Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Key Tronic Corporations F4Q and Year-End Results Conference Call. [Operator instructions] This conference is being recorded today, August 21, 2012. I would now like to turn the conference over to Craig Gates. Please go ahead, sir.

Good afternoon, everyone. I’m Craig Gates, President and Chief Executive Officer of Key Tronic. I’d like to thank everyone for joining us today for our investor conference call. Joining me here in our Spokane Valley headquarters is Ron Klawitter, our Chief Financial Officer. Today we released our results for F4Q and year-end for F2012. It was a great year for Key Tronic, marked by rapid growth and increasing profitability. Our success continued to be driven by our unique combination of world-class engineering and global footprint and by the competitive advantages that resulted from our vertical integration and the expanding production capabilities in Mexico, China and the U.S.. As we continue to capture more market share and grow faster than many of our competitors we set a new record for annual revenue of $346.5 million. That’s up 36% from the prior year. This growth was powered by an increasingly diverse mix of new customer programs. At the end of F2012 we generated revenue from 165 separate programs with 48 different customers, up from 119 programs with 33 customers at the end of the prior year. As our business grew we overcame many challenges associated with rapid growth, steep program ramps, product mix changes and the addition of new facilities and people. We focused on optimizing product designs, production processes and supply chains, and made changes in our business processes to enable continued profitable growth. We saw significant increases in our margins and profitability. During the year we continued to expand our customer portfolio across a wide range of industries. We won new programs involving industrial, medical, military, educational, irrigation, gaming, automotive, transportation management, consumer electronics, household and robotics products. A lot of these new programs will take many months to move into production. The outstanding and unique services we provide our customers during a ramp phase has played a key role in our growth by becoming a powerful differentiator to help us win new programs. Now I would like to turn the call over to Ron to review our financial performance; then I will come back to discuss our strategy going forward. Ron?

Okay. Thanks, Craig. 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(q)’s and 8(k)’s. 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 and a recorded version of this call will be available on our website. Today we’ve released the results for the quarter ended and the year ended June 30, 2012. For F4Q 2012 we reported total revenue of $96.7 million. This is up 26% from the $66 million in the same period of F2011. For the full year F2012 total revenue was a record $346.5 million which is up 36% from the $253.8 million in F2011. Despite the fact that we have been moving many new programs into production we have continued to improve our gross margins. Our gross margin was 9.6% in F4Q 2012. This is up from 7.6% in the same period of F2011. For Q1 F2013, we expect to see our gross margins continue to be around 9% to 10%. Our operating expenses were $4 million for F4Q 2012. This is up 20% from F4Q last year, but it’s up much less than our year-over-year growth in revenue. Although the new program startups that fueled our revenue growth have required the addition of new engineers and program managers, we’ve done a pretty good job of controlling our costs. Our operating…

Okay. Thanks, Ron. Moving into F2013, we believe our fundamental strategy is sound. There are 3 major competitive advantages driving our continued success. First, increasing costs in China are forcing localized production - Mexico for North America, China for Asia. We stand alone in excellence and breadth of our Mexican operations. Second, our unique organizational structure which we have honed over 25 years of experience running offshore operations brings significant advantages to OEMs who want offshore cost savings but fear IP loss, who do not want to manage an offshore relationship, who fear offshore schedule risk and inventory uncertainty, and want US-based engineering and prototyping. And third, our size and responsiveness compared to our degree of vertical integration and engineering capability becomes even more attractive as the push for localized production intensifies. With these 3 competitive advantages we expect to continue to win market share. While mix changes in our product portfolio and costs associated with ramping up new programs will continue to be a part of our business, we expect our sustained focus on controlling costs, augmenting production processes and enhancing our capabilities will continue to result in profitable growth and competitive advantage. We are now the ninth largest US contract manufacturer and expect to be sixth by next year. As our growth moves us into the Tier II category of EMS providers we continue to provide the flexibility of a Tier III provider and the capabilities of a Tier I provider. Despite the continued macroeconomic uncertainty, we have strong business momentum and an increasingly diversified customer base. We anticipate more of our new customer programs moving into production and gradually ramping up and our pipeline of new business opportunities remains robust. Over the longer term, the EMS market is expected to see steady growth and we believe Key Tronic is increasingly well positioned to continue to capture market share and capitalize on emerging opportunities. In closing, I want to express my gratitude to our employees for their dedication and hard work during this challenging and rewarding period in our history. I also want to thank our valued customers who continue to honor us with their trust, and our shareholders for your continuing support. This concludes the formal portion of our presentation. Ron and I will be pleased to answer your questions.

[Operator instructions] And our first question comes from the line of Jay Kumar with Mid-Southwest.

Yes. My question is you’ve been adding a lot of new accounts. What is it, in a brief sentence or 2 - what is you secret sauce or hook, or what you think is the reason you’re adding so many new accounts. You all add more than anybody that I know of.

Secret sauce is what we’ve referred to it as before. There’s a number of ingredients in the sauce. The first is that for our size we have a number of unique advantages, so everything I’m going to mention in the next couple sentences has to be placed with the “for our size” proviso. So first of all, we have a very good and deep and talented engineering design capability. That’s unique for people in our size. Second, we’ve got a level of vertical integration that’s very unique for our size. The amount of different capabilities we have in Mexico, China and the states here are very unusual with our plastic molding, our tool manufacturing, our SMT high-volume assembly and our ability to deal with products that are very unusual. If you were to wander through our factory after having spent some time wandering through a number of our competitors’ factories you’d be amazed and shocked by what you see us build, and this is something that happens all the time when we get customers to our facilities. Typically an EMS company is putting PCB components onto a PCB, testing them and maybe sliding them into a white or gray plastic box - that’s where the term “box build” came from. We use the term “box build” but we find it a little bit dismissive because the boxes we build, perched inside of them are shafts, gears, pulleys, separate motors, hydraulics, pneumatics. So the things we build are very complex. They are unusual for the EMS world and typically we’re the first person or company that our OEM customer has ever outsourced a product to - not all the time. But so that gets us a lot of opportunities that maybe other EMS companies are bidding on, but when the customer walks into our factory and sees all the crazy stuff that we can build compared to what he sees in a regular competitor’s factory, that’s why we get these strange and wonderful products. And then finally the fact that we’ve been running offshore for so long - I started the factory in Juarez back in 1984, as a young pup engineer. We know a lot about running facilities offshore. It’s not easy and when customers look at how we do it versus how the rest of our competitors do it, that’s a very strong competitive advantage for us. So that probably exceeded your couple of sentences by quite a bit but it’s a pretty cool secret sauce that we’re quite proud of.

And our next question comes from the line of Mike Cikos with Sidoti & Company.

Just a couple of quick questions for you, one housekeeping: can you give the numbers for how much was borrowed and repaid on the revolver during F4Q and for the full year?

Well, we’ve got $15 million outstanding at the end of the year but we borrow and repay every day. So every expense that we have, we borrow; every dollar we collect from our customers, we repay. So probably equivalent to about $90 million that’s been borrowed and repaid during the quarter, and then during the year it’s close to what our revenue is, you’re going to have payments close to what our turnover is.

Okay, so it’s really just a function of the programs that you’re working on and your working capital needs. I guess number of programs and customers that you’ve been able to grab a hold of, that you guys are having greater success with - is it like robotics that you guys are doing well or is it medical? Is there one in particular that you can kind of point out?

No, in fact it’s a matter of pride that there’s not. Way back about 5, 6, 7 years ago when we were talking to people and they were berating us for the fact that we weren’t heavy into the telecom market, we were always a little bit contrary and said that we don’t want to be focused on one market; we want to spread our risk. So when we’re talking to customers about markets we talk about the similarities in the products and not the market. So we talk about if it’s got complex plastic parts that require precision molding, if it’s got complex printed circuit board assemblies that require high-level test and assembly, and particularly if the product has moving parts that require understanding of mechanics, electronics, tolerances, forces and things besides melting solder and sticking a part in the solder - those are the types of products that we have a bit of a competitive advantage in and usually win. So that’s the product type that we go after. The customer type that we go after are customers with high morals, customers who are looking for a long-term relationship and customers who value not only our price, but also value the responsiveness that we can provide as well as the level of added services that really define our relationship over time - but a lot of times, people don’t come to understand it until their third or fourth outsourcing experience.

Jumping around, I’m sorry for the movement but I’m thinking more about the engineers that you guys have taken on this year – can you comment on how many you have hired this year and what your expectations are for hires over the course of next year?

We’ve got quite a few interns - I don’t know how to count an intern, as a hire or maybe hire. But we’re probably over ten that we’ve hired and we’ll probably hire more than that again next year.

And as far as the guidance you’re giving, I know you guys had also made a mention of some other programs, more mature programs that are either going to start to decline or are just going to start coming offline. Can you give us an idea of how long the typical program does run for you guys or how many of these programs are going to be coming offline?

As far as the typical program goes, boy, it’d be hard to come off with an average off the top of my head. We have some programs that are 14 years old and are still going strong; we have some that are a couple of years old that have reached maturity. And we didn’t mention any programs actually that we thought were going to be coming offline. We just talked about programs that have hit maturity and are either going to be flat or maybe decline a little bit. We don’t have any programs that are coming offline and we don’t see a whole lot of decline. We’re more I guess really concerned about the mature programs matching up with the economics that we’re facing today. We’re seeing a lot of our customers begin to forecast on a much shorter timeline. Everybody seems to be so concerned about risk that they would rather pay upsides for air freight and overtime than they would give us the forecast outlook that they used to give us; and then have to talk with us about excess inventory. So even though the demand materializes on these mature programs, we don’t have quite the visibility that we did before because people are more and more concerned about what’s going to happen with the economy.

And with the shorter timelines and forecasts that you’re receiving, is that starting to smooth out the linearity of the quarter? I know that the last month always seems to be the biggest push. I mean what do you see on that front?

If we look at our charts and we do quite a bit of statistical analysis on the shape of the quarter, if we look back over the last year we see a consistent improvement in the orders we have at the beginning of the quarter. So for sure the last 4 quarters we’ve seen improvement in what’s in our order book at the beginning of the quarter. We still see a common pattern of at the beginning of the quarter it looks pretty good, then we see a kind of swoon in the middle of the quarter and then things pick up at the end of the quarter. And I don’t know if that’s just because God likes to make us nervous or what the cause is of that but that has gotten to be better understood as we’ve been doing all the stats on it. And as I said, the upfront orders have been looking higher as a percentage of our projection for the quarter so we’ve been consistently less nervous over the past 4 or 5 quarters.

Okay, and then last question before I jump back into the queue. I wanted to make sure I didn’t miss anything. Typically in the last couple of press releases there’s been a statement saying “Hey, we won 3 or 4 new customers; programs are going to run anywhere between $5 million and $15 million.” Is there anything like that, that we should know about?

Yes, we did about that same range again. We’ve been winning programs, I think we won 4 or 5, what was the number - do you remember?

During the quarter it was about the same level, 3 or 4.

Yes, 3 or 4 between $5 million and $20 million.

[Operator instructions] And our next question comes from the line of Bill Dezellem with Tieton Capital Management.

First of all I want to circle back to your comments. Craig, your reference to the first questioner’s question where you prefaced everything by saying “for your size,” would you share with us why that’s a relevant preface to all your comments?

You can find somebody that’s a competitor of ours so to speak that does $4 billion or $5 billion a year in revenue that have the kind of advantages that I talked about, but they’re doing $4 billion or $5 billion in revenue. And if you’re a Key Tronic’s targeted customers you’re probably looking to place a program between $5 million and $80 million. This $4 billion or $5 billion competitor of ours to answer the phone because you need him to do the plastic molding, you need some mechanical designs, you need to test equipment design and you need to have somebody figure out how to build your machine that has pneumatics, hydraulics and stepper motors in it. The only guys you can think of to call won’t answer your call because you’re too small to interest them. So Key Tronic is about or probably the only person in our size range that can offer a customer of that size the advantages that we offer.

That’s helpful. And then relative to the 4 new programs that you referenced in the release - robotic, automotive, industrial, and gaming products - is that in fact 4 new programs or did you happen to have more than one new program in one of those 4 categories?

That was 4 distinct programs.

And did I hear correctly in response to the prior questioner $5 million to $20 million as the range of those 4 programs?

Yes.

And which of those 4 are from existing customers and which are from new customers?

One is from existing and 3 are from new.

And I guess I’m curious how on your side of the discussion, you view an existing customer versus a new customer, because clearly if you’re getting new programs from an existing customer that implies that you’ve done something well for them in their mind and you are gaining further penetration and market share with that customer; and yet new programs, clearly that’s also positive. Do you distinguish between them and what remarks would you have for us on the outside about that?

Well, it’s kind of like asking me which I prefer more - T-bone steak or a butterscotch shake. I like them both.

Let me shift then to the 165 programs that you referenced that you have that are revenue producing today. How many of those are not fully ramped? And the sequel to that question is if they were all fully ramped, what would do in terms of a quarterly revenue run rate?

I don’t think I can answer that off the top of my head - the number’s got too big.

And is that a question that we can take offline or is the level of complication behind it just not…

It’s one of those things where if I sit there and try to answer it with the level of quality I like to put on an answer I would have to make so many assumptions and provisos and carve-outs that I don’t think the number that I finally gave you would be any good.

Alright, that’s helpful. And then I’ve got I guess somewhat of a bigger qualitative sort of question that I’d like to get your feedback on. Your revenues grew very, very quickly, basically sprinted from the mid-$60 million’s per quarter up to the mid-$90 million’s for quarter. Now it’s back on what I’ll call a methodical, steady, more of a marathon pace rather than the sprint sort of pace that you had been on. Do you foresee as you look out between any of the many programs that have not fully ramped or that have not even started ramping, that you see additional periods of revenue blast or pop? Or do you believe the company has to some degree matured to a point that it’s now more that steady marathon?

Well, what we said is that we’re going to grow faster than the market and that’s all we’re willing to commit for the shareholders. If you’d have asked me the same question 2 years ago before the sprint occurred, what I saw then is no different from what I see today in terms of when we say we’ve won a new customer or a new program in the $5 million to $20 million range. Some of those, if you were to believe what the customer told us it could be $40 million, $50 million, $60 million, but we’ve been disappointed so many times. So we don’t claim that number because we’ll believe it when we see it. But 2 years ago when we were looking ahead, what we saw then - if I try to compare that to what we see today, the programs we’ve won, the customers we have and projections for their programs, it looks about the same. But are we willing to commit to you and shareholders that we’re going to have another sprint? No.

So the interesting challenge that I’m curious how you address is it almost seems as though you need to plan for the marathon pace but be ready to sprint at any moment? Is that fair or how do you balance the realities that you just described?

That’s a great question. We’ve been working the past year on what we call the $1 billion plan. We can’t afford another sprint under the highly stressed conditions we had in the last sprint, so if we want to stick with the sports analogy, even though we may not have to be ready to run the sprint we’re doing ladders to make sure we’re not going to pull a muscle if we have to. So we’re working on the business processes that are in place. If we do ring the bell and we get another 100% growth we’ll be able to do it without killing ourselves in terms of the costs required to get the programs in here or the systems required to control the programs once they’re here, or the hiring and training practices that would be required to grow that fast. So we’re trying to get ready for it. We’re trying to be prepared for it because it’s possible it may happen. But at the same time as you can see form our profit margins we’re not spending a ton of money betting on it and forcing ourselves into a corner if it doesn’t happen, and “all” that we do is beat the market.

If you were to end up in another situation where you needed to sprint when some big revenue programs come on all at once, as you did here in the past, you believe that your net income results would not be negatively affected in the same way that they were through that new product introduction and ramp phase.

We believe that. Whether we’d be right or not who knows, but we certainly did a lot of work to get ourselves to believe that. It hasn’t been just looking in the mirror and saying “By golly, we’re going to be okay.” We’ve actually made a lot of changes

Great, well that’s very helpful, and best of luck in having to actually address that situation and figuring out whether what you see in the mirror is correct now.

And we do have a follow-up question from the line of Mike Cikos with Sidoti & Company.

I just wanted to touch up on one other thing. Given your size, and I understand that the growth we’re seeing is tremendous, but are you looking to layer in acquisitions on top of your current growth strategy? If so, can you comment on whether or not you’re looking for opportunities currently in the market?

We always have our eye toward an acquisition. We want to, if possible, the only way we’re going to do it I should say, is if we can find somebody that we can help quite a bit. So we are going to look for a target who has customers that we’re interested in and who either has a problem with where their factories are or has a problem with how their factories are being run, or has a problem with the engineering services that they can bring to bear. But something we can add value to and not just try to make the thing accretive by laying off a layer of management.

And can you provide some more clarification then on what kind of size or range, or how is it you would elavaluate those candidates aside from the value added proposition that you can throw in the mix?

Well, I don’t think we’re going to buy anybody bigger than ourselves and I don’t think it would be worth the trouble to buy anybody much smaller than $30 million or $40 million. So somewhere in between there is probably where we would be looking for a target.

[Operator instructions] And we do have a follow up question from the line of Bill Dezellem with Tieton Capital Management.

I wanted to circle back to the new programs real quickly here, and specifically those you have no revenue from. I hesitate to ask this but I sense that in your business some of the customers can be flaky and award business but then never actually do anything with it. If you have 165 producing today, how many programs have you won but they’re not revenue producing? Or is the question even relevant given how flaky I perceive some customers can be?

Well, let me take a little bit of a liberty with your question and change it into one I think I can answer and that will make sense.

It’s always helpful when someone asks a better question and then will answer it too.

Thanks, Bill. As you know we meet every morning with the management team to review the operations, and on our SMART whiteboard in the conference room we have 13 customers or programs that are on the wall that are either very, very much in their infancy or at zero that we’re focusing on driving through our goals on what that program or customer will be worth to us in a year. So these are all programs that have been born just recently and this process is something we just implemented a couple of months ago because there’s starting to be too many of them that we were losing track of each one of them - and there it was. These new customers/programs have management team executive sponsors assigned to them and we’re reviewing them on a weekly basis to make sure that we’re doing what we can do to help the customer bring the program into our factory as quickly as possible, because what we find is that almost without exception, our customers have good intentions when they award us a program and give us a number, but in many cases the transfer is slowed down by one item that isn’t necessarily our responsibility to help; but if we can help it without a lot of cost and bring ourselves some more revenue a quarter or 2 earlier we’re happy to do it. In other cases we’re screwing up because we don’t understand that a customer is waiting for something or thinks we need to do something. Looking at them with this high level of focus is helping keep them all on track, but the number you’re looking for I think is 13.

And how does that number compare to 1, 2, 3 years in the past?

It’s quite a bit bigger.

[Operator instructions] And I am showing no further questions at this time. I would like to turn the call back over to management for any closing remarks.

Okay, well we thank you again for participating in today’s conference call. Ron and I look forward to speaking with you again next quarter. Thanks and have a good day.

Ladies and gentlemen, this does conclude today’s conference call. If you would like to listen to a replay of today’s conference call please dial 1-800-406-7325 or 303-590-3030 and enter access code 455286. Thank you and have great day.