Kimball (KE) Q3 2026 Earnings Call Transcript

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Date

Wednesday, May 6, 2026 at 10 a.m. ET

Call participants

• Chief Executive Officer — Richard D. Phillips
• Chief Financial Officer — Jana T. Croom

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Takeaways

• Net Sales -- $352.9 million, a 3.4% increase sequentially from Q2 and a 6% decrease year over year; the year-over-year decline reverses to nearly 1% growth when adjusting for last year’s $24 million one-time consigned inventory sale.
• Medical Vertical Sales -- $106 million, representing 30% of total company revenues; medical sales grew 10% sequentially and 17% year over year when normalized, marking the third straight quarter of double-digit growth for the segment.
• Automotive Vertical -- Sales of $161 million, 46% of the total, declined 3% year over year, with growth in Europe (notably Poland and Romania up 20%) offset by declines in Asia and North America; company leadership attributes performance to reduced demand for electronic steering in North America following legislative changes.
• Industrial Sales -- $86 million, comprising 24% of total sales, declined 8% year over year, led by lower demand for HVAC systems in North America; public safety and smart meters provided partial offset, with ongoing recovery in Europe noted.
• Foreign Exchange Impact -- Positive 3% effect on consolidated sales this quarter.
• Gross Margin Rate -- 7.9%, a 70 basis point improvement from 7.2% in 2025, driven by favorable mix and lower-margin inventory sales in the prior year; management expects margin pressure to persist into fiscal 2027 due to expansion costs at the new Indianapolis medical facility.
• Adjusted Operating Income -- $14.8 million (4.2% of net sales) steady with the prior year’s adjusted margin but $0.9 million lower in absolute terms.
• Adjusted Net Income -- $8 million, or $0.33 per diluted share, compared to $6.8 million, or $0.27 per diluted share, a year ago.
• Operating Cash Flow -- Ninth consecutive quarter of positive cash from operations; period-end cash balance was $14.9 million.
• Inventory -- $273.3 million, down $8.4 million from Q2 and $23.3 million (8%) year over year, reflecting tighter working capital management.
• Adjusted SG&A Expenses -- $13 million, up $1.8 million year over year and 3.7% of sales versus 3% previously; management attributes the increase to business transformation and IT investment.
• Borrowings -- $163 million as of March 31, 2026, rising $8.8 million from Q2 but declining $15.8 million (about 9%) year over year.
• Short-Term Liquidity -- $358.5 million available in cash and unused revolver; the $300 million revolver was renewed in April.
• Capital Expenditures -- $14.4 million, mostly for leasehold improvements at the new Indianapolis facility and scaling new programs in Europe.
• Share Repurchases -- $4 million spent in Q3 to repurchase 165,000 shares; $113.5 million has been returned to shareholders since October 2015, with $6.5 million remaining under the authorization.
• Guidance -- Full-year revenue affirmed at $1.4 billion to $1.46 billion, with adjusted operating income margin expected at the high end of the 4.2% to 4.5% range; Q4 sales expected at $370 million to $380 million and margin at 4.4% to 4.6%.
• Indianapolis Medical Facility -- Production expected before year-end; management notes ramping costs and states "the expectation is that by fiscal 2028, the impact on margin starts to abate as we are bringing in more and more revenue to cover those fixed costs."
• Medical Asia Growth -- Medical sales in Asia grew over 20% in Q3; management notes Asia growth aligns with global trends due to the export focus of the Thailand facility.
• Customer Base -- Management confirms target of signing five new medical customers annually and reports being "on target for the goal" in the current year.
• M&A Strategy -- Inorganic growth in the medical vertical is prioritized, with leadership describing "very active" evaluation of potential "tuck-ins" to enhance geographic reach, scale, and technical capabilities.
• Tax Rate -- Effective rate was 34.9% in Q3, down from 46.6% in the prior year (which was elevated due to interest deductibility limits); management forecasts a full-year tax rate of approximately 30%.
• Cash Conversion Days (CCD) -- 90 days, reduced by one day sequentially and by nine days from the prior year, reflecting continued focus on working capital efficiency.
• Pricing Environment -- CFO Croom said, "the pricing is always competitive" in the CMO space and characterized current market conditions as "aggressive, fair, but still rational," driven by supply chain needs.
• Automotive Market Commentary -- CEO Phillips noted, "the biggest pressure...has been the level of demand for programs that we already have been awarded, where the demand has not been where we anticipated it to be"; continues to monitor macroeconomic factors affecting demand for electronic steering/EV systems in North America.
• Geographic Mix -- North America represented just under half of total sales; the remainder was evenly divided between Asia and Europe.

Risks

• Management highlights "reduced the demand for EV programs we had won over the past few years." in automotive due to changes in North American legislation and volatile gas prices, negatively impacting key awarded business.
• Gross margin will face continued pressure into fiscal 2027 from ramp-up costs at the new Indianapolis facility; CFO Croom projected a "40 to 50 basis point impact to gross margin in fiscal 2027 related to the costs associated with ramping that facility."
• Industrial segment's near-term outlook could be "by a protracted war in the Middle East," particularly affecting European demand for smart meters and public safety solutions.

Summary

Kimball Electronics (NASDAQ:KE) closed the quarter with sequential revenue growth, led by the medical segment's double-digit advance and continued balance sheet improvement. Investments in the new Indianapolis facility and ongoing M&A initiatives are aligned to accelerate the company's medical manufacturing footprint, though management flags increased margin headwinds in the near term. Geographical and segmental diversification remained evident, with company leadership citing strong European automotive growth and robust medical progress in Asia.

• The company achieved its ninth consecutive quarter of positive operating cash flow, coinciding with active debt reduction initiatives.
• Ongoing share repurchases resulted in $4 million deployed this quarter, with cumulative returns to shareholders totaling $113.5 million since 2015.
• Leadership emphasized disciplined SG&A growth linked to technology and business transformation, with current SG&A levels at 3.7% of net sales.
• Management remains positive regarding adding new medical business, reporting sustained customer acquisition pace and active dialogue with existing and prospective clients regarding program expansion.
• Leadership stated that, barring unforeseen events, "we affirmed our revenue range of $1.4 billion to $1.46 billion" for the year and anticipate hitting the high end of projected operating margins.

Industry glossary

• CMO: Contract Manufacturing Organization; a third-party company that manufactures products for another company, commonly used in the medical device sector.
• CDMO: Contract Development and Manufacturing Organization; offers both product development and manufacturing services, especially in life sciences.
• CCD (Cash Conversion Days): Metric measuring the average time required for a company to convert resource inputs into cash flows from sales.

Full Conference Call Transcript

Richard D. Phillips: Thank you, Andy, and good morning, everyone. Results for the third quarter were in line with expectations. Sales increased sequentially compared to Q2, driven by strong growth in our medical vertical market. Margins remain solid, and cash from operations was positive for the ninth consecutive quarter. We expect Q4 to be a good finish to the year, and we are affirming our guidance for fiscal 2026 with adjusted operating margin estimated to be at the high end of the range. As we look forward, the medical CMO continues to be a key part of our strategy and we are making deliberate investments in our capabilities, operating capacity, and commercial focus.

When volumes ramp, we expect it to become a meaningful driver of both top-line growth and margin expansion. In addition, we continue to focus on inorganic growth as a possible complement to this strategy. We believe this could be a powerful combination for the future of our company. Turning to the third quarter. Net sales were $353 million, an increase of 3.4% compared to the prior quarter, with medical up 10%. At face value, this result was a 6% decline compared to Q3 last year, and all three end-market verticals were down. It is important to highlight, however, that 2025 included a nonrecurring sale of consigned inventory totaling $24 million in the medical market.

If we normalize the comparison for that event, total company sales this quarter increased nearly 1% year over year with medical up a robust 17%. This would represent our third consecutive quarter of double-digit medical growth and year-to-date growth of 15% in this vertical. Drilling down a little deeper into Medical, sales in the third quarter were $106 million, or 30% of the total company, which at nearly one-third of the portfolio is a key milestone in our strategic objective to balance the verticals with a higher concentration of medical business. North America accounted for slightly less than half of the sales in the quarter, while the other half was roughly split between Asia and Europe.

The growth in Q3, after adjusting for the inventory sale last year, occurred primarily in Asia and North America with increases in respiratory care, imaging systems, drug delivery devices, and blood separation products. Sales in Europe were up low single digits, driven primarily by patient monitoring systems. Medical continues to be a compelling opportunity to diversify our top line and leverage core strengths. Our strategy is to support new and existing blue-chip customers in need of manufacturing capacity to keep pace with overall market growth. Our state-of-the-art manufacturing facility in Indianapolis is designed to do just that.

With capabilities in precision, injected molded plastics, complete device assembly, and cold chain management, we are uniquely positioned to produce medical disposables, surgical instruments, and selected drug delivery devices such as auto-injectors. Our recent investments in this new facility underscore our deep commitment to the medical CMO market. Next is automotive, with sales in the third quarter of $161 million, down 3% compared to Q3 of last year, and 46% of the total company. The decline this quarter was primarily in Asia and North America, partially offset by growth in Europe. Similar to Q2, Poland and Romania reported strong sales resulting from the ramp-up of new programs in steering and braking.

Combined, these two locations were up 20% in automotive sales in the quarter, and we expect this strength to continue for the balance of 2026. In addition, we are carefully monitoring the demand for electronic steering systems for EVs, particularly in North America, where legislative changes significantly impacted consumer incentives and overall market, which unfortunately has significantly reduced the demand for EV programs we had won over the past few years. As you might imagine, this situation is fluid, particularly as gasoline prices move upward in the U.S. Finally, sales in Industrial totaled $86 million, an 8% decrease compared to Q3 last year, and 24% of total company sales.

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 systems. Off-highway equipment and green energy were also down, partially offset by higher sales in public safety and smart meters, which continue to rebound in Europe but may be impacted near term by a protracted war in the Middle East. I will now turn the call over to Jana for more detail on third quarter results and our guidance for fiscal 2026.

Jana T. Croom: Thank you, and good morning, everyone. As Richard highlighted, net sales in the third quarter were $352.9 million, a 6% decrease year over year. Foreign exchange had a 3% favorable impact on consolidated sales in the quarter. On a sequential basis, sales increased 3.4% driven by growth in the medical vertical. The gross margin rate in the third quarter was 7.9%, a 70 basis point improvement compared to 7.2% in 2025, with the increase resulting from favorable mix, offset by the ramp-up of the medical CMO, and a somewhat easier comparison as the inventory sales we experienced in 2025 had very little margin.

We expect gross margin to remain under some pressure in fiscal 2027, related to the cost of the facility, as expenses associated with the expansion fully ramp up in Q4 this year. As we have previously stated, the path to CMO revenue is 18 to 36 months for new programs, and we expect this impact to abate over time as business grows and margin improves. Adjusted selling and administrative expenses in the third quarter were $13 million, a $1.8 million increase year over year. When measured as a percentage of sales, the rate was 3.7% this year compared to 3% last year.

As we previously indicated, expenses will be higher in fiscal 2026 as we make strategic investments in business transformation, IT solutions that drive innovation and efficiency, and business development for the future. Adjusted operating income in Q3 was $14.8 million, or 4.2% of net sales, which compares to last year's adjusted results of $15.7 million, which was also 4.2% of net sales. Other income and expense was expense of $3 million compared to $4.6 million of expense last year. Once again, this quarter, interest expense drove the decrease, down nearly 30% year over year. The effective tax rate in Q3 was 34.9% compared to 46.6% last year.

As a reminder, the rate in 2025 was driven by the limitation of the tax deductibility of our interest expense, which cannot exceed a certain percentage of domestic EBIT. We expect a tax rate of approximately 30% for the full fiscal year. Adjusted net income in the third quarter was $8 million, or $0.33 per diluted share, compared to last year's adjusted results of $6.8 million, or $0.27 per diluted share. Turning now to the balance sheet. Cash was $14.9 million, our ninth consecutive quarter of positive cash flow. Cash conversion days were 90, a one-day improvement compared to last quarter and a nine-day improvement compared to 2025.

For clarity, our CCD calculation in Q3 fiscal 2025 excludes the consigned inventory sale. We continue to focus on improving cash conversion days by actively managing the components. Inventory ended the quarter at $273.3 million, an $8.4 million reduction compared to Q2 and down $23.3 million, or 8%, from a year ago. Capital expenditures in Q3 were $14.4 million, with much of the spend on leasehold improvements in the new facility in Indianapolis, balanced by spend to support new programs in Europe. We expect CapEx for the full year to be in our guidance range of $50 million to $60 million.

Borrowings at 03/31/2026 were $163 million, up $8.8 million from the second quarter but down $15.8 million, or roughly 9%, from a year ago. Short-term liquidity available, represented as cash and cash equivalents plus the unused portion of our credit facility, totaled $358.5 million at the end of the third quarter. In April, we renewed our $300 million revolver. Combined with our strong balance sheet, we have ample dry powder to support the future growth of the business, including opportunities for inorganic tuck-ins that would further our CMO strategy. We invested $4 million in Q3 to repurchase 165 thousand shares.

Since October 2015, under our Board-authorized share repurchase program, a total of $113.5 million has been returned to shareholders by purchasing 7 million shares of common stock. We have $6.5 million remaining on the repurchase program. As Richard mentioned, we affirmed our revenue range of $1.4 billion to $1.46 billion and expect adjusted operating income margin to come in at the high end of our guidance range of 4.2% to 4.5%. This would indicate that Q4 sales will be in the range of $370 million to $380 million, with adjusted OI margin in the range of 4.4% to 4.6%. I will now turn the call back over to Richard.

Richard D. Phillips: Thanks, Jana. Before we open the lines for questions, I would like to share a few thoughts in closing. We are expecting Q4 to be a good finish to the fiscal year with another sequential increase in sales, and with the growth in medical outpacing the other two verticals. As we monitor the impacts of the war on Iran, including higher freight and raw material costs, higher gas prices, and consumer sentiment, looking ahead, we continue to evaluate strategic opportunities that could accelerate the expansion of our medical CMO. In particular, we see strong inorganic growth potential with established medical manufacturers outside the U.S. seeking domestic market entry and scaled U.S. production.

The ideal profile would bring complementary capabilities such as micro molding, advanced precision injection, and high automation engineering expertise, while benefiting from cost-efficient operations in lower-cost geographies. These efforts are ongoing, align with our objective to broaden our capabilities, deepen customer relationships, and position the company as a differentiated medical manufacturing partner. As I noted in my opening comments, we believe this is a powerful combination that will drive profitable growth in the future. I am very excited for what is ahead for the company. Thank you for your ongoing support. Operator, we would now like to open the lines for questions.

Operator: Thank you. We will now open the call for questions. Ladies and gentlemen, to ask a question, please press star two on your dial pad. The first question comes from the line of Michael Roy Crawford with B. Riley Securities. Please proceed with your question.

Michael Roy Crawford: Thank you. I was hoping you could give us some more details on your new 300 thousand square foot manufacturing facility and how the ramp of new programs in there is going to affect potential revenue growth and also margins, and when you hit that level where you are covering costs and the margins are starting to layer in on incremental revenue from there?

Richard D. Phillips: Good morning, Mike. Thanks for joining, and thanks for the question. Yes, continuing to be really excited about Indianapolis, and I actually just connected with our GM there in the last couple of days, and the work continues to ramp up. Obviously, there are some approvals that we need that we are working on, and the clean rooms are going in there, and a lot of exciting things. We expect that we will be actually producing in there by the end of the calendar year.

As we ramp toward that, it will be a combination of taking lots of customers through there, as you can imagine right now, existing and new potential customers, but we will also be moving over all of our current production in Indianapolis to that facility. So there will be a combination of existing programs that are moving over, new programs that are coming, and we are also talking to customers about what we call lift and shift, which is programs that are already underway somewhere else, usually within the customers that we have producing themselves, that we would shift over to us and customers can find advantage from doing that. So it will be a combination.

New programs, as Jana mentioned in her remarks, take time to ramp up between clinical trials and so on. But yes, we will be producing in there before the end of the calendar year and look to ramp that up through a combination of new and existing customers.

Jana T. Croom: So, Mike, to give you a little more color on the margin impact, we expect a 40 to 50 basis point impact to gross margin in fiscal 2027 related to the costs associated with ramping that facility. We still have all the costs associated with the current facility. We have not closed that facility; it is continuing to operate, and so we will feel it in fiscal 2027 while we are bringing on new production. The expectation is that by fiscal 2028, the impact on margin starts to abate as we are bringing in more and more revenue to cover those fixed costs.

Michael Roy Crawford: Okay. Just to continue on that, is that going to be most acute in September and December and then start to abate in March?

Jana T. Croom: In terms of calendar, it depends on the timing and speed of the ramp of new business, which is difficult to predict, and so I am hesitant to give you specifics. But first half, you will definitely feel it because there will not be much production there covering the expense. It depends on how Q3 and Q4 ramp as we are bringing in new business, and I can give you a better update on that in the coming quarters as volumes are ramping.

Michael Roy Crawford: Okay. Thank you. And then just a final question for me is, given that your automotive business is well situated for trends like electronic braking and steering and new technologies being bought by your customers, is that a vertical that you would expect to grow, or is that really still overly dependent on the global macro economy?

Richard D. Phillips: You just nailed it, Mike. Global macro. We continue to feel like we are well positioned in both steering and braking. We are really focused on ensuring that we win those next-generation programs. We do not see major changes or losses, as you mentioned we have experienced in the past, at this point. But as I mentioned in my remarks, the biggest pressure there has been the level of demand for programs that we already have been awarded, where the demand has not been where we anticipated it to be.

As we look forward, and as Jana said, we will give more insight as we get to year end across the whole business and also, of course, in automotive on what we are seeing. But the global economy is truly the biggest impact and driver of what we see there because we feel good about our positioning. The programs that we have won—we are just waiting to see what the demand for those programs is going to look like in the short term.

Operator: Our next questions are from the line of Derek John Soderberg with Cantor Fitzgerald. Please proceed with your questions.

Derek John Soderberg: Good morning, everyone, and congrats on returning to organic growth here. So starting with another question on the medical facility, Richard, you mentioned you plan on moving existing programs into that facility. When you take into account the medical deals you have signed over the past 12 to 18 months or so, can you quantify how much of the facility's capacity you have booked already?

Richard D. Phillips: No, Derek, I think we are early on that. It is a leased facility. We ensured that we have lots of space for growth. I can tell you I have personally taken customers through there; they are really excited about what that looks like. Some of those programs in CMO can be much more significant than the typical medical programs that we have had. But I would say that we are early, given the ramp, to estimate capacity there. I will say we have had customers ask us, can you expand? And the answer is yes. But I think we are a little early on those moves.

Derek John Soderberg: Got it. And then just on the pricing environment within the medical space specifically, we have seen some of your private peers mention intensifying competition in the medical and aerospace segments. Are you seeing any aggressive pricing in competitive bids for new medical opportunities?

Jana T. Croom: The pricing is always competitive. Especially in the CMO/CDMO space, the pricing is always competitive. What I would say is it is still rational. There are other areas of the market where we have seen pricing that is not rational, but in the medical CMO space, we would say aggressive, fair, but still rational. Part of that is driven by the need for supply chain in the space; the proliferation of growth in the medical space is such that they need more and more suppliers in the supply chain, and that is keeping everything rational right now.

Derek John Soderberg: Got it. And then my last question, could you talk about the M&A environment? It looks like your balance sheet continues to improve here, debt coming down. Is your ability to go out and do a larger inorganic agreement increasingly on the table, or maybe those plans have not changed? And then broadly on the M&A space, how are valuations trending—getting more expensive—anything to note on that front?

Richard D. Phillips: Yes, thanks, Derek. It is very much part of our strategy. I will tell you our efforts over the last year in terms of laying out criteria within the medical CMO, thinking about potential targets, interacting with our Board, are at a high level. So definitely part of our strategy. We think about it, as Jana mentioned in her comments, around tuck-ins that could add geographic advantages for us, things that could help us as we look to continue to fill capacity within the new facility in Indianapolis, and opportunities that will advance our capabilities and expand what we are able to do from a technology standpoint. All of those are on the table.

Our team is very active in evaluating, and yes, from a financial standpoint, we are very comfortable with the cash that we have generated and our situation from a debt standpoint that we can act decisively in M&A.

Operator: Our next questions are from the line of Maxwell Michaelis with Lake Street Capital Markets. Please proceed with your question.

Maxwell Michaelis: Hey, thanks for taking my questions. First one for me, I think I read an article saying that you were targeting five new customers annually in the medical side of the business. Maybe give us a few comments on where you stand there in adding new customers this year.

Jana T. Croom: You did read that. Our targeted goal is to add five new customers annually. This year, we are on target for the goal. The question becomes, when you bring the customers on, how big is the initial program that you have been awarded, and then how quickly can you ramp that program and do what we call land and expand, which is you bring on a new program, you do it exceptionally well, and then you expand with that customer into bigger programs, higher volumes, and you build the relationship over time. That is very much center play to the Kimball strategy—and not just for medical, but that is our strategy for all three of our verticals.

Maxwell Michaelis: Okay. And were any of these new applications, or are they all things you have done before?

Jana T. Croom: Some are new applications, and some are work that we have done for other customers that we are now going to be doing for the new customers that we are bringing on board. It is both.

Maxwell Michaelis: Great. And then last one for me—I will stick to medical. I think you said in the prepared remarks, Europe grew low single digits. Is there any way you can share the growth rate from the Asian market, and how you expect that to trend going forward in fiscal 2027, if you can share?

Richard D. Phillips: As Jana pulls the specifics, Max, maybe just a general comment. As you know, our Thailand facility does a lot of our medical work overseas and is an export facility. I think you will find that the Asia growth will likely be consistent with overall company growth because, as an export facility, it is responding to growth opportunities globally.

Jana T. Croom: I want to go back to Max's question and answer it because he asked specifically about medical in Asia. That growth for Q3 was over 20%. It was offset by some movement that we have had in other areas, but it was over 20%.

Operator: Our next question is from the line of Anja Soderstrom with Sidoti. Please proceed with your question.

Anja Soderstrom: Congrats on the performance here in the quarter. I am curious—you are talking about the meaningful growth in the CMO business, but how dependent are you on new logos to drive that growth?

Richard D. Phillips: Anja, we could not quite hear you. Could you say it one more time?

Anja Soderstrom: Yes. You were talking about driving meaningful growth in the CMO business, but how dependent are you on adding new logos to be able to drive that growth?

Richard D. Phillips: Got it. Great question, Anja. I would say that is an important part of our strategy. What we knew—and what we have found since we announced the Indianapolis facility—is you have to have that space, you have to have a modern, ready-to-go medical facility in order to attract those new logos. The conversations that we are having have accelerated. We do have existing customers that are really excited about what we are doing, and we are talking about programs with them. But if you fast-forward to the future, we will be adding a number of new logos as part of that CMO growth strategy for sure.

Anja Soderstrom: Thank you. And then you talked about moving the production from the old facility to the new one. How much revenue do you generate from that facility, and what is the time frame for completing that move?

Jana T. Croom: We do not disclose the revenue of that facility specifically. We disclose revenue of North America. I know we need to think about that because as we are talking about the CMO more, we need to be able to give you some of that. We are just not going to give that information today.

Anja Soderstrom: Okay. Thank you. Understood. And then in terms of M&A, are you more imminently looking at adding capabilities to make you more competitive, or adding customers?

Richard D. Phillips: I would say both. It is a combination of capabilities, customers, and geographies. One of the things that I mentioned on the call today is it is interesting that we have customers we talk to who are looking for a U.S. footprint, and that is one of the things that we think will help us really gain utilization in Indianapolis over time. It just gives us a new capability. But yes, all of the above: customers, capabilities, geographies.

Anja Soderstrom: Thank you. And then one last one on inventories. They came down for the quarter, but with the growth you are expecting, how should we think about that? Was that some inventory you had built up that you are building down?

Jana T. Croom: That is just us working through days inventory. We are getting better and tighter with managing our inventory and our supply chain. So it does not necessarily have anything to do with revenue or top line. It is much more just working capital management that is improving. It has been a goal of ours over time.

Operator: Thank you. Ladies and gentlemen, this will conclude today's Q&A session and will also conclude today's conference. We would like to remind you that a telephone replay will be available on this call approximately three hours after the end of the conference. To access the conference replay, you may dial 17060853. International callers, please dial 12017415. The Access ID is 13759805. Thank you for joining us today. Have a wonderful day. Thank you.

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