course, is that if you look in the last couple of weeks, there's been an awful lot of question marks about the economy, at least in the popular press. Would love to get your view of
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
