Kimball Electronics Q3 Earnings Call Highlights

Key Points

• Medical-led revenue lift: Q3 sales rose sequentially to $353 million driven by a 10% sequential increase in medical sales, which reached $106 million (30% of total) and—adjusting for a prior-year $24M consigned inventory sale—medical revenue was up about 17% year over year, marking the third straight quarter of double-digit medical growth.
• Guidance affirmed and Indianapolis CMO ramp: Management reaffirmed FY2026 revenue guidance of $1.4–$1.46 billion and expects operating margin at the high end of the 4.2–4.5% range, while a new 300,000 sq. ft. Indianapolis medical CMO facility is expected to begin production by year‑end and create a ~40–50 bps gross margin headwind in FY2027 before easing in FY2028.
• Financials and liquidity remained solid: gross margin rose to 7.9%, adjusted net income was $8.0 million ($0.33/share), the company generated its ninth consecutive quarter of positive operating cash flow ($14.9M), ended the quarter with $82.5M cash and ~$358.5M in short-term liquidity, and repurchased $4M of shares during the quarter.

Kimball Electronics NASDAQ: KE reported third-quarter fiscal 2026 results that executives said were “in line with expectations,” driven by continued strength in its medical business and another quarter of positive operating cash flow.

Quarterly sales lift led by medical growth

Chief Executive Officer Ric Phillips said net sales rose sequentially from the second quarter, supported by “strong growth in our medical vertical market,” while margins “remained solid.” Kimball posted third-quarter net sales of $353 million, up 3.4% from the prior quarter. Medical sales increased 10% sequentially, Phillips said.

Year over year, sales declined 6% versus the third quarter of fiscal 2025, and Phillips noted all three end markets were down on that basis. However, he emphasized that last year’s third quarter included a “non-recurring sale of consigned inventory totaling $24 million in the medical market.” Adjusting for that, Phillips said total company sales increased nearly 1% year over year, with medical up 17%, marking what he described as the third consecutive quarter of double-digit medical growth and year-to-date medical growth of 15%.

Medical revenue totaled $106 million, or 30% of company sales, which Phillips called “a key milestone” in the company’s effort to increase its medical mix. He said medical growth, adjusted for the prior-year inventory sale, occurred primarily in Asia and North America, with gains in respiratory care, imaging systems, drug delivery devices, and blood separation products. Europe was up low single digits, led by patient monitoring systems.

Automotive and industrial trends

In automotive, Phillips said third-quarter sales were $161 million, down 3% year over year and representing 46% of total company revenue. The decline was primarily in Asia and North America, partially offset by growth in Europe. Phillips highlighted strong performance in Poland and Romania, where he said ramp-ups in steering and braking programs drove a 20% increase in automotive sales for those two sites combined. He added that the company expects this strength to continue through the balance of 2026.

Phillips also said Kimball is monitoring demand for electronic steering systems for electric vehicles, particularly in North America, where legislative changes have affected consumer incentives. He said those changes “significantly reduced the demand for EV programs we have won over the past few years,” while noting the situation remains fluid.

Industrial sales were $86 million, down 8% year over year and 24% of total revenue. Phillips said the business remains heavily concentrated in North America, where lower demand for HVAC systems drove much of the decline. Off-highway equipment and green energy were also down, he said, while public safety and smart meters improved, with smart meters “continu[ing] to rebound in Europe.” Phillips cautioned that near-term results could be affected by “a protracted war in the Middle East.”

Margins, earnings, and cash flow

Chief Financial Officer Jana Croom said foreign exchange provided a 3% favorable impact on consolidated sales in the quarter. Gross margin was 7.9%, up 70 basis points from 7.2% a year earlier. Croom attributed the increase to favorable mix, partially offset by the ramp-up of Kimball’s medical contract manufacturing organization (CMO) initiative and an easier comparison because the prior-year inventory sale carried “very little margin.”

Croom said the company expects gross margin to remain “under some pressure in FY 2027” as costs associated with its Indianapolis expansion “fully ramp up in Q4 this year.” She reiterated that new medical CMO program ramps typically take 18 to 36 months. In response to an analyst question, Croom estimated the new facility would create a 40 to 50 basis point headwind to gross margin in fiscal 2027, with the impact beginning to abate in fiscal 2028 as revenue scales to cover fixed costs.

Adjusted selling and administrative expense was $13 million, up $1.8 million year over year, reflecting strategic investments in “business transformation, IT solutions that drive innovation and efficiency, and business development for the future,” Croom said.

Adjusted operating income was $14.8 million, or 4.2% of sales, compared with $15.7 million, also 4.2% of sales, a year earlier. Other income and expense was a $3 million expense, down from $4.6 million of expense last year, which Croom said was driven by a nearly 30% year-over-year decrease in interest expense. The effective tax rate was 34.9% versus 46.6% last year; Croom said the prior-year quarter was affected by limits on interest deductibility. She said the company expects an approximately 30% tax rate for the full fiscal year.

Adjusted net income was $8 million, or $0.33 per diluted share, compared with $6.8 million, or $0.27 per diluted share, in the year-ago quarter.

Kimball ended the quarter with $82.5 million in cash and cash equivalents. Operating cash flow was $14.9 million, which management said marked its ninth consecutive quarter of positive operating cash generation. Cash conversion days improved to 90, down one day sequentially and down nine days from a year earlier. Inventory declined to $273.3 million, down $8.4 million from the second quarter and down $23.3 million, or 8%, year over year.

Capital allocation and liquidity

Capital expenditures were $14.4 million in the quarter, with spending largely tied to leasehold improvements at the new Indianapolis facility and support for new programs in Europe. Croom said full-year CapEx is expected to remain within guidance of $50 million to $60 million.

Borrowings were $163 million at March 31, up $8.8 million sequentially but down $15.8 million, or roughly 9%, year over year. Short-term liquidity, including cash plus the unused portion of the company’s credit facility, totaled $358.5 million. Croom said Kimball renewed its $300 million revolver in April.

Kimball also repurchased 165,000 shares for $4 million during the quarter. Croom said that since October 2015, the company has returned $113.5 million to shareholders through share repurchases totaling 7 million shares, with $6.5 million remaining under the authorization.

Guidance affirmed; Indianapolis medical CMO ramp in focus

Management affirmed fiscal 2026 revenue guidance of $1.4 billion to $1.46 billion and said adjusted operating margin is expected to land at the high end of its 4.2% to 4.5% range. Croom said the outlook implies fourth-quarter sales of $370 million to $380 million with adjusted operating income margin of 4.4% to 4.6%.

Phillips said the company expects a “good finish” to fiscal 2026 with another sequential sales increase and medical growth outpacing automotive and industrial, while monitoring impacts tied to the war on Iran, including higher freight and raw material costs, higher gas prices, and consumer sentiment.

Discussion on the call also focused on Kimball’s new 300,000-square-foot Indianapolis medical manufacturing facility. Phillips said clean rooms are being installed and that the company expects to be producing there “by the end of the calendar year.” He said the facility ramp will include transferring existing Indianapolis production, onboarding new programs, and pursuing “lift and shift” opportunities where customers move in-house production to Kimball.

Asked about medical pricing, Croom said bids remain competitive but “still rational” in the medical CMO/CDMO market, which she attributed in part to supply-chain needs driven by growth in the sector.

Phillips also reiterated Kimball’s interest in inorganic growth to accelerate its medical CMO strategy, including potential “tuck-ins” that add capabilities, customers, or geographic advantages. In closing remarks, he said the company sees potential with established medical manufacturers outside the U.S. seeking domestic entry and scaled U.S. production, and he described an “ideal profile” as bringing complementary capabilities such as micro molding, advanced precision injection, and high automation engineering expertise.

About Kimball Electronics NASDAQ: KE

Kimball Electronics, Inc is a global electronic manufacturing services (EMS) provider headquartered in Jasper, Tennessee. The company offers end-to-end product design and manufacturing solutions, serving original equipment manufacturers (OEMs) across a range of industries. With a focus on precision electronics and complex assemblies, Kimball Electronics leverages advanced engineering capabilities, quality systems and lean production methods to support customers from product concept through full-scale production.

The company's core offerings include printed circuit board assembly (PCBA), system integration, tooling and test fixture development, and aftermarket services.

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