KEY TRONIC CORP Q2 FY2025 earnings call

• Tony mentioned lower-than-anticipated revenue and earnings in Q2 FY25 due to component shortages, holiday production issues, and reduced demand; component shortages were resolved post-Q2. - Gross margins and operating margins declined in Q2 FY25 but margins expected to strengthen in coming quarters with higher revenue, efficiency, and cost savings. - New asset-based financing agreement provides up to $115M credit, $76M borrowed at end of Q2 FY25. - Brett noted expectation of revenue and earnings recovery in Q3 FY25 as strategic initiatives take effect; streamlining operations, headcount reductions, inventory in line with revenue. - Increased production capacity in Arkansas and Vietnam to benefit from onshoring and mitigate tariff uncertainties. - Won new programs in aerospace and energy resiliency, with one program expected to exceed $60M annual revenue once ramped.

For the second quarter of fiscal year 2025, total revenue was $113.9 million compared to $147.8 million in the same period of fiscal year 2024. The first six months of fiscal 2025 had total revenue of $245.4 million compared to $298 million in the same period of fiscal 2024. Gross margins were 6.8% and operating margins were negative 1% in Q2 FY25, versus 8% and 2.7% respectively in Q2 FY24. Inventory was reduced by approximately $23 million or 19% from the same time a year ago. Total liabilities were reduced by $38 million or 15% from a year ago. Accounts receivable DSOs were 99 days compared to 83 days a year ago.

• No revenue or earnings guidance for Q3 FY25. - Expect growth in US and Vietnam production, strong pipeline of new business, focus on improving profitability. - Long-term belief in being well-positioned to win new programs and expand profitably.

• Unexpected component shortages impacted Q2 FY25 revenue. - Recently announced tariffs on China and potential tariffs on Mexico create uncertainties for costs and margin performance. - Reduced demand from certain longstanding customers. - Economic and political uncertainty making it difficult to quantify full impact of tariffs.

Q: Bill Dezellem asked about the size and timing of the aerospace and energy resiliency wins.

A: Brett Larsen said the aerospace opportunity starts at $5M with potential to grow, ramping in latter half of 2025; energy resiliency tech program also ramping in latter half of 2025, annual revenue could exceed $60M once fully ramped.

Q: Bill Dezellem inquired about component shortages.

A: Brett Larsen said it was a specific set of components with high demand industry-wide, now resolved and production resuming.

Q: Bill Dezellem asked about customers' mindset regarding tariffs on Mexico.

A: Brett Larsen said customers are freaked out by potential tariffs, and Key Tronic is expanding domestic Arkansas facility and building Vietnam as part of cost-set solutions.

Q: George Melas asked about inventory trends.

A: Tony Voorhees said inventory uptick in Q2 due to missed revenue and components in route; expects inventory turns to improve as revenue increases.

Q: George Melas asked about gross profit and margin.

A: Brett Larsen said production and overhead costs are mostly fixed in short timeframe, contributing to gross profit drop.

Q: George Melas asked about guidance.

A: Tony Voorhees said no guidance due to uncertainty from tariffs and customers digesting tariff impacts, with many shifts in customers' demands still in the air