Key Tronic Corp (KTCC) 2011 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Than you for standing by. Welcome to the Key Tronic Corporation fourth quarter and year end for fiscal 2011 conference call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be opened for questions.

(Operator Instructions)

This conference is being recorded today, Tuesday, August 23, 2011. At this time I'd like to turn the conference over to Craig Gates, President and Chief Executive Officer. Please go ahead, sir.

Good afternoon, everyone. I'm Craig Gates, President, Chief Executive Officer of Key Tronic. I'd like to thank everyone for joining us today for our investor conference call. Joining me here at our Spokane Valley headquarters is Ron Klawitter, our Chief Financial Officer.

Today, we released our results for the fourth quarter and full year fiscal 2011. In spite of a sputtering global economy and industry-wide supply chain constraints that were affected by a natural disaster and uneven demand, fiscal 2011 was a year of strong growth and continued profitability for Key Tronic. The unique strategic attributes that we have worked to strengthen and leverage have driven our profitable growth and enabled us to continue to capture market share.

As we move into 2012, we are still in the ramp phase of many of the programs won during 2011. As a result of these ongoing ramps, we see last year's growth continuing through the near term. Over the longer term, we remain well-positioned to profitably grow our business, capture additional market share, and capitalize on emerging EMS opportunities.

Now, I'd like to turn the call over to Ron to review our financial performance, then I will come back to discuss our progress and our strategy going forward. Ron?

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-Qs and 8-Ks. 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 released the results for the quarter and year-end July 2, 2011.

For the fourth quarter of fiscal 2011, we reported total revenue of $66 million, this is up 7% from the same period of fiscal 2010. For the full year of fiscal 2011, total revenue was $253.8 million, which is up 27% from fiscal 2010.

Throughout most of the year, our operating margins were adversely affected as we absorbed the cost associated with bringing many new programs into production under tight deadlines and while dealing with industry-wide supply chain constraints. The fourth quarter, however, with the component shortages behind us, we saw marked improvement in our margins as our efforts to optimize the product designs, production processes, and supply chains of our new programs began to pay off.

Our gross margin was 8% in Q4, this is up from 7% in the previous quarter; and within our long-term target of around 8% to 9%. Our operating expenses were $3.3 million in the fourth quarter of fiscal 2011, comparable to the previous quarter and down from $3.6 million in the fourth quarter of last year. Although the new program start-ups that fueled our revenue growth required the addition of engineers and program managers to our staff, we've done a pretty good job of controlling our costs. Net income for the fourth quarter of fiscal 2011 was $1.5 million or $0.15 per diluted share, compared to $2.3 million or $0.22 per diluted share for the same period of fiscal 2010. For the full year of fiscal 2011, net income was $5.7 million or $0.55 per diluted share, compared to $8.7 million or $0.85 per diluted share for fiscal 2010.

Turning to the balance sheet. Inventory was up from a year ago, but down $3.8 million from the previous quarter. The year-over-year inventory increase reflects our recent and expected growth in production levels for a number of our new programs. Sequentially, we're pleased to see our inventories return to levels more in line with our expected revenue levels. Note that by the end of the fourth quarter, we had brought the balance of our line of credit down by about $8 million from the previous quarter.

Despite our revenue growth, our trade receivables were $40.4 million at the end of the fourth quarter. This is down from $42.3 million at the end of the previous quarter. Our days sales outstanding was 49 days, which is even lower than recent quarters and below our target range. Our capital expenditures for fiscal 2011 were $3.1 million, and we expect CapEx to be about $5 million for fiscal year 2012.

Moving into the first quarter of 2012, our new programs continued to ramp in production; yet, our customers generally remained cautious in the current macroeconomic environment. Taking these factors into consideration, we expect revenue in the range of $65 million to $69 million in the first quarter of fiscal 2012. In the first quarter, we expect our gross margins to continue to be in the 8% and 9% range. We also expect our operating margins -- or operating expenses to remain relatively flat in coming periods. We expect earnings in the range of $0.10 to $0.15 per share for the first quarter.

Note that our forecast may be impacted by supply chain issues, changes in customers' forecasts, changes in general economic conditions, and other risk factors outlined in the documents the Company has filed with the SEC that could result in variances in our results. Over the longer term, we believe that we are well-positioned to continue to profitably expand our business.

That's it from me Craig.

All right. Thanks, Ron. We're happy with our strong revenue growth in fiscal 2011. While our customers' existing programs tended to remain closer to recession levels than they and we would like, our growth was powered by revenue from new programs with both existing and new customers. We're proud of the fact that we achieved solid profitability and set a new revenue record the hard way, new program wins and successful ramps.

Due to our unique blend of multinational facilities and centralized management and the result in benefits to our customers, we continue to see our market share grow. At the end of fiscal 2011 we were generating revenue from 30 EMS customers compared to 20 at the end of the previous year. We believe that our continued investment in our business, our solid execution of our long-term strategy, and our continued profitability is being rewarded with increased confidence from existing customers and increased interest from potential new customers.

During the year, we continued to extend our customer portfolio across a wide range of industries. We won new programs involving electric motor controllers, innovative display devices, fire safety devices, military power supply equipment, mobile device accessories, aerospace, household products, solar power controllers, energy monitors, and electronic white boards. As a part of our long-term strategy, we're doing more design work for our customers.

Optimizing the new product designs, production processes, supply chains, and communications channels is complex. While most of our new program wins will take many months to ramp in production, our work during the ramp phase helps demonstrate our unique expertise and our commitment to quality and service excellence helping to cement and deepen our customer relationships.

In recent periods, more potential customers are recognizing the advantages of our production capabilities in Mexico, particularly as manufacturing costs in China and Trans-Pacific shipping costs increase. Our combination of facilities in Mexico, China, and the US allows us to offer world class manufacturing from three geographic locations and optimize the supply chain for our customers' unique businesses. Moreover, our expertise in operating multiple offshore facilities and our centralized inventory IP, production, and engineering management provides significant competitive advantages to our customers.

Moving into fiscal 2012, our 2011 results bolster our belief in our fundamental strategies. While mix changes in our program portfolio and costs associated with ramping up new programs will continue to be part of our business, we expect our sustained focus on controlling costs, augmenting production processes, redesigning our customers' products for manufacturability, and enhancing our production capabilities will continue to result in profitable growth and to set us apart from many of our peers.

Despite the current macroeconomic uncertainty, we've got strong business momentum and a well-diversified customer base, and we expect a number of our new programs to move in to production and gradually ramp up. Recent studies continue to forecast double-digit growth for the EMS market in the coming years. We believe we're increasingly well-positioned to continue to capture market share, and capitalize on emerging opportunities in fiscal 2012 and beyond.

In closing, I want to express my gratitude to our employees for their unwavering dedication and hard work. Our valued customers continue to place their trust in us and we feel honored by that trust. Finally, I want to thank our shareholders for your continuing support.

This concludes the formal portion of our presentation. Ron and I will now be pleased to answer your questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Our first question's from the line of Bill Dezellem with Tieton Capital Management. Please go ahead.

Thank you. We have a group of questions. I'd like to start out, though, with -- your revenues were above the guidance that you gave at the end of last quarter. What happened to cause that and why was it that revenues were higher than guidance?

Well, the guidance in our industry is pretty tough to be right on the money in normal situations, Bill. And in the situation we're in right now, which is quite a few steep ramps, it's pretty hard for us to tell plus or minus $1 million of revenue when that ramp is going to take off, when it's going to be effective and if it's going to be smooth or filled with some problems or filled with a lot of problems. So the little bit above our guidance is a result of some ramps going a little bit faster than we had hoped and some other ramps not going as bad as we had feared.

To what degree did the component shortages alleviating themselves lead to any additional catch-up revenues in this quarter?

I don't think there were any catch-up revenues as a result of the supply chain getting a little bit more comfortable. I think the biggest effect that the supply chain had this quarter and the fact that it got better was that we didn't spend as much money on overtime, trying to get product out the door, even though we got the supplies in late to build them.

So really the supply chain phenomenon was a benefit to earnings, not necessarily to revenues?

Yes.

That makes sense. And then, I guess as I generally do each quarter, ask about your new customer wins or new program wins. It appears as though the press release that there were 3 different program wins this quarter. Is that correct?

Yes.

And I guess 2 additional questions on that. What's the size of each of them and would you describe in whatever detail you can each of those wins, please?

I can't give you much detail on the description, and they all fit our typical answer which is $5 million to $30 million in revenue a year.

All right. That's helpful. And one additional question for now and then I'll step back into the queue. How was the linearity of revenues in the June quarter?

It was pretty bad. It was better than the previous quarter, but it was still pretty bad. But by bad I mean that the third month of the quarter was quite a bit above the revenue in the first and second months.

Almost half our revenue for the quarter came in the last month. Of course, our last month -- the way we got our fiscal calendar, our last month is 5 weeks under the 13 week quarter, but still represented almost half of our revenue.

When you recall that that's better than the previous quarter, you know how tough the previous quarter was.

Yes, and I guess that raises an additional question, which is would you anticipate the linearity to improve in the September quarter? And if so, wouldn't that indicate that maybe you could have some margin improvement sequentially?

Well, again, it all goes to how much of the revenue in this quarter and next quarter are due to new programs versus existing programs, how fast the ramps go, how good of a job our customers do in transferring their supply chains to us. So there's a lot of different moving parts to this machine that, in general, we usually figure out how to make it all work. But being able to forecast it and compare it, I can't really do that much with that much surety.

Bill, I will clarify for you, though, on our fourth quarter, our income tax rate was almost zero because we were able to realize some, and recognize some R&D credits that we previously hadn't recognized. Going into the Q1, we're expecting our effective tax rate to be back around 32%. So when you factor that into our earnings projection, it shows that our pretax margins we're expecting about a 1% improvement in our margin percentage in Q1 compared to Q4.

With that in mind --

Your comment about better margins or more efficiency gains in the Q1 is included in our forecast for Q1.

So really the way that we should be thinking about your guidance, if we were to put it -- a similar or comparable income tax rate is, that revenues you're looking for them approximately to be flat to up sequentially and you're looking for earnings to be up sequentially?

Pretax earnings; that's correct.

Pretax earnings.

Yes.

That's very helpful. Thank you. I have additional questions but I'll let others ask some first.

Thank you. Our next question's from the line of Mike Secos with Sidoti & Company. Please go ahead.

Hi, Ron, Craig, how's everything going today?

Great.

Good. The question I had, the previous caller had tapped into it as far as the tax rate. So you're expecting I guess approximately 32% in the first quarter of fiscal '12?

That's correct.

Okay. And do you think that's going to be the standard going forward? Because I know in the last couple quarters it's kind of been all over the charts here.

Yes, we've had -- coming out of the last couple years, we've had a lot of work on our income taxes. We've had -- we still have approximately $18 million of net operating loss carry-forwards, which up until last year, we hadn't recognized those benefits to our statements. We also then have done a study on R&D credits that we haven't done in the last 15 years because we have the NOLs, and we said doesn't make much sense spending money on an R&D study if we're not going to be able to utilize all our NOLs.

Now it looks like we're going to be able to utilize our NOLs within the next couple years. So when we did the R&D study, we found out that we had some R&D credits that were available to us that we recognized. So the income taxes over this past year has been kind of erratic. We think we've got those -- most of the items identified for our foreign locations and for the US, so that going forward we expect our effective tax rate to be around the 32% range, plus or minus a couple percentage points.

Okay. And the plus or minus, those couple of percentage points as a result of those, I guess, $18 million you're still carrying in net operating losses.

That $18 million's already been recognized in our financial statements.

Okay, I apologize, I misinterpreted. Okay. And then as far as the -- you don't give a number as far as the number of new clients you've been able to draw, because I know the biggest thing for this story right now is just diversifying your customer base. Should we expect something like that in the 10-K?

Well, we gave you -- we said that we're at 30 customers today versus 20 a year ago, and we talk in every release about the types of new customers we've won. We have a hard time getting real precise on that also because, the day you're told you're going to win the business, versus the day you see the first PO, versus the day you see the first production, they're all kind of hard to tie down. So there's a lot of slop-over between quarter to quarter.

But there will be -- as you mentioned, there will be in our 10-K, we do have an analysis of our industry diversification where revenues are coming from industries. Also, it talks about our customers, number of customers, and our revenue concentration.

Okay. And then the other question I had is, as far as new programs that you've been able to sign or I guess even with the efficiencies you have for new projects, I know gross margins we're talking about you aiming for that 8% to 9%. With the R&D and the SG&A, do you think those will remain relatively stable or do you expect any, I guess, increased expenses trying to ramp up your sales team at all?

Yes, our operating expenses are fairly fixed. We don't expect much in dollar terms -- much change in our run rate and operating expenses. They may go up $100,000 to $200,000 a quarter towards the end of the year; but there's going to range in the $3.3 million to $3.5 million range for operating expenses. We're able to leverage off of that as we grow revenue, not have to add a lot of additional people in our operating expense category and get that incremental benefit of that revenue growth.

Part of what we're seeing is that the -- we're finding that we're able to do more and more engineering work for our customers so even though we have added some engineers, we're getting reimbursed for quite a bit of their time and work too.

Okay. All right. Terrific. That's very helpful. Thank you guys.

Thank you. Our next question comes from the line of Buzz Heidtke with Midsouth Investment Fund. Please go ahead.

All my questions were answered except for R&D. Are you going continue spending about the same amount on R&D?

Right.

In relation to sales?

Yes, on the R&D as a part of our operating expenses. So as Craig mentioned, a good portion of our engineering is reimbursed, but we're running about $1 million a quarter in R&D expenses and that's about what we expect to stay.

Okay. That's fine. Thank you very much.

Thank you. Our next question comes from the line of Sheldon Grodsky with Grodsky & Associates. Please go ahead.

Good afternoon, everybody.

Hello.

I have -- it might be a nitty gritty question, it might be a naive question, but how do your contracts run as far as cost? Do you guarantee a certain number -- do you say you're going to deliver the units at this price and if the costs run up, then it comes out of your pocket; or is there some kind of moving negotiation as to who's responsible? As an example, not the best example for your Company, necessarily, steel prices -- if steel prices were to run up, would that be something that could hurt your gross margins; or is it something that would be part of the calculation? I assume plastic resins maybe more important than steel, but I really don't know how that works. Can you give me some idea?

Yes, sure. First of all, there's 30 different customers so there's 30 different arrangements, so I'm going to have to speak on average. This business, the industry standard in our business are all pretty much a pass-through in terms of material cost. Various contracts differ on the percentage that triggers a pass-through change and various contracts differ on the time sequences that are required for a price to be higher or lower before that is recognized in our price to our customers.

But in general and on average, you could say that the materials costs are passed through by us to our customers. And if it goes up sharply and then drops right before the end of a period, then we may be hurt by it. On the other hand, if it goes down and then comes up sharply right before the end of the period, we may reap some benefits from it. So it's kind of random in terms of the short-term effects.

Thank you.

Thank you. Our next question comes from the line of Jeffrey Link with Insmed. Please go ahead.

Good afternoon.

Hi.

I think I may be asking a variation of some of the prior callers' questions. This is just on the gross profit and, I'm still, Ron, even though you and I have spoken on I think some of these issues in the past, I'm still trying to understand if you take a look at gross profit last year versus this year, and for example in the last year's quarter I think it was around 10%+, now it's in this kind of 8%, 9%-ish range.

Yes.

I know you've discussed the fact that when you're bringing new accounts on, oftentimes it starts off at a lower percentage. I guess, what took place last year versus this year? And if you can just first talk about that and then understanding, as you're bringing the new accounts on now, are you having to kind of give up some margin to get to win that business and then does it kind of normalize after that?

So for last year to this year, there was quite a bit of more mature programs that we have been building for 7, 8, 9 years that we have pretty much all the bugs worked out of. So they were running at quite a bit higher margins than a lot of the new programs that we've been bringing on that are pretty buggy. So there's a pretty big change in I'd say the average age of the program that's creating our revenue. So that's probably the first and the biggest change.

And then the second is that we periodically place bets on ourselves, where if we see a big piece of business that's at a tight margin, and if we believe that we're going to be able to design ourselves out of either through processes or through product changes -- design ourselves out of that tight margin into better margin, we will take that business and bet on ourselves. And we've got a pretty stellar track record of making those bets pay off. So those are the 2 things that are going on. I wouldn't say that on average or as a trend we've had to take a lot of tighter margin business because of macroeconomic trends or industry trends. But the timing of it, just in a random fashion is that this year versus last year there's a lot of new programs and a few of those we placed bets on.

There has been a change in our product mix as well, our customer mix, and as a result of that, our material cost as a percentage of revenue this year compared to last year is about 5 points higher. So on a year-over-year basis, our overall gross margin last year for the 12 months was about 10%. This year was about 8%. So it's about a 2% erosion on gross margin year-over-year. But material costs as a percentage of revenue is actually higher by 5%.

So we were able to make up part of that with the higher volumes and our efficiencies in the factory. It's unusual, in this industry, to get sustained double-digit gross margins and we were fortunate last year, as Craig mentioned, because we had some older programs that we've been building for quite a long time that we had some nice margins on it. The new business we're winning is we look at every piece of business individually and we look at the return on invested capital on each piece of business and we can tell that it's all above our hurdle rates of about 12% to 14% return on invested capital.

But we did see an erosion of our gross margins. We do expect to see those gross margins go up this coming year. Probably, as we mentioned, sequentially from Q4 to Q1, we're expecting to see about a 1% improvement in our gross margins.

Again, I guess it's because I'm newer to understanding this piece of the business, but why would higher material costs impact you if the client is paying for all that and you're just responsible for the assembly?

Well, the material cost is a larger percentage of the overall business, of overall revenue. So if material costs are being passed through, which they are, that means that there's less value add that we can really markup on. So that's the reason why there's -- the material costs as a percentage of revenue is a pretty significant factor that we look at. If you look at overall, material costs are running about 70% to 75% of revenue, and you can't really mark up that material much.

So most of the markup that we have is going to be in our value-add. So on some of these new programs that we've won, the material cost as a percentage of revenue on some of those newer programs were above 80%. And as I mentioned, we don't really markup the material that much, so that's the reason why you'd see an erosion of the overall gross margin. But it's not really affecting our overall bottom line in dollar terms.

And just then to the extent you can talk about this, you have 30 customers, 3 of those 30 are newer accounts, correct?

Yes.

So if you look at that base of 27, now being a more maturing base and you're saying that you guys are very good at kind of tweaking the assembly and production to improve that, do you see a lot of opportunity with those 27 accounts?

Well, first of all, you need to -- I'm sorry if you already know this, but if you don't, I'm going to explain it anyway. In our business, the acquisition cycle is anywhere from 9 months to 1.5 years. So when we say that we had 20 customers at the end of last year and we've got 30 today, out of those 10 new programs, quite a few of those are still in the ramp phase.

So even though we talk about the 3 programs that we won just the last quarter, you have to think about all 10 of those as being -- actually, there's more programs than new customers. So it's probably more like 17 or 18 new programs that we're still -- either just got done ramping or we're still in the ramp phase of because it takes a long time to bring these in. So that's why we say, looking forward, that if we were to stop -- and this is what you have to think of -- if we were to stop growing today and remain stable at the run rate we've got today, our margins would probably grow again.

We don't intend to stay stable. We intend to continue to grow and so we think we're going to hold our margins in the 8% to 9% as we take on new business and invest in our ability to put that new business up at higher margin levels. So it's kind of a split answer to your question but that's the way we look at it. If we were to stabilize, we could drive the margins up. If we're going to keep growing, we're going to have to hold them about flat because every one of these new programs is expensive to put in here and fix.

Understand. Okay. And then on a different topic, this will be my last question. I know you addressed it a little bit at the beginning of your remarks but, just in understanding the overall business tone, we get these manufacturing numbers, the Philly Fed was down dramatically I think last week, and you get the sense that manufacturing is really weakening and there's predictions of if not an outright recession but a severe slowdown in growth. Are you seeing anything at all in your customer base that would suggest a slowdown or any kind of a concern of a slowdown?

Well, I wish we could tell you that we're a leading indicator and so you and I could all go out and trade in the market and make a ton of money, but we're not. So we -- if we look back at what happened in '08, we didn't see our customers forecasting the sudden drop that happened. And so as we look at what's going on today, we again don't see our customers forecasting a sudden drop. But we all read the various pieces of data that come out, and it's scary but it's not apparent in our current forecast.

Our customers typically update their forecast every month, on average again, and our customers are typically woefully wrong on their forecasts. That's part of why we've been succeeding so well is we can respond even though the forecasts are not very accurate. So we don't see, as of yet, any kind of a consistent down signal from our customers in terms of their forecasts. But that's not to say that we won't, and you can't take that to the bank is that we're a leading indicator, because we're not.

And if you looked at '08 from the time that things slowed down, when did you guys experience the slowdown from your customers saying, okay, we're putting the brakes on?

It was about 3 to 6 months later.

Okay. Thank you very much.

You bet.

Thank you. (Operator Instructions). And our next question is a follow-up from the line of Bill Dezellem from Tieton Capital Management. Please go ahead.

Thank you very much. Would you please address the violence in Juarez and the effect, if any, that's had on your business?

Sure. Well, the Juarez situation is different than what you read in the press. I started our factory when I worked for Honeywell, the factory we own today, I started back in 1985. So I've been going down there since '85.

All of us in Key Tronic are still traveling to Juarez. We have taken a lot of precautions because if anything bad were ever to happen, we all want to be able to look ourselves in the mirror and say we did everything humanly possible to keep our people safe. So it's not like we're trying to discount what's going on in Juarez because it's not good, but the devil's in the details. If you look at business' reaction to what's gone on in Juarez, it's pretty contradictory to what you read in the press. The number of maquilladoras and the people they've hired, I think I've got a stat here that says it was 8,800 people in the first quarter of calendar 2011 were hired by maquilladoras like us in Juarez.

If you look at the trucking data that tracks the number of semis that crossed the border in and out on a daily basis, it continues to grow. If you look at the anecdotal data, people like Foxcon just built a plant there that added I think it was 6,000 employees and they just bought another plant. So they're up to over 12,000 people in Juarez. So all the data that we see says that business continues to thrive in Juarez. In terms of threats to our ability to produce in Juarez, the big threat would be if we were unable to hire people, good people, and get them to come to work and we have never seen an issue with that. We have no problem in hiring or retaining people, and in fact, our turnover rates are as low or lower than they've ever been today.

The other threat you can think about is our customers being scared off by the violence in Juarez. And the answer to that is there's probably been a couple of bids over the last 2 years that we would have won if there wasn't a safety issue in Juarez, but you have to remember that we do hundreds and hundreds of bids a year so that percentage of bad outcome is not very high. We have customers who have asked us to put in place backup plans in case the border were to close for a couple of days and things like that.

But in terms of the overall effect on our business, we see it as very minimal. In terms of the effects on our employees, we see it as very minimal. In terms of the effects on our customers, there's concern, and we certainly talk about it quite a bit, but it seems like they end up doing pretty much the same thing they were going to do. And all this is driven by the fact that Juarez is dangerous, but China is becoming more and more expensive every day, as we said in our previous comments.

We're looking at China labor rates that, when you combine them with shipping and a little bit of forecast uncertainty, it's beginning to say that China is viable for production that's going to stay in Asia, but China's not viable for a lot of products that are going to be consumed in Europe or America. And it's always been kind of a window of how broad the spectrum was, the type of product that was really a good fit for China. And now with the costs the way they are, both in labor, overhead and shipping, that window has narrowed very tightly on what products are clearly a winner in China.

So all those things combined make us believe that Juarez is a good choice, remains a good choice and, with the government's continued and heightened focus -- the Mexican government's focus on making it safer, we don't see any reason to switch. So that was kind of a long and rambling answer. Did you have a specific concern or did that hit it?

No, that absolutely addressed it. Thank you.

Okay.

And then I'd like to come back to an answer that you gave me to one of the earlier questions, which was the size of your new customer wins. You said it was your standard $5 million to $30 million. When I look back, the last 4 quarters you have said $5 million to $20 million. Does that imply that one of these customers in this quarter was a bit larger?

Implies you're taking better notes than I anticipated. Yes, one of them was bigger than our standard average. You're correct.

Congratulations. Then a couple of additional questions. The first one is to really follow up on that winning of new business -- that you continue to win new business. It seems like you're kind of on this course of 2 to 3 wins every quarter. And given that those pieces of new business are going to have to ramp in the future, and given that this last year the new business ramp was actually part of the negative from an earnings standpoint, what has improved so that future production ramps aren't going to have as negative an impact on the overall Company?

Well, first of all, we're not anticipating a worldwide shortage of supplies. So we think we can get components on time without having to pay extra for them and not have to work overtime to meet our schedules when we get them late. Second, this business isn't one of averages and macro, this is micro. So in the last year, we had 2 big pieces of business that both required that we essentially invent our customer out of a bad situation.

And so in the middle of last year, we were inventing product on the fly and inventing process on the fly as our customers were struggling to meet the demand that they had. So just by a strange combination of timing and situation, last year was particularly bad for those 2 major programs that required us to invent things. That hasn't happened to us in the past. Typically we've only got one of those going on at a time.

And it's not that they're bad because once we get done inventing then our customers realize that there's really not anybody else that they know of that could have done it. But if they both happen to you at once and, on top of that, you're piling the fact that you can't get any dang parts, even after you figured out how to build it, then things got pretty expensive for us. So we don't expect that combination to happen to us in this concentrated fashion in the coming year as we did last year.

That's very helpful. So really you're just feeling like there was a super unique culmination of events that led to the earnings impact last year?

Yes.

And then finally, in the press release you made reference, a quote, that there's an increasing industry awareness of Key Tronic's unique capabilities. Would you please expand on that and help us understand what it is that prospective customers are seeing that is causing the most draw to Key Tronic, please?

Well, I think the first thing is that we've been doing this EMS industry for a long enough time now that people do know us and people who have worked with us in one capacity leave that company and go to another company and remember that we did well for them. So compared to the first half decade of our efforts in EMS, we get more and more business from former customers in terms of individuals who have gone to new companies.

It used to be that every piece of new business we got, we had to dig out from under some rock somewhere. So now we get leads from people who go to new companies. We get leads from people that are still with their old company who have a friend who works for another company. And so the word of mouth, based upon the performance that we generated in the past, is starting to work in our favor.

We've got a slogan on the bottom of our business card that says trust, commitment, and results. And one of the finer points in this last year was when a customer said to me, you guys actually do live that, that's not just words. So that's a big part of when we talk about increased awareness in the industry is that there's enough folks who have experienced our definition of trust, commitment, and results, that we're starting to get unsolicited bid opportunities, which is really cool. That's a lot cheaper than a bid you had to dig out from under a rock.

On top of that, you've got the fact that, as we said earlier, the Mexican equation is becoming quite a bit more of a good answer for people. We, at one point, were fighting what we called it was China google eyes where everybody just thought they had to be in China, no matter what the product, no matter what the situation and now a days people are a lot more interested in looking at total cost rather than just the part cost. So when you factor in all the things that people learned are true landed costs, whether you buy it from China or from Juarez through Key Tronic, we're able to answer those questions in a lot more of a strategic manner for people. When they were just focused on I've got to be in China and I don't care what you tell me it's going to cost, I have to be there.

Now, when we can say that, well, let's look at your product mix and we can build half of it in Mexico and half of it in China and you don't have to learn to speak Spanish, and you don't have to stay up until 2 in the morning to speak to my guys in China. I'll do it for you. That's becoming a much more easily explainable and easily recognizable benefit for our Company than it has been in the past.

And then finally, as we do quite a few of these product transitions that are really Key Tronic helping our customers dig themselves out of a bad situation, people are talking about that more and more too where we get unsolicited calls from people who start off with saying yes, I've got this pretty bad deal, I don't know where else to turn, would you guys be willing to look at it; and we like those. Because even though they might be a little bit tight when they start, they are sticky and they stay around and they're helping to build the momentum that we've got. But that's a decent subset of what we were trying to talk about when we talked about the industry knowing more about Key Tronic.

That's very helpful. Thank you and congratulations on a nice quarter.

Thank you.

Thank you. (Operator Instructions) And gentlemen, I'm showing no further questions at this time. I'd like to turn the conference back over to you for any closing remarks.

Okay. Well, thank you all again for participating in today's conference call. Ron and I look forward to speaking with you again in a couple of months. Thanks and have a good day.

Thank you, sir. Ladies and gentlemen, if you would like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030 using the access code of 4452261. This does conclude the Key Tronic Corporation fourth-quarter and year-end for fiscal 2011 conference call. Thank you for your participation. You may now disconnect.