Key Tronic (KTCC) Q3 2026 Earnings Transcript

Image source: The Motley Fool.

DATE

Tuesday, May 5, 2026 at 5 p.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer — Anthony L. Voorhees
• Chief Financial Officer — Brett R. Larsen

TAKEAWAYS

• Total Revenue -- $89.6 million, a decline from $112.0 million, attributed to reduced demand from a legacy customer, end-of-life programs, weather disruptions, and delays in new program ramp-ups.
• Gross Margin -- 8.0%, up from 7.7%, due to operating efficiencies and cost-cutting initiatives.
• Operating Margin -- Negative 0.3%, improved from negative 0.4%, reflecting efficiency gains despite revenue shortfall.
• Adjusted Gross Margin -- 8.5%, an increase from 8.4%, excluding China closure costs.
• Net Loss -- $2.6 million, or $0.24 per share, compared to a net loss of $0.6 million, or $0.06 per share.
• Adjusted Net Loss -- $2.8 million, or $0.26 per share, versus adjusted net income of $0.1 million, or $0.01 per share.
• Inventory -- Declined by $13.5 million (14.0%) to reflect better management and lower activity.
• Accounts Receivable Days Sales Outstanding (DSO) -- Improved to 85 days, down from 92 days, indicating stronger collections.
• Year-to-Date Operating Cash Flow -- $10.0 million, nearly unchanged from $10.1 million.
• Debt Reduction -- Debt lowered by $14.3 million, supporting financial flexibility.
• Capital Expenditures (CapEx) -- Approximately $3.7 million year-to-date, with a full-year target of $5 million to $8 million, focused on new production equipment and automation.
• China Winddown Savings -- Expected savings of $1.2 million per quarter after completion, with partial savings starting in the current quarter following completion of production in April.
• Mexico Headcount Reduction -- 42% reduction over 24 months, with ongoing operational streamlining in response to rising wage pressures.
• New Program Wins -- Four new programs secured: $3 million to $5 million automotive technology program in Juarez (starts fiscal 2027); $3 million industrial tooling program in Spokane (ramping immediately); $2.5 million pest control program in Juarez; $8 million to $10 million industrial power management program in Arkansas (starts fiscal 2027).
• Production Backlog -- Backlog has increased, with ramping demand and pipeline strength across longstanding and new customers.
• Facility Expansion -- U.S. and Vietnam capacity expanded; Arkansas site expected to achieve double-digit growth, and Vietnam output has doubled and will focus on medical device manufacturing.
• Tariff Mitigation Strategy -- Facility shifts position the company to mitigate tariff and geopolitical risks, expecting approximately half of future manufacturing in the U.S. and Vietnam by fiscal year-end.
• Profitability Outlook -- Management expects revenue to rise sequentially in Q4 and affirmed, "we still feel strongly that we'll be in the black bottom line" next quarter, though no quantitative guidance is provided.
• Data Processing Program in Mississippi -- Remained flat quarter over quarter; current activity is at about 50% of initial expectation and highly market sensitive.
• Design Engineering Hiring -- The company is actively expanding its design engineering team to drive stickier customer relationships and support complex product launches.
• Quoting Activity in Mexico -- Increased quoting volume and probability of securing new programs is resulting from recent cost-competitiveness improvements at the Juarez facility.
• CapEx Control -- Management cited "minimal" capital expenditures in the quarter, with investments targeted for selective automation and capacity improvements.

Need a quote from a Motley Fool analyst? Email pr@fool.com

RISKS

• The reduction in revenue had a significant impact on the company's bottom line. The net loss was $2.6 million, or $0.24 per share, for the third quarter of fiscal year 2026, compared to a net loss of $0.6 million, or $0.06 per share, for the same period of fiscal year 2025.
• "We continue to face a lot of global economic uncertainties and volatile trade policies," causing the company to withhold forward-looking guidance for the next quarter.
• Delays from weather disruptions, customer design issues, and component shortages created temporary setbacks on new program launches.
• Demand from the data processing customer in Mississippi remains "flat" and only at "50% of what [the] initial expectation was," with future volume described as a "complete unknown at this point."

SUMMARY

Key Tronic (NASDAQ:KTCC) reported a substantial year-over-year revenue decline and widened net and adjusted losses while improving gross and operating margin rates through structural cost reductions and facility realignment. Significant new program wins across multiple industries were announced, and facilities in the U.S. and Vietnam are positioned for future growth, aided by tariff mitigation and nearshoring strategies. Management cited a growing production backlog, improved cash flows, and rising pipeline activity but withheld formal guidance due to persistent macroeconomic and trade-related uncertainties.

• The company anticipates approximately $1.2 million in quarterly savings from the completed China manufacturing winddown, which will begin affecting results in the current and next quarter.
• Headcount reduction and operational efficiencies in Mexico are beginning to yield increased quoting volume and customer audits at the Juarez campus.
• Brett R. Larsen, Chief Financial Officer, said, "we still feel strongly that we'll be in the black bottom line. In future quarters, we'll readdress that. But at this point, I'd rather not give guidance."
• Adjusted net loss swung from a profit in the prior year to a sizeable loss as program and customer-specific delays weighed on results, despite better working capital management and stable operating cash flow year-to-date.

INDUSTRY GLOSSARY

• SMT (Surface Mount Technology): A method for producing electronic circuits where components are mounted directly onto the surface of printed circuit boards without leads.
• USMCA: United States-Mexico-Canada Agreement, an updated trade treaty providing tariff mitigation benefits for manufacturing operations in these regions.
• DSO (Days Sales Outstanding): A calculation measuring the average number of days a company takes to collect payment after a sale.
• Consignment Program: A manufacturing arrangement where key materials or inventory are owned by the customer and supplied to the manufacturer for assembly.

Full Conference Call Transcript

Anthony Voorhees: For the third quarter of fiscal year 2026, we reported total revenue of $89.6 million, compared to $112.0 million in the same period of fiscal year 2025. Year-over-year revenue for the third quarter of fiscal year 2026 continued to be adversely impacted by reduced demand from a legacy customer and an end-of-life program. Additionally, we also faced temporary challenges during the quarter related to winter storm Fern in the Southern U.S., customer design delays on a new program with a legacy customer, and delays in receiving allocated components on a separate new program. For the first 9 months of fiscal year 2026, our total revenue was $284.6 million, compared to $357.4 million in the same period of fiscal year 2025. Despite these short-term impacts, we are already seeing activity improve, with demand returning from several legacy customers and multiple new programs continue to launch and ramp, driving expected revenue growth for the fourth quarter. Importantly, even with lower revenue in the third quarter of fiscal year 2026, we delivered an improvement in gross margin compared to the prior year period. This demonstrates the operating efficiencies gained from our cost-cutting initiatives during the past 2 years. Gross margin was 8.0% and operating margin was negative 0.3% in the third quarter of fiscal year 2026, up from 7.7% and negative 0.4%, respectively, in the same period of fiscal year 2025. Excluding the charges related to the China closure, which we will discuss in a moment, the adjusted gross margin was 8.5% for the third quarter of fiscal year 2026, up from 8.4% in the same period of fiscal year 2025. These results demonstrate that our business today is structurally more efficient and better positioned to generate margin as volume returns. In line with our long-term strategic plan, we continue to prepare for anticipated long-term growth by executing our nearshoring and tariff mitigation strategies to reduce costs while maintaining the diversity and flexibility of our key locations and capabilities. During the quarter, we continued to wind down manufacturing operations in China, shifting more production to our expanding facilities in the U.S. and Vietnam. The China winddown is expected to be completed by the end of the current fiscal year and anticipated to save approximately $1.2 million per quarter following completion. As top line growth returns, we anticipate margins to be strengthened by the improvements in our operating efficiencies and the positive impact of our strategic cost-savings initiatives. We also believe the recent cost-savings initiatives have made us more competitive when quoting new program opportunities. As production volumes increase and our operational adjustments take full effect, we expect to see greater leverage on fixed costs, enhanced productivity, and a more streamlined supply chain, all contributing to stronger financial performance. The reduction in revenue had a significant impact on our bottom line. The net loss was $2.6 million, or $0.24 per share, for the third quarter of fiscal year 2026, compared to a net loss of $0.6 million, or $0.06 per share, for the same period of fiscal year 2025. For the first 9 months of fiscal year 2026, the net loss was $13.5 million, or $1.24 per share, compared to net loss of $4.4 million, or $0.41 per share, for the same period of fiscal year 2025. Our adjusted net loss was $2.8 million, or $0.26 per share, for the third quarter of fiscal year 2026, compared to adjusted net income of $0.1 million, or $0.01 per share, for the same period of fiscal year 2025. For the first 9 months of fiscal year 2026, our adjusted net loss was $3.9 million, or $0.36 per share, compared to adjusted net loss of $1.2 million, or $0.11 per share, for the same period of fiscal year 2025. Our focus on operating discipline continues to support a strong balance sheet. Our inventory for the third quarter of fiscal 2026 is down $13.5 million, or 14.0% from a year ago. Our current ratio was 2.1: 1 compared to 2.7:1 from a year ago. At the same time, accounts receivable DSOs were at 85 days, compared to 92 days a year ago, reflecting stronger collection on receivables. Year-to-date cash flow provided by operations for the first 9 months of fiscal year 2026 was approximately $10.0 million, as compared to $10.1 million for the same period of fiscal year 2025. Our continuing ability to generate cash from operations has allowed us to reduce debt year-over-year by approximately $14.3 million and helps position us well as demand accelerates and new programs ramp. Capital expenditures in the third quarter were minimal, while year-to-date total capital expenditures through the third quarter were approximately $3.7 million.

We expect CapEx for the full year to be around $5 million to $8 million, largely spent on new innovative production equipment and automation. While we're keeping a careful eye on capital expenditures, we plan to continue to invest selectively in our production equipment, SMT equipment, and plastic molding capabilities, utilize leasing facilities, and make efficiency improvements to prepare for growth and add capacity. As we move further into fiscal 2026, we continue to face a lot of global economic uncertainties and volatile trade policies. Nevertheless, we are increasingly encouraged by the demand trends we're seeing as we enter the fourth quarter.

Activity with several longstanding customers is improving, new programs are ramping, and our expanded U.S. and Vietnam capacity is generating increased customer interest. Our improved operating efficiency makes us more competitive, resulting in a stronger pipeline of potential new business, and we remain focused on further improving our profitability. Our production backlog has grown, and we believe that we are increasingly well positioned to win new programs and profitably expand our business. Due to the uncertainty of timing of new product ramps in light of continued macroeconomic uncertainty, we are not providing forward-looking guidance in the fourth quarter of fiscal year 2026. That's it for me. Brett?

Brett Larsen: Thanks, Tony. Despite reduced demand from certain longstanding customers and the delays in production caused by winter storm Fern in the third quarter, we're encouraged by the improvements in our operating efficiencies and by the gradual rebound in demand from several longstanding customers and the continued growth of new programs that we're seeing in the fourth quarter. We continue to provide our customers with options to better manage macroeconomic uncertainties and enhance our potential for profitable long-term growth as we cease manufacturing operations in China, continue to right-size our Mexico facility, and build out new production capacity in the U.S. and Vietnam.

Our improved operating efficiency has made us more competitive, and we expect our revenue to gradually begin to rebound and see a return to profitability in the fourth quarter of fiscal 2026. As part of our long-term strategy and in recognition of the continuing geopolitical tensions, tariff uncertainties, and increasing costs associated with China-based production, we are winding down our facilities there and transferring programs to Vietnam. We anticipate savings generated from the shutdown to approximate $1.2 million per quarter once fully executed. As part of our global sourcing strategy, we will, however, continue to operate in China with a small team focused on sourcing critical components locally.

Over the past 24 months, we have also reduced our total head count by approximately 42% in Mexico and have begun transferring some programs from Mexico to the U.S. and Vietnam. Our Mexico facility continues to offer a unique solution for tariff mitigation under the existing USMCA tariff agreement. Given the sustained trend of continued wage increases in Mexico, we have streamlined our operations, increased efficiencies, and invested in automation to be more cost-competitive in the market. Due to the successful cost reduction and streamlining production processes, we have recently seen an increase in the quoting volume and probability of landing new programs manufactured in our Mexican facilities.

We've also seen an influx of new customer visits and audits of our Juarez campus as of late that demonstrates we are competitive for a growing variety of quoting opportunities. Our improved cost structure in Mexico is anticipated to lead to new programs and growth over the longer term. We are very excited about the recent investments made in the U.S. and Vietnam to build out capacity and new capabilities to meet evolving customer demand. You will recall that we opened our new technology and resource and development location in Arkansas during the first quarter of fiscal 2026. Our U.S.-based production provides customers with outstanding flexibility, engineering support, and ease of communications.

We expect double-digit growth in our facility in Arkansas during the upcoming fiscal year. You will also recall that we have recently doubled our manufacturing capacity in Vietnam that now has the capability to support anticipated future medical device manufacturing. Our Vietnam-based production offers the high-quality, low-cost choice that was associated with China in the past. In coming years, we expect our Vietnam facility to play a major role in our growth. We anticipate that these new facilities in the U.S. and Vietnam will enable us to benefit from customer demand for rebalancing their contract manufacturing and mitigate the severe impact and uncertainty surrounding the tariffs on goods and critical components.

By the end of fiscal 2026, we expect approximately half of our manufacturing to take place in our U.S. and Vietnam facilities. These initiatives reflect the longstanding customer trends, both to nearshore as well as derisk the potential adverse impact of tariff increases and geopolitical tensions. During the third quarter of fiscal 2026, we won new programs in automotive technology, industrial tooling, pest control, and industrial power management. Our improved operating efficiency has also made us more competitive, increasing our sales pipeline, particularly in such steady growth sectors as utilities and data center equipment.

Despite the many uncertainties and disruptions in global markets, our strong pipeline of potential new business underscores the continued trend towards onshoring and dual sourcing of contract manufacturing. In light of the significant transitions and streamlining initiatives we've made in the past 2 years, it's worth reviewing our key competitive advantages going forward. The combination of our flexible global footprint and our expansive design capabilities continues to be extremely effective in capturing new business. First, we've enhanced our cost and tariff efficiency and the flexibility of our global manufacturing footprint. We expect that global tariff wars and geopolitical tensions will continue to drive OEMs to reexamine their traditional outsource strategies.

Over time, the decision to onshore production is becoming more widely accepted as a smart, long-term strategy. Second, many of our manufacturing program wins are predicated upon Key Tronic's deep and broad design services. And once we have completed the design and ramped it into production, we believe our knowledge of a program-specific design challenges make that business extremely sticky. We anticipate a continued increase in the number and capability of our design engineers in coming quarters.

Third, we continue to invest in vertical integration and manufacturing process knowledge, including a wide range of plastic molding, injection blow, gas assist, multishot, as well as PCB assembly, metal forming, painting and coating, complex high-volume automated assembly, and the design, construction, and operation of complicated test equipment. We believe this expertise will increasingly set us apart from our competitors of a similar size. While the global market uncertainties have created some delays to new product launches for us, our suppliers and our customers, we believe geopolitical tensions and heightened concerns about tariffs and supply chains will continue to drive the favorable trend of contract manufacturing returning to North America as well as to our expanding Vietnam facilities.

We're expecting revenue growth in the coming quarters from new programs launching in the U.S., Mexico, and Vietnam. Significant improvements in our operating efficiencies are creating a stronger pipeline of potential new business. Over the long term, we remain very encouraged by our cost reductions made over the past 2 years to become more market-competitive, our increasing cash flow generated from operations, enhanced global manufacturing footprint, and the innovations of our design engineering. All these initiatives have increased our potential for profitable growth. This concludes the formal portion of our presentation. Tony and I will now be pleased to answer your questions.

Operator: [Operator Instructions] And we will take our first question from Matt Dhane with Tieton Capital Management.

Matthew Dhane: I did want to ask, you referenced you had 4 wins in your press release. Just wanted to get a sense of the size of each of those wins, as well as where they're going to be -- where the manufacturing is going to be taking place, and then also expected timing of the ramps of those.

Brett Larsen: You bet. Happy to do that, Matt. So I think the first one, that automotive technology, that's about a $3 million to $5 million program that's slated to start in Juarez in fiscal '27. My expectation is we'll probably start ramping that in the second quarter. Next is the industrial tooling. This one is a bit unique. It was a design program that we started here in Spokane. Now they're wanting us to actually start building some low-volume production. So we're actually going to do that in our downstairs facility here in Spokane temporarily while we ramp that. Currently, it has about an order of about $3 million, but we're expecting that to grow. Ramp on that is immediate.

Third is pest control. That's a $2.5 million opportunity incremental to some other business of an existing customer down in Juarez, Mexico. And then the last -- fourth is the industrial power management. That's an $8 million to $10 million opportunity that will start towards the end of the calendar quarter, so again, second quarter of fiscal '27 in our Springdale, Arkansas facility.

Matthew Dhane: One other question I did have. So obviously, tariffs has been a key conversation point here for a while. You talked about your pipeline building. What role is tariffs playing today in conversations with prospective customers? And yes, just help me understand all that, if you could.

Brett Larsen: Yes. There's quite a bit of moving parts -- continue to be moving parts with -- related to tariffs. I think we're well situated now that we have an increased capacity to build product in Vietnam. The fact that USMCA is still in -- still a mitigation opportunity as well in Mexico and those that want to nearshore in the U.S. So I think we're seeing a hesitancy to make a decision or to award us a program. Some of that hesitancy is coming to close, and we're actually seeing the actual awarded opportunities begin to pile up.

So I think this hesitancy and uncertainty for so long of awarding a program and elongating that sales cycle now begins to -- I think, people are becoming okay with the fact that there's going to be continued uncertainty, and we're actually seeing stocking levels decrease in certain key new opportunities and legacy customers. So I think it's a change in the market of, 'I'll wait and see what tariffs do,' to now, 'it's a complete, open -- continued changing in and out because of the required response -- or the required stockouts and reducing inventories, they're going to need to make a decision. And so, I'm making that in light of the uncertainty.

That's a long-winded answer to, I think we anticipate some wins that we've been waiting for, for quite some time.

Operator: [Operator Instructions] And we will take our next question from George Melas with MKH Management.

George Melas: Nice to hear a consistent story about increased capability -- in the number and capability of design engineers. Can you elaborate a little bit on that? And is that still very much -- is design complexity very much one of the focus of your sales opportunities?

Brett Larsen: Yes. As we spoke before, George, part of our strategy is to continue to grow that design capability. So we're continuing to recruit and hire new design engineers. We have found it incredibly important for us to continue down that path. If you get into a customer relationship where you're providing design capabilities to them, not only is that business very sticky, you're also helping them design the product to be a good fit to your own production equipment and capabilities within your own factory. So we're going to continue down that road. What's kind of fun to see is this is the first design project that we're actually building within our Spokane facility with the engineers themselves.

This is a little new to us. We've done this many years back. But my expectation is that this may become a bit more of the norm, as we take over the design responsibility to bring a new product to market. And maybe they use our engineers to put the first series or set of products together.

George Melas: That sounds good. Can you also give us a bit of an update on the data processing customer in Mississippi? I think that's a potentially very, very significant project, but I think it was always expected to ramp rather slowly or progressively. Can you update us on that?

Brett Larsen: You bet, George. So that customer down in Mississippi continues to be flat quarter-over-quarter, so quarter 2 to quarter 3 is flat. Our hope is that, that will continue to ramp over time. But to date, it's been relatively flat over the last 2 quarters. There's not any real growth that we see in Q4, but maybe in fiscal '27. That's the consign program, I think, that we spoke about at length a couple of quarters ago. But it still continues to be a very good program for us. It's just -- it's been fairly flat last 2 quarters.

George Melas: And at what level it is now in terms of what you think it could be? Is it at 1/4 of its potential? Or how would you characterize it compared to what the potential expectation is?

Brett Larsen: That's a difficult one to quantify. I think we're probably 50% of what our initial expectation was. But I think this is very market sensitive and based off of where we're at today, again, that's a tough one. I wish I had a crystal ball, George, but we're definitely not where we thought its capacity was, but it's a complete unknown at this point.

Anthony Voorhees: And I'd just add to that, George, that this customer has a number of SKUs that we could build. And we've actually built a few different SKUs for them already. So we're ready to take on more when it becomes available to us.

Brett Larsen: Yes. The relationship is just very market sensitive.

George Melas: And maybe just one clarification. You guys mentioned in your prepared remarks that you can see a return to profitability in the fourth quarter. So basically, it means next quarter.

Brett Larsen: Yes.

George Melas: What kind of revenue level do you need in order to hit that target?

Brett Larsen: Yes, I don't know that we're yet giving guidance. Tony mentioned that there still is quite a bit of uncertainty in some ramps and the things that are going on. So I don't know that we want to quantify our revenue. Our expectation is definitely that there's going to be revenue growth Q4 sequentially from Q3. And we still feel strongly that we'll be in the black bottom line. In future quarters, we'll readdress that. But at this point, I'd rather not give guidance.

George Melas: Okay. And then just a quick question. In the last quarter, you mentioned potential savings from China from stopping the -- closing the manufacturing operations there. And you also mentioned $1.5 million of savings related to the reduction in force in Mexico. Is that something that you've started to benefit from that has started to hit the bottom line? Or do we really see that in the fourth quarter or in fiscal '27?

Anthony Voorhees: Yes. Thanks, George, for that question. So in China, specifically, we have completed our manufacturing operations there. So now we have a bit additional work to do just to get other materials and equipment out of China that we want to send to one of our other locations or sell it. So we do have a bit of work to do there. We completed that production in April, so just not that long ago. So we should start to see those employees severanced now, and we'll start to see improvements related to the $1.2 million that we mentioned in the script, probably in later this quarter.

Brett Larsen: Yes. So I think the full $1.2 million won't be until Q1. But there is some incremental savings in this quarter, Q4, that we will see.

Anthony Voorhees: And with regard to the Juarez, Mexico question, we have completed that severance. We are seeing some revenue growth down there in our Mexico operations. So we didn't complete 100% of that severance, as we will need some of those employees as we're seeing some revenue growth there in that facility.

Operator: [Operator Instructions] And at this time, we have no further questions. I would now like to turn the call back to Brett Larsen.

Brett Larsen: Thank you again for participating in today's conference call. Tony and I look forward to speaking to you again next quarter. Thank you.

Operator: This does conclude today's call. Thank you for your participation. You may now disconnect.

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.