Kimball Electronics, Inc. (KE) Q4 2026 Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to Kimball Electronics' fourth quarter fiscal 2026 earnings conference call. My name is Sherry, and I will be the facilitator for today's call. All lines have been placed in a listen-only mode to prevent any background noise. After the completion of prepared remarks from Kimball Electronics' leadership team, there will be a question and answer period. To ask a question, simply press star and the number one on your telephone keypad. Today's call, August 13, 2026, is being recorded. A replay of the call will be available on the Investor Relations page of Kimball Electronics' website. At this time, I would like to turn the call over to Andy Riegrout, Vice President, Investor Relations, Strategic Development, and Treasurer. Mr. Riegrout, you may begin.

Thank you, and good morning, everyone. Welcome to our fourth quarter conference call. With me here today is Rick Phillips, our Chief Executive Officer, and Janet Croom, Chief Financial Officer. We issued a press release yesterday afternoon with our results for the fourth quarter and full fiscal year into June 30, 2026. To accompany today's call, a presentation has been posted to the Investor Relations page on our company website. Before we get started, I'd like to remind you that we will be making forward-looking statements that involve risk and uncertainty and are subject to our safe harbor provisions as stated in our press release and SEC filings, and that actual results can differ materially from the forward-looking statements. Our commentary today will be focused on adjusted non-GAAP results. Reconciliations of GAAP to non-GAAP amounts are available in our press release. This morning, Rick will start the call with a few opening comments, Janna will review the financial results for the quarter and guidance for fiscal 2027, and Rick will complete our prepared remarks before taking your questions. I'll now turn the call over to Rick.

Thank you, Andy, and good morning, everyone. I'm proud of our results in the fourth quarter and very good finish to fiscal. Q4 were in line with expectations, adjusted operating income was better than estimates, and we generated strong cash from operations, which was used to pay down debt to its lowest level in over four years. Our balance sheet continued to strengthen, and we are actively leveraging it to make strategic investments in growth in the medical CDMO space, such as the build-out of our new medical facility in Indianapolis and the acquisition of Helboet Polymer Technology. Our guidance for fiscal 2027 is highlighted by organic sales growth and the accretive impact from Helboet Polymer Technology. We are expecting medical to continue to outpace the other two verticals and represent more than one-third of total company sales in the fiscal year, which is in line with our objective to balance the portfolio. Net sales for the company were $372 million, a 2% decline compared to Q4 last year, but a 5% sequential increase with all three vertical markets posting gains over. Geographically, sales in the fourth quarter were more evenly distributed around the world, with approximately 40% in North America and 30% in both Asia. And once again this quarter, our medical business was the headliner, growing both year over year and sequentially, and completing a fiscal year where the growth occurred in all four quarters, exceeded 10% versus a normalized fiscal 25 when adjusting for the consigned inventory sale. In Q4, medical sales were $109 million, a 1% increase compared to the same period a year ago, and 29% of the total company. Approximately 30% of these sales occurred in both Asia and Europe, with the same year-over-year increases in each region. North America was down mid-single digits, which is below our run rate for most of the fiscal year. This apparent slowdown in the growth trajectory is more of a function of the comparison from a year ago than production this year. In 2025, we were supporting our customers with inventory builds for facility closures and transfers of work. Both were one category perspective. The growth was driven by demand for surgical devices, in vitro diagnostics, patient monitoring. Next is automotive. with net sales in Q4 of $170 million, down 3% compared to the same period last year, and 46%. Business in the fourth quarter was roughly divided, a third, a third, and a third, between North America, Asia, and Europe, with Poland and Romania reporting mid-single-digit increases as a result of new steering and braking programs. China was up low single digits, and North America was down, driven largely by lower EV demand, offsetting these increases. continued to be the largest concentration of work, accounting for approximately 70%. For the full year, our automotive business was down 7% year-over-year, so successive 3% declines in the back half of Fiscal 26 suggest a stabilizing trend. It totaled $93 million, a 5% decrease compared to Q4 last year, and 25%. Once again this quarter, our industrial business was heavily concentrated in North America, where the majority of the decline occurred from lower demand for HVAC, partially offset by higher sales of smart meters in Europe, which continue to recover from price. I'll now turn the call over to Jana for more detail on our financial results and guidance.

Thank you, and good morning, everyone. As Rick highlighted, net sales in the fourth quarter were $371.6 million, a 2% decrease year over year. Foreign exchange had a 1% favorable impact on consolidated sales in Q4. The gross margin rate in the fourth quarter was 8.9%, a 90 basis point improvement compared to 8% in Q4 of fiscal 2025, with the increase resulting from favorable mix partially offset by incremental costs associated with the ramp-up of our medical CDMO facility in Indianapolis. Adjusted selling and administrative expenses in the fourth quarter were $14.8 million, a $4 million increase year-over-year, with higher expense from investments for future growth initiatives, including personnel costs and IT infrastructure. When measured as a percentage of sales, the rate was 4% this year compared to 2.8% in the same period last year. Adjusted operating income in Q4 was $18.1 million, or 4.9% of net sales, which compares to last year's adjusted result of $19.6 million, or 5.2% of net sales. Other income and expense was expense of $2.6 million, compared to $3.8 million of expense last year. Once again, this quarter, interest expense drove the decrease, down nearly 30% year-over-year as a result of a combination of lower average debt levels and lower borrowing rates. The effective tax rate in Q4 was 67.8%, compared to 48.3% last year, with this year's rate adversely impacted by the resolution of two long-standing dividend withholding matters with tax authorities at international locations. We ended the fiscal year with an effective tax rate of 47.5%, and we're expecting the rate in fiscal 27 to be in the low 30s. Net income in the fourth quarter was $8.5 million, or 35 cents per diluted share. The adjusted result was skewed by the tax rate, with Q4 posting a loss of $163,000, or a minus one cent per diluted share. Turning now to the balance sheet, cash and cash equivalents at June 30, 2026, were $88.9 million. Cash generated by operating activities in the quarter was a robust $42.4 million, dollars, our 10th consecutive quarter of positive cash. Cash conversion days were 82, an 8-day improvement compared to last quarter, and 3 days better than the 4th quarter of fiscal 25. This is our best CCD in 17 quarters with all components posting good results, but DSO accounting for the most significant improvement versus prior periods. Inventory ended the quarter at $271.9 million, down slightly, that is $1.4 million compared to Q3, and $1.6 million lower than a year ago. Capital expenditures in Q4 were $8.5 million. Much of the spend, once again this quarter, on leasehold improvements in the new facility in Indianapolis, plus investments to support new programs in Europe. For the full year, we invested $51.7 million in CapEx, which was in line with our estimate. Borrowings at June 30, 2026 were $116.6 million, representing our lowest level in over four years, and a decrease of $46.4 million from the third quarter and down $30.9 million or 21% from a year ago. Short-term liquidity available represented as cash and cash equivalents plus the unused portion of our credit facilities totaled $411.3 million at the end of the fourth quarter. As a reminder, the acquisition of Helvut occurred on July 1st, the beginning of fiscal 27, so the financing activities on that transaction are not reflected in the June 30th balances. We invested 2.1 million dollars in Q4 to repurchase 83,000 shares. Since October 2015, under our board authorized share repurchase program, a total of 115.6 million dollars has been returned to our share owners by purchasing 7.1 million shares of common stock. In May, our Board of Directors unanimously increased the share repurchase program by $20 million. We now have $24.4 million available on the program. As we expected, fiscal 2026 was a year of transition, and I am impressed with our team's resilience and ability to deliver results in a challenging environment. We ended the fiscal year with net sales totaling $1.431 billion with medical up over 10% after normalizing last year for the consigned inventory sale. Adjusted operating income was $65.7 million or 4.6% of net sales. Cash generated from operating activities was $72.3 million and and we invested $11.9 million to repurchase 447,000 shares of common stock. As a CFO who takes great pride in the condition of our balance sheet, we exited the fiscal year in a position of strength with plenty of dry powder in the form of borrowing capacity and available cash to strategically invest. As Rick highlighted, our guidance for fiscal 2027 projects a return to growth, and we will be leveraging our balance sheet to support those efforts. Net sales in fiscal 27 are expected to be in the range of $1.535 to $1.56 billion, a 7% to 9% increase compared to fiscal 2026, with organic sales growth of 3% to 5% and revenue from Helvet of $60 million. From a vertical market perspective, organic growth in medical is expected in the high single to low double-digit range, industrial in line with the company average, and automotive will likely be flattish for the year. Revenue should be fairly evenly distributed over the fiscal year. Adjusted operating income is estimated to be 4.4 to 4.7 percent of net sales, and capital expenditures are expected to be in the range of $50 to $60 million. For FY27, the dilutive impact of the ramp of our new facility in Indianapolis is roughly offset by the accretive benefit from our acquisition of Helwet. We expect this combination of assets to drive significant revenue synergies as we execute our CDMO strategy over time. This outlook reflects the efforts and contributions from all areas of the company, and I am grateful for the collaboration and our return to profitable growth. I'll now turn the call back over to Rick.

Thanks, Janet. Before we open the lines for questions, I'd like to share a few thoughts in closing. We are thrilled to see our base business stabilize and a return to organic sales growth, which, as Jana highlighted, will be led by our medical vertical. I noted in my opening comments, our guidance implies medical will approach 35% of the total company. And Heldwick, the newest member of the Kimball family, is announced the deal announcement in early July. The integration efforts have gone very well, with our number one priority focused on unlocking top-line synergies. Customer interest around the acquisition has been strong, with many customers wanting more information about Heldwood operations in Tilburg and Pune, as well as new requests to tour our facility in Indianapolis, which we welcome as the team there continues to make good progress moving out of the existing campus. is now being installed in the new facility and the qualification of certain manufacturing processes is expected all goes according to plan early production will commence at the end of this calendar year and the move will be completed in the addition of helvowet has given us reason to reconsider how we talk about our medical business the co-development work that both organizations do may have noticed that we're now incorporating the letter d in our reference to the medical cd mo business. This is reflective of our go-to-market strategy as a full-service provider in Kimball Solutions and will be used going forward. Looking ahead, we continue to evaluate strategic opportunities that could accelerate the expansion of this business, including the lift and shift of active manufacturing and automation, exposure to highly attractive medical end markets, a presence or expanded presence in a new geography, and a well-run operation.

We believe this strategy will be powerful our strategic journey continues to build and so does my excitement for the future of the company operator we would now like to open the lines for questions thank you ladies and gentlemen analysts may ask questions at this time by simply pressing star one on your dial pad you may remove yourself from the queue by pressing star two on the dial pad we ask that If you are using a speakerphone, please pick up your handset before asking your question. One moment, please, for our first question. Our first question is from Brett Fishman with KeyBank Capital Markets. Please proceed.

Thank you so much for taking the questions and good to be on the call today. Just wanted to start off by asking if you could provide a little bit more color on what you saw in the medical segment this quarter, particularly in Asia and Europe, which seemed a little bit stronger, and then it sounded like North America, the biggest impact was comps, but if there's anything else to call out in that geography as well.

I think with that adjustment, it really was a continuum now being included, but we saw a pretty consistent double-digit increase over the course of each of the quarters, and again, with that adjustment that you mentioned.

Yeah, so to give you some technical color, and Q4, one was related to a transfer of work, And one was related to a facility closure where they needed to build up inventory in support of that. And so if you adjust for those things, a normalized quarter v. quarter, FY26, FY25 is closer to 10%. Great.

And then maybe just following up on that, you know, it sounds like a key part of the return to positive organic growth in FY27. and its continued performance in the medical segment with high single-digit to low double-digit organic growth expected. I was hoping you could just walk through kind of the key drivers and components of that level of growth expected in medical, particularly how much you think could come from the early ramp of the new facility in Indy or if there's any other incremental contributors compared to FY26.

And Brett, we're really pleased as we look across and look at our coming year. So we're really, we're really, I think the Indian impact see production by the end of the calendar in Indianapolis that we're going to close. So that would be transfer opportunities already in market that we could move there, but, but those will take some time as well. So it's really a more broad-based improvement.

All right, super helpful. Last question from me is just on the inorganic contribution. I believe when you announced the deal, I think Halibut had revenue of around $56 million in calendar year 2025. So it just seems like the outlook for inorganic revenue might be a little bit lower than the normalized growth rate for that asset. So just curious if there's any transition impact that you're assuming for year one or any other near-term headwinds that may be impacting the speed of growth for Halibut. Thank you so much.

Okay, Brett, great question. So there are really two impacts. One is actually FX, translation from the INR and the Euro on the U.S. dollar. That's going to be an impact for our fiscal year. And so not really a transition impact, because we've been really, really thoughtful about not interrupting what they've got going on in terms of sales and actually trying to unlock opportunity there in terms of cross-selling opportunities geographically so it's it's much more just business as usual and looking for revenue synergies but there will be some currency impact but going from you know 56 to 60 million ish you know still 8% top-line growth range feels pretty good all right great thank you so much our next question is from

Mike Crawford with B. Riley Securities. Please proceed.

Thank you. Just so we get this into the transcript, what was your EBITDA and EBITDA margin in the fourth quarter? Was it $27.2 million and 7.3%?

$27.2 million and, yes, 7.6%. Oh, okay. And we put it in for the first time specifically for you, Mike.

It's hidden in the press release somewhere. I need to look more closely. So I think, Rick, you said that the drag from Indianapolis ramp in the current fiscal year is going to be offset by Heavolet. But, I mean, so does that mean that there's only a $5 million drag from ramp up in Indianapolis? correlate on a revenue dollar-for-dollar base.

The drag from Indianapolis is probably closer to $6.5 million, $7 million.

Okay. And would it be fair to assume that there's really almost no drag in the next fiscal year?

No. So think of it this way. You've got all of the associated depreciation, plant cost, just all of the things associated with utility expense, et cetera, for a facility that's empty. It's not that there won't be a drag in FY28. It's that eventually it will produce enough revenue to overcome the drag.

Are you saying that 18 months isn't from, that's from when you actually start production?

We opened the building in February. We're bearing all of the costs associated with that facility, but it's not producing revenue. All of the revenue is at the existing campus. It will start producing revenue. It will open for production in the fourth quarter of the calendar year, our second quarter fiscal year. And then, you know, we'll be putting business in it, and it will start to ramp, and it will be able to cover the incremental costs.

Okay, so just to clarify, it's 18 months to ramp, not from February, but from December, not lift and shift. Okay, and then – Correct, not lift and shift. Yeah. What – given that your leverage is now, you know, 1x-ish EBITDA, do you have a – is there a best capital structure? to run a consistent business like this with perhaps more leverage? And if so, then what are your capital allocation priorities then or deployment priorities?

Yeah, great question and something we've been burning a lot of calories on. So, you know, somewhere between one and a half and two times feels good for our business, but you need to keep your balance sheet strong enough when incremental growth opportunities that are inorganic present themselves, you've got the dry powder to act. So you're going to see the cost of the acquisition show up on our balance sheet in Q1. We're going to be actively utilizing our operating cash flow and global cash repatriation options to pay that down so that we can continue to have dry powder should another inorganic opportunity present itself. Plus, we've got 50 million of organic CapEx needs that we need to deploy. We do plan on continuing our share repurchase program at the rate that it's been at for the past few fiscal years. And so, we don't plan on solving that. We think share repurchase, particularly where our stock price is right now, is also a very compelling opportunity. So, we plan on doing – it really is sort of a do-it-all strategy. Share repurchase, yes. Investment in the organic business, yes, but maintaining the dry powder so that we can take advantage of it in organic opportunities. We could take the leverage ratio actually over three times.

I don't, obviously, that would be short-lived and we would have to work aggressively to pay it down, but for the right inorganic opportunity in the short run, would we be willing to do that? probably great well thank you very much our next question is from derek satterberg with cantor fitzgerald please proceed yeah hey everyone thanks for taking the questions um so it looks like automotive uh sales ended up you know being down this uh fiscal year and sort of sort of flattish next year um you know it sounds like european breaking growth is sort of offsetting some of the North America stuff. I guess I was wondering if you just kind of detail your thoughts on that segment sort of turning positive. You know, I know there's individual aspects of the automotive piece by region and braking and steering. I was just wondering if you can maybe comment on when you think that's going to turn positive, kind of the puts and takes between the regions and segments, just any sort of additional detail on the automotive segment for us to think about?

Low demand for, you know, so, you know, we'll see. But yes, Europe, these are fairly new programs that will continue to ramp. So I'd say, you know, our relationships remain as strong as they've ever been. We continue to win. And so, you know, stabilization appears ahead of us and come back, which it looks like it is overall.

Got it. Appreciate the detail there. And then, Jana, congrats on the cash conversion days. You know, really has been trending in the right direction for some time here. I was wondering if that sort of 82-day, you know, conversion days, is that sustainable as you guys sort of, you know, see growth accelerate here, both on an organic and inorganic basis? You know, any additional thoughts there would be great. Thanks.

82 days was hard fought. It also gives me an opportunity to touch on what we're seeing in the business now, which is we're getting back to an environment where there's some inventory disruption in the supply chain and golden screw type events. customers are wanting us to carry more inventory, the turns of certain things as we're waiting for that one golden screw is flowing, and so I'm anticipating that there is going to be some pressure in working capital generally in FY27. We've taken that into consideration as we're thinking about the guide for next year and the impact that it's going to have on the balance sheet. and we're managing through it with our customers, but we're already seeing the impact. So if it rose a couple of days in FY27, let me say that differently. We are planning for it to rise a few days in FY27.

Got it. Appreciate it. Thank you.

Our next question is from Max Milius with Lake Street Capital Markets. Please proceed.

Hey, guys. Thanks for taking my questions. Just a few questions around the model. I mean, 8.9% of the gross margin, really strong quarter. Obviously, that was impacted by a favorable mix. Just curious to know what you're sort of expecting for 2027. I mean, should we be looking for gross margins kind of north of that 8% mark just with the increased focus on the medical side of the business?

Sort of trending in that 4% range again. And so if you consider the midpoint of the guide that we put out being like, you know, call it four or five-ish, you would need a gross margin in the range of 8.5%.

That's awesome. And then I think I heard on the call you're sort of expecting a balanced revenue quarter by quarter throughout the remainder of next year. Is that correct?

First quarter is really heavy, or fourth quarter is really heavy this year. It just so happens that the way that the forecast is shaking out right now, the quarters are going to be pretty easy.

Okay, that's it for me.

As a reminder, the star one on your telephone keypad, if you would like to ask a question. Our next question comes from Anja Satterstrom with Sidodian Company. Please proceed.

Good morning. This is Alex on for Anja. Thanks for taking questions. Jenna, I know you touched on FX, and it was a modest tailwind in 26. What euro assumptions, I'm just curious, underpin the 2027 guide now that Helvet adds euro-denominated revenue?

Great.

Very good. Thank you for sharing. And, you know, I know we've touched on some of the Helvet contributions, you know, for the next year. I'm curious what the improved balance sheet and, you know, recognizing obviously June 30th figures or pre-Helvet, how you're thinking about capital allocation priorities on a pro-forma basis and is there a leverage level you're managing towards?

A dry powder and organic opportunity pop-up that was attractive to us, we could use our balance sheet to take advantage of it. And so it's really walking that line of investing in the base business, which I'll remind everyone is still the overwhelming portion of Kimball and supporting the growth opportunities that we have there, but also dry powder for other tuck-in acquisitions that were going to be force multipliers for the CDMO strategy. I would also add, though, that we just closed on this acquisition July 1. We need to absorb it, integrate it, get the revenue synergies, the top-line synergies out of it. So it's also not likely that we would make another acquisition for, you know, in the fiscal year. We had said that we would want to be serial acquirers in terms of our opportunity set, but we need to give this one time to work before we start chewing on the next one.

Helpful context. Thank you. And last one from us, I'm curious if there have been any surprises, good or bad, post the Helvet acquisition, customer retention, integration pace, go-to-market, you know, anything that's tracking differently, good or bad, than what you underwrote.

And if anything, the top-line synergy opportunities, which are, you know, very much still taking shape, have been really encouraging. And we're so early, you know, when exactly are they going to happen and where exactly will they be located and how big will they be is, you know, those are the things that we're working on. But, you know, the teams across both organizations are talking every single week at least about a pretty impressive list leveraging, you know, the combined footprint. and also one of the areas of capital, these aren't huge numbers yet, but there were some things with customers that needed to be funded in order to make that opportunity happen, and we're eager to invest in those and have already identified and started to.

That is contemplated in our capital.

Glad to hear, and thanks again for taking our questions.

There are no further questions at this time. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. A replay of the call will be available on the Investor Relations page of Kimball Electronics' website or by dialing 877-660-6853. ID number is 13761725. Please disconnect your lines and have a wonderful day.