Kimball Electronics, Inc. 2026 Q4 Earnings Call

Thank you, and good morning, everyone. Welcome to our fourth quarter conference call. With me here today is Ric Phillips, our Chief Executive Officer, and Jana Croom, Chief Financial Officer. We issued a press release yesterday afternoon with our results for the fourth quarter and full fiscal year ended 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 would 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. Jana 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 will now turn the call over to Rick.

Thank you, Andy, and good morning, everyone. I am proud of our results in the fourth quarter and very good finish to fiscal 2026. Sales in 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 Helvoet Polymer Technologies. Our guidance for fiscal 2027 is highlighted by organic sales growth and the accretive impact from Helvoet.

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 across the markets we serve. Turning now to the fourth quarter, 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 Q3. Geographically, sales in the fourth quarter were more evenly distributed around the world versus prior periods, with approximately 40% in North America and 30% in both Asia and Europe.

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 and the total exceeded 10% versus a normalized fiscal 2025 when adjusting for the consigned inventory sale last year. 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 the fourth quarter of fiscal 2025, we were supporting our customers with inventory builds for facility closures and transfers of work. Both were one-time events. From a product category perspective, the growth was driven by demand for surgical devices, in vitro diagnostics, patient monitoring, and drug delivery. Next is automotive with net sales in Q4 of $170 million, down 3% compared to the same period last year and 46% of the total. Our 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.

Steering programs continue to be the largest concentration of work, accounting for approximately 70% of total automotive sales for us. For the full year, our automotive business was down 7% year-over-year, so successive 3% declines in the back half of fiscal 2026 suggest a stabilizing trend in this vertical. Finally, sales in industrial totaled $93 million, a 5% decrease compared to Q4 last year and 25% of the total company. 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. This was partially offset by higher sales of smart meters in Europe, which continue to recover from prior year declines. I'll now turn the call over to Jana for more detail on our financial results and guidance for fiscal 2027.

Jana? Thank you and good morning, everyone.

As Ric 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 longstanding 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 2027 to be in the low 30s. Net income in the fourth quarter was $8.5 million, or $0.35 per diluted share.

The adjusted result was skewed by the tax rate, with Q4 posting a loss of $163,000, or a minus $0.01 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, our 10th consecutive quarter of positive cash. Cash conversion days were 82, an eight-day improvement compared to last quarter and three days better than the fourth quarter of fiscal 2025. This is our best CCD in 17 quarters, with all components posting good results, with 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 estimates. 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 Helvoet occurred on July 1st, the beginning of fiscal 2027. So the financing activities on that transaction are not reflected in the June 30th balances. We invested $2.1 million in Q4 to repurchase 83,000 shares.

Since October 2015, under our board-authorized share repurchase program, a total of $115.6 million 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 we invested $11.9 million to repurchase 447,000 shares of common stock.