Kimball Electronics, Inc. Q4 FY2025 earnings call

Management Statement and Operational Highlights

• Ric noted Q4 was better than expectations with sequential sales increase, improving margins, and sixth consecutive quarter of positive cash flow used to pay down debt.
• Significant accomplishments included record future business wins, more green customer scorecards, quality ratings at 15-year high, cost structure adjustment, portfolio alignment, and progress in medical CMO with new 300,000 sq. ft. facility in Indianapolis for expanded production capabilities.
• Medical business grew Y/Y while other verticals declined sequentially; sequential sales increase was encouraging excluding nonrecurring items.
• Medical facility in Indianapolis supports expansion into new applications like cardiology, orthopedics, etc., leveraging expertise in regulated medical industry.

Segment Performance

• Medical: Net sales were $107 million, which is a 5% increase compared to the same period last year and accounts for 28% of total company revenue.
• Automotive: Net sales were $184 million, a 13% decrease compared to the fourth quarter of the previous year, making up 48% of total company revenue.
• Industrial: Net sales were $90 million, a 12% decrease year-over-year when excluding AT&M, representing 24% of total company sales.

Guidance

• Fiscal 2026 net sales expected to be in the range of $1.35 billion to $1.45 billion, a 2% to 9% decrease compared to fiscal 2025.
• Adjusted operating income expected to be in the range of 4.0% to 4.25% of net sales, similar to fiscal 2025.
• Capital expenditures expected to be in the range of $50 million to $60 million, heavily weighted towards the Indianapolis medical facility (~$30M).
• Normalization of 2025 events (loss of braking program, nonrecurring consigned inventory sale) impacts 2026 guidance, with top line guide approximately flat Y/Y without these items.

Risks

• Tariff uncertainties and their potential impact on global operations, as tariffs are often viewed as pass-throughs to customers.
• Uncertainty in market demand trends and regulatory changes affecting the medical and other segments.

Q: Can you remind us the timing of when the new facility in Indianapolis will be ready and the potential revenue capacity of that building?

A: Ric said they are planning the grand opening in November of 2025, and the 300,000 sq. ft. facility has capacity for hundreds of millions of dollars of business depending on program size, with Jana adding it's well in excess of $0.5 billion.

Q: What about some other directions you've been considering in the past year, like industrial adjacencies?

A: Ric said they continue to consider strategic opportunities in Industrial but have nothing to announce yet, and see opportunities across all verticals.

Q: What about tariffs in general for your global footprint?

A: Ric noted most business isn't as importer of record, tariffs are often pass-throughs, and they take no-regrets moves to stay flexible with customers and qualify alternative suppliers.

Q: Can you remind us what you were doing for the respiratory program the last time and comment on margin profile change?

A: Jana said there's no material change in margin profile, they were doing higher level full and final assembly before and just starting up again with the customer.

Q: Can you talk about cash conversion days improving and initiatives?

A: Jana said it's a return to normal from COVID effects, sitting at 85 days with goal to get to ~75 days, due to working on AR, AP, and inventory terms with customers.

Q: What kind of changes are you making to sales organization and go-to-market strategy for Medical?

A: Ric said they're making hires in business development, leveraged experienced leaders in Medical, and have a comprehensive marketing plan to support CMO efforts.

Q: Will there be a lot of automation in the Indiana facility and effect on margins?

A: Ric said there will be significant automation, and the CMO segment is expected to be accretive to margins over time.

Q: Are there other pockets of strength in the Medical segment for this year?

A: Ric said they're seeing incremental growth in Medical beyond the called-out customer, with most new customers in the last 2 years in Medical.