Key Tronic Corporation Aktie

Good day, and welcome to the Key Tronic's Fiscal Year 2026 Third Quarter Investor Call. Today's conference is being recorded. After the presentation, we will begin the question-and-answer period. At this time, I would like to turn the call over to Tony Voorhees. 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 of 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 the link can be found on our Investor Relations website. In addition, the slides, together with the 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 reconciliations to the most directly comparable GAAP measures are provided in today's press release, which is posted to the Investor Relations section of our website.

For the third quarter of fiscal year 2026, we reported total revenue of $89.6 million, compared to $112.0 million in the same period of fiscal year 2025. Year-over-year revenue for the third quarter of fiscal year 2026 continued to be adversely impacted by reduced demand from a legacy customer and an end-of-life program. Additionally, we also faced temporary challenges during the quarter related to winter storm Fern in the Southern U.S., customer design delays on a new program with a legacy customer, and delays in receiving allocated components on a separate new program. For the first 9 months of fiscal year 2026, our total revenue was $284.6 million, compared to $357.4 million in the same period of fiscal year 2025.

Despite these short-term impacts, we are already seeing activity improve, with demand returning from several legacy customers and multiple new programs continue to launch and ramp, driving expected revenue growth for the fourth quarter. Importantly, even with lower revenue in the third quarter of fiscal year 2026, we delivered an improvement in gross margin compared to the prior year period. This demonstrates the operating efficiencies gained from our cost-cutting initiatives during the past 2 years. Gross margin was 8.0% 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 the charges related to the China closure, which we will discuss in a moment, the adjusted gross margin was 8.5% for the third quarter of fiscal year 2026, up from 8.4% in the same period of fiscal year 2025. These results demonstrate that our business today is structurally more efficient and better positioned to generate margin as volume returns. 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 continued to wind down manufacturing operations in China, shifting more production to our expanding facilities in the U.S. and Vietnam. The China winddown is expected to be completed by the end of the current fiscal year and anticipated to save approximately $1.2 million per quarter following completion. 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. The reduction in revenue had a significant impact on our bottom line.

The net loss was $2.6 million, or $0.24 per share, for the third quarter of fiscal year 2026, compared to a net loss of $0.6 million, or $0.06 per share, for the same period of fiscal year 2025. For the first 9 months of fiscal year 2026, the 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. Our 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 $0.01 per share, for the same period of fiscal year 2025. For the first 9 months of fiscal year 2026, our adjusted net loss was $3.9 million, or $0.36 per share, compared to adjusted net loss of $1.2 million, or $0.11 per share, for the same period of fiscal year 2025.

Our focus on operating discipline continues to support a strong balance sheet. Our inventory for the third quarter of fiscal 2026 is down $13.5 million, or 14.0% from a year ago. Our current ratio was 2.1:1 compared to 2.7:1 from a year ago. At the same time, accounts receivable DSOs were at 85 days, compared to 92 days a year ago, reflecting stronger collection on receivables. Year-to-date cash flow provided by operations for the first 9 months of fiscal year 2026 was approximately $10.0 million, as compared to $10.1 million for the same period of fiscal year 2025. Our continuing ability to generate cash from operations has allowed us to reduce debt year-over-year by approximately $14.3 million and helps position us well as demand accelerates and new programs ramp. Capital expenditures in the third quarter were minimal, while year-to-date total capital expenditures through the third quarter were approximately $3.7 million. We expect CapEx for the full year to be around $5 million to $8 million, largely spent on 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 add capacity. As we move further into fiscal 2026, we continue to face a lot of global economic uncertainties and volatile trade policies. Nevertheless, we are increasingly encouraged by the demand trends we're seeing as we enter the fourth quarter. 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 the uncertainty of timing of new product ramps in light of continued macroeconomic uncertainty, we are not providing forward-looking guidance in the fourth quarter of fiscal year 2026.

That's it for me. Brett?

Thanks, Tony. Despite reduced demand from certain longstanding customers and the delays in production caused by winter storm Fern in the third quarter, we're encouraged by the improvements in our operating efficiencies and by the gradual rebound in demand from several longstanding customers and the continued growth of new programs that we're seeing in the fourth quarter. We continue to provide our customers with options to better manage macroeconomic uncertainties and enhance our potential for profitable long-term growth as we cease manufacturing operations in China, continue to right-size our Mexico facility, and build out new production capacity in the U.S. and Vietnam. 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 the fourth quarter of fiscal 2026.

As part of our long-term strategy and in recognition of the continuing geopolitical tensions, tariff uncertainties, and increasing costs associated with China-based production, we are winding down our facilities there and transferring programs to Vietnam. We anticipate savings generated from the shutdown to approximate $1.2 million per quarter once fully executed. As part of our global sourcing strategy, we will, however, continue to operate in China with a small team focused on sourcing critical components locally.

Over the past 24 months, we have also reduced our total head count by approximately 42% in Mexico and have begun transferring some programs from Mexico to the U.S. and Vietnam. Our Mexico facility continues to offer a unique solution for tariff mitigation under the existing USMCA tariff agreement. Given the sustained trend of continued wage increases in Mexico, we have streamlined our operations, increased efficiencies, and invested in automation to be more cost-competitive in the market.

Due to the successful cost reduction and streamlining production processes, we have recently seen an increase in the quoting volume and probability of landing new programs manufactured in our Mexican facilities. We've also seen an influx of new customer visits and audits of our Juarez campus as of late that demonstrates we are competitive for a growing variety of quoting opportunities. Our improved cost structure in Mexico is anticipated to lead to new programs and growth over the longer term.

We are very excited about the recent investments made in the U.S. and Vietnam to build out capacity and new capabilities to meet evolving customer demand. You will recall that we opened our new technology and resource and development location in Arkansas during the first quarter of fiscal 2026. Our U.S.-based production provides customers with outstanding flexibility, engineering support, and ease of communications.

We expect double-digit growth in our facility in Arkansas during the upcoming fiscal year. You will also recall that we have recently doubled our manufacturing capacity in Vietnam that now has the capability to support anticipated future medical device manufacturing. Our Vietnam-based production offers the high-quality, low-cost choice that was associated with China in the past. In coming years, we expect our Vietnam facility to play a major role in our growth. We anticipate that these new facilities in the U.S. and Vietnam will enable us to benefit from customer demand for rebalancing their contract manufacturing and mitigate the severe impact and uncertainty surrounding the tariffs on goods and critical components. By the end of fiscal 2026, we expect approximately half of our manufacturing to take place in our U.S. and Vietnam facilities.

These initiatives reflect the longstanding customer trends, both to nearshore as well as derisk the potential adverse impact of tariff increases and geopolitical tensions. During the third quarter of fiscal 2026, we won new programs in automotive technology, industrial tooling, pest control, and industrial power management. Our improved operating efficiency has also made us more competitive, increasing our sales pipeline, particularly in such steady growth sectors as utilities and data center equipment. Despite the many uncertainties and disruptions in global markets, our strong pipeline of potential new business underscores the continued trend towards onshoring and dual sourcing of contract manufacturing.

In light of the significant transitions and streamlining initiatives we've made in the past 2 years, it's worth reviewing our key competitive advantages going forward. The combination of our flexible global footprint and our expansive design capabilities continues to be extremely effective in capturing new business. First, we've enhanced our cost and tariff efficiency and the flexibility of our global manufacturing footprint. We expect that global tariff wars and geopolitical tensions will continue to drive OEMs to reexamine their traditional outsource strategies. Over time, the decision to onshore production is becoming more widely accepted as a smart, long-term strategy.

Second, many of our manufacturing program wins are predicated upon Key Tronic's deep and broad design services. And once we have completed the design and ramped it into production, we believe our knowledge of a program-specific design challenges make that business extremely sticky. We anticipate a continued increase in the number and capability of our design engineers in coming quarters.

Third, we continue to invest in vertical integration and manufacturing process knowledge, including a wide range of plastic molding, injection blow, gas assist, multishot, as well as PCB assembly, metal forming, painting and coating, complex high-volume automated assembly, and the design, construction, and operation of complicated test equipment. We believe this expertise will increasingly set us apart from our competitors of a similar size.

While the global market uncertainties have created some delays to new product launches for us, our suppliers and our customers, we believe geopolitical tensions and heightened concerns about tariffs and supply chains will continue to drive the favorable trend of contract manufacturing returning to North America as well as to our expanding Vietnam facilities. We're expecting revenue growth in the coming quarters from new programs launching in the U.S., Mexico, and Vietnam. Significant improvements in our operating efficiencies are creating a stronger pipeline of potential new business. Over the long term, we remain very encouraged by our cost reductions made over the past 2 years to become more market-competitive, our increasing cash flow generated from operations, enhanced global manufacturing footprint, and the innovations of our design engineering. All these initiatives have increased our potential for profitable growth.

This concludes the formal portion of our presentation. Tony and I will now be pleased to answer your questions.

[Operator Instructions] And we will take our first question from Matt Dhane with Tieton Capital Management.

I did want to ask, you referenced you had 4 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.

You bet. Happy to do that, Matt. So I think the first one, that automotive technology, that's about a $3 million to $5 million program that's slated to start in Juarez in fiscal '27. My expectation is we'll probably start ramping that in the second quarter. Next is the industrial tooling. This one is a bit unique. It was a design program that we started here in Spokane. Now they're wanting us to actually start building some low-volume production. So we're actually going to do that in our downstairs facility here in Spokane temporarily while we ramp that. Currently, it has about an order of about $3 million, but we're expecting that to grow. Ramp on that is immediate.

Third is pest control. That's a $2.5 million opportunity incremental to some other business of an existing customer down in Juarez, Mexico. And then the last -- fourth is the industrial power management. That's an $8 million to $10 million opportunity that will start towards the end of the calendar quarter, so again, second quarter of fiscal '27 in our Springdale, Arkansas facility.

One other question I did have. So obviously, tariffs has been a key conversation point here for a while. You talked about your pipeline building. What role is tariffs playing today in conversations with prospective customers? And yes, just help me understand all that, if you could.

Yes. There's quite a bit of moving parts -- continue to be moving parts with -- related to tariffs. I think we're well situated now that we have an increased capacity to build product in Vietnam. The fact that USMCA is still in -- still a mitigation opportunity as well in Mexico and those that want to nearshore in the U.S. So I think we're seeing a hesitancy to make a decision or to award us a program. Some of that hesitancy is coming to close, and we're actually seeing the actual awarded opportunities begin to pile up.

So I think this hesitancy and uncertainty for so long of awarding a program and elongating that sales cycle now begins to -- I think, people are becoming okay with the fact that there's going to be continued uncertainty, and we're actually seeing stocking levels decrease in certain key new opportunities and legacy customers. So I think it's a change in the market of, 'I'll wait and see what tariffs do,' to now, 'it's a complete, open -- continued changing in and out because of the required response -- or the required stockouts and reducing inventories, they're going to need to make a decision. And so, I'm making that in light of the uncertainty. That's a long-winded answer to, I think we anticipate some wins that we've been waiting for, for quite some time.

[Operator Instructions] And we will take our next question from George Melas with MKH Management.

Nice to hear a consistent story about increased capability -- in the number and capability of design engineers. Can you elaborate a little bit on that? And is that still very much -- is design complexity very much one of the focus of your sales opportunities?

Yes. As we spoke before, George, part of our strategy is to continue to grow that design capability. So we're continuing to recruit and hire new design engineers. We have found it incredibly important for us to continue down that path. If you get into a customer relationship where you're providing design capabilities to them, not only is that business very sticky, you're also helping them design the product to be a good fit to your own production equipment and capabilities within your own factory.

So we're going to continue down that road. What's kind of fun to see is this is the first design project that we're actually building within our Spokane facility with the engineers themselves. This is a little new to us. We've done this many years back. But my expectation is that this may become a bit more of the norm, as we take over the design responsibility to bring a new product to market. And maybe they use our engineers to put the first series or set of products together.

That sounds good. Can you also give us a bit of an update on the data processing customer in Mississippi? I think that's a potentially very, very significant project, but I think it was always expected to ramp rather slowly or progressively. Can you update us on that?

You bet, George. So that customer down in Mississippi continues to be flat quarter-over-quarter, so quarter 2 to quarter 3 is flat. Our hope is that, that will continue to ramp over time. But to date, it's been relatively flat over the last 2 quarters. There's not any real growth that we see in Q4, but maybe in fiscal '27. That's the consign program, I think, that we spoke about at length a couple of quarters ago. But it still continues to be a very good program for us. It's just -- it's been fairly flat last 2 quarters.

And at what level it is now in terms of what you think it could be? Is it at 1/4 of its potential? Or how would you characterize it compared to what the potential expectation is?

That's a difficult one to quantify. I think we're probably 50% of what our initial expectation was. But I think this is very market sensitive and based off of where we're at today, again, that's a tough one. I wish I had a crystal ball, George, but we're definitely not where we thought its capacity was, but it's a complete unknown at this point.

And I'd just add to that, George, that this customer has a number of SKUs that we could build. And we've actually built a few different SKUs for them already. So we're ready to take on more when it becomes available to us.

Yes. The relationship is just very market sensitive.

And maybe just one clarification. You guys mentioned in your prepared remarks that you can see a return to profitability in the fourth quarter. So basically, it means next quarter.

Yes.

What kind of revenue level do you need in order to hit that target?

Yes, I don't know that we're yet giving guidance. Tony mentioned that there still is quite a bit of uncertainty in some ramps and the things that are going on. So I don't know that we want to quantify our revenue. Our expectation is definitely that there's going to be revenue growth Q4 sequentially from Q3. And we still feel strongly that we'll be in the black bottom line. In future quarters, we'll readdress that. But at this point, I'd rather not give guidance.

Okay. And then just a quick question. In the last quarter, you mentioned potential savings from China from stopping the -- closing the manufacturing operations there. And you also mentioned $1.5 million of savings related to the reduction in force in Mexico. Is that something that you've started to benefit from that has started to hit the bottom line? Or do we really see that in the fourth quarter or in fiscal '27?

Yes. Thanks, George, for that question. So in China, specifically, we have completed our manufacturing operations there. So now we have a bit additional work to do just to get other materials and equipment out of China that we want to send to one of our other locations or sell it. So we do have a bit of work to do there. We completed that production in April, so just not that long ago. So we should start to see those employees severanced now, and we'll start to see improvements related to the $1.2 million that we mentioned in the script, probably in later this quarter.

Yes. So I think the full $1.2 million won't be until Q1. But there is some incremental savings in this quarter, Q4, that we will see.

And with regard to the Juarez, Mexico question, we have completed that severance. We are seeing some revenue growth down there in our Mexico operations. So we didn't complete 100% of that severance, as we will need some of those employees as we're seeing some revenue growth there in that facility.

[Operator Instructions] And at this time, we have no further questions. I would now like to turn the call back to Brett Larsen.

Thank you again for participating in today's conference call. Tony and I look forward to speaking to you again next quarter. Thank you.

This does conclude today's call. Thank you for your participation. You may now disconnect.

Good day, and welcome to the Key Tronic FY 2026 Q2 investor call. Today's conference is being recorded. [Operator Instructions]

At this time, I'd like to turn the call over to Tony Voorhees. Please go ahead.

Good afternoon, everyone. I am Tony Voorhees, Chief Financial Officer of Key Tronic. I'd 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 the link can be found on our Investor Relations website. In addition, the slides, together with the 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 reconciliations to the most directly comparable GAAP measures are provided in today's press release, which is posted to the Investor Relations section of our website.

For the second quarter of fiscal year 2026, we reported total revenue of $96.3 million compared to $113.9 million in the same period of fiscal 2025. Revenue for the second quarter of fiscal 2026 was adversely impacted by reduced demand from a long-standing customer and the transition of an end-of-the-life program. However, this impact was partially offset by new program wins and an increase in demand from other long-standing customers.

As in other recent quarters, we believe customers continue to face uncertainties in the global economy and volatile trade policies. In addition, we continued ramping the consigned materials program that was previously announced.

For the first 6 months of fiscal 2026, our total revenue was $195.1 million compared to $245.4 million in the same period of fiscal 2025. In line with our long-term strategic plan, we proactively advanced our near-shoring and tariff mitigation strategies to reduce costs while maintaining the diversity and flexibility of our key locations and operational capabilities.

During the second quarter of fiscal 2026, we initiated a wind down of our manufacturing operations at our China-based facility. Designed to better align organizational structure and resources with our strategic initiatives, including filling the capacity recently created in Vietnam. We expect to complete this wind down in our fourth quarter, at which point we anticipate saving approximately $1.2 million per quarter.

We also continue to further reduce our workforce in Mexico as we intend to have that facility focused on higher volume manufacturing. Once these reductions are fully implemented during our third quarter, we would expect to save approximately $1.5 million per quarter moving forward. These strategic initiatives resulted in charges for severance, inventory write-offs and other related expenses of approximately $10.5 million for the quarter, which had a significant adverse impact on our margins.

Gross margin was 0.6% and operating margin was negative 10.7% in the second quarter of fiscal 2026 compared to 6.8% and negative 1.0%, respectively, in the same period of fiscal 2025. Excluding the charges related to the China closure and the Mexico workforce reductions, the adjusted gross margin was 7.9% for the second quarter of fiscal year 2026.

As top line growth returns, we anticipate margins to be strengthened by 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.

The wind down of China production, severance charges and the reduction in revenue had a significant impact on our bottom line. Our net loss was $8.6 million or $0.79 per share for the second quarter of fiscal 2026 compared to a net loss of $4.9 million or $0.46 per share for the same period of fiscal 2025.

For the first 6 months of fiscal 2026, the net loss was $10.9 million or $1 per share compared to $3.8 million or $0.35 per share for the same period of fiscal 2025. Our adjusted net income was breakeven or $0.00 per share for the second quarter of fiscal 2026 compared to adjusted net loss of $4.1 million or $0.38 per share for the same period of fiscal 2025.

For the first 6 months of fiscal 2026, the adjusted net loss was $1.1 million or $0.10 per share compared to an adjusted net loss of $1.3 million or $0.12 per share for the same period of fiscal 2025.

Turning to the balance sheet. Our inventory for the second quarter of fiscal 2026 is down $12.3 million or by 12% from a year ago. Our current ratio was 2.0:1 compared to 2.8:1 from a year ago. At the same time, accounts receivable DSOs were at 77 days compared to 99 days a year ago, reflecting stronger collection on receivables.

Total cash flow provided by operations for the second quarter of fiscal 2026 was approximately $6.3 million as compared to $1.3 million in the same period of fiscal 2025. Our continuing ability to generate cash from operations has allowed us to reduce our debt year-over-year by approximately $13.4 million.

In the second quarter, capital expenditures were approximately $3.3 million, bringing year-to-date total capital expenditures through the second quarter to approximately $6.5 million. We expect CapEx for the full year to be around $8 million to $10 million, largely spent on 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 add capacity.

As we move further into fiscal 2026, we continue to face a lot of global economic uncertainties and volatile trade policies. Nevertheless, we are pleased to continue to see our new programs gradually ramping and our cost and efficiency improvements from our recent overhead reductions taking hold.

We also expect to see growth in our U.S. and Vietnam production, have a strong pipeline of potential new business and remain focused on improving our profitability. Over the longer term, we believe that we are increasingly well positioned to win new programs and profitably expand our business. Due to the uncertainty of timing of new product ramps in light of the continued macroeconomic uncertainty, we are not providing forward-looking guidance in the third quarter of fiscal 2026. That's it for me. Brett?

Thanks, Tony. During the second quarter of fiscal 2026, we continue to provide our customers with options to better manage macroeconomic uncertainties and enhance our potential for profitable long-term growth. We are excited about the significant investments made to our U.S. and Vietnam locations.

During the quarter, we witnessed the increasing number of customer program starts in Springdale, Arkansas, started a new production line in Corinth, Mississippi in support of a growing consignment customer, and we shipped our first batch of medical products from Da Nang, Vietnam.

Due to ongoing geopolitical tensions and tariff uncertainties, we began to execute our long-term strategy to wind down manufacturing operations at our China facility and continue to rightsize our Mexico facility. Demand from a specific long-standing customer has declined in recent periods, but we believe that recently won programs more than offset the loss in revenue in future quarters.

Moreover, the continued market uncertainty and shifts of tariffs have unfortunately impacted the timing and launch of new programs, but those programs continue to slowly proceed. We are doing our best to work with suppliers and with our customers on options for manufacturing their products from different locations in mitigating the impact of tariffs.

Our changes made to our manufacturing footprint and cost reductions have enabled us to offer improved mitigation options, particularly when our customers consider the varying implications of current and future potential tariffs. As part of our long-term strategy and in recognition of the continuing geopolitical tensions, tariff uncertainties and increasing costs associated with China-based productions, we have begun winding down our facilities there and transferring several programs to Vietnam.

As part of our global sourcing strategy, we will continue to operate in China with a small team focused on sourcing critical components locally. Over the past 18 months, we have also reduced our total headcount by approximately 40% in Mexico and have begun transferring some of the programs from Mexico to the U.S. and Vietnam.

Our Mexico facility continues to offer a unique solution for tariff mitigation under the existing USMCA tariff agreement. Given the sustained trend of continued wage increases in Mexico, we have streamlined our operations, increased efficiencies and invested in automation in order to be more cost competitive in the market.

Due to the successful cost reductions and streamlining production processes, we have recently seen an increase in the quoting volume and probability of landing new programs manufactured within our Mexico facilities. We've also seen an influx of new customer visits and audits of our Juarez campus as of late that demonstrates we are competitive for a growing variety of quoting opportunities. Our improved cost structure in Mexico is anticipated to lead to new programs and growth over the longer term.

We are very excited about the recent investments made in the U.S. and Vietnam to build out capacity and new capabilities to meet evolving customer demand. You will recall that, we opened our new technology and research and development location in Arkansas during the first quarter of fiscal 2026.

Our U.S.-based production provides customers with outstanding flexibility, engineering support and ease of communication. We expect double-digit growth in our facility in Arkansas during the latter half of this fiscal year.

You will also recall that we have recently doubled our manufacturing capacity in Vietnam that now has the capability to support medical device manufacturing. Our Vietnam-based production offers the high-quality, low-cost choice that had been associated with China in the past. In coming years, we expect our Vietnam facility to play a major role in our growth.

We anticipate these new facilities in the U.S. and Vietnam will enable us to benefit from customer demand for rebalancing contract manufacturing and mitigate the severe impact and uncertainty surrounding the tariffs on goods and critical components. By the end of fiscal 2026, we expect approximately half of our manufacturing to take place in our U.S. and Vietnam facilities. These initiatives reflect both the long-standing customer trend to nearshore as well as derisk the potential adverse impact of tariff increase and geopolitical tensions.

During the second quarter of fiscal 2026, we won new programs in automotive technology, pest control and industrial equipment. As already noted, we continue to ramp our recently announced manufacturing services contract with a data processing OEM that consigns its materials to our Corinth, Mississippi manufacturing facility.

As we discussed, the consigned material model is new for us at this scale, and if successful, will considerably improve our profitability in coming quarters. It has the potential to grow to over $25 million in annual revenue, roughly the equivalent of $100 million turnkey program. Despite the many uncertainties and disruptions in global markets, our strong pipeline of potential new business underscores the continued trend towards onshoring and the dual sourcing of contract manufacturing.

We expect that global tariff wars and geopolitical tensions will continue to drive OEMs to reexamine their traditional outsource strategies. Over time, the decision to onshore production is becoming more widely accepted as a smart long-term strategy.

We believe our manufacturing footprint and cost competitiveness will allow us to take advantage of these opportunities. The combination of our flexible global footprint and our expansive design capabilities continues to be extremely effective in capturing new business.

Many of our manufacturing program wins are predicated upon Key Tronic's deep and broad design services. And once we have completed the design and ramped it into production, we believe our knowledge of a program-specific design challenges makes that business extremely sticky. We anticipate a continued increase in the number and capability of our design engineers in coming quarters.

We also continue to invest in vertical integration and manufacturing process knowledge, including a wide range of plastic molding, injection, flow, gas assist, multi-shot as well as PCB assembly, metal forming, painting and coating, complex high-volume automated assembly and the design, construction and operation of complicated test equipment.

We believe that this expertise will increasingly set us apart from our competitors of a similar size. While the global market uncertainties have created some delays to new product launches for us, our suppliers and our customers, we believe geopolitical tensions and heightened concerns about tariffs and supply chains will continue to drive the favorable trend of contract manufacturing returning to North America, as well to our expanding Vietnam facilities.

We are expecting revenue growth in the coming quarters from new programs launching in the U.S., Mexico and Vietnam. We move forward with a strong pipeline of potential new business, and we are anticipating significant improvements in our operating efficiencies.

Over the long term, we remain very encouraged by our cost reductions made over the past 2 years to become more price competitive. Our increasing cash flow generated from operations enhanced global manufacturing footprint and the innovations from our design engineering. All of these initiatives have increased our potential for profitable growth.

This concludes the formal portion of our presentation. Tony and I will now be pleased to answer your questions.

[Operator Instructions] And our first question will come from Matt Dhane with Tieton Capital Managemen.

Great. I was hoping to delve a little bit more. You referenced earlier in the call that -- can you hear me?

Yes, we can, Matt.

Okay. I'm sorry. I thought maybe someone was saying they could not hear me. So, I wanted to circle back around like I was saying, the increased demand from existing customers. I was hoping to get a little bit more color how significant that is? Is it across a wide variety of customers? And what do you sense is driving that increased demand?

Yes. I would say that the large part, it's predominantly 2 specific long-standing customers. One is product maturation, just the fact that there's a need for a refresh of this particular design. That had a rough order of magnitude, probably about a $20 million hit to our overall quarter revenue. I think the next was essentially an end-of-life program. They're looking at replacing it down the road, but that one too is roughly about a $7 million reduction from last year's fiscal. Of course, offsetting that, those large decreases in revenue are some of the ramping new programs.

Okay. So, you're not really seeing a ramp from existing customers that the ramp is really coming from new programs then. Is that -- am I hearing you correct then?

Yes, Matt, we do have a few customers that we're seeing some increased demand on. I would say it's around a half dozen that are kind of impacting that increase from long-standing customers.

Okay. Okay. No, that's helpful. And then you also in the press release referenced the 3 new programs that you won. I was just hoping to get a size, rough size estimate of each and the timing of the ramp and then also where you're going to be manufacturing each of those?

Sure. I think the first, we'll start with the automotive. That one will be manufactured down in Mexico. That will -- rough order could be up to $5 million when fully ramped. I think the pest control, I think that one is actually in our U.S. facility in Vietnam, and that could be up to $2 million. And then the industrial equipment is also in our U.S. location, $2 million to $5 million.

Okay. No, that's helpful. And then final question I'd like to ask. You folks have referenced in the past and again on this call today that you have a number of tariff mitigation strategies. I don't think I've ever actually delved in and tried to better understand when you say that, what are you actually doing behind the scenes? And what can you do to help us understand better what you're doing there?

Yes. I mean that really gets to the core of our strategy, our long-term strategy to essentially have a lower-cost Asian facility that could eventually replace our China facility. One of the biggest reasons we're winding down China is now that we've ramped Vietnam. We feel confident in the new technology and the new production equipment that we now have online. It really is ready now to essentially resolve the China to U.S. tariff situation and then also some of the geopolitical tension that we have. That's one piece.

The other piece is that we offer either a U.S.-made opportunity for those that would require that but we also still offer the production down in Mexico that currently, you still can take advantage of the USMCA agreement that allows you to build things down in Mexico and bring it back up into the U.S. and even consume it in the U.S. under that agreement and avoid certain tariffs as well. It's a complex algorithm that really we help our customers with coming up with the best solution.

A lot of that is dependent on how much labor is required, what -- where the components are currently being supplied, where could they be supplied from, possibly using some more North American-centric suppliers that we have. And then basically coming up with various price points of a total cost to our customer and saying, here's where we think it's advantageous to build your product. We feel confident based on our locations and footprint that we can offer a suite of different answers to our customers that really could mitigate tariffs regardless of where they end up.

Okay. Okay. And so, whenever a prospective customer is coming to you looking to have you quote a new product or program, do you usually go back to them? And if they're really agnostic where it comes from, do you go back to them and offer them pricing if we were to build it in Vietnam, this will be your price, U.S. price and then a Mexico price? Do they really have the full choice in spectrum? And is that really how you approach it oftentimes?

It really is. And that -- I think that's one of the unique things that we can offer as Key Tronic is we can easily quote from all 3 of those locations that you provided and offer our customer, this is what the lead time that would be required. Here's what your price is. Here's what -- here's the pros and cons from building in each of those locations and really offer that to our customer to ultimately make that decision of where they want the product built.

[Operator Instructions] And our next question will come from George Melas with MKH Management.

Just want to review a little bit the gross margin. On an adjusted basis, it's roughly -- it's 7.9%, which is better than a year ago, but it's down a bit sequentially. And I'm just trying to see if there is anything unusual in the quarter in the gross margin, something positive like the high level of tooling or engineering services or maybe something negative with some disruptions and the transition of the end-of-life program or other things like that?

Yes. Just to mention a few, and I'm sure Tony will fill in as well, but I think some of the negative or some of the headwind we had during the quarter was we still are transferring programs from Mississippi up into Arkansas, the new facility. And of course, with that comes some additional costs.

I'd also mention that in our second quarter, as always, we really lose out on a week of production just due to the holidays. particularly -- in particular, our Mexican facility was closed for a full week. And then, of course, our domestic sites are closed for at least half a week over Christmas. So, you lose some production time, but that helps explain some of the sequential drop in the adjusted gross margin. We really need volume. And looking forward, prospectively is in order to really increase our gross margin prospectively, we need to drive sales volume and utilize some of the excess capacity that we have in each of our sites. Tony, anything you'd add?

There was just -- to add to that, there were some slight mix changes that negatively impacted gross margin quarter-over-quarter potentially.

And mix changes, Tony, do you mean different programs or different locations?

Primarily just different programs, yes.

Okay. Okay. Maybe another question on sort of you guys reiterating the expectation to be net income breakeven in the June quarter, so just 2 quarters away. And with interest expense sort of remaining, let's say, $2.3 million or in that range, you need -- and if we think of OpEx, normalized OpEx at roughly $7.4 million, you need roughly $10.7 million in my basic calculation of gross profit. And that implies both revenue growth and margin expansion. I think some of the margin expansion will come from the consignment program in Mississippi. But can you comment on that and how you think that you're able to both grow revenue and margin?

Yes. I think we would stick with that same expectation. We still anticipate achieving somewhere breakeven by the end of the fiscal year. We mentioned a bit about that consignment program that continues to ramp nicely. It's definitely not to the level of revenue that we expect it to be exiting this quarter or even in the fourth quarter. There's more growth there that is required. But as we mentioned earlier, I think with that consignment program as large as it is, you will also see some uptick in the gross margin percentage. So, you'll see both -- our expectation is some additional revenue, but then also improvement in the gross margin percentage.

Okay. Any -- just a follow-up on that, Brett. Any particular reason for the program sort of ramping up maybe slower than you expected because it seems like it's a very important program for you guys.

No. We expected that it would be a slow growth. Some of that required some additional equipment. We were able to procure that. It had some lead time to it. We actually ended up installing some of that over the Christmas holiday. And then unfortunately, in Mississippi this quarter, they got hit with some bad ice storm. So, we are recovering from that. I think that will have a slight impact to the -- into our third quarter, but won't disrupt the momentum of growing that consignment model. It just may delay it by a week or 2 as we get through this ice storm. But we fully anticipated that, that would be a slow role to be -- to get to its peak.

Okay. Okay. And then just to try to understand, in Mexico, you expect growth in Mexico going forward. So does that mean that Mexico has hit sort of a bottom and that you restructured Mexico into, let's say, a lower service, but full capability, but maybe slightly lower service but low-cost operation. How would you characterize that?

George, I think I would -- I kind of like what we mentioned is that we have found that we were not market competitive. We needed to increase our efficiency. We needed to invest in some automation. We really needed to be far more competitive in our pricing down in Mexico. I hope that we're at a bottom. I can't -- I don't have a crystal ball. But my expectation based off of just the recent history, just the recent visits that we've had down in Mexico and some of the quoting opportunities that we've been down selected to take it to the next round.

I feel like we're more competitive in Mexico than we were. So yes, over the longer term, we're still expecting Mexico to grow. We don't have anticipated additional reductions in headcount other than those that we've already accrued for in our second quarter. But as you know, things change. We are looking forward to the review of the USMCA that is to occur midyear this year and hoping that most, if not all of that continues as part of a trilateral agreement between us, Mexico and Canada. But things do change. And -- but for now, yes, we -- based on the volume of quotes and the recent visits by potential customers, our expectation is that Mexico will grow.

Okay. Great. And then just one quick final question for Tony. You mentioned the $1.2 million savings per quarter once the ramp down or the wind down of the China manufacturing operation is completed. That $1.2 million, is that the impact on, on cost of sales? Is it the impact on the EBIT line? What -- how does that $1.2 million flow through the P&L?

Well, yes, it's a good question, George. So that $1.2 million really is kind of taking into consideration the entire wind down of the manufacturing portion of our China operations. So, it's across the board. It's up in COGS as well as certain SG&A as well and OpEx. So, as we see -- and we expect to have that done by our fiscal year-end. So, at which point is when we'd see that $1.2 million begin to take full effect in our results.

I would say the bulk of it is in cost of goods. But to Tony's point, there is also some OpEx that will be reduced based off of that wind down.

Okay. And that $1.2 million in savings, what would be the impact on the EBIT line?

I would take the $1.2 million.

But if you have some COGS, wouldn't there be some revenue attached to the COGS that -- so the $1.2 million is a net number basically?

It is. Sorry. Yes, it is. Sorry. We know now what you're asking. Sorry about that, George.

I just had to ask 3 times because I couldn't find the way to do it. I'm not surprised by that.

No.

Okay. Great. Great. Thanks for your hard work. It seems like you're really doing a lot of stuff to make the operation better.

[Operator Instructions] And that does conclude the question-and-answer session. I'll now turn the conference back over to Brett Larsen for closing remarks.

Thank you again for participating in today's conference call. Tony and I look forward to speaking to you again next quarter. Thank you.

Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.

Good day, and welcome to the Key Tronic First Quarter Fiscal Year '26 Investor Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Tony Voorhees. 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 in our Corinth, Mississippi facility 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, 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 the 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 reconciliations to the most directly comparable GAAP measures are provided in today's press release, which is posted to the Investor Relations section of our website. For the first quarter of fiscal 2026, we reported total revenue of $98.8 million compared to $131.6 million in the same period of fiscal year 2025.

Revenue for the first quarter of fiscal year 2026 was adversely impacted by reductions in demand from one long-standing customer and delays in new program launches as our customers face continued uncertainties in the global economy. In addition, the consigned materials program that was announced last quarter has begun to ramp. As this large program grows, reported revenue is expected to be lower compared to traditional turnkey programs, while our gross margin is projected to improve. Our gross margin was 8.4% in the first quarter of fiscal year 2026 compared to 6.2% in the previous quarter and 10.1% in the same period of fiscal year 2025. The sequential quarterly increase in gross margin was primarily related to operational efficiencies gained from the reductions in workforce. The year-over-year decreases in gross margin in the first quarter of fiscal 2026 largely reflects reduced revenue as well as inventory and accounts receivable reserves of approximately $1.6 million due to a customer bankruptcy.

Our operating margin for the first quarter of fiscal year 2026 was a negative 0.6%, down from 3.4% for the same period of fiscal year 2025. As top line growth returns, we expect margins to be strengthened by 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 $2.3 million or $0.21 per share for the first quarter of fiscal year 2026 compared to net income of $1.1 million or $0.10 per share for the same period of fiscal year 2025.

As mentioned previously, the change in earnings was largely due to the reduction in revenue when compared to last year's results. Our adjusted net loss was $1.1 million or $0.10 per share for the first quarter of fiscal year 2026 compared to adjusted net income of $2.8 million or $0.26 per share for the same period of fiscal year 2025. See non-GAAP financial measures in the earnings release for additional information about adjusted net loss and adjusted net loss per share. Turning to the balance sheet. Our inventory for the first quarter of fiscal 2026 remained largely unchanged from the same time a year ago. Our recent strategic initiatives were designed to better align our inventory with our current revenue. While many of our customers have revamped their forecasting methodologies, we have made significant enhancements to our materials resource planning algorithms. As a result, we are now more prepared to address potential future disruptions in the supply chain and more able to respond effectively to evolving tariff implications as we continue to manage inventory more cost effectively.

For the first quarter of fiscal 2026, we reduced our total liabilities by a combined amount of $21.8 million or 9% from a year ago. Our current ratio was 2.4:1 compared to 2.6:1 from a year ago. At the same time, accounts receivable DSOs were at 81 days compared to 92 days a year ago, reflecting stronger collection on receivables. Total cash flow provided by operations for the first quarter of fiscal year 2026 was approximately $7.6 million as compared to $9.9 million for the same period of fiscal year 2025. Our continuing ability to generate cash from operations has allowed us to reduce our debt year-over-year by approximately $12 million. Total capital expenditures in the first quarter of fiscal 2026 are about $3.2 million, and we expect CapEx for the full year to be around $8 million, largely spent on 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 as well as make efficiency improvements to prepare for growth and add capacity. As we move further into fiscal year 2026, we are pleased to continue to see our new programs gradually ramping and our cost and efficiency improvements from our recent overhead reductions are paying off. We expect to see growth in our U.S. and Vietnam production, have a strong pipeline of potential new business and remain focused on improving our profitability. Over the longer term, we believe that we are increasingly well positioned to win new programs and profitably expand our business. Due to the uncertainty of timing of new products ramping, we are not providing forward-looking guidance in the second quarter of fiscal year 2026. That's it for me. Brett?

Thanks, Tony. Moving into fiscal 2026, the uncertainty surrounding global tariffs and the macroeconomic outlook continued to delay new program ramps for many of our customers. To provide our customers with options to manage these uncertainties and to remain cost competitive, we have continued to build up new production capacity in the U.S. and Vietnam and have rightsized our Mexico facility. Demand from certain long-standing customers has reduced total revenues when compared to last year's first quarter results. Moreover, the continued market uncertainty and shifts of tariffs have unfortunately impacted new program launches across all of our facilities.

We're doing our best to work with suppliers and with our customers on options for manufacturing their products from different locations in mitigating the impact of tariffs. Our changes made to our manufacturing footprint and cost reductions enable us to offer improved mitigation options, particularly when our customers consider the varying implications of current and future potential tariffs. We're moving full speed ahead with adding capacity in key regions. During the first quarter of fiscal 2026, we opened our new technology and research and development location in Arkansas. We're delighted to be enhancing our operations in a region where we have maintained a long-standing presence and a strong team and can benefit from a business-friendly environment. Our U.S.-based production provides customers with outstanding flexibility, engineering support and ease of communications. We expect double-digit growth in our facility in Arkansas during the latter half of this fiscal year.

In Vietnam, we have doubled our manufacturing capacity in Vietnam and now has the capability to support anticipated future medical device manufacturing. Our Vietnam-based production offers the high-quality, low-cost choice that was associated with China in the past. In coming years, we expect our Vietnam facility to play a major role in our growth. We anticipate that these new facilities in the U.S. and Vietnam will enable us to benefit from customer demand for rebalancing their contract manufacturing and to mitigate the impact and uncertainty surrounding tariffs on goods and critical components. By the end of fiscal 2026, we expect approximately half of our manufacturing to take place in our U.S. and Vietnam facilities. These initiatives reflect both the long-standing customer trends to nearshore as well as derisk the potential adverse impact of tariff increases and geopolitical tensions. Our Mexico facility offers a unique solution for tariff mitigation under the existing USMCA tariff agreement.

Given the sustained trend of continued wage increases in Mexico, we have streamlined our operations, increased efficiencies and invested in automation in order to be more cost competitive in the market. Our improved cost structure in Mexico is anticipated to lead to new programs and growth over the longer term. During the first quarter of fiscal 2026, we won new programs in medical technology and industrial equipment. In addition, we got underway with the recently announced manufacturing services contract with a data processing OEM that will consign its materials to our Corinth, Mississippi manufacturing facility. As we discussed, the consigned materials model is new for us at this scale, and if successful, will considerably improve our profitability in coming quarters. It has the potential to ramp significantly during fiscal year 2026 and is estimated to grow to over $20 million in annual revenue.

Despite the many uncertainties and disruptions in our global markets, our strong pipeline of potential new business underscores the continued trend towards onshoring and the dual source of contract manufacturing. We expect that global tariff wars and geopolitical tensions will continue to drive OEMs to reexamine their traditional outsourcing strategies. Over time, the decision to onshore production is becoming more widely accepted as a smart long-term strategy. We believe our manufacturing footprint and cost competitiveness will allow us to take advantage of these opportunities. The combination of our flexible global footprint and our expansive design capabilities continues to be extremely effective in capturing new business.

Many of our new manufacturing program wins are predicated upon Key Tronic's deep and broad design services. And once we have completed the design and ramped it into production, we believe our knowledge of the program specific design challenges makes that business extremely sticky. We anticipate a continued increase in the number and capability of our design engineers in coming quarters. We also continue to invest in vertical integration and manufacturing process knowledge, including a wide range of plastic molding, injection [indiscernible] assist, multi-shot as well as PCB assembly, metal forming, painting and coating, complex high-volume automated assembly and the design, construction and operation of complicated test equipment. We believe this expertise will increasingly set us apart from our competitors of a similar size. While the global market uncertainties have created some delays to new product launches for us, our suppliers and our customers, we believe geopolitical tensions and heightened concerns about tariff and supply chains will continue to drive the favorable trend of contract manufacturing returning to North America as well to our expanding Vietnam facilities.

We are expecting revenue growth in the coming quarters from new programs launching in the U.S., Mexico and Vietnam. We move forward with a strong pipeline of potential new business, and we're seeing significant improvements in our operating efficiencies. Over the long term, we remain very encouraged by our cost reductions made over the past 2 years to become more market competitive, our increasing cash flow generated from operations, enhanced global manufacturing footprint and the innovations from our design engineering. All of these initiatives have increased our potential for profitable growth. This concludes the formal portion of our presentation. Tony and I will now be pleased to answer your questions.

[Operator Instructions] And we will take our first question from Bill Dezellem with Tieton Capital.

Let's just start with the 2 wins this quarter. What was the size of each of those, please?

Sure, Bill. Just to clarify, there was actually 1 medical and 2 industrial. The medical was roughly about $5 million in size. And the 2 industrial combined is probably around $6 million.

All right. And you referenced in your opening remarks the medical capabilities, medical production capabilities in Vietnam. Does this particular product belong in Vietnam? Or will it be produced somewhere else?

So our intent is that later this fiscal year to be actually up in production for some medical device over in Vietnam. We've recently received certification to do that, and our customer actually visited the site just last week and has given us the go ahead.

And this specific customer or one another medical customer?

This specific customer. And I think with the introduction of one, our anticipation is that, that facility will continue to show well, and we're expecting continued interest from others.

Right. Okay. That's helpful. And you referenced the manufacturing services contract. As you -- I guess, let's start with the level of revenues that you experienced this quarter. You said it was the first quarter where you had some revenue there.

Yes. It had just started. So I'm assuming you're talking about the -- the consigned program that we referenced.

That's right.

Yes. The consigned program down here in Corinth, and Tony and I are actually down in Corinth today visiting and checking in on that program and seeing it launch and ramp. And in our first quarter, there was roughly just over $1 million of actual revenue. That will grow sequentially over the next few quarters and our expectation it could exceed $20 million on an annual basis.

Great. That's helpful. And then as you referenced in your opening remarks, if it's successful, the $20 million or more, what are the swing factors that will make that contract more successful or less successful?

I think from our perspective, Bill, a consigned program, it takes a special customer that has its own supply chain capabilities and has the ability to provide the components on a timely basis and has the capital to do so. In this specific instance, all of those are true. And I think with the consigned model, the amount of margin will increase because you're not including the cost of the materials. So on 2 fronts, both our reported margin percent is expected to go up. And then also the amount of working capital required for that revenue is minimal other than local ancillary supplies and, of course, labor.

Great. So essentially, you are really billing for use of the facility, labor and your profit and not for the inventory component, which historically is a very large portion of your revenue?

It is. It is.

Okay. That's helpful. And so ultimately, this model's success or failure is a function of your customers' ability to manage the inventory. It's really on their shoulders rather than anything tied to Key Tronic and your activities other than what would be normal for any other manufacturing contract?

Yes. This one is a bit different in that respect. And of course, there's communication and correspondence between us and them of specific components that are required, but ultimate delivery of that will be dependent on their supply chain rather than our own group going out and buying from specific suppliers.

Right. Okay. And thinking out loud, do I remember correctly that 80% of the bill of materials ends up being inventory as opposed to labor or overhead expense?

That's a bit high. I would say it's closer to about 60% to 70%, Bill, is material on a typical turnkey program.

Okay. Appreciate that. And then over the last several quarters, you all have talked about a utility product program. It's not for a utility, but your customer would be selling to a utility. What's the update on that product's success with their customer -- and customers and your ramp of that business?

Sure. That's a good question, Bill. In our first quarter, we had anticipated to have some production revenue from that particular customer. It was delayed by about 1.5 months, but fortunately, we're seeing that ramp nicely in our second quarter.

And then you have also talked about a consumer product that I think that the -- your customer had some challenges. It was -- could have been a very large program had they been able to be successful with the retailers that they were going into. What's the update on that? Or is there an update?

No update at this point. We are seeing some softness in some of our long-standing customers, in particular, consumer products. I can't recall the specific one you're mentioning, but we are seeing some reductions in demand from some consumer products that we are building today.

So the one I'm specifically referring to, I believe you all announced -- made an announcement about it. It could have been that large.

Okay.

That's not resonating what that one might be.

No, I'm sorry, Bill.

Okay. No problem. And then relative to one additional question here, and then I'll turn it over. Relative to Mexico, you have been rightsizing that for some period of time. Where are you at in that process?

We will continue to monitor that. We have excess capacity in Mexico, but we also have a very strong sales pipeline that we're expecting to drop in, in the latter half of this fiscal year into Mexico. If that doesn't transpire, we'll need to make some additional cost reductions, but I don't anticipate in our second quarter to make any big severance or headcount reductions in Mexico. We do have capacity. I feel like we are now market competitive in our cost structure, and we're seeing the benefits from that in an increased amount of activity and interest down in that site.

So basically, you -- the excess capacity that you have, you believe you will be able to fill or start to utilize in a meaningful way in the second half of this fiscal year. If that does not happen, then you'll have to take another bite at the apple.

Absolutely. Yes, well said.

And if it does happen and you are able to use that capacity, then would I be mistaken to think that, that will have a meaningfully favorable benefit to net income and should be something that we shareholders are quite enthusiastic about?

Yes. If that comes to fruition, as we've discussed before, there's an earnings multiple once your fixed costs are covered. And yes, that would be a meaningful improvement in the overall profitability.

And we will take our next question from Sheldon Grodsky with Grodsky Associates.

[Audio Gap] quarter after quarter here, but let me ask a couple of questions here. First of all, is your facility in Vietnam primarily to serve the North American market or to serve the Asian market?

It's both.

Any sense as to how much is going to Asia and how much to the U.S.?

Broad brush, I would say 2/3 Asia, 1/3 North America at this point.

Okay. And what kind of tariffs are you facing on your Vietnam imports?

It's -- what is it, Tony? 20% or 30%.

Yes.

And that -- Sheldon, that's actually covered by our customers would be paying that to import that into the U.S. We'd be selling that to them in Vietnam.

Okay. And what sort of tariffs -- but what is the actual tariff situation in Mexico? I know there have been a lot of moving targets, and I've come to the conclusion that I know nothing on the subject of tariffs and where the tariffs, and I have a feeling we're getting a lot of misinformation on the subject. But are most of your products exempt under NAFTA too? Or are you being heavily tariffed there? Or what's that story?

Yes. I think you bring up a good topic Sheldon, is our Juarez, Mexico facility does provide a level of tariff mitigation. So if there is enough product change, if there's a tariff shift, oftentimes, you can take advantage of the USMCA and be able to provide manufactured product without incurring a tariff. Of course, there's nuances in that depending on if it has metal from a foreign source. And I don't even -- I'm not even going to pretend to know that I know all the details. But for the most part, yes, we are able to mitigate most tariffs by production of an assembly down in Mexico.

Okay. So I've been trying to figure out where it's bad and where it [ isn't ], but your customers seem to be put off completely anyway. It seems like we're going into a manufacturing depression with the tariffs that was supposed to give us a manufacturing new beginning here. So.

What we're finding is there's a lot of paralysis. There's a lot of intent, a lot of verbal discussion of transfers of manufacturing, but I think the unknown and the fluidity of duties and tariffs, I think, have put many of those on a -- let's wait and see.

Okay. You mentioned also in the presentation that you had a customer bankruptcy that cost you some money. Is this a big customer, long-standing customer? Or someone who came briefly and managed to go belly up?

It was about a 3- or 4-year customer relationship. We did get stuck with some inventory and receivables, unfortunate. But yes, that was not a significant customer by any means, but it did stay in writing off the $1.6 million this quarter.

And we will take our next question from George Melas with MKH Management.

A follow-up on the last question. You had gross margins of $8.4 million this quarter. And in dollar terms, it was $8.3 million. If we add back the $1.6 million, which was the reserve that you took, you also had some severance of $1.2 million in the quarter. How did those flow through the P&L?

Yes. So the severance definitely goes through COGS. So that would have an impact to your gross margin. The $1.6 million write-off for the bankruptcy was segregated into 2 amounts. $600,000 of that went through cost of goods to write off the inventory and roughly $1 million went through SG&A as writing off the receivable.

Got it. Okay. So let me just quickly adjust this in my model. So I would say your adjusted gross margin was roughly 10.2%. It goes from 8.4% to 10.2% if you add back the [indiscernible] and the $600,000 for the inventory write-off.

Yes.

So trying to find some good things in the release, that's a pretty good gross margin for you guys, especially at that revenue level and especially given that the consignment material model hasn't really sort of contributed much. As you said, it was just roughly $1 million in revenue. So help us understand why that margin is as robust as it is.

I think there's 2 things there, George. One is, of course, the continued reduction in our overall costs. I think that is -- that's -- we're demonstrating that. And even if you look at the gross margin sequentially from Q4 to Q1, it's improved. One item to talk about in Q1 is there was quite a bit of NRE revenue, which is essentially revenue we charge our customer upfront for tooling, for line set up, for engineering services, that was fairly high. And I think that helped bring up the gross margin in the first quarter. So can we continue to replicate a 10% gross margin? It would take more revenue going forward.

Okay. Because the tooling revenue, the line set up, the engineering -- I can see how engineering services, you would charge more than a normal average gross margin. But we do the same for tooling and line set up then.

We do. We do. It just so happens with a couple of large programs we're ramping, we were able to book the profits associated with that during our first quarter.

Okay. Can you give us roughly in the order of magnitude of how much that was?

An estimate, I think, between $1 million and $1.5 million.

Of revenue?

Of profit.

Of gross profit. Okay. So it was meaningful. The consignment materials program, if it ramps up to $20 million and with the math that you gave, Bill, it's sort of equivalent to a $60 million program for one of your regular programs, right?

That is correct.

Okay. So that would make it probably your largest customer or one of your top 3 customers?

Yes, it would.

Okay. And what is your assessment so far of how the program is ramping up?

We are actually down in Corinth real time and watching that ramp and excited to see where it's headed. We are definitely not on a $20 million run rate yet, but that's our goal to get there by the end of the fiscal year, and we are busily trying to add some additional capacity down here in order to achieve that.

Okay. So as you see the program ramp as you expected, the entire program production would be in Mississippi?

At this point, yes, there is some possibility of some dual sharing of that program across a couple of sites. But at this point, we're expecting that to be in our Mississippi.

Okay. Great. And then I was quite -- a quick question on SG&A. SG&A was sort of flattish year-over-year despite a meaningful revenue drop. And is that how one should model SG&A going forward? Or is there something I'm missing maybe?

I don't expect any big changes in SG&A with additional revenue. I do know that we had the $1 million of write-off associated with the bankruptcy that went through there in Q1. But I think we'll largely be close to that dollar amount moving forward.

And so that dollar amount includes the $1 million write-off or.

With some -- there will be some increases. As we return to profitability, I think there will be some -- our intent is to have some bonuses and different things that go into that G&A going forward, which there's not now. So I would expect it to be roughly about what it was in Q1.

Okay. Great. And then you mentioned sort of you have -- you expect to return to profitability by the end of this fiscal year. So it's just a few quarters away. And what needs to happen in order to achieve that? And maybe what kind of revenue do you need to achieve and of course, you have the different kinds of revenue. You have the regular revenue, the consigned material program revenue. But can you give us some color on what needs to happen?

Yes. I think we were able to demonstrate -- if you take Q4 to Q1, even on less revenue, we were able to generate some additional profitability and actually some improvement. Our expectation to get back to profitability is that we'll need to continue to ramp this consigned program. We'll also need to continue down the ramp of the utility provided metering system that is ramping nicely this quarter. And we'll need to add some additional revenue down in Mexico. If we're able to do those 3 things, we'll be able to achieve those goals.

Okay. Can you give us roughly a revenue target that you need to achieve to.

I don't think we can at this point, particularly with the complexity of now a fairly large consigned program.

Right, right. So if you have those 3 major factors that you need to achieve, the consignment program has started and it's ramping. The utility program is ramping. So it's really about executing on that, but also having some additional sales in order to fill up the Mexico plant.

Correct.

Okay. Great. And just one quick question on the balance sheet. The AR seems to have been -- came down drastic meaningfully and the inventory was roughly flattish. So I was really happy about one and disappointed in the other. Can you talk a little bit about the reduction in AR and also about whether -- where you see inventory going?

You bet. So definitely a reduction of $16 million in AR sequentially. Some of that is obviously driven by reduction in revenue quarter-over-quarter, but a lot of that is largely due to favorable collections by our AR group. So we've seen some significant improvements there. In addition to that, like Brett mentioned, we did write off some AR. So that's primarily the result of the reduction in trade receivables there. The inventory, like Brett mentioned, we have 2 one which is consigned, but we have another large program that is material heavy. So the reason we didn't see inventory continue to go down quarter-over-quarter is largely due to us bringing in inventory to support a couple of other programs that we're currently ramping.

Okay. And one of those programs you're ramping, Tony, is the one that you referred to as the utility program.

That is correct, yes.

And we will take our next question from Bill Dezellem with Tieton Capital.

I have a couple of follow-ups. First of all, you all haven't talked a lot about the Mississippi facility in the past. Why is it that this customer chose this facility and the advantages that it brings for them?

Yes, that's a good point, Bill. I think in the past, there's been some fairly flat revenue in Mississippi, some long-standing customers of many years. I think there's a lot of history here down in Mississippi. This particular consigned program, I think, for us strategically was best suited down here, one, because of the labor that's available locally. And then two, I think we are looking to transfer some of those existing programs that have been in Mississippi up into Arkansas into that new Springdale facility we discussed because it's a better fit from a technological standpoint. That leaves the capacity and the labor available for this consigned program down here in [ Corinth ]. It will take some additional capital, but I think we're well on the way proving that this is the right location for that.

Great. And then I understand that you're not providing official guidance. But when you look out at the variables, directionally, are you thinking that revs will be up or down in Q2 versus Q1?

I think in Q2, there won't be any meaningful change.

That's helpful. Okay. And one additional question relative to the -- this general delays that you referenced with new programs. I think it was in the press release. Is it your sense that, that is nearly 100% tied to tariffs and the uncertainty with that? Or is it a broader uncertainty in the overall market or a broader cautiousness? What's your view there?

Yes, [indiscernible] would be my view, Bill, is I think it's both. I think not only are they concerned about the uncertainty of specific tariffs, but I think there also is some uncertainty of consumer demand and how good -- how healthy is the economy. And I think everybody is extra cautious right now, I think, in making any big changes.

And we will take our next question from Sheldon Grodsky with Grodsky Associates.

This is a tricky question to ask, but if I remember correctly, you guys got a new bank relationship sometime in the last year. And as far as I can remember there haven't been too many good things happening since you signed on with them. How is your relationship with your bank lender?

I would state that actually our relationship with our bank is extremely solid and healthy. We meet with them on a quarterly basis, while our income or our actual net income has not met what we had hoped, we are generating cash, and we're actually paying down debt. And there's actually more available on our revolver now than there was a year ago.

[Operator Instructions] And at this time, we have no further questions. I'd now like to turn the call back to Mr. Larsen for any additional or closing remarks.

We'd like to thank you for attending or listening today's conference. Tony and I look forward to talking with you in next quarter.

Thank you. And this does conclude today's call. Thank you for your participation. You may now disconnect.

Conference call. We are excited to be calling in from our new Springdale, Arkansas facility this week. Joining me here 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 the 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 reconciliations to the most directly comparable GAAP measure are provided in today's press release, which is posted to the Investor Relations section of our website.

For the fourth quarter of fiscal 2025, we reported total revenue of $110.5 million compared to $126.6 million in the same period of fiscal 2024. The revenue for the fourth quarter of fiscal 2025 was adversely impacted by decreased demand from 2 large long-standing customers. In addition, the recent escalation and fluctuations in global tariffs caused uncertainty that contributed to delays to new program launches as customers stalled orders.

For the full fiscal year 2025 total revenue was $467.9 million compared to $566.9 million in fiscal year 2024. Our gross margin was 6.2% and operating margin was negative 2.1% in the fourth quarter of fiscal 2025 compared to 7.2% and 0.1%, respectively, in the same period of fiscal 2024. These decreases largely relate to continued reductions in demand from 2 large long-standing customers during the period. Gross margin and operating margin for the full fiscal year 2025 was 7.8% and 0.1% compared to 7.0% and 1.2% for the full year fiscal 2024.

Despite the revenue reduction of approximately $100 million in fiscal year 2025 we were still able to increase gross margins year-over-year. This is largely related to operational efficiencies gained from reductions in workforce and other cost savings initiatives over the last 2 years. In order to better align costs with current customer demand in boost automation, we cut approximately 300 more jobs during the fourth quarter of fiscal year 2025 for a total headcount reduction during fiscal year 2025 of approximately 800.

The negative impact of severance expense on our income statement was approximately $0.1 million during the fourth quarter of fiscal 2025 and $2.9 million for the entire fiscal year 2025. As top line growth returns, we anticipate margins to be strengthened by improvements in our operating efficiencies and the continued and increasing benefits of our strategic cost savings initiatives.

We also believe the cost savings initiatives have allowed us to be more competitive in quoting new program opportunities. As production volumes increase and our operational adjustments take full effect -- we expect to see greater leverage on fixed costs, enhance productivity and a more streamlined supply chain, all contributing to stronger financial performance.

Our net loss was $3.9 million or $0.36 per share for the fourth quarter of fiscal year 2025 compared to a net loss of $2 million or $0.18 per share for the same period of fiscal year 2024. For the full fiscal year 2025, our net loss was $8.3 million or $0.77 per share compared to a net loss of $2.8 million or $0.26 per share for fiscal year 2024. The increase in year-over-year net loss is primarily related to the large reductions in revenue as well as adjustments for estimated collections from customers of approximately $1.1 million for the fourth quarter of fiscal year 2025 and $1.8 million for the full year of fiscal year 2025. Our adjusted net loss was $3.8 million or $0.35 per share for the fourth quarter of fiscal year 2025 compared to an adjusted net loss of $0.7 million or $0.06 per share for the same period of fiscal year 2024. The adjusted net loss was $5 million or $0.47 per share for the full fiscal year 2025 compared to adjusted net loss of $0.2 million or $0.02 per share for the same period fiscal year 2024.

The non-GAAP financial measures below for additional information about adjusted net loss and adjusted net loss per share. Turning to the balance sheet. We ended fiscal 2025 by reducing inventory by approximately $8 million or 7% from the same time a year ago. These improvements in inventory levels primarily reflect our strategic initiatives designed to better align our inventory with our current revenue.

At the same time, the state of the worldwide supply chain still requires that we drive demand for parts differently than in historical periods. Many of our customers have revamped their forecasting methodologies and we have made significant enhancements to our materials resource playing algorithms. As a result, we are now more prepared to address potential future disruptions in supply chain and we're able to respond to evolving to respond to respond effectively to evolving tariff implications as we continue to manage inventory more cost effectively.

For fiscal 2025, we also reduced our total liabilities by a combined amount of $32.7 million or 14% from a year ago. Our current ratio was 2.5:1 compared to 2.8:1 from a year ago. At the same time, accounts receivable DSOs were at 86 days compared to 95 days a year ago reflecting stronger collection on receivables.

For the full fiscal year 2025 cash flow provided by operations was $18.9 million up from $13.8 million for fiscal 2024. This represents 2 fiscal years in a row of positive cash from operations. Total capital expenditures in fiscal year 2025 are about $4.1 million, an increase of approximately 3% from a year ago.

In addition, we entered into financing arrangements which will provide up to $9 million in available funding to be used in our planned expansions in Arkansas and Vietnam. 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 as well as make efficiency improvements to prepare for growth and add capacity.

We expect to spend about $8 million in capital expenditures during fiscal year 2026, largely on new innovative production equipment and automation. As we move into fiscal year 2026, we are pleased to continue to see our new programs ramping and cost and efficiency improvements from our recent overhead reductions take hold. We expect to see growth in our U.S. and Vietnam production, have a strong pipeline of potential new business and remain focused on improving our profitability.

Over the longer term, we believe that we are increasingly well positioned to win new programs and profitably expand our business. We will not be providing forward-looking guidance due to uncertainty of timing of new products ramping over fiscal year 2026.

That's it for me, Brett.

Thanks, Tony. Fiscal 2025 was a year of transition and uncertainty. We anticipated a reduction of demand from 2 long-standing customers, but we had fully expected to fill that void with recently won new programs. However, with the uncertainty of recent varying tariffs, most of these launches were delayed into fiscal 2026.

The reduction in overall revenue had a significant impact on our bottom line financial results. Nevertheless, during the fiscal year, we were able to rightsize our cost structure in Mexico and introduce new production efficiencies in automation that have allowed us to become more cost competitive. Additionally, we transitioned our manufacturing footprint by investing in a new facility here in the U.S. and investing in new production equipment in Vietnam that increases our capacity and capability.

The sudden increases and decreases in tariffs have unfortunately impacted new program launches across all of our facilities. We are doing our best to work with suppliers and with our customers on options, for manufacturing their products from different locations and best mitigating the impact of tariffs. Our changes made to our manufacturing footprint and our cost reductions enable us to offer improved mitigation options particularly when our customers consider the varying implications of current future potential tariffs. We're moving full speed ahead with adding capacity in key regions.

In the U.S., we're expanding our clean tech, cutting-edge manufacturing operations here in Arkansas. We expect to invest more than $28 million in our new flagship manufacturing and research and development location here in Arkansas, which we will believe -- which we fully believe should create over 400 new jobs over the next 5 years. We're delighted to be enhancing our operations in a region where we have maintained a long-standing presence and a strong team and can benefit from a business-friendly environment.

Our U.S.-based production provides customers with outstanding flexibility, engineering support and ease of communications. In Vietnam, we have ample space in our current facility to double our manufacturing capacity. We're also putting the finishing touches on a major production capability in Vietnam, that will secure medical device manufacturing. Our Vietnam-based production offers the high-quality, low-cost choice that was often associated with China and Mexico in the past.

In coming years, we expect our Vietnam facility to play a major role in our growth. We anticipate these new facilities in the U.S. and Vietnam will come online during the first quarter of fiscal 2026 and enable us to benefit from customer demand for rebalancing their contract manufacturing and mitigate the severe impact and uncertainties surrounding the tariffs on goods and critical components.

By the end of fiscal 2026, we expect to approximately have half of our manufacturing take place in our U.S. and Vietnam facilities. These initiatives reflect both the long-standing trends to nearshore and move more of their production away from China as well as derisk the potential adverse impact of tariff increases and geopolitical tensions.

Our Mexico facility also offers a unique solution for tariff mitigation under the existing USMCA tariff agreement, but there is a sustained trend of continued wage increases in Mexico. And as it has become clear that these changes in the base cost of Mexican production are long-standing. We have streamlined our operations increase efficiencies and invested in automation in order to become more cost competitive in the market.

During fiscal 2025, we reduced our total headcount by approximately 800 individuals or roughly 30% during the year, which was mostly done in Mexico. Our improved cost structure in Mexico is anticipated to lead to new programs and growth over the longer term. During fiscal 2025, we continue to win new programs in manufacturing equipment, vehicle lighting, aerospace systems energy resiliency, telecommunications, pest control, energy storage, medical technology, temperature-controlled shipping, personal protection equipment, air purification, automotive and utilities inspection equipment.

In addition, we executed a manufacturing services contract with a data processing equipment, OEM that will consign its materials to our core Mississippi manufacturing facility. The consigned materials model is new for us at this scale. And if successful, will considerably improve our profitability in the coming quarters. It has the potential to ramp significantly during fiscal year 2026 and is estimated to grow eventually to over $20 million in annual revenue.

Despite the many uncertainties and disruptions in global markets, our strong pipeline of potential new business underscores the continued trend towards onshoring and dual sourcing of contract manufacturing. We expect that the global tariff wars and geopolitical tensions will continue to drive OEMs to reexamine their traditional outsourcing strategies. Over time, the decision to onshore production is becoming more widely accepted as a smart long-term strategy.

We believe our manufacturing footprint and cost competitiveness will allow us to take advantage of these opportunities. The combination of our flexible global footprint and our expansive design capabilities continues to be extremely effective in capturing new business. Many of our manufacturing program wins are predicated upon Key Tronic's deep and broad design services. And once we have completed a design and ramped it into production, we believe our knowledge of a program-specific design challenges, makes that business extremely sticky. We anticipate a continued increase in the number and capability of our design engineers in coming quarters.

We also continue to invest in vertical integration and manufacturing process knowledge, including a wide range of plastic molding, injection blow gas assist, multi-shop as well as PCB assembly, metal coin, painting, coating, complex, high-volume automated assembly and the design construction and operation of complicated test equipment. We believe that this expertise will increasingly set us apart from our competitors of similar size.

While the global tariff policies are creating delays to new product launches for us, our suppliers and our customers, we believe geopolitical tensions and heightened concerns about tariffs and supply chains will continue to drive the favorable trend of contract manufacturing returning to North America as well as to our expanding Vietnam facilities. These tariff challenges were a significant factor in replacing reduced demand, both long-standing and recently awarded programs, which hammered our growth in profitability in fiscal 2025. Nevertheless, we continue to rebalance our manufacturing across our facilities in the U.S., [indiscernible] Vietnam. We will move forward with a strong pipeline of potential new business and we're seeing significant improvements in our operating efficiencies.

Over the long term, we remain very encouraged by our cost reductions made over the past few years to become more cost competitive. Our increasing cash flow generated from operations, enhanced global manufacturing footprint and the innovations from our design engineering. All these initiatives have increased our potential for future profitable growth.

In closing, I want to emphasize that this was a challenging year, our industry and for Key Tronic specifically. In these circumstances, the execution of our strategy was made possible not only by our investments in plants and equipment, but even more so because of the skills, local knowledge and talent of our people.

I want to thank our exceptional employees for their dedication and hard work during this past year. This concludes the formal portion of our presentation. Tony and I will now be pleased to answer your questions.

[Operator Instructions] And our first question will come from Matt Dane with Tieton Capital Management.

I was curious, looking at the new wins in the core, can you give us the range of sizes of the 6 new wins and how we should be thinking about those ramping?

Yes. For the quarter, those were predominantly around the $5 million program size. Three of them in Mexico, the others are in the U.S. And then, of course, the data processing could be -- could exceed $20 million, and that's more of a service consigned materials contract.

Okay. Great. Good to know. I also wanted to talk about the Vietnam medical device manufacturing capability that you folks are getting set up over there. How are you thinking about that? I know you called out that you want a medical device, it sounds like that's either for the U.S. or Mexico where you're going to be manufacturing that. But the go-forward opportunity, are you talking with potential customers around that? And what attracted you to build out that capacity over there?

Yes, absolutely. That's a great question. So we've always wanted to grow Vietnam. I think it was hampered largely after we took it and started that in denim right around 2019, 2020, I think we were hindered by COVID for a number of years and being able to market and sell that. That has drastically changed. And I think now being certified to build medical product there and actually now having a program slated to start there in fiscal 2026, I think that will just have our Vietnam shop show even better and more capable. And we're expecting additional new opportunities in Vietnam from that.

Great. And final question, if I could ask here. You folks on the call and in the release, you talked about how you've seen an increase in new program big bids recently. I was hoping for a little bit of additional color here. Is it just pent-up demand. People cannot continue to sit around and wait for 100% tariff clarity? Do they feel like they have an up clarity on tariffs? Is the things that you're doing could drive this increased bidding activity? Just what markets around that?

Sure. Probably 2 points. Probably the first and foremost is us becoming more cost competitive. I think the cost reductions we have done over the last 2 years have enabled us to provide I think what we've mentioned is commodity pricing for certain customers that require low cost. That has definitely opened up our opportunities to close out on quotes that we may have lost historically. I think the other is the impact of investing in key locations. .

Our new Arkansas facility, we're extremely excited about. We had a number of customers come and bid it. There is quite a bit of pent-up demand for U.S. manufacturing, particularly with -- in light of the varying tariffs and geopolitical tensions that are going on, that has definitely impacted recent quote opportunities as well. So I think it's kind of a combination of all. It's both the cost reductions, but then improving our actual global footprint to provide our customers with more options for tariff mitigation.

[Operator Instructions] And our next question will come from George Melas with MKH Management.

Two questions -- question on the DSO. Somehow, I probably calculate it somewhat differently than you guys. But it seems that receivables came down by $16 million sequentially. And I'm just wondering whether that's possible or whether there's something some factoring or some other factor that sort of explained that decline in your receivables. .

Yes. Good question, George. Appreciate it. This is Tony. So the large driver of that reduction in ARR is primarily due to the reduction in revenue over the quarter.

There is no factoring. I think we did a better job of collections during the year. There was also, unfortunately, some write-offs and some bad debt that occurred during the year. But there was no factory.

Okay. Great. Regarding the write-off and the bad debt, was there a significant amount of that in the fourth quarter.

Yes, there was $1.1 million in the fourth quarter. We didn't write it off. We just reserved for it. So -- but that did negatively impact our results.

Okay. And that flew all through to cost of goods sold, I guess, Tony.

It's down in SG&A actually.

And that reduced the receive net receivables that you had.

Correct.

It's still an impressive reduction in the DSO? And do you think that could come down further? How -- is it just better collection? Or is it somewhat different terms in your contracts with your customers?

Yes. I would say it's primarily collection efforts, George. We've done a better job of collecting recently from our customers. We've really worked hard at building those relationships and making sure we have a path to a contract that can help us out when we need it.

Okay. Very good. And then help me understand a little bit better the potential size of that manufactured services contract that you single out with the data processor you say it could be opening. But given the fact that they we can sign the parts is this -- how does that compare with some other contracts that you may have from a size perspective because the $20 million would not be my understanding, does not include the parts flowing through your P&L. Is that correct?

Yes, absolutely. And I think that's 1 of the reasons we wanted to make mention of it. While it is only $20 million only -- it's a strong $20 million program. But that's just for the manufacturing services that we would provide. So this is probably -- we've done other consigned material contracts, but nothing to this scale.

And so while it's $20 million additional revenue to Key Tronic, it should have a strong incremental permit margin because there's far less material content to it. So is that $2 million win really the equivalent of a $80 million to $100 million program that's turnkey.

And that contract, it was signed in the June quarter or...

It was. It was in the fourth quarter, and we are ramping that as we speak in our facility.

Okay. And is it going to be just in the Mississippi facility? Or it will be in other places as well? Because it seems like a potentially large contract.

It is. It's currently scheduled for Mississippi. But with the -- with this new Arkansas facility, we've got plenty of capacity here as well. If it continues to grow, remaining to dual source it. But at this point, it's scheduled just to be within the Mississippi plant.

Okay. And in fiscal '26 what would you expect in terms of revenue from that contract? So let me ask you SP-5 First of all maybe and the run rate as you end the year. I'll make it more consolidated, Brett. I'm sorry.

No, you're not going to let me get away with that. With all ramps, it takes always longer than you hoped. Our expectation will be at the $20 million per year run rate by the fourth quarter of 2026, but there's still a lot of unknowns between now and then, but that's what we project to be at that level as we exit the fiscal year.

Okay. So it means that it would have largely ramped to the $20 million run rate by June by the end of June of 26. So that's good. Okay. Great. And in Mexico, you were adding 3 new -- so you're adding 3 programs -- 6 programs, 3 of which in Mexico. How do you see your Mexico operations in fiscal '26, do you see them growing or sort of flattening? How do you see that part of the operation?

I think with these recent program wins, we will see some growth in Mexico we found that we were not always as competitive. And I think we've made the correct reductions and changes to the cost structure down there. And the other thing is right now under the USMCA agreement, it really is a perfect way to mitigate tariffs for U.S. consumer goods.

So I think they're going to continue to get opportunities down there. And as you're fully aware, that's where predominantly a lot of our vertical manufacturing exists. So even if it's not a full box build down in Mexico, I could see us building subassemblies, either [indiscernible] or molded components that would then be shipped into a Vietnam or U.S. location. So it's still going to be very much a critical operation facility for success in the future.

Okay. Great. And then maybe a last question. Any thoughts about your gross margin in fiscal '26 and maybe longer term, is there any sort of thinking that it is impaired? Or do you think it can come back to the 9s and maybe even double digit at some point.

That's always our goal. That's always our strategy to get there on paper. It looks like we can get there there's just a lot of things that need to happen. So we definitely are not happy with the results of this past fiscal year, and that is inclusive of gross margins. We're expecting those to improve -- and I think now more than ever, with the increased capacity that we have in Mexico, in the U.S. and in Vietnam now it's incumbent on us to really grow our top line and utilize some of that capacity in order to get to reasonable gross margin.

Okay. So from an incremental gross margin as you add revenue, what do you think that could be?

It can be 15% to 20%.

And that would hold in all 3 locations.

Yes. yes.

[Operator Instructions] And that does conclude the question-and-answer session. I'll now hand the conference back over to you for any additional or closing remarks.

Thank you again for participating in today's conference call. Tony and I look forward to speaking to you again next quarter.

Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.