Craig Gates - President, Chief Executive Officer Ronald Klawitter - Chief Financial Officer, Executive Vice President - Administration, Treasurer

Bill Dezellem - Tieton Capital Management

Welcome to the Key Tronic fourth quarter and year end fiscal year 2009 conference call. (Operator Instructions) At this time I would like to turn the conference over to our host, Mr. Craig Gates. Please go ahead, Sir.

Good afternoon everyone. I am Craig Gates, President and Chief Executive Officer of Key Tronic. I would like to thank everyone for joining us today for our investor conference call. Ron Klawitter, our Chief Financial Officer is here with me in our headquarters in Spokane Valley, Washington. : Today we released our results for the fourth quarter and full year fiscal year end 2009. We successfully confronted the challenging global economic environment in the second half of fiscal 2009 by reducing our costs while ramping our new customer programs which allowed us to maintain our profitability and strengthen our balance sheet. Despite the current economic uncertainty, our strong financial condition and string of 22 consecutive profitable quarters have helped us to win additional new programs and further diversify our customer portfolio across a wide range of industries. Now I would like to turn the call over to Ron to review our financial performance and I will come back and 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. As we mentioned, today we released the results for the quarter and year ended June 27, 2009. For the fourth quarter of fiscal 2009, we reported total revenue of $45.5 million compared to $57.3 million in the same period in fiscal 2008. For the full year of fiscal 2009 total revenue was $184.9 million, down 9% from $204.1 million for fiscal 2008. In the second half of fiscal 2009 the global economic recession clearly impacted our business yet the impact was partially offset by growth among our new programs which now represent over 40% of our revenue. As the economy recovers we expect to see increased orders from existing customers which will be additive to the new customer revenue. For the fourth quarter of fiscal 2009 our gross margin was 6%. This was down from 10.5% for the same period last year. For the full year fiscal 2009 our gross margin was 7%. This is down from 8% in fiscal 2008. The decline in gross margin reflects the substantially lower sales volumes than the previous fiscal year and approximately $1.5 million for severance charges related to cost reduction achievements during the year. In the face of slowing demand from many of our customers, our flexible operating model allows us to take the necessary steps to reduce our variable operating expenses and trim fixed overhead. Our headcount at the end of June 2009 was approximately 2,000 people down from about 2,500 a year ago. In coming periods we expect our gross margins to be around 7% until the economy recovers and we begin growing our total production volumes again. We continue to focus on controlling our operating expenses without hurting our long-term competitiveness. Our research, development and engineering costs for the fourth quarter were $515,000. This is down from $679,000 in the fourth quarter of fiscal 2008. Selling, general and administrative expense was $1.8 million for the quarter down from $2.4 million in the fourth quarter of fiscal 2008. Going forward we expect to hold our total operating expenses to about $2.5 million in the coming quarters. Despite the overall decline in our revenue and the challenges and costs of bringing on many new customers we have maintained profitability for 22 consecutive quarters. Net income for the fourth quarter of fiscal 2009 was $300,000 or $0.03 per diluted share compared to $2.6 million or $0.25 per share for the same period of fiscal 2008. For the full year of fiscal 2009 net income was $1.1 million or $0.11 per diluted share compared to $5.6 million or $0.54 per share for fiscal 2008. Turning to the balance sheet our trade receivables were $24.9 million at the end of fiscal 2009. This is down from $36 million at the end of last fiscal year reflecting the slower sales activity and an increased focus on cash management. Given the challenging economic environment and credit environment we are very pleased to see our average day sales outstanding improve to 46 days. Inventory was $42.3 million at the end of fiscal 2009 down from $37.9 million at the end of fiscal 2008. In general, we are pleased with our efforts to keep our inventory in line with our revenue levels even as we dealt with sharp reductions in orders from existing customers and brought a number of new customers into production. Our cash management and cost reduction programs allowed us to pay down our debt by nearly $10 million during fiscal 2009. At year end we had $2.4 million borrowed against our credit line which is the lowest balance we have had in the last 17 years. We recently received a commitment letter from a bank for a new line of credit which we expect to sign before August 22, 2009, when our existing credit agreement expires. Finally, our total capital spending was $1.2 million for the fourth quarter fiscal 2009 and $1.8 million for the full year with most of the spending related to bringing on new customer programs. In summary, we saw a significant slowdown in revenue from existing programs in the second half of the year. This was partially offset by revenue from new customers. Moving into fiscal 2010 expect to see gradual growth in the revenue contribution from our new customer programs though the overall economic environment continues to create uncertainty. In response, we continue to control our costs while making the necessary investments to support our long-term competitiveness and maintaining our strong balance sheet. Taking all these factors into consideration we expect revenue in a range of $41-44 million with earnings in a range of $0.01 to $0.03 per share in the first quarter of fiscal 2010. Over the longer term we believe we are well positioned to profitably expand our business as the overall economy rebounds. That’s it for me Craig.

Thanks Ron. While the global economic situation significantly impacted our business in the second half of fiscal 2009 we are pleased that our conservative fiscal administration, intense focus on cost control, quick response to inventory pressures and diversified and growing customer base has combined to allow us to remain on track and profitable. As the saying goes, in a recession cash is king. Key Tronic’s debt at the end of Q4 is the best it has been, the lowest it has been in 17 years. The ramp up for our new programs was slowed by the recession but these new programs continue to represent a growing portion of our revenue and a promising foundation for our future. In keeping with our long-term strategic objectives, we have been successfully building a more diversified customer portfolio and a less concentrated revenue base adding a wider range of industries. During fiscal 2009 we won new customer programs involving military electronics, computer networking, telecommunications, gaming technology, consumer medical devices and HVAC control systems. We expect these recent wins to begin moving into production during fiscal 2010. When they reach full production each program represents a total revenue contribution of between $5-30 million annually. Even in the current economic environment the pipeline of potential business remains relatively robust and the long-term trend towards outsourcing continues to look encouraging. While the recession may have initially put some potential customers’ outsourcing plans on hold, many of these companies are now recognizing the growing need to move forward with their outsourcing strategies to improve their long-term efficiencies and operating flexibility. In the face of this severe economic recession we believe Key Tronic has actually strengthened its position. We continue to see our prospective and current customers place an increasing value on the policies and initiatives that have been at the core of our strategic efforts. Our focus on creating and growing world class manufacturing sites in three geographic areas allows customers to choose from a menu of attributes and create the best possible supply chain for their unique businesses. They increasingly recognize our strong centralized management approach to inventory, IP, production control and engineering which has been honed and refined through decades of operating off-shore facilities. As OEMs have struggled with IP control, insurance and supply issues and product launch delays with standalone and independent foreign sites, our approach has become a clear competitive advantage in many of our recent program wins. In many cases, we are providing design services in Spokane, building prototypes in Spokane, ramping production in both China and Mexico, cross supplying parts for that production from China, Spokane and Mexico and controlling the production, planning and delivery from Spokane. This type of seamless blending of the advantages of each locale is not readily available from our tier three competitors. The value of this blend is becoming more of a competitive weapon as the marketplace gains experience in outsourcing. Our conservative approach to financial and business risk has been validated during the recession. We have won several customers based solely upon our stability and performance and continue to see increasing emphasis placed on long-term viability by both prospective and current customers. Our consistent focus on customer and market diversification has also been validated during the recession. While we are not happy with our reduction in revenue we are pleased with the manageable decrease we have experienced compared with the overall performance of the EMS marketplace. As we move into fiscal 2010 we are not sitting still on improving our operations. We are taking steps to further strengthen our competitive position by enhancing the efficiency of our supply chain and our new product introduction processes. In the marketplace we are seeing more potential customers moving forward with outsourcing and we are more strongly positioned than we have been ever before to win new business. We expect to continue to work to control our costs, maintain our operational efficiency and excellence even as we continue to broaden and diversify our customer base. As the economy recovers we are increasingly confident in our ability to grow our revenue and profits over the long-term. This concludes the formal portion of our presentation. Ron and I will now be pleased to answer any of your questions. :

(Operator Instructions) The first question comes from the line of Bill Dezellem - Tieton Capital Management. Bill Dezellem - Tieton Capital Management: First of all, are we thinking about your fiscal 2009 results correctly in that if we exclude the restructuring cost of the last couple of quarters, the small goodwill write down and the small bad debt write off during the year you made approximately $0.31 of earnings during fiscal 2009? Is that roughly correct?

Goodwill was a $765,000 write off. That was about $0.07. Bad debt reserve was about $500,000 and was $0.05. Severance costs were about $1.5 million, actually about $1.2 million. I think it was around $0.12. So you have the $0.12, the $0.07 and the $0.05 which is $0.24 added to the $0.11. I think what you are coming up with is somewhere around $0.30 to $0.35. Bill Dezellem - Tieton Capital Management: So it is actually even a little bit higher than I was thinking. Did we read the press release correctly that you had four customer new wins in the fourth quarter or did you actually have more than that and so a couple of the categories noted in the release you had more than one win?

We had four in the fourth quarter and in those categories over the year we had more than one in some of them. Bill Dezellem - Tieton Capital Management: The size range you mentioned on the opening remarks of this call, the $5-30 million does that apply to these four customers you won in the fourth quarter?

Yes. Bill Dezellem - Tieton Capital Management: While we are talking about new customers, how many new customers did you begin the ramping process in the fiscal 2009 year?

I don’t keep track of them. It is kind of hard to keep track of when they actually start because the day you sign the PO is typically long after you started putting it into the factory. We can look it up and give you a call with the official score card.

There were about ten customers that actually generated revenue for the first time in fiscal 2009. Bill Dezellem - Tieton Capital Management: We are curious, have you either won business or is there business that is up for grabs from some of your tier three competitors that have gone out of business?

Not so much gone out of business but have become distressed financially. Bill Dezellem - Tieton Capital Management: Do you see a prognosis where some of them may actually be at risk of going out of business when the economy turns and they require additional working capital but with credit conditions the way they are they are not able to raise the funds?

Yes. It is hard for us to really assess that because there are only a few tier three companies that are public companies. We only see the ones that are public. I think we have mentioned in previous calls that I think I read there are something like 6,500 different EMS companies in the U.S. These are anywhere from a couple million of annual revenue up to a couple hundred million like we are in the small category. So, I guess it would just be speculation. We don’t really know exactly what the impact of the financial environment is on some of those competitors but I’m sure it would be stressed if you had any amount of debt at all there has to be some stress.

I can give you a specific example. I can’t give you any names but one that is a perfect match to your question this competitor had gotten to the point where they needed to sell themselves to the venture capitalists. Our customer, although that customer felt reasonably confident the short-term was secure, our customer was very concerned about what would happen 1-3 years out when things got better and the VC decided to sell our competitor. So this is taking all different little permutations. The general theme is if you aren’t in pretty good shape financially this testy economy has scared a lot of your customers away. Bill Dezellem - Tieton Capital Management: In the release you made a comment you were increasing the efficiency of the supply chain and the new product introduction process. Would you please expand on those comments?

I will talk about the new product introduction first. We had originally convinced ourselves we could run NPIs through our Juarez, Mexico plant because technically we can. What we found was even though you can force the customer and the project through the Juarez plant you have to do battle every day with logistics in terms of getting parts across the border and back out again, getting information in and out and getting it translated quickly. What we have ended up doing is creating an NPI center here in Spokane that has twins of the machines both in Juarez and in China. This means our customers can communicate with us any wish pretty much on their time zone. We can move parts around within the confines of the United States a lot more quickly than we could get them across the border into Mexico. Once we have successfully built the product we are pretty confident once we move it to Juarez or to China since the machines are the same, the processes are the same, the documentation is the same, the production control and planning is the same, it will be a very smooth and successful transition. So, we have just put that in and started to work with it this year and actually having that in place played a major role in a couple of key program wins for us. So it is kind of a nice surprise in that it brought some new customers to us I don’t think we would have otherwise, and it has also dramatically eased the NPI process for current customers. That is the first question. The other one was talking about the supply chain. We are still in the transition from a keyboard manufacturer to an EMS provider in that we have added to the size of our purchasing department over the years but we are going to do a better job of using all the computer tools that we have to help plan our buying and to link up well with our customers. As our customers get better at EMI we are finding we can take advantage of money they have invested in their MRP system and linking our MRP with theirs and in being quicker at using the computers to answer a lot of the questions on what if we increase? What if we decrease our volume? How fast can we go? The kinds of answers that used to take a lot of thought and a lot of spreadsheet analysis we can now do quickly. The other step of that is we can do a lot more efficient looking for parts at a lower cost and looking for parts that we need to bring in because of an upside. If we can do a better job of linking our computer systems with our people and with our customers’ computer systems.

I am showing no further questions in the queue. I will turn it back over to management for closing comments.

Thank you again for participating in today’s conference call. Ron and I look forward to speaking with you again. Thanks and have a good day.

Ladies and gentlemen this does conclude today’s Key Tronic fourth quarter and year end fiscal 2009 conference call. If you would like to listen to a replay of today’s call please dial 303-590-3030 or 800-406-7325 and enter the pass code of 4099852. Thank you for your participation. You may now disconnect.