Key Tronic(KTCC 5.30%) reported its fiscal fourth quarter and full-year 2025 results on August 27, 2025, highlighting a 12.7% year-over-year revenue decline in the fourth quarter and a 17.5% drop for the full year, driven by reduced customer demand and tariff-driven uncertainties. The company increased gross margin to 7.8% for the year despite an $8.3 million net loss, while implementing aggressive cost reductions, completing an approximately 800-employee headcount reduction, and announcing strategic expansion in Arkansas and Vietnam. Insights below address strategic facility investments, margin trajectory, and a transformative manufacturing contract, each with specific investor implications.

Key Tronic expands Arkansas and Vietnam capacity

The company allocated over $28 million to its new flagship Arkansas manufacturing and R&D facility, targeting the creation of over 400 new jobs over the next five years, and is simultaneously scaling its Vietnam operation to double capacity with an added medical device production line. These capital projects are supported by up to $9 million in new financing for planned expansions in Arkansas and Vietnam, and form part of a deliberate shift away from China-related supply risk while catering to customer demand for tariff mitigation and North America manufacturing.

"We expect to invest more than $28 million in our new flagship manufacturing and research and development location here in Arkansas, which we fully believe should create over 400 new jobs over the next five years. We are 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 US-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 are also putting the finishing touches on a major production capability in Vietnam that will support future 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 US and Vietnam will come online during 2026 and enable us to benefit from customer demand for rebalancing their contract manufacturing to mitigate the severe impact and uncertainties surrounding the tariffs on goods and critical components. By 2026, we expect to have approximately half of our manufacturing take place in our US 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 de-risk the potential adverse impact of tariff increases and geopolitical tensions."

-- Brett Larsen, President and Chief Executive Officer

This footprint realignment accelerates Key Tronic’s positioning in tariff-resilient, diversified markets.

Cost reductions and automation lift Key Tronic margin potential

Total headcount was reduced by roughly 800, or 30%, with the majority in Mexico, supporting a year-over-year gross margin increase to 7.8% (GAAP), despite a $99 million drop in annual revenue. Severance expenses totaled $2.9 million, but management anticipates greater fixed-cost leverage and an incremental gross margin opportunity of 15%-20% as new revenue scales up with recent facility expansions, based on commentary during the fiscal fourth quarter ended June 28, 2025, earnings call.

"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 efficiency gains, reductions in workforce, and other cost-saving initiatives over the last two years. In order to better align costs with current customer demand and 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 $100,000 during 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-saving initiatives. We also believe the cost-saving 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, enhanced productivity, and a more streamlined supply chain, all contributing to stronger financial performance."

-- Tony Voorhees, Chief Financial Officer

Key Tronic’s proactive restructuring and automation drive enable the company to outcompete on price and capture new business, positioning it for significant margin expansion as utilization rates of new capacity rise and program ramps offset current customer losses.

Consigned-materials contract transforms Key Tronic revenue mix

The company signed a new manufacturing services contract with a data processing equipment original equipment manufacturer (OEM), potentially scaling to a $20 million annual revenue run-rate by fiscal 2026, using a consigned-materials model rather than traditional turnkey production. This contract is differentiated by generating higher incremental margins, as material costs do not flow through Key Tronic’s financials and the service revenue contributes more directly to profitability.

"While it is only a $20 million program, it's a strong $20 million program. But that's just for the manufacturing services that we would provide. So, you know, this is probably, we have done other consigned material contracts but nothing to this scale. And so, while it's $20 million additional revenue to Key Tronic Corporation, it should have a strong incremental improvement in margin. You know? Because there's far less material content to it. So, you know, is that $20 million win really the equivalent of an $80 to $100 million program that's turnkey?"

-- Tony Voorhees, Chief Financial Officer

This contract creates a scalable template for higher-margin service deals as the industry seeks dual sourcing and greater supply chain resilience.

Looking Ahead

Management provided no specific quantitative guidance for fiscal 2026 due to uncertainty in timing for new product launches and customer programs, but expects to reach a $20 million annual run-rate for the new consigned-materials contract by the end of fiscal 2026. Approximately $8 million in capital expenditures is planned for fiscal 2026, primarily focused on automation and capacity expansions in Arkansas and Vietnam. The company continues to expect improved margins and profitability as new facilities ramp up in fiscal 2026, with about half of total manufacturing volume projected to occur in the U.S. and Vietnam by fiscal 2026.