Kimball Electronics, Inc. (KE) Q1 2027 Earnings Call Transcript

Last year, the Q1 rate was unusually low due to tax benefits associated with OVA. For the full fiscal year, we're expecting the rate to be in the low 30s when excluding the impact of the withholding taxes. Adjusted net income in the first quarter was $6.1 million, or $0.25 per diluted share, compared to $12.3 million, or $0.49 a year ago. The difference in the effective tax rate between the two periods accounted for 50% of the variance, approximately $0.12 per share. Turning now to the balance sheet. Cash and cash equivalents at September 30, 2026 were $72.8 million. Cash used for operating activities in the quarter was $19.3 million, with the usage driven by an inventory bill needed to support future production. This was expected as we returned to growth after several quarters of declining revenue. Cash conversion days were 82 days, equaling our multi-year best from last quarter, and a one-day improvement from the first quarter of fiscal 26. Inventory ended the quarter at $312.1 million compared to $271.9 million last quarter and $272.7 million a year ago. So, this quarter was approximately $40 million higher than both periods. Inventory, which is classified as long-term, is not included in these totals, but it's part of the PDS-OH calculation. It decreased $13.6 million in Q1. Combined, they represented a net increase of $26.7 million, but PDS-OH remained at a respectable 88 days in the quarter. Capital expenditures in Q1 were $9 million, spread fairly evenly across our footprint to support future growth. Borrowings at September 30, 2026 were $235.7 million, an increase versus Q4 driven by the acquisition. Short-term liquidity available, represented as cash and cash equivalents, plus the unused portion of our credit facilities, totaled $270.8 million. We invested $3.1 million in Q1 to repurchase 127,000 shares. Since October 2015, under our board-authorized share repurchase program, a total of $118.6 million has been returned to our share owners by purchasing 7.2 million shares of common stock. As Rick highlighted, we are reiterating our guidance for fiscal 2027 with sales expected at the high end of the range of $1.535 to $1.560 billion. Adjusted operating income is expected to be 4.4 to 4.7% in net sales, and capital expenditures should be in the range of $50 to $60 million. 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. Q1 was our first quarter with Heldwet included in consolidated results, and as I mentioned in my opening remarks, our excitement for the overall strategic fit and growth opportunities of this new partnership are higher now than ever. Integration is progressing on plan and on budget, as we focus on top-line synergies as a first priority. The interest levels from customers, both new and existing, are rising, particularly as the complementary capabilities of Tilburg, Pune, Indianapolis, and the broader Kimball footprint are better understood. Our enhanced medical CDMO platform is elevating our prominence in the industry as a medical device manufacturer with available capacity to support the fast-paced growth in a variety of end-market applications. We've recently taken steps to sharpen our business development efforts in this area by expanding the responsibilities of Evelina Hogenkamp, the CEO of Healthwood, and her team, and arming them with new AI-driven data mining tools that identify real-time opportunities in the medical market where our capabilities can provide immediate assistance with a near-term solution. I continue to be impressed with the talent, industry knowledge, and passion of this team, and I'm excited for their contributions to our CDMO strategy. The transfer of operations in Indianapolis also remains on schedule and on budget, with the movement, installation, and qualification of equipment and manufacturing lines occurring in a manner to ensure uninterrupted customer support. We expect production will start in December. It is all exciting progress, but we know that growing the medical CDMO takes time. Finally, next week, we will be holding our annual meeting of shareowners, which once again this year will be in Indianapolis. A very important element is shareholder support for rebranding the entire company to Kimball Solutions. If approved, it will occur at the end of the fiscal year and complete the phased rollout that started at individual locations across our footprint this past July. The rebrand demonstrates our commitment to innovation and the vision to deliver comprehensive solutions beyond traditional electronics manufacturing services with an expanded portfolio of capabilities that includes design and engineering support, supply chain management, Precision molded plastics, and high-level product assemblies. Our recent investments in Indianapolis and Helbuet have positioned the medical CDMO for growth, and we are now seeing new opportunities to leverage our unique set of capabilities in the marketplace. I thank you for your support. Operator, we would now like to open the lines for questions.

Thank you. Ladies and gentlemen, we will now start the question and answer session. Should you have a question, please press star followed by the one on your telephone keypad. You will hear a three-tone prompt acknowledging your request, and should you wish to cancel your request, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Thank you. And your first question comes from the line of Mike Crawford from B. Riley. Please go ahead.

Thank you. Maybe, Rick, could we just start with, you know, what makes you more excited now than ever with Heldewit versus what you knew previously?

Well, I think, Mike, thanks for joining the call. There's a number of, I think, aspects to that. And obviously, you know, you get to know your partner better, you know, after you close the transaction. The talent is very impressive. So as we're getting to know the leaders of Helbuet, that's why on the call I mentioned we've made a change in business development to even better leverage their capabilities and activity and just the set of, you know, Daily opportunities that we're talking about for synergies across the companies are at a high level. Of course, they take time to execute, but as we're communicating our now combined capabilities in the medical CDMO, I think the talent, the level of customer interest, and the momentum that I think is starting in those customer conversations are what really shapes that thinking for us.

Okay, thank you. And then as you grow this CDMO business, I know margins are getting increased, but are there any particular supply chain components that are tight, that are constraining growth or impacting margin more than others?

Yeah, Mike, this is Janet. It's a great question. So memory is affecting all of us. And electronic components are also tight. And so we're seeing much more on autos and industrial where we don't have as much higher level and full assembly, right, where it's just PCBA, that tightness in terms of components for sure. Cost pressures. But in medical, where we do more full and final assembly, and we have more injected plastic molding, there's inflation, but it's not like what you're seeing with the memory market where, you know, you're competing with the data centers and AI providers.

And, Janet, would you attribute... Is much of your inventory built to those factors, or is that just more a factor of your business is now once again on a growth trajectory?

No, the business is on a growth trajectory, so you'll see some inventory and inflation pricing, but it's more longer lead times, higher costs. But it's the growth. I mean, the 9% in medical, we were very excited about. It's driven by some new launches that we have, and it was across the geography, so not specific to any customer or any program, and not driven by inflationary pressures on electronics components.

Thank you. And then just the last one for me, could you, Janet, go into the tax rate for gap and with the repatriation, all of that? I think, is it like 25% for the rest of the year? Anyway, thank you.

Yeah, so we anticipate low 30s for the rest of the year, and even that we acknowledge is too high, and we are working aggressively on bringing our consolidated tax rate down. So I just want to start by saying that we acknowledge that. What we did in Q1 of 27 is we repatriated global cash of about $30 million, and we paid the tax withholding dividend associated with bringing that cash back. To relieve some pressure off of our balance sheet in terms of the cost of making the acquisition. And so that was always the game plan. And we could sit here and debate whether or not we should have done that or just placed it completely on our revolver. But strategically, it made sense to us, given some of the other support that we need in terms of CapEx and dry powder for future activities to grow this business. And so that impact made our tax rate basically twice what it would have been under normal circumstances. And so the year-over-year impact, and remember Q1 of FY26 was artificially low because of the big, beautiful bill and the way we were able to take advantage of that. So it's about a 12-cent impact to EPS when you compare the two just due to the cash repatriation.

Okay. Thank you very much.

Yeah.

Thank you. And your next question comes from the line of breath from TD Capital and Markets. Please go ahead.

Hey, guys. Good morning. Thank you so much for taking the questions. I wanted to just ask again about, you know, the new U.S. medical facility. Sounds like, you know, production may start. Pretty soon, but I was just curious if you could discuss how, you know, the efforts towards filling some of the capacity with, you know, existing and, you know, new programs is going, and if there's any just general metrics or data points that could help us think about, like, the pacing to fill that capacity.

Yeah, thanks, Brett, and appreciate you joining the call today, and a good question. Obviously, a big focus for us. We're excited, you know, as I mentioned on the call, to expect production to start here before the end of the calendar year. You know, I can tell you, you know, the level of activity in terms of taking customers through the facility, new and existing, the efforts with Helvowet in terms of revenue synergies that will leverage that facility are really exciting. And, you know, we know it takes time. You know, when you win a program in that space, it takes a while to ramp. But we're obviously going to have some immediate production in there because we'll be moving over what's in our current Indianapolis facility. But the focus is really on driving incremental growth from new and existing customers and leveraging that space. And we feel good about that. You know, we'll be continuing to report on it and feel like we have some good momentum. But we do recognize, you know, as I said on the call, that it will take time to wrap.

All right, great. And then maybe just more broadly for FY27, you know, you maintained most of the key guidance metrics, but, you know, are pointing to the higher end of the sales range from last quarter. So maybe if you could just touch on, you know, what modestly improved incrementally relative to the initial guidance that gives, you know, more confidence in the high end this year. Thank you so much.

Hey, Brett, that was a great question. So, What is improving for us is clearly core medical is coming in really strong. So in terms of the acquisition, Helvud is tracking pretty much as we expected to, right? So in terms of that $60 million of revenue and contribution range, core medical is coming in stronger. Automotive is coming in a little bit stronger, but some of that is inflationary pressure as we look at the forecast. And so the challenge, higher revenue, we're still working through margin because, as you know, we'll get revenue that won't have margin associated with it on the autos and industrial side if inflation progresses and continues to be aggressive. Right now, we're still monitoring that, and so we're not ready to give an update on adjusted OI margin. Right now, we're just saying we expect it to hold, and when we give Q2 update, that's typically when we update all of our guidance ranges, and we'll do that at that time because we'll have a better understanding of the impact it's going to have on the full fiscal year.

All right, perfect. Thanks again.

Thank you. Once again, should you have a question, please press star, followed by the one on your telephone keypad. And your next question comes on the line of Luke Fingerson from Lake Street Capital. Please go ahead.

Hey, guys. Luke Fingerson on for Max Michaelis. Just one question from me. Open orders grew 16% year-over-year to $690 million. Can you give me any color on the growth from medical?

So, what I will say and reiterate, and thanks for the question, Luke, is the growth is across all geographies and all programs. And so, it is North America, Europe, and Asia focused and not specific to any program or any single customer. So that, you know, 9% in growth may actually be the lowest. In terms of core medical growth that we see over the course of the fiscal year, we're looking at double digit growth, you know, just really driving it. You're starting to see it in terms of the open orders numbers. Again, you know, we're monitoring automotive and industrial, but what we have been saying for the last, you know, year and a half, two years is that we were focusing on balancing the portfolio thoughtfully over time with a focus on growth. And you're really seeing that come to fruition now, represented in the growth numbers and in the, as you indicated, the open order numbers for future.

Thank you.

Thank you. There are no further questions at this time. This concludes today's conference call. A replay will be available. You can also dial in at 877-660-6853 or 201-612-7415. Again, you can dial 877-660-6853 or 201-612-7415. The access ID is 13763075. Thank you for participating. You may all disconnect.