Key Tronic Corporation (KTCC) Q2 2026 Earnings Call Transcript
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Overview
The earnings call summary indicates strong financial performance with improved cash flow and debt reduction. The strategic focus on manufacturing expansion, particularly in Vietnam, and new programs in the U.S., Mexico, and Vietnam suggest future growth. The Q&A section highlights demand from new programs and effective tariff strategies. Although there are some concerns about the consignment program's slower ramp-up, the overall sentiment is positive with expectations of breakeven and margin expansion by year-end. The company's strategic initiatives and operational improvements are likely to have a positive impact on the stock price.
Key Financial Performance
Total Revenue (Q2 FY 2026) $96.3 million, a decrease from $113.9 million in Q2 FY 2025 (-15.4%). The decline was due to reduced demand from a long-standing customer and the transition of an end-of-life program, partially offset by new program wins and increased demand from other long-standing customers.
Total Revenue (First 6 months FY 2026) $195.1 million, a decrease from $245.4 million in the same period of FY 2025 (-20.5%). The decline aligns with strategic near-shoring and tariff mitigation strategies.
Gross Margin (Q2 FY 2026) 0.6%, a decrease from 6.8% in Q2 FY 2025. The decline was due to charges for severance, inventory write-offs, and other related expenses from the China facility wind-down and Mexico workforce reductions. Adjusted gross margin was 7.9%.
Operating Margin (Q2 FY 2026) -10.7%, a decrease from -1.0% in Q2 FY 2025. The decline was driven by strategic initiatives and related charges.
Net Loss (Q2 FY 2026) $8.6 million or $0.79 per share, compared to $4.9 million or $0.46 per share in Q2 FY 2025. The increase in net loss was due to reduced revenue and charges related to strategic initiatives.
Net Loss (First 6 months FY 2026) $10.9 million or $1 per share, compared to $3.8 million or $0.35 per share in the same period of FY 2025. The increase in net loss was due to similar factors as Q2.
Adjusted Net Income (Q2 FY 2026) Breakeven ($0.00 per share), compared to an adjusted net loss of $4.1 million or $0.38 per share in Q2 FY 2025. Improvement due to adjustments excluding strategic charges.
Inventory (Q2 FY 2026) Down $12.3 million (-12%) year-over-year, reflecting improved inventory management.
Current Ratio (Q2 FY 2026) 2.0:1, a decrease from 2.8:1 a year ago, indicating changes in liquidity.
Accounts Receivable DSOs (Q2 FY 2026) 77 days, an improvement from 99 days a year ago, reflecting stronger receivables collection.
Cash Flow from Operations (Q2 FY 2026) $6.3 million, an increase from $1.3 million in Q2 FY 2025. The improvement was due to better operational cash management.
Debt Reduction (Year-over-Year) $13.4 million, reflecting improved cash flow and financial management.
Capital Expenditures (Q2 FY 2026) $3.3 million, bringing year-to-date total to $6.5 million. Investments focused on new production equipment and automation.
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Operating Highlights
New program wins: Won new programs in automotive technology, pest control, and industrial equipment. Ramping up a manufacturing services contract with a data processing OEM in Mississippi, which could grow to over $25 million in annual revenue.
Medical products: Shipped the first batch of medical products from Da Nang, Vietnam.
Geopolitical and tariff impact: Shifted manufacturing from China to Vietnam and the U.S. to mitigate tariff uncertainties and geopolitical tensions. Approximately half of manufacturing is expected to take place in the U.S. and Vietnam by the end of FY 2026.
Onshoring trend: Observed a growing trend of onshoring and dual sourcing of contract manufacturing, driven by global tariff wars and geopolitical tensions.
Cost savings initiatives: Winding down China operations and reducing workforce in Mexico, saving $1.2 million and $1.5 million per quarter, respectively. Streamlined operations and invested in automation in Mexico to remain cost-competitive.
Efficiency improvements: Invested in new production equipment and automation, with $6.5 million spent on capital expenditures year-to-date. Anticipate stronger financial performance through enhanced productivity and streamlined supply chains.
Manufacturing footprint shift: Transitioned programs from China to Vietnam and the U.S. to reduce risks associated with tariffs and geopolitical tensions. Expanded Vietnam facility to support medical device manufacturing.
Vertical integration: Invested in advanced manufacturing processes, including plastic molding, PCB assembly, and automated assembly, to differentiate from competitors and enhance design capabilities.
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Risk or Challenges
Reduced demand from a long-standing customer: Revenue for Q2 FY 2026 was adversely impacted by reduced demand from a long-standing customer, contributing to a decline in total revenue compared to the same period in FY 2025.
Transition of end-of-life program: The transition of an end-of-life program negatively impacted revenue for Q2 FY 2026.
Global economic uncertainties and volatile trade policies: Customers continue to face uncertainties in the global economy and volatile trade policies, impacting demand and the timing of new program launches.
Wind down of China-based manufacturing operations: The wind down of manufacturing operations in China resulted in significant charges for severance, inventory write-offs, and other related expenses, adversely impacting margins.
Workforce reductions in Mexico: Workforce reductions in Mexico led to severance charges and operational adjustments, which negatively impacted margins in the short term.
Decline in gross and operating margins: Gross margin dropped to 0.6% and operating margin to negative 10.7% in Q2 FY 2026, compared to 6.8% and negative 1.0% in the same period of FY 2025, due to restructuring costs and reduced revenue.
Geopolitical tensions and tariff uncertainties: Ongoing geopolitical tensions and tariff uncertainties have impacted the timing and launch of new programs and necessitated adjustments in the manufacturing footprint.
Delays in new product launches: Global market uncertainties have caused delays in new product launches for the company, its suppliers, and customers.
Increased costs in Mexico: Sustained wage increases in Mexico have necessitated streamlining operations and investing in automation to remain cost-competitive.
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Guidance & Outlook
Revenue Growth: The company expects revenue growth in the coming quarters from new programs launching in the U.S., Mexico, and Vietnam. They anticipate double-digit growth in their Arkansas facility during the latter half of fiscal 2026.
Margin Improvements: Margins are expected to strengthen as top-line growth returns, driven by improvements in operating efficiencies, cost-saving initiatives, and increased production volumes.
Cost Savings: The wind-down of the China facility and workforce reductions in Mexico are expected to save approximately $1.2 million and $1.5 million per quarter, respectively, once fully implemented.
Capital Expenditures: Capital expenditures for fiscal 2026 are expected to be around $8 million to $10 million, focusing on new production equipment, automation, and efficiency improvements.
Vietnam Facility Growth: The Vietnam facility, which has doubled its manufacturing capacity, is expected to play a major role in growth, particularly in medical device manufacturing.
Onshoring and Nearshoring Trends: The company anticipates benefiting from the trend of onshoring and nearshoring, with approximately half of its manufacturing expected to take place in the U.S. and Vietnam by the end of fiscal 2026.
New Business Opportunities: The company has a strong pipeline of potential new business, driven by geopolitical tensions, tariff uncertainties, and the trend towards dual sourcing and onshoring.
Consigned Material Model: The consigned material model being implemented in the Corinth, Mississippi facility has the potential to grow to over $25 million in annual revenue, significantly improving profitability.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:What is driving the increased demand from existing customers?
A:The increased demand is predominantly from two specific long-standing customers. One is due to product maturation, requiring a refresh of a particular design, which had a $20 million impact on quarterly revenue. The other is an end-of-life program, resulting in a $7 million reduction from last year's fiscal revenue. These decreases are offset by ramping new programs.
Q:Is the ramp in demand coming from existing customers or new programs?
A:The ramp is primarily coming from new programs, although there are a few long-standing customers (around half a dozen) showing increased demand.
Q:What are the sizes and manufacturing locations of the three new programs mentioned in the press release?
A:The automotive program will be manufactured in Mexico and could reach up to $5 million when fully ramped. The pest control program will be manufactured in the U.S. facility in Vietnam and could reach up to $2 million. The industrial equipment program will also be manufactured in the U.S. and could range from $2 million to $5 million.
Q:What are the company's tariff mitigation strategies?
A:The company is transitioning to a lower-cost Asian facility in Vietnam to replace its China facility, addressing U.S.-China tariffs and geopolitical tensions. They also offer U.S.-made products and production in Mexico, leveraging the USMCA agreement to avoid certain tariffs. The strategy involves analyzing labor requirements, component sourcing, and pricing to provide customers with optimal solutions.
Q:How does the company approach quoting for new products or programs?
A:The company provides customers with pricing options for manufacturing in Vietnam, the U.S., and Mexico, along with lead times and pros and cons for each location. This allows customers to make informed decisions on where to build their products.
Q:What factors impacted the gross margin in the quarter?
A:Gross margin was affected by the transfer of programs from Mississippi to Arkansas, holiday-related production downtime (a full week in Mexico and half a week in domestic sites), and slight mix changes in programs. Sequentially, the adjusted gross margin dropped due to these factors.
Q:What is the company's expectation for achieving net income breakeven by the June quarter?
A:The company expects to achieve breakeven by the end of the fiscal year through revenue growth and margin expansion. This includes the ramping of a consignment program in Mississippi, which is expected to contribute to both revenue and gross margin percentage improvements.
Q:Why is the consignment program ramping slower than expected?
A:The slower ramp is due to the need for additional equipment, which had lead times and was installed over the Christmas holiday. Additionally, an ice storm in Mississippi caused slight delays, but the program's momentum remains intact.
Q:What is the outlook for growth in Mexico?
A:The company expects growth in Mexico, having restructured operations to increase efficiency and competitiveness through automation and pricing adjustments. Recent customer visits and quoting opportunities indicate potential growth, although the company remains cautious due to possible changes in the USMCA agreement.
Q:What is the expected impact of winding down the China manufacturing operation?
A:The wind-down is expected to save $1.2 million per quarter, primarily in cost of goods sold (COGS) but also in SG&A and OpEx. The savings will take full effect once the wind-down is completed by the fiscal year-end.
Q:Review of Unclear Management Responses
A:Management avoided directly addressing the specific reasons for the slower-than-expected ramp of the consignment program, providing only general explanations such as equipment lead times and weather-related delays. Additionally, while discussing the $1.2 million savings from the China wind-down, there was some initial lack of clarity on whether the figure was net or gross, requiring multiple clarifications.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
China closure
China facility
China production
FY investor
Investor Relations
Key Tronic
Mexico workforce
Relations section
Spokane Washington
Tronic FY
Vietnam wind
Washington headquarters
capability wind
capacity lot
chain wind
charge China
charge reduction
charge severance
closure Mexico
customer transition
demand quarter
diversity flexibility
economy trade
facility structure
facility volume
increase demand
inventory ratio
investor Today
life program
light uncertainty
line loss
location capability
lot uncertainty
month loss
period month
share loss
trade policy
KTCC Transcript
Key Tronic Corporation (KTCC) Q2 2026 Earnings Call Transcript
Positive2-3
The earnings call summary indicates strong financial performance with improved cash flow and debt reduction. The strategic focus on manufacturing expansion, particularly in Vietnam, and new programs in the U.S., Mexico, and Vietnam suggest future growth. The Q&A section highlights demand from new programs and effective tariff strategies. Although there are some concerns about the consignment program's slower ramp-up, the overall sentiment is positive with expectations of breakeven and margin expansion by year-end. The company's strategic initiatives and operational improvements are likely to have a positive impact on the stock price.
Key Tronic Corporation (KTCC) Q1 2026 Earnings Call Transcript
Unknown11-4
The earnings call presents a mixed outlook. Strong financial metrics and optimistic guidance suggest potential positive movement, but concerns about consumer demand softness, customer bankruptcy, and unclear management responses temper enthusiasm. The consigned materials program shows promise, but its success hinges on external factors. The Vietnam facility's strategic importance is a positive, yet tariff issues and production delays introduce uncertainty. Overall, the sentiment is neutral, reflecting a balanced view of positive growth prospects and existing challenges.
Key Tronic Corporation (KTCC) Q4 2025 Earnings Call Transcript
Unknown8-27
The earnings call reveals a significant revenue decline and increased losses, with reduced demand from key customers. Despite some positive aspects like new business wins and cost-saving measures, the lack of guidance and unclear responses in the Q&A raise concerns. The refusal to provide guidance, especially amidst tariff uncertainties, and weak financial performance overshadow optimistic long-term growth prospects, indicating a negative sentiment.
Key Tronic Corporation (KTCC) Q3 2025 Earnings Call Transcript
Unknown5-7
The earnings call indicates a challenging environment: significant revenue decline, cost increases due to tariffs, and geopolitical tensions. Despite improved gross margins and reduced net losses, the absence of revenue guidance, continued net losses, and lack of a share repurchase program weigh negatively. The Q&A reveals management's evasiveness on key financial metrics and macroeconomic impacts, further contributing to a negative sentiment. While there are new business wins and improved financial management, the overall outlook remains strained, leading to a likely stock price decline of -2% to -8% over the next two weeks.
KTCC Report
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