Kimball Electronics, Inc. Q1 FY2026 earnings call

• Ric Phillips noted sales were in line with expectations, driven by strength in the medical vertical, margins improved year-over-year, cash from operations was positive for the seventh consecutive quarter, and debt was at the lowest level in over 3 years. He emphasized the company's solid footing as an EMS provider and medical CMO, and plans for organic and inorganic growth in the medical space, including a new facility in Indianapolis for manufacturing medical products.
• Jana Croom reviewed financial results: net sales of $365.6 million, 2% decrease year-over-year with a 1% favorable foreign exchange impact; gross margin rate was 7.9%, a 160 basis point increase; adjusted selling and administrative expenses were nearly flat year-over-year; adjusted income was $17.5 million; cash and cash equivalents were $75.7 million, cash from operations was $8.1 million (seventh consecutive quarter of positive cash flow); inventory was $272.7 million, roughly flat vs Q4 but down 19% y-o-y; borrowings were $138 million, a $9.5 million reduction from Q4; and reiterated guidance for fiscal 2026 with net sales expected $1.35B-$1.45B and adjusted operating income 4%-4.25% of net sales.
• Ric Phillips mentioned completing a profit sharing bonus tour, progress in new business, operations, quality, on-time delivery, and cost initiatives; excitement about medical business growth and tuck-in acquisition strategy to augment growth in the medical CMO space.

Net sales for Kimball Electronics in the first quarter of fiscal 2026 were $366 million, a 2% decline from Q1 fiscal '25. From a segment perspective: Medical sales were $102 million, up 13% year-over-year, accounting for 28% of total company revenue. Automotive sales were $164 million, down 10% year-over-year, making up 45% of total revenue. Industrial sales totaled $100 million, a 1% decrease year-over-year, representing 27% of total company sales. Additionally, certain customers previously included in automotive were reclassified to industrial this quarter for comparability.

• Net sales for fiscal 2026 are expected to be in the range of $1.35 billion to $1.45 billion.
• Adjusted operating income is expected to be 4% to 4.25% of net sales.
• Capital expenditures for fiscal year are estimated to be $50 million to $60 million.

• Increased tariffs have and may continue to impact end consumer demand, and if unable to fully recover tariff costs, operating results and cash flows could be adversely impacted.
• Geopolitical and economic environments put pressure on the automotive and industrial segments, affecting sales and demand.

Q: And as Kimball starts to resume top line growth, is there going to be an increase in working capital? Or more progress on working capital management?

A: Jana Croom said not a significant amount of increased working capital management and debt reduction expected; as preparing for growth in FY '27, inventory will need to be bought, so numbers will start to move.

Q: The cash conversion days, is this a good level to think about it remaining stable at?

A: Jana Croom said ideally it would be in the low 70s, but realistically stabilizing in the low 80s is good as the business starts to grow again.

Q: The 7.2% EBITDA margin in the quarter, and stepping down for the rest of the year and declining next year; is that the wrong way to think?

A: Jana Croom said it's early days for FY '27; not expecting deterioration, expect EBITDA in FY '27 to be better as returning to growth and improving absorption in facilities.

Q: What's the focus around potential acquisitions in the Medical segment?

A: Richard Phillips said focused in the medical CMO space, could include new technologies, customers, or geographies to extend capabilities.

Q: Industrial growth, with HVAC softness hindering, do you see breakeven or low single-digit growth?

A: Jana Croom said Q1 results can be a proxy for full year FY '26, industrial will be softer than anticipated, medical stronger, automotive roughly as expected.

Q: How did the largest medical customer in respiratory care perform?

A: Richard Phillips said it's been very good, relationship has never been better, expect continued growth.

Q: Talk about the medical projects pipeline turning into revenue over next 6 months?

A: Richard Phillips said funnel is strong, volume in medical is high; Jana Croom added growth not centered in one customer, geography, etc.

Q: Core automotive business run rate and if bottoming?

A: Richard Phillips said hard to say, top automotive customers anticipate challenges in next couple of years, but relationships are strong and focused on non-commoditized areas.

Q: How do you balance organic growth, cash flow, and inorganic growth?

A: Jana Croom said capital allocation is top of mind; have dry powder for inorganic opportunity if it augments CMO, improves EBITDA margins, and is disciplined; next quarter debt may climb due to growth needs.

Q: Impact of accelerated depreciation from OBBA?

A: Jana Croom said OBBA has some benefits, including interest expense deductions on domestic income, and still working through it.

Q: With gross margin expansion despite lower revenue, what are the factors?

A: Jana Croom said favorable product mix, closure of Tampa facility, and restructuring benefits.

Q: Expect SG&A to increase as percentage of sales for rest of year?

A: Jana Croom said yes, as need to spend for growth, was artificially low in FY '25.

Q: Further debt reduction?

A: Jana Croom said next quarter debt may climb due to growth needs, but take as good sign for upcoming growth.

Q: How has the M&A market changed recently?

A: Jana Croom said market is more rational now, PE companies not paying absorbent multiples, so better able to buy right opportunity at right price for CMO strategy.