Key Tronic Corporation Q3 FY2026 earnings call

The third quarter of fiscal year 2026 revenue was adversely impacted by reduced demand from a legacy customer and an end-of-life program, as well as temporary challenges like winter storm fern, customer design delays, and component allocation delays. Activity improved in the first nine months with demand returning from several legacy customers and new programs launching and ramping. The company continued nearshoring and tariff mitigation strategies, winding down manufacturing operations in China and shifting production to the U.S. and Vietnam, expected to be completed by the end of the current fiscal year and saving approximately $1.2 million per quarter. It continued to right-size the Mexico facility, transfer programs to the U.S. and Vietnam, and invested in automation. The U.S. facility in Arkansas was expected to have double digit growth, and Vietnam facility's capacity was doubled. Won new programs in automotive technology, industrial tooling, pest control, and industrial power management. Enhanced flexible global footprint, design services, and vertical integration and manufacturing process knowledge.

For the third quarter of fiscal year 2026, total revenue was $89.6 million compared to $112 million in the same period of fiscal year 2025. For the first nine months of fiscal year 2026, total revenue was $284.6 million compared to $357.4 million in the same period of fiscal year 2025. Gross margin was 8% 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 charges related to China closure, adjusted gross margin was 8.5% in the third quarter of fiscal year 2026, up from 8.4% in the same period of fiscal year 2025. Net loss was $2.6 million, or 24 cents per share, for the third quarter of fiscal year 2026 compared to net loss of $0.6 million, or 6 cents per share, for the same period of fiscal year 2025. For the first nine months of fiscal year 2026, 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. 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 1 cent per share, for the same period of fiscal year 2025. For the first nine months of fiscal year 2026, adjusted net loss was $3.9 million, or 36 cents per share, compared to adjusted net loss of $1.2 million, or 11 cents per share, for the same period of fiscal year 2025. Inventory for the third quarter of fiscal 2026 was down $13.5 million, or 14% from a year ago. Current ratio was 2.1 to 1 compared to 2.7 to 1 from a year ago. Accounts receivable DSOs were at 85 days compared to 92 days a year ago. Year-to-date cash flow provided by operations for the first nine months of fiscal year 2026 was approximately $10 million as compared to $10.1 million for the same period of fiscal year 2025. Debt was reduced by approximately $14.3 million year-over-year. Capital expenditures in the third quarter were minimal, while year-to-date total capital expenditures through the third quarter were approximately $3.7 million. CapEx for the full year was expected to be around $5 to $8 million.

Due to the uncertainty of timing of new product ramps in light of continued macroeconomic uncertainty, no forward-looking guidance was provided in the fourth quarter of fiscal year 2026. Expect revenue to gradually rebound and see a return to profitability in the fourth quarter of fiscal year 2026.

Global economic uncertainties, volatile trade policies, uncertainty related to the China manufacturing operations wind-down, cost pressure from wage increases in Mexico, impact of tariff policy changes, uncertainty in new program launches.

Q: You referenced you had four 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.

A: The automotive technology is about a $3 million to $5 million program slated to start in Juarez in fiscal 27, ramping in the second quarter. Industrial tooling is a $3 million order with low volume production starting in Spokane temporarily with immediate ramp. Pest control is a $2.5 million opportunity in Juarez, Mexico. Industrial power management is an $8 to $10 million opportunity starting towards the end of the calendar quarter in Springdale, Arkansas in the second quarter of fiscal 27.

Q: What role is tariffs playing today in conversations with prospective customers?

A: Tariffs have moving parts, the company is well situated with increased capacity in Vietnam and USMCA mitigation in Mexico and US. Hesitancy in awarding programs is beginning to close, with stocking levels decreasing and people making decisions in light of tariff uncertainty.

Q: Can you elaborate a little bit on the increased capability in the number and capability of design engineers? And is that still very much, is sort of design complexity very much one of the focus of your sales opportunities?

A: The company is continuing to recruit and hire new design engineers as part of the strategy. Design capability is important for sales opportunities as it makes business sticky.

Q: Can you sort of update us on the data processing customer in Mississippi?

A: The customer in Mississippi is flat quarter over quarter, hope it ramps over time, currently at about 50% of initial expectation.

Q: What kind of revenue level do you need in order to be, to hit that target of return to profitability in the fourth quarter?

A: No guidance is given as there is still uncertainty in ramps, but expectation is revenue growth sequentially from Q3 and will be in the black.

Q: Is the savings from China and Mexico reduction in force starting to hit the bottom line?

A: In China, manufacturing operations were completed in April, some severance and savings in Q4, full $1.2 million savings expected later. In Mexico, severance was completed with some revenue growth seen in Mexico operations.