KEY Tronic Corp 2026 Q4 Earnings Call

Please go ahead. Good afternoon, everyone.

I am Tony Voorhees, Chief Financial Officer of Key Tronic. I would like to thank everyone for joining us today for our investor conference call. Joining me here at our Spokane, Washington headquarters is Brett Larsen, our President and Chief Executive Officer. 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 and quarterly 10-Qs. 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.

During this call, we will also reference slides that accompany our discussion. The slides can be viewed with the webcast, and a link can be found on our investor relations website. In addition, the slides, together with a recorded version of this call, will be available on the investor relations section of our website. We will also discuss certain non-GAAP financial measures on this call. Additional information about these non-GAAP measures and the reconciliation to the most directly comparable GAAP measures are provided in today's press release, which is posted in the investor relations section of our website. For the fourth quarter of fiscal year 2026, we reported total revenue of $102 million, compared to $89.6 million in the prior quarter and $110.5 million in the same period of fiscal 2025.

The 14% sequential increase in revenue in the fourth quarter of fiscal year 2026 was driven by strong demand from both legacy and new programs. Notably, revenue from our Vietnam-based production more than doubled sequentially, driven by medical device and consumer products programs. While customer demand rebounded significantly in the fourth quarter of fiscal year 2026, our production was constrained by tightening credit availability and liquidity pressures across the global supply chain. These constraints have affected the entire electronics manufacturing services industry as suppliers, customers, and manufacturers navigate ongoing macroeconomic uncertainty. While not immune to these challenges, our operational discipline, strength in manufacturing footprint, and long-standing customer relationships have positioned us ahead of our competitors. As a result, we continue to win new business and gain market share in several target markets, exhibited by over $60 million in new program awards in the fourth quarter of fiscal 2026.

Supply chain financing constraints forced us to delay approximately $10 million of shipments during the quarter, but underlying customer demand remains strong. We are actively working with our customers and suppliers while evaluating additional sources of capital to propel growth and alleviate these constraints in future periods. For the full fiscal 2026, our total revenue was $386.7 million, compared to $467.9 million in fiscal 2025, largely reflecting during the first three quarters of the year reduced demand from certain legacy and end-of-life programs, as well as uncertain global economic conditions. Moving into fiscal 2027, we are experiencing increased activity from both legacy customers and new program wins, along with a stronger new sales funnel activity, leading us to expect revenue growth in coming quarters of fiscal 2027. Gross margin was 7.8% in the fourth quarter of fiscal 2026, up from 6.2% in the same period of fiscal 2025.

Adjusted gross margin was 8.3% for the fourth quarter of fiscal year 2026, up from 6.2% in the same period of fiscal year 2025. Our gross margin improvements in the fourth quarter of fiscal 2026, despite the aforementioned challenges, demonstrated the operating efficiencies gained from our cost-cutting initiatives over the past two years. These margin gains highlight our resilience, commitment, and success in improving operating efficiency. Operating margin was -3.6% in the fourth quarter of fiscal 2026, down from -2.1% in the same period of fiscal 2025. The operating margin for the fourth quarter of fiscal 2026 was adversely impacted by an $8.4 million write-off of long-term receivables for distressed customers, along with the related legal costs incurred in pursuing recovery. Partially offset by a benefit from a $5.3 million insurance recovery related to a roof replacement in our Mississippi-based facility.

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 completed our wind down of our manufacturing operations in China, shifting more production to our expanding facilities in the U.S. and Vietnam. The China wind down is expected to save approximately $4 million in fiscal 2027. 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. Our net loss was $34.3 million, or $3.16 per share for the fourth quarter of fiscal 2026, compared to a net loss of $3.9 million or $0.36 per share for the same period of fiscal 2025. During the fourth quarter of fiscal 2026, we recorded a $28.4 million non-cash charge to establish a valuation allowance against certain deferred tax assets. The accounting adjustment was driven primarily by the cumulative loss of U.S. taxable income over the last four years. While management remains confident in our expected return to profitability and the future expected utilization of certain tax benefits, the valuation allowance was based on the relative weighting of historical results.

The adjustment has no impact on cash flows, debt covenant compliance, or our underlying operating performance. Additionally, as discussed earlier, approximately $8.4 million of distressed customer-related long-term receivables were written off in connection with customers that are no longer contributing program revenues. The reduction in revenue during fiscal 2026 also had a significant impact on our bottom line. For the full year 2026, our net loss was $47.8 million or $4.41 per share, compared to a net loss of $8.3 million or $0.77 per share for fiscal 2025. Our adjusted net loss for 2026 was $2.9 million, or $0.26 per diluted share, compared to adjusted net loss of $3.8 million or $0.35 per diluted share for the same period of fiscal 2025.

For the full fiscal year 2026, our adjusted net loss was $3.7 million, or $0.34 per diluted share, compared to adjusted net loss of $5 million or $0.47 per diluted share for fiscal 2025. Our focus on operating discipline continues to support a strong balance sheet. Our inventory at the end of fiscal 2026 is down $1.5 million or 2% from a year ago. Our current ratio was 2.1 to one, compared to 2.6 to one a year ago. At the same time, our accounts receivable DSOs were at 75 days, compared to 86 days a year ago, reflecting stronger collection on receivables. Capital expenditures in the fourth quarter of fiscal 2026 were $2.7 million, and total capital expenditures for the full year were approximately $6.4 million, reflecting our investments in 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 added capacity. As we move into fiscal 2027, we expect global economic uncertainty and volatile trade policies. Nevertheless, we are increasingly encouraged by the demand trends we're seeing as we enter the first quarter. We believe our customers are adjusting to the volatility as the new normal. 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 uncertainty of timing of new product ramps, in light of continued macroeconomic uncertainty, we're not providing forward-looking guidance for the first quarter of fiscal 2027. That's it for me. Brett?

Thanks, Tony. Over the past year, we have taken decisive actions to strengthen Key Tronic's competitive position and create a more efficient global manufacturing footprint. We successfully exited manufacturing operations in China, right-sized our Mexico facility, and expanded production capacity in both the U.S. and Vietnam. These initiatives have improved our cost structure, enhanced supply chain flexibility, and enabled us to provide customers with attractive manufacturing options amid ongoing macroeconomic and geopolitical uncertainties. 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 fiscal year 2027. As part of the long-term strategy to improve competitiveness and better align our manufacturing footprint with evolving customer needs, we completed the wind-down of our China manufacturing operations and successfully transferred production programs to Vietnam.