Key Tronic Q2 Earnings Call Highlights

Key Tronic (NASDAQ:KTCC) reported lower revenue in its fiscal 2026 second quarter as the contract manufacturer dealt with reduced demand from a longstanding customer and the transition of an end-of-life program, partially offset by new program wins and increased demand from other customers. Management also detailed a series of footprint and cost actions—including a wind down of China manufacturing and additional workforce reductions in Mexico—that drove significant one-time charges during the period.

Quarterly results reflect revenue decline and restructuring charges

For the second quarter of fiscal 2026, Key Tronic posted revenue of $96.3 million, down from $113.9 million in the same quarter a year earlier. CFO Tony Voorhees said the decline was driven primarily by reduced demand from a longstanding customer and the transition of an end-of-life program, though new program wins and stronger demand from other longstanding customers provided a partial offset.

For the first six months of fiscal 2026, revenue totaled $195.1 million, compared with $245.4 million in the year-ago period.

Profitability was heavily affected by charges tied to strategic initiatives. The company recorded approximately $10.5 million of expenses during the quarter related to severance, inventory write-offs, and other costs associated with the China wind down and Mexico workforce reductions. As a result, gross margin fell to 0.6% and operating margin to -10.7%, compared with 6.8% and -1.0%, respectively, in the prior-year quarter.

Excluding the charges, management said adjusted gross margin was 7.9% in the quarter.

Net loss widens, but adjusted results improve

The company reported a net loss of $8.6 million, or $0.79 per share, compared with a net loss of $4.9 million, or $0.46 per share, in the year-ago quarter. For the first half of fiscal 2026, net loss was $10.9 million ($1.00 per share), versus $3.8 million ($0.35 per share) a year earlier.

On a non-GAAP basis, adjusted net income was break-even in the quarter, compared with an adjusted net loss of $4.1 million in the prior-year quarter. For the first six months, adjusted net loss was $1.1 million, compared with $1.3 million a year earlier.

Manufacturing footprint changes: China wind down and Mexico right-sizing

Management emphasized nearshoring and tariff-mitigation efforts amid what it described as ongoing global economic uncertainty and volatile trade policies. During the quarter, Key Tronic initiated a wind down of manufacturing operations at its China facility, in part to better align resources with its strategy and to utilize capacity it has built in Vietnam.

Voorhees said the company expects to complete the China wind down in the fourth quarter of fiscal 2026 and anticipates savings of approximately $1.2 million per quarter once completed. In the Q&A, management clarified that the $1.2 million is a net savings figure and would flow through both cost of goods sold and operating expenses, with the bulk in cost of goods sold.

Key Tronic also said it is continuing to reduce its workforce in Mexico, with the intent of having that facility focus on higher-volume manufacturing. Once fully implemented in the third quarter, management expects savings of approximately $1.5 million per quarter going forward.

CEO Brett Larsen added that while manufacturing is being wound down in China, the company expects to keep a small China-based team focused on local sourcing of critical components.

Operational updates: U.S. and Vietnam investments, consignment program ramp

Larsen highlighted investments and recent activity across U.S. and Vietnam sites. During the quarter, the company:

• Saw an increasing number of customer program starts in Springdale, Arkansas.
• Started a new production line in Corinth, Mississippi, supporting a growing consignment customer.
• Shipped its first batch of medical products from Da Nang, Vietnam.

The company reiterated that the consigned materials model—where the customer provides materials—represents a newer approach for Key Tronic at this scale. Larsen said that if successful, the model could “considerably” improve profitability and has the potential to grow to over $25 million in annual revenue, which management compared to “roughly the equivalent of a $100 million turnkey program.”

In response to an analyst question, Larsen said the ramp has proceeded as expected to date, citing the need for additional equipment (installed over the Christmas holiday) and noting that an ice storm in Mississippi caused some disruption that could delay progress by “a week or two” into the third quarter.

Looking ahead, Larsen said the company expects double-digit growth in Arkansas in the latter half of the fiscal year, and he expects Vietnam to play a “major role” in growth in coming years. He also said the company expects that by the end of fiscal 2026, approximately half of manufacturing will take place in its U.S. and Vietnam facilities.

Customer demand shifts, new wins, and tariff mitigation approach

During the Q&A, management provided additional color on revenue headwinds, noting two major declines tied to longstanding customers: a “product maturation” situation that management estimated as a roughly $20 million hit to quarterly revenue and an end-of-life program that contributed an additional roughly $7 million year-over-year reduction. Management said increases in demand from longstanding customers were driven by roughly six customers, while new programs are expected to help offset revenue losses in future quarters.

Key Tronic also discussed three new program wins during the quarter and where they will be manufactured:

• Automotive technology program to be manufactured in Mexico, estimated at up to $5 million in annual revenue when fully ramped.
• Pest control program to be manufactured in Vietnam, estimated at up to $2 million.
• Industrial equipment program to be manufactured in the U.S., estimated at $2 million to $5 million.

On tariff mitigation, management said it leverages its footprint to quote programs across multiple locations—including the U.S., Mexico, and Vietnam—helping customers evaluate lead times, pricing, and tariff exposure. Larsen described it as a customer-specific process that depends on labor content, component sourcing, and total delivered cost. He said Key Tronic can provide customers with pricing options across locations when customers are agnostic about where products are built.

On the balance sheet, inventory was down $12.3 million (12%) from a year ago, the current ratio was 2.0 versus 2.8 a year earlier, and days sales outstanding improved to 77 days from 99 days. Operating cash flow was $6.3 million in the quarter, up from $1.3 million a year ago, which management said helped reduce debt by approximately $13.4 million year-over-year. Capital expenditures were $3.3 million in the quarter and $6.5 million year-to-date; the company expects full-year CapEx of $8 million to $10 million, focused largely on production equipment and automation.

Management said it is not providing third-quarter guidance due to uncertainty in the timing of new product ramps amid macroeconomic conditions, but reiterated expectations for improving operating efficiencies and revenue growth in coming quarters as new programs launch across the U.S., Mexico, and Vietnam.

About Key Tronic (NASDAQ:KTCC)

Key Tronic Corporation (NASDAQ: KTCC) is a global electronics manufacturer headquartered in Spokane, Washington. The company specializes in the design, development and production of human-machine interfaces and input devices, with a core legacy in keyboard technology. Over more than five decades, Key Tronic has expanded its capabilities beyond keyboards to encompass a broad range of electronic assemblies for OEMs across computing, industrial, medical and consumer markets.

Key Tronic’s product portfolio includes membrane and mechanical keyboards, touch panels, silicone keypads and custom input solutions tailored to customer specifications.