Key Tronic's Q4 2025: Contradictions Emerge on Revenue Growth, Gross Margin Outlook, U.S.-Mexico Strategy, and Mexico Operations Expansion

The above is the analysis of the conflicting points in this earnings call

Date of Call: Unknown

Financials Results

• Revenue: $110.5M for Q4 FY2025, down 12.7% YOY (vs $126.6M prior year)
• EPS: $-0.36 per diluted share (loss), worse than $-0.18 in the prior year period
• Gross Margin: 6.2%, compared to 7.2% in the prior year period
• Operating Margin: -2.1%, compared to 0.1% in the prior year period

Business Commentary:

* Revenue Decline and Demand Reduction: - Keytronic reported total revenue of $110,500,000 for Q4 fiscal 2025, down from $126,600,000 in Q4 fiscal 2024. - The decline was attributed to decreased demand from two major long-standing customers and uncertainty due to global tariff fluctuations, which delayed new program launches.

• Gross Margin Improvement and Cost Savings:
• Despite a $100,000,000 revenue reduction in fiscal 2025, Keytronic was able to increase gross margins year-over-year, from 7.1% to 7.8%.

• This improvement was due to operational efficiencies gained from workforce reductions, cost savings initiatives, and strategic cost management.

• Emphasis on U.S. and Vietnam Production:

• Keytronic plans to have half of its manufacturing take place in U.S. and Vietnam facilities by the end of fiscal 2026.

• This shift is driven by the trend to nearshore production, tariff mitigation strategies, and the desire to take advantage of the U.S.-based manufacturing benefits and Vietnam's cost-effective production capabilities.

• New Program Wins and Expansion:

• Keytronic won new programs in various industries, including vehicle lighting, aerospace systems, and medical technology, contributing to a strong pipeline of potential new business.
• Growth is anticipated from nearshoring trends, dual sourcing, and the company's expanded design capabilities, which make program-specific designs more attractive to customers.

Sentiment Analysis:

• Revenue declined due to reduced demand and tariff uncertainty; net loss widened. Management stated: “We will not be providing forward looking guidance due to uncertainty of timing of new products ramping.” Tariffs “contributed to delays to new program launches” and “hammered our growth and profitability in fiscal twenty twenty five.”

Q&A:

• Question from Matt Dane (Titan Capital Management): What is the size and ramp profile of the six new wins this quarter?
  Response: Most are ~$5M programs (three in Mexico, others in the U.S.); a consigned-materials data-processing program could exceed $20M.

• Question from Matt Dane (Titan Capital Management): What is the strategy and customer interest for Vietnam medical device capability?
  Response: Vietnam is now certified and has a medical program slated for FY2026, with improved marketing post‑COVID and expectation of additional opportunities.

• Question from Matt Dane (Titan Capital Management): What’s driving the increase in new program bids?
  Response: Greater cost competitiveness from reductions and expanded U.S. footprint (Arkansas) offering tariff mitigation is unlocking pent-up demand.

• Question from George Melas (MKH Management): Why did receivables drop so much; any factoring?
  Response: Lower revenue and better collections drove AR down; no factoring; some bad-debt reserves impacted figures.

• Question from George Melas (MKH Management): How much bad debt was reserved in Q4 and where did it hit?
  Response: About $1.1M reserved in Q4, recorded in SG&A.

• Question from George Melas (MKH Management): Clarify the $20M consigned-materials contract economics and timing.
  Response: $20M is services-only revenue with higher incremental margins than turnkey; signed in Q4, ramping in Corinth, targeting ~$20M run rate exiting FY2026.

• Question from George Melas (MKH Management): Outlook for Mexico operations in FY2026?
  Response: Expect growth from recent wins and improved cost structure; Mexico remains key for USMCA tariff mitigation and vertical subassemblies.

• Question from George Melas (MKH Management): Can gross margin recover toward 9–10% and what’s incremental margin on growth?
  Response: Goal is to improve margins via top-line growth and capacity utilization; incremental gross margin on added revenue expected at ~15–20%.