Kimball Electronics outlines $1.35B-$1.45B sales target for FY26 as medical CMO strategy advances

Earnings Call Insights: Kimball Electronics (KE) Q4 2025

MANAGEMENT VIEW

* CEO Richard D. Phillips described Q4 as a period where “sales increased sequentially, margins continued to improve and working capital management drove our sixth consecutive quarter of positive cash flow, which was used to pay down debt.” Phillips stated the company is “positioning the company for a return to profitable growth with noteworthy accomplishments, including a record number of wins for future business, a meaningful increase in the number of green customer scorecards, quality ratings at a 15-year high, adjusting the cost structure and aligning the portfolio to demand trends and intensifying our focus as a medical CMO.”
* Phillips highlighted the new 300,000 square foot Indianapolis medical facility, emphasizing its role in expanding production capabilities into areas such as cold chain management, device assembly, and precision molded plastics, with applications across cardiology, orthopedics, and minimally invasive surgery.
* The CEO noted Medical sales grew 5% year-over-year to $107 million, now 28% of company revenue, driven by increased sales to the largest medical customer. He reported Kimball is now the sole supplier for respiratory care final assembly and higher-level assemblies for this customer, with most production in Thailand.
* Phillips explained, “we expect fiscal 2026 to be another step forward in this journey, and we anticipate positive top line growth for the company overall in FY '27.”
* CFO Jana T. Croom stated, “Net sales in the fourth quarter were $380.5 million, a 12% decrease year-over-year, down 8% when excluding AT&M. Foreign exchange had a 1% favorable impact on consolidated sales in Q4.”
* Croom detailed, “Adjusted selling and administrative expenses in the fourth quarter were $10.8 million, a $3.2 million or 23% reduction compared to the $14 million we reported in Q4 last year.” She also highlighted a $31.3 million reduction in borrowings from Q3 and a 50% reduction in debt from the start of the fiscal year.

OUTLOOK

* For fiscal 2026, Croom guided to “net sales in the range of $1.35 billion to $1.45 billion, a 2% to 9% decrease compared to fiscal 2025, adjusted operating income in the range of 4.0% to 4.25% of net sales compared to 4.1% of net sales in fiscal 2025, and capital expenditures in the range of $50 million to $60 million.”
* She noted, “the loss of the braking program in Reynosa will have a $60 million unfavorable impact in the year. In addition, we do not expect another large consigned inventory sale similar to Q3 to occur again. Without these 2 items, our top line guide is approximately flat year-over-year.”
* Management expects “modest growth in our Medical and Industrial businesses, but it will be offset by a decline in Automotive. Margins are estimated to be in line with FY '25.”
* Croom stated, “In fiscal 2026, we expect a tax rate in the low 30%.”

FINANCIAL RESULTS

* Net sales for Q4 were $380.5 million, an 8% decline year-over-year when excluding the divested business. Medical sales were $107 million, up 5% year-over-year. Automotive sales were $184 million, down 13%. Industrial sales were $90 million, down 12%.
* Gross margin in Q4 was 8%, down from 8.5% in the prior year period but improved sequentially.
* Adjusted net income was $8.4 million or $0.34 per diluted share, compared to $9.7 million or $0.38 per share last year.
* Cash generated by operating activities was $78.1 million for the quarter, with cash conversion days reduced to 85 from 100 in the prior year quarter.
* Inventory ended at $273.5 million, a $23.1 million reduction from Q3.
* Borrowings at quarter-end were $147.5 million, down $31.3 million sequentially and 50% from the fiscal year start.
* $3 million was invested to repurchase 162,000 shares in Q4, with $16.3 million remaining on the repurchase program.

Q&A

* Michael Roy Crawford, B. Riley Securities: Asked about the Indianapolis facility timeline and revenue potential. Phillips responded, “We are planning the grand opening that facility in November of this year...we could handle hundreds of millions of dollars of business in that facility, depending on the size of programs that ramp up.” Croom added, “Well in excess of $0.5 billion.”
* Crawford inquired about expansion into industrial adjacencies. Phillips stated, “We have been in some interesting discussions in Industrial...We don't have anything to announce on that front at this point.”
* Crawford asked about tariff impacts. Phillips explained, “for the majority of our business, we are not typically the importer of record, which provides us a little bit of protection...tariffs are a pass-through.”
* Derek John Soderberg, Cantor Fitzgerald: Queried about margin profile changes for the respiratory program. Croom clarified there is no major change, noting, “We're just starting up again, which feels really, really great.” She also explained improvements in cash conversion days, aiming for around 75 days.
* Anja Soderstrom, Sidoti & Company: Asked about drivers of margin improvement. Croom responded, “gross margin, you're going to see improvement, and that's a result of a lot of the restructuring that we've done, capacity utilization efforts, the shutdown of Tampa. We've got controls on the SG&A side and a real discipline there, too.”
* Soderstrom also asked about Medical segment strategy. Phillips said, “we're making hires in business development...we've also undertaken a pretty comprehensive marketing plan, particularly to support the CMO efforts.”
* Jaeson Schmidt, Lake Street Capital: Asked about Medical segment growth outside the largest customer. Phillips said, “most of the new customers that we've introduced over the last 2 years have been in that Medical segment. So we do see opportunity to expand.”

SENTIMENT ANALYSIS

* Analysts were generally constructive, focusing on facility expansion, margin drivers, and cash conversion, but showed some caution regarding ongoing challenges and the transition period, especially around automotive declines.
* Management maintained a confident and forward-looking tone, frequently emphasizing opportunity, growth, and disciplined cost control. Phillips stated, “I've never been more excited about the future of the company.”
* Compared to the previous quarter, management’s sentiment shifted slightly more positive, reflecting increased confidence in the medical CMO strategy and working capital progress, while analysts maintained a neutral to slightly positive tone.

QUARTER-OVER-QUARTER COMPARISON

* Guidance shifted from reiterating FY25 sales and margin ranges in Q3 to outlining a lower FY26 sales target, primarily due to the loss of the braking program and the absence of a large consigned inventory sale.
* Strategic focus shifted further toward medical CMO expansion and increased investment in new Indianapolis capacity, with more detailed discussion of business development and marketing for Medical.
* Q4 featured a larger reduction in borrowings and improved cash conversion days compared to Q3. Inventory was reduced further, and net cash flow from operations was significantly higher.
* Management’s confidence in the Medical vertical and margin accretion opportunities increased, while acknowledging continued automotive headwinds.
* Analysts continued to press for detail on margin sustainability, medical growth, and working capital, similar to Q3.

RISKS AND CONCERNS

* Management cited the $60 million adverse impact from the loss of the Reynosa braking program and the nonrecurrence of a major consigned inventory sale as key headwinds for FY26.
* Tariff unpredictability and global trade remain an ongoing challenge, with management emphasizing flexibility and pass-through strategies.
* Automotive weakness, particularly in electronic braking and steering for EVs, was highlighted as a risk.
* The company acknowledged ongoing investment requirements for expanding the medical CMO, including business development and automation.

FINAL TAKEAWAY

Kimball Electronics management emphasized disciplined execution and strategic investment as the company enters a transition year. With a focus on expanding the Medical segment, the new Indianapolis facility is expected to support significant future growth. The company is targeting FY26 net sales between $1.35 billion and $1.45 billion, reflecting near-term headwinds but positioning for margin improvement and long-term profitability through medical CMO expansion and continued working capital optimization.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/ke/earnings/transcripts]

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