Kimball Electronics, Inc. Q3 FY2026 earnings call

• Third quarter sales increased sequentially driven by strong growth in medical vertical. Margins remained solid and cash from operations was positive for ninth consecutive quarter.
• Expect Q4 to be a good finish to the year and affirm guidance for fiscal 2026 with adjusted operating margin at high end of range.
• Medical CMO is key part of strategy with deliberate investments in capabilities, operating capacity, and commercial focus. Inorganic growth is also a possible complement.
• In third quarter, net sales $353 million, up 3.4% sequentially, medical up 10%. Normalized year-over-year sales increase nearly 1% with medical up 17%.
• Automotive sales $161 million, 46% of total, down 3% year-over-year, with Europe growth offsetting Asia/North America decline. Monitoring EV electronic steering system demand in North America affected by legislative changes.
• Industrial sales $86 million, 24% of total, down 8% year-over-year, heavy in North America with HVAC, off-highway, green energy down, public safety/smart meters up in Europe but impacted by Middle East war.

Medical: Third quarter net sales were $106 million, accounting for 30% of total company sales. After normalizing for the prior year's non-recurring consigned inventory sale, medical sales grew robustly by 17% year-over-year, marking the third consecutive quarter of double-digit growth and 15% year-to-date growth. Automotive: Sales in the third quarter were $161 million, 46% of total company sales, down 3% year-over-year. Decline was primarily in Asia and North America, partially offset by growth in Europe. Industrial: Sales totaled $86 million, 24% of total company sales, down 8% year-over-year. Decline was concentrated in North America due to lower demand for HVAC systems, partially offset by rebounds in public safety and smart meters in Europe but impacted by the Middle East war near-term.

• Affirmed revenue range of $1.4 to $1.46 billion for fiscal 2026.
• Expect adjusted operating income margin to be at the high end of 4.2 to 4.5% range.
• Q4 expected to be a good finish with sequential sales increase and medical growth outpacing other verticals, monitoring impacts of Middle East war on freight, raw materials, gas prices, and consumer sentiment.

• Impact of global economy on automotive vertical, especially EV electronic steering system demand in North America due to legislative changes and gasoline price movements.
• Protracted war in the Middle East potentially impacting near-term industrial business in Europe for public safety and smart meters.
• Margin pressure in fiscal 2027 related to cost of ramping up medical CMO facility, with impact abating over time as business grows.

Q: Please give more details on new 300,000 square foot manufacturing facility and its effect on revenue growth and margins.

A: Expect 40 - 50 basis point impact to gross margin in fiscal 2027 related to facility costs. Continue to ramp production, with expectation that impact starts to abate in fiscal 2028 as revenue covers fixed costs.

Q: Quantify medical facility capacity booked.

A: Early on ramping, customers interested but early to estimate capacity.

Q: Pricing in medical CMO space.

A: Pricing is competitive but rational, driven by need for supply chain in growing medical space.

Q: M&A environment.

A: Part of strategy, team active in evaluating opportunities for geographic advantages, capability advancement, etc., with comfortable cash and debt situation to act in M&A.

Q: New medical customers.

A: Targeting 5 new customers annually, on target, with land and expand strategy.

Q: Asia medical growth and trend.

A: Asia growth over 20% in Q3, likely consistent with overall company growth in fiscal 2027.

Q: Dependence of CMO growth on new logos.

A: Adding new logos is important part of CMO growth strategy as modern facility attracts new customers.

Q: Revenue from old medical facility and move timeframe.

A: Not disclosing specific revenue of old facility, move timeframe not specified today.

Q: M&A focus: capabilities vs customers.

A: Both, combination of capabilities, customers, geographies.

Q: Inventory and growth.

A: Inventory down due to working capital management improvement, not directly related to revenue top line.