Release Date: February 04, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Key Tronic Corp (NASDAQ:KTCC) resolved component shortages, allowing production to resume, which is expected to improve future revenue.
• The company has secured a new asset-based financing agreement providing up to $115 million of available credit, enhancing financial flexibility.
• Inventory levels have been reduced by approximately $23 million, reflecting improved inventory management and increased component availability.
• Key Tronic Corp (NASDAQ:KTCC) is expanding production capacity in Arkansas and Vietnam, positioning itself to meet growing demand for onshoring manufacturing.
• The company has won new programs in aerospace systems and energy resiliency technology, with potential annual revenue exceeding $60 million, indicating strong future growth prospects.

Negative Points

• Key Tronic Corp (NASDAQ:KTCC) reported a significant decline in revenue for Q2 2025, down to $113.9 million from $147.8 million in the same period of fiscal 2024.
• The company experienced a net loss of $4.9 million for Q2 2025, compared to a net income of $1.1 million in the same period of fiscal 2024.
• Gross margins decreased to 6.8% in Q2 2025 from 8% in the same period of fiscal 2024, reflecting reduced revenue and operational challenges.
• The company faces uncertainties due to newly announced tariffs on China and potential tariffs on Mexico, which could impact costs and margins.
• Accounts receivable days sales outstanding (DSO) increased to 99 days from 83 days a year ago, indicating slower collection of receivables.

Q & A Highlights

• Warning! GuruFocus has detected 4 Warning Sign with KTCC.

Q: With the two new program wins, what is the size and timing for production ramping? A: The aerospace opportunity will start as a $5 million program with potential growth. It is expected to ramp in the latter half of the calendar year, around September or October. The energy resiliency technology program is also expected to begin ramping in the latter half of the year. - Brett Larson, CEO

Q: Can you explain the component shortages mentioned, as it seems unusual in the current market? A: The shortages were specific to a set of components driven by a large customer, which became in high demand quickly. This disrupted production, pushing it into the current quarter. The issue has been resolved, and production has resumed. - Brett Larson, CEO

Q: How are tariffs affecting your customers in Mexico, and what are the dynamics there? A: The potential tariffs have caused concern among customers, as they could change cost dynamics significantly. While there's a 30-day pause on the Mexico tariff, it has prompted customers to reassess risks. We are expanding in Arkansas and Vietnam to offer alternatives and mitigate tariff impacts. - Brett Larson, CEO

Q: Regarding the large win in the energy resiliency space, are you taking over production or becoming a second source? A: The product is currently outsourced, and we are stepping in as a larger contract manufacturer with a global footprint. - Brett Larson, CEO

Q: Can you clarify the impact of revenue drop on gross profit and fixed costs? A: The fixed production and overhead costs are largely unchanged in the short term, despite revenue drops. We made headcount reductions in January to address this. The peso's depreciation also helped offset some costs. - Brett Larson, CEO

For the complete transcript of the earnings call, please refer to the full earnings call transcript.