Kimball Electronics, Inc. Aktie

Good morning, ladies and gentlemen, and welcome to Kimball Electronics Fourth Quarter Fiscal 2026 Earnings Conference Call. My name is Sherry, and I will be the facilitator for today's call. [Operator Instructions] Today's call, August 13, 2026, is being recorded. A replay of the call will be available on the Investor Relations page of Kimball Electronics website.

At this time, I would like to turn the call over to Andy Regrut, Vice President, Investor Relations, Strategic Development and Treasurer. Mr. Regrut, you may begin.

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'd 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, Ric will start the call with a few opening comments. Jana will review the financial results for the quarter and guidance for fiscal 2027, and Ric will complete our prepared remarks before taking your questions. I'll now turn the call over to Ric.

Thank you, Andy, and good morning, everyone. I'm 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 4 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 2 verticals and represent more than 1/3 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 3 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 4 quarters and the total exceeded 10% versus a normalized fiscal '25 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 '25, we were supporting our customers with inventory builds for facility closures and transfers of work, both were onetime 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 1/3, 1/3 and 1/3 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 '26 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 continued 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 2 long-standing 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 '27 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 8-day improvement compared to last quarter and 3 days better than the fourth quarter of fiscal '25. 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 4 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 1, the beginning of fiscal '27. So the financing activities on that transaction are not reflected in the June 30 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.

As a CFO who takes great pride in the condition of our balance sheet, we exited the fiscal year in a position of strength with plenty of dry powder in the form of borrowing capacity and available cash to strategically invest. As Ric highlighted, our guidance for fiscal 2027 projects a return to growth, and we will be leveraging our balance sheet to support those efforts.

Net sales in fiscal '27 are expected to be in the range of $1.535 billion to $1.56 billion, a 7% to 9% increase compared to fiscal 2026 with organic sales growth of 3% to 5% and revenue from Helvoet of $60 million. From a vertical market perspective, organic growth in Medical is expected in the high single to low double-digit range, Industrial in line with the company average and Automotive will likely be flattish for the year. Revenue should be fairly evenly distributed over the fiscal year. Adjusted operating income is estimated to be 4.4% to 4.7% of net sales and capital expenditures are expected to be in the range of $50 million to $60 million.

For FY '27, the dilutive impact of the ramp of our new facility in Indianapolis is roughly offset by the accretive benefit from our acquisition of Helvoet. We expect this combination of assets to drive significant revenue synergies as we execute our CDMO strategy over time. This outlook reflects the efforts and contributions from all areas of the company, and I am grateful for the collaboration and our return to profitable growth.

I'll now turn the call back over to Ric.

Thanks, Jana. Before we open the lines for questions, I'd like to share a few thoughts in closing. We are thrilled to see our base business stabilize and a return to organic sales growth, which, as Jana highlighted, will be led by our medical vertical. As I noted in my opening comments, our guidance implies medical will approach 35% of the total company in fiscal '27. And Helvoet, the newest member of the Kimball family, is an important contributor. Since the deal announcement in early July, the integration efforts have gone very well with our #1 priority focused on unlocking top line synergies.

Customer interest around the acquisition has been strong with many customers wanting more information about Helvoet operations in Tilburg and Pune as well as new requests to tour our facility in Indianapolis, which we welcome as the team there continues to make good progress moving out of the existing campus. Production equipment is now being installed in the new facility and the qualification of certain manufacturing processes is expected to start in the fall. If all goes according to plan, early production will commence at the end of this calendar year, and the move will be completed in the next 18 months.

The addition of Helvoet has given us reason to reconsider how we talk about our Medical business, in particular, the co-development work that both organizations do. You may have noticed that we're now incorporating the letter D in our reference to the Medical CDMO business. This is reflective of our go-to-market strategy as a full-service provider in Kimball Solutions and will be used going forward.

Looking ahead, we continue to evaluate strategic opportunities that could accelerate the expansion of this business, including the lift and shift of active [indiscernible] adds to this strategy with expertise in precision manufacturing and automation, exposure to highly attractive medical end markets, a presence or expanded presence in a new geography and a well-run operation with an excellent management team. We believe this strategy will be powerful in driving value creation. Our strategic journey continues to build and so does my excitement for the future of the company.

Operator, we would now like to open the lines for questions.

[Operator Instructions] Our first question is from Brett Fishbin with KeyBanc Capital Markets.

Just wanted to start off by asking if you could provide a little bit more color on what you saw in the Medical segment this quarter, particularly in Asia and Europe, which seemed a little bit stronger. And then it sounded like North America, the biggest impact was comps, but if there's anything else to call out in that geography as well.

So I think with that adjustment, Brett, and thanks for joining the call. Good to have you. It really was a continuation of the trend that we've been seeing throughout the year. As you know, Helvoet will now be included in the results, and of course, it wasn't at all in the prior year with the July 1 close. But we saw a pretty consistent double-digit increase over the course of each of the quarters. And again, with that adjustment that you mentioned, Q4 looked pretty similar.

Yes. So to give you some technical color. In Q4 of '25, we had 2 onetime builds for customers. One was related to a transfer of work and one was related to a facility closure where they needed to build up inventory in support of that. And so if you adjust for those things, a normalized quarter-v-quarter FY '26, FY '25 is closer to 10%.

All right. Great. And then maybe just following up on that. It sounds like a key part of the return to positive organic growth in FY '27 is continued performance in the Medical segment with high single-digit to low double-digit organic growth expected. I was hoping you could just walk through kind of the key drivers and components of that level of growth expected in Medical, particularly how much you think could come from the early ramp of the new facility in Indy or if there's any other incremental contributors compared to FY '26?

Sure. And Brett, we're really pleased as we look across the product categories within medical and look at our expectations for the coming year, we see growth in most categories, respiratory care, surgical devices, in vitro diagnostics, imaging, drug delivery. So we're really pleased to see that. I think the Indy impact is definitely going to take time. As you heard on the call, if all goes according to plan, we'll begin to see production by the end of the calendar year, but that's going to start with production that is currently taking place in our -- the facility in Indianapolis that we're going to close. So that would be transfer rather than incremental growth.

What I'd say is -- and we can talk more about this, we're really encouraged. And obviously, this acquisition just closed, as you know, July 1. But the opportunities that we're talking about in terms of synergies are multiple. Helvoet was looking for U.S. footprint anyway, independent of the transaction because of demand from their customers for U.S. footprint for what they do, which they'll now have. We have customers that want footprint in Europe and India that we didn't necessarily have specifically for those technologies. And we're working together to collaborate on scaled larger programs that bring forth the capabilities of both companies.

So I wouldn't expect you'll see a big impact in '27 from Indianapolis just because new programs take time to ramp. We may have some good opportunities with lift and shift programs that are already in market that we could move there, but those will take some time as well. So it's really a more broad-based improvement kind of building on the momentum that we saw this year.

All right. Super helpful. Last question for me is just on the inorganic contribution. I believe when you announced the deal, I think Helvoet had revenue of around $56 million in calendar year 2025. So it just seems like the outlook for inorganic revenue might be a little bit lower than the normalized growth rate for that asset. So just curious if there's any transition impacts that you're assuming for year 1 or any other near-term headwinds that may be impacting like the speed of growth for Helvoet?

Brett, great question. So there are really 2 impacts. One is actually FX and the FX translation from the INR and the euro on the U.S. dollar. That's going to be an impact for our fiscal year. And -- so not really a transition impact because we've been really, really thoughtful about not interrupting what they've got going on in terms of sales and actually trying to unlock opportunity there in terms of cross-selling opportunities geographically. So it's much more just business as usual and looking for revenue synergies, but there will be some currency impact. But going from $56 million to $60 million-ish, still 8% top line growth in that range feels pretty good.

Our next question is from Mike Crawford with B. Riley Securities.

Just so we get this into the transcript, what was your EBITDA and EBITDA margin in the fourth quarter?

Mike thanks for the question. Hold on. I should have that here right in front of me.

Was it $27.2 million and 7.3%, Jana?

It's $28.2 million and yes, 7.6%. And the press release -- we put it in for the first time, specifically for you, Mike, it's in the press release.

It's hidden in the press release somewhere. Okay. I need to look more closely. So I think, Ric, you said that the drag from Indianapolis ramp in the current fiscal year is going to be offset by Helvoet. I mean -- so does that mean that there's only a $5 million drag from ramp-up in Indianapolis?

So you can't necessarily correlate on a revenue dollar for dollar basis. The drag from Indianapolis is probably closer to $6.5 million, $7 million, all in.

Okay. And -- is it -- would it be fair to assume that there's really almost no drag in the next fiscal year?

No. So think of it this way. You've got all of the associated depreciation, plant costs, just all the things associated utility expense, et cetera, for a facility that's empty. It's not that there won't be a drag in FY '28. It's that eventually, it will produce enough revenue to overcome the drag.

Are you saying the 18 -- so the 18 months isn't -- that's from when you actually start production?

So -- and we opened the building in February. We're still -- we're bearing all of the costs associated with that facility, but it's not producing revenue. All the revenue is at the existing campus. It will start producing revenue. It will open for production in the fourth quarter of the calendar year, our second quarter fiscal year. And then we'll be putting business in it and it will start to ramp, and it will be able to cover the incremental cost.

Okay. So just to clarify, it's 18 months to ramp not from February, but from December?

Roughly, yes.

For new programs.

For new programs, yes.

Not lift and shift. Okay. And then...

Not lift and shift.

Yes. What -- given that your leverage is now 1x-ish EBITDA, do you have -- is there the best capital structure to run a consistent business like this with perhaps more leverage? And if so, then what are your capital allocation priorities or deployment priorities?

Yes. That's a really great question and something we've been burning a lot of calories on. So somewhere between 1.5 and 2x feels good for our business, but you need to keep your balance sheet strong enough when incremental growth opportunities that are inorganic present themselves, you've got the dry powder to act. So you're going to see the cost of the acquisition show up on our balance sheet in Q1. We're going to be actively utilizing our operating cash flow and global cash repatriation options to pay that down so that we can continue to have dry powder should another inorganic opportunity present itself, plus we've got $50 million of organic CapEx needs that we need to deploy.

We do plan on continuing our share repurchase program at the rate that it's been at for the past few fiscal years. And so we don't plan on stopping that. We think share repurchase, particularly where our stock price is right now is also a very compelling opportunity. So we plan on doing -- it really is sort of a do-it-all strategy, share repurchase, yes, investment in the organic business, yes, but maintaining the dry powder so that we can take advantage of inorganic opportunities. We could take the leverage ratio actually over 3x debt to EBITDA. I don't -- obviously, that would be short-lived and we would have to work aggressively to pay it down. But for the right inorganic opportunity in the short run, would we be willing to do that, probably.

Our next question is from Derek Soderberg with Cantor Fitzgerald.

So it looks like Automotive sales ended up being down this fiscal year and sort of flattish next year. It sounds like European braking growth is sort of offsetting some of the North America stuff. I guess I was wondering if you could just kind of detail your thoughts on that segment sort of turning positive. I know there's individual aspects of the automotive piece by region and braking and steering. I was just wondering if you can maybe comment on when you think that's going to turn positive, kind of the puts and takes between the regions and segments. Just any sort of additional detail on the Automotive segment for us to think about?

Sure. And Derek, thanks for joining the call. I think we're encouraged to see this stabilizing. The decline is really, as I mentioned earlier on the call, has been driven by low demand for EV programs that we won. It's not programs that we lost. It's just programs that have underperformed in terms of the volumes that we originally anticipated. So we'll see how that continues to evolve with regulations and incentives and so on over time. I don't know how to predict that one. But yes, Europe is strong, and these are fairly new programs that will continue to ramp. So we feel really good about where that's at. China is very competitive. Our business has performed pretty well there over a good period of time. But the local Chinese competitors are tough.

So I'd say our relationships remain as strong as they've ever been. We continue to win the next-gen programs, which is really important to us. And so stabilization and an eventual return to growth, market-driven there appears ahead of us, and we're going to stay close to those customers and hopefully see some of that demand come back, which it looks like it is overall.

Got it. Appreciate the detail there. And then, Jana, congrats on the cash conversion days, really has been trending in the right direction for some time here. I was wondering if that sort of 82-day conversion days, is that sustainable as you guys sort of see growth accelerate here, both on an organic and inorganic basis? Any additional thoughts there would be great.

Yes. Thank you. 82 days was hard thought. And so it also gives me an opportunity to touch on what we're seeing in the business now, which is we're getting back to an environment where there's some inventory disruption in the supply chain and golden screw type events. Customers are wanting us to carry more inventory, the turns of certain things as we're waiting for that one golden screw is flowing. And so I'm anticipating that there is going to be some pressure in working capital generally in FY '27.

We've taken that into consideration as we're thinking about the guide for next year and the impact that it's going to have on the balance sheet, and we're managing through it with our -- but we're already seeing the impact. So if it rose a couple of days in FY '27, let me say that differently. We are planning for it to rise a few days in FY '27.

Our next question is from Max Michaelis with Lake Street Capital Markets.

Just a few questions around the model. I mean 8.9% on the gross margin, really strong quarter. Obviously, that was impacted by a favorable mix. Just curious to know what you're sort of expecting for 2027. I mean should we be looking for gross margins kind of north of that 8% mark just with given the increased focus on the medical side of the business?

Yes. So our S&A is sort of trending in that 4% range again. And so if you consider the midpoint of the guide that we put out being like, call it, 4.5-ish, you would need a gross margin in the range of 8.5% for that math to work.

That's awesome. And then I think I heard on the call, you're sort of expecting a balanced revenue quarter-by-quarter throughout the remainder of next year. Is that correct?

Yes. And that's important because sometimes it's skewed right. First quarter is really heavy or fourth quarter is really heavy this year, it just so happens that the way that the forecast is shaking out right now, the quarters are going to be pretty even.

[Operator Instructions] Our next question comes from Anja Soderstrom with Sidoti & Company.

This is Alex on for Anja. Jana, I know you touched on FX. I know it's a modest tailwind in '26. What euro assumptions, I'm just curious, underpin the 2027 guide now that Helvoet adds euro-denominated revenue?

Yes, $1.14. It's engraved in my brain.

Very good. And I know you've touched on some of the Helvoet contributions for the next year. I'm curious with the improved balance sheet and recognizing obviously June 30 figures of pre-Helvoet, how you're thinking about capital allocation priorities on a pro forma basis? And is there a leverage level you're managing towards?

Yes. So somewhere in the 1.5 range feels good. We don't want to be underleveraged. We don't want to be overleveraged. As I said, the key is supporting the organic growth of the business and the needs there, but also having enough dry powder that should an inorganic opportunity pop up that was attractive to us, we could use our balance sheet to take advantage of it. And so it's really walking that line of investing in the base business, which I'll remind everyone is still the overwhelming portion of Kimball and supporting the growth opportunities that we have there, but also dry powder for other tuck-in acquisitions that we were going to be force multipliers for the CDMO strategy.

I would also add, though, that we just closed on this acquisition July 1. We need to absorb it, integrate it, get the revenue synergies, the top line synergies out of it. So it's also not likely that we would make another acquisition for -- in this fiscal year. We had said that we would want to be serial acquirers in terms of our opportunity set, but we need to give this one time to work before we start chewing on the next one.

Helpful context. And last one from us. I'm curious if there have been any surprises, good or bad, post the Helvoet acquisition, customer retention, integration pace, go-to-market, anything that's tracking differently, good or bad than what you underwrote?

Great question, right? There's always -- in any acquisition, there's things that you're going to learn. I'd say, on balance, really positive. The customer conversations, they ask some good questions. Are you going to keep the footprint that Helvoet has today, for example? Yes, we are. And I think those all went really well. We anticipate keeping those customers. And I think probably the integration process itself is going as expected, really encouraged. All the leaders are engaged. All the functions are engaged. Facilities are talking to each other.

We have a master integration plan that we're on track for. So the process itself feels really good and -- but it's as we expected. I wouldn't see any big changes there. If anything, the top line synergy opportunities, which are very much still taking shape, have been really encouraging. And we're so early when exactly are they going to happen and where exactly will they be located and how big will they be is -- those are the things that we're working on. But the teams across both organizations are talking to every single week at least about a pretty impressive list of potential synergy opportunities, leveraging the combined footprint.

And also one of the areas of capital, these aren't huge numbers yet, but there were some things with customers that Helvoet had identified that needed to be funded in order to make that opportunity happen, and we're eager to invest in those and have already identified and started to move forward in those capital processes, which are great returns for us.

And that is contemplated in our CapEx guide.

There are no further questions at this time. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. A replay of the call will be available on the Investor Relations page of Kimball Electronics website or by dialing (877) 660-6853. ID number is 13761725. Please disconnect your lines, and have a wonderful day.

Good morning, ladies and gentlemen, and welcome to the Kimball Electronics Strategic Update Conference Call and Webcast. My name is Donna, and I will be the facilitator for today's event. [Operator Instructions] Today's call, July 1, 2026, is being recorded. A replay will be available on the Investor Relations page of the Kimball Electronics website. At this time, I will turn the call over to Andy Regrut, Vice President, Investor Relations, Strategic Development and Treasurer. Mr. Regrut, please begin.

Thank you, and good morning, everyone. Welcome to our strategic update. We appreciate you joining us on short notice. With me here today is Rick Phillips, our Chief Executive Officer; and Jana Croom, Chief Financial Officer. We issued a press release earlier this morning announcing the acquisition of Helvoet Polymer Technologies, a wholly owned subsidiary of Hydratec Industries. To accompany today's discussion, a presentation has been posted to the Investor Relations page on our company website. Before we get started, I'd 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.

This morning, Rick will start the call with a few opening comments on the strategic fit of the acquisition. Jana will provide insights on the financial profile of Helvoet and discuss the terms of the transaction, and Rick will complete our prepared remarks before opening the lines for questions. I'll now turn the call over to Rick.

Good morning, everyone, and thank you for joining us. As Andy noted, we are excited to announce that we have acquired Helvoet Polymer Technologies, a contract development and manufacturing organization or CDMO based in Europe and with operations in India, focused on microfluidics, diagnostics and drug delivery applications. The transaction was valued at a purchase price of EUR 90 million or approximately $103 million, which represents approximately 9x the expected adjusted EBITDA for Helvoet in calendar 2026. This is another meaningful step in our journey to expand our CMO capabilities and strategically position the company with an increased presence and penetration in the medical industry. Over the past 3 years, we have made deliberate decisions that involve divesting noncore assets, streamlining our manufacturing network, strengthening our balance sheet and most notably, opening a new state-of-the-art facility in Indianapolis, exclusively focused on the medical CMO.

These actions were not taken in isolation. They were part of an effort to focus on medical manufacturing opportunities and establish the foundation for a differentiated global medical CMO platform. The acquisition of Helvoet is a direct extension of that strategy, a high-quality business with a strong leadership team at an attractive valuation. For some time, we have communicated our intention to expand our medical manufacturing capabilities with an acquisition strategy that would deepen relationships with leading health care customers and build a broader global footprint that is capable of supporting medical companies across the full product life cycle. Helvoet is a good start toward reaching those objectives while bringing additional capabilities that we believe will strengthen our competitive position for years to come. Based in the Netherlands, Helvoet was founded in 1939 and has been operating most recently as a wholly owned subsidiary of Hydratec Industries with manufacturing facilities in Tilburg, Netherlands and Pune, India.

Approximately 70% of Helvoet revenue supports medical end markets, while the remainder is derived outside of medical in areas such as food and beverage dosing and distribution and plastic injection molded parts for industrial and automotive applications. These products generate healthy margins and have supported ongoing investments to grow the medical business. Under the leadership of CEO, Eveline Hogenkamp, Helvoet has established itself as a world-class provider of advanced medical manufacturing solutions that include highly automated micro molding and precision injected molding technologies that serve microfluidics, diagnostics and drug delivery, 3 areas that are among the most attractive and fastest-growing segments within health care and where competitive differentiation can agree from engineering expertise, manufacturing precision and quality systems.

What makes these markets particularly attractive is that success is driven less by manufacturing scale and more by technical capability, aligning very well with the core competencies of Kimball. For example, in microfluidics, product dimensions are measured in microns where even minor variations can impact fluid flow, test accuracy and overall device performance. These products require specialized tooling, advanced process controls, highly automated manufacturing environments and deep materials expertise to consistently achieve the precision and repeatability that customers demand. The same is true across drug delivery applications where reliability, consistency and regulatory compliance are critical given the direct impact these devices can have on patient outcomes.

As a result, customers prioritize proven engineering expertise, quality systems and long-term manufacturing partners over simply selecting the lowest cost supplier. These dynamics create higher barriers to entry, longer customer relationships and more durable revenue streams, which we find attractive. Helvoet has a blue-chip customer base that is highly complementary to our existing portfolio. We see meaningful opportunities to expand customer engagements, pursue larger and more complex programs and leverage the combined capabilities of the platform to support customers throughout the entire development and manufacturing life cycle. Finally, the geographic footprint offers future growth potential with a strengthened presence in Europe, immediate access to the rapidly growing medical market in India and a clear pathway to accelerate growth to our facility in Indianapolis by providing Helvoet with a much needed manufacturing location in the United States.

We believe this combination creates a real-time opportunity to leverage Helvoet's technologies, customer relationships and engineering expertise while utilizing Kimball's manufacturing capacity, operational infrastructure, commercial relationships and access to capital to support future growth. I'll now turn the call over to Jana to provide additional insights on the financial profile of Helvoet and discuss terms of the transaction. Jana?

Thank you, Rick. In calendar 2025, Helvoet revenue totaled approximately $56 million with an EBITDA margin rate in the mid-teens. Geographically, nearly 60% of revenue was shipped to customers in Europe and almost 40% to Asia, demonstrating the opportunity for future expansion, particularly in the United States. From a medical end market perspective, over 50% of revenue is derived from in vitro diagnostics, including diagnostics and microfluidic applications such as point-of-care testing cartridges, blood warming cartridges and blood filtration solutions. Approximately 10% of revenue comes from drug delivery, including disposable syringes, proprietary syringe technologies, inhalers, pen injectors and glucose monitoring solutions. These categories represent some of the most attractive segments within health care and align closely with our strategic priorities.

Customer concentration is manageable with the top 10 customers representing approximately 70% of total revenue. Helvoet has maintained an average relationship tenure over 10 years, consistent with our focus on long-standing customer relationships. Based on our estimates for calendar 2026 and projections for future years, we believe this transaction will be accretive to our fiscal 2027 adjusted earnings with sales in the Kimball Medical vertical increasing in the low double-digit range. These dynamics create a unique opportunity to acquire a highly attractive medical manufacturing asset at a valuation below typical medical CDMO transaction multiples. At the same time, our existing customer relationships, manufacturing footprint and medical capabilities could further expand the medical portion of the combined businesses.

As Rick mentioned, the purchase price was EUR 90 million or approximately $103 million, excluding working capital adjustments, customary purchase price adjustments and transaction-related costs. We funded the acquisition through a combination of cash and available borrowing capacity on our existing line of credit. Our pro forma leverage profile remains consistent with the capital allocation priorities of the company. Overall, the transaction is strategically compelling, financially attractive and positions Kimball for long-term value creation. I'll now turn the call back over to Rick for a few closing remarks. Rick?

Thanks, Jana. In closing, we are extremely excited about the opportunity ahead. We've been talking about our medical CMO strategy for quite some time, and we are pleased with the execution of our teams and partners to get this across the finish line. From a strategic standpoint, Helvoet possesses the characteristics we look for in an acquisition.

A differentiated medical CDMO platform with expertise in material science, precision manufacturing, automation and customer development, an accretive expansion opportunity that deepens our presence in Europe, provides access to the emerging market in India and potentially accelerates growth in the U.S. by leveraging our facility in Indianapolis, meaningfully expands our exposure to highly attractive medical end markets such as microfluidics, diagnostics and drug delivery; a well-run operation with an excellent management team that brings approximately 85 years of combined industry experience; and finally, possible vertical integration sometime down the road as Helvoet currently outsources electronics manufacturing activities.

This transaction brings together 2 organizations that share a commitment to engineering excellence, operational quality, customer partnership and long-term value creation. We are extremely excited to welcome Helvoet to the Kimball family. Over time, we will rebrand the Tilburg and Pune facilities as Kimball Solutions, but this will occur at a measured and thoughtful pace. Our #1 priority is to grow our medical CMO business by unlocking the synergies that exist between the organizations. And while today marks an important milestone, we view it as another step in the journey, not the destination. Operator, we would now like to open the lines for questions.

[Operator Instructions] Our first question today is coming from Mike Crawford of B. Riley Securities.

Was this a competitive transaction? Or could you describe the process a little more in detail?

Mike, yes, it was. They actually ran a process. They had sell-side representation and it was a competitive process, multiple bidders, both strategic and PE.

Okay. And have you pursued similar processes in the recent future where you haven't won out? Or are there any similar opportunities in your pipeline?

So I'll answer both questions. First, we've been at this in terms of M&A opportunity, looking for the right strategic fit for some time now. I mean we've been talking about this for probably the better part of 2 years. Was this the first acquisition we looked at? No. Have we been in other processes? Yes. But we didn't lose out on anything at a price point that we felt badly about. So I'll just -- I'll say that. Some of the best deals are the ones you don't do because they, at some point, don't make sense. And in terms of future pipeline, it remains really strong. And so what we have said historically is what we intend to do, which is strategic tuck-in acquisitions over time that really create a thoughtful portfolio of assets for the medical CMO, CDMO business. So this is the first, it will likely not be the last.

Mike, this is Andy. We are very disciplined. I mean, disciplined in prior processes to know when to walk away and disciplined in our screening. So we have a set out series of criteria, and we are very much closely monitor how the target aligns with what we think we need in an acquisition.

Okay. And then just one final one for me is, how long do you expect it to take to port some of the IP and CDMO processes to a new facility in Indiana?

We're going to start that process immediately. As a matter of fact, the Helvoet team has already been to our Indianapolis facility, and we'll have members from our Indi team over visiting Helvoet in short order immediately.

Yes. They actually have a 6-hour head start on us today. And after the local announcement started a customer outreach around the new ownership and around the opportunities for top line synergies. So that process has started.

[Operator Instructions] The next question is coming from Max Michaelis of Lake Street Capital Markets.

Jaeson, on for Max. Congrats on the announcement this morning. Just curious if you could provide some info on their growth rate and gross margin profile recently.

Yes. Very attractive growth rate. They've been growing double digits, and we expect double-digit growth into the future on the top line. Gross margin is in keeping with what you would expect for a medical CDMO. So really robust gross margin rate, significantly higher than Kimball's, but in keeping with industry average for CDMO.

Yes. And Jaeson, Eveline, the CEO, has very much executed a strategy that, in some ways, mirrors Kimball in that when she joined the company 3, 4, 5 years ago, she started to lean more and more into medical end markets and to reduce or divest nonmedical end market products. So she moved away from some food and beverage. She still has quite a bit, but she very much honed in on the best food and beverage opportunities to keep those in the portfolio, free up space and equipment for future medical opportunities, and that's reflected in the top line projections that Jana mentioned.

Got you. That's really helpful. And I know you mentioned sort of the customer concentration, but curious if there are a couple kind of chunky programs that make up a large part of their revenue.

Yes. So their top customer represents less than 10% of their revenue and the top 10 customers are about 70% of their revenue. We're really comfortable with the customer diversification because, again, it's not just customers also then programs within that customer. So very similar to Kimball where you might have a customer like NexTeer that's our #1 customer, representing 10% of our revenue, but it's made up of 18 different programs. Their profile is similar.

Okay. That makes sense. And last one for me, and I'll jump back in queue. Just curious if you could expand a bit more on your comments about pursuing larger and more complex programs now that they're under the Kimball umbrella. Can you just talk about sort of the confidence? And have you already sort of targeted some customers where this could be possible?

Yes, and good to have you on, Jaeson. We have. So one of the things that we know that Kimball will bring to the opportunity is funding capital in order to go after larger programs. Just given the size of Helvoet, there -- we understand that there were some opportunities in the past that were more difficult to pursue, and we're very eager to invest in those kinds of programs. So we did have the opportunities, as is customary to have sort of high-level discussions during the process with some of Helvoet's largest customers, and we were really encouraged with not only the reputation of Helvoet and the long-term relationships and partnerships that they've had with those customers, but with their excitement about the combination of the 2 companies. So yes, we're -- it's priority #1 for us to go after these customer synergies. And as Jana said earlier, that work is starting now.

[Operator Instructions] Our next question is coming from Anja Soderstrom of Sidoti & Company.

Congratulations on what seems like a good acquisition. So I'm just curious, what do you think motivated Hydratec Industries to divest of Helvoet?

That's a good question. So Hydratec did a fair amount of strategic streamlining of their own. They actually sold off not just this business, but another similarly situated asset so that they could focus on the core of their business. It is, again, very much akin to when we sold off our automated Test and Measurement business a year ago, really great business, but just wasn't center plate strategy for what we wanted to do. And so we're really happy to have Helvoet part of our strategic portfolio.

And how did you come across it? How did they get in front of you?

We actually received an inquiry from the sell-side representation. And it's a company that we had known. So it wasn't a cold call, but they reached out with the opportunity when it was entering market to test our level of interest. That was well over 6 months ago. So we've been talking about this for some time. And we just -- as we went through our due diligence, just found an awful lot of synergies and an awful lot of alignment with what was important from an acquisition perspective from our side.

Okay. And what kind of customer overlap do they have with you? And what sort of cross-selling opportunities do you have with what you already have in your portfolio with the customers that you acquire?

Yes. Great question. We were excited as we worked through and understood, as Andy said, in the diligence, their customer list, it's actually quite complementary. So we're -- we both have blue-chip customers. We have very little overlap of those customers. So we expect it to be additive and for there to be, again, more growth opportunities that we can help fund with those customers. And we're excited to leverage the additions now to our footprint with the additional capacity and capability in Europe as well as the fast-growing market in India.

And talking about India and the India facility that you're also getting in this deal, how do you see yourself benefit from that?

Well, India is a great low-cost region to operate in. So if you think about that for customers and the demand there. Also, if you look at the demand for medical devices and products in the country, the demand is significant and growing. And so we are really excited about that opportunity. They need, as Rick alluded to, some capital to unlock growth there. We're going to be investing in that and supporting the Helvoet leadership team there. It's a great opportunity for growth.

Okay. And then also you mentioned about 30% of their revenue is not related to medical customers. How does that fit into the rest of your portfolio?

So I chuckle a little bit because surprisingly, it fits into the other 2 verticals that we have quite well. So no issues there. I mean, really, when you look at this opportunity from a vertical integration standpoint in terms of outside of medical, great, great strategic fit.

Okay. And you are planning on holding this into the verticals you're already reporting? Or are you going to report this separately?

Still working through that. But in terms of just revenue distribution, we'll fold them into the verticals. But we'll also be giving you color on how this acquisition is performing specifically as a whole because we know that you're going to want that for modeling purposes. So we'll give you both.

Okay. And one last one. I don't know, maybe I missed this, but when is this expected to be closed or...

Today...

It's closed.

Done and done. Well, congratulations.

Thank you. Ladies and gentlemen, this concludes today's question-and-answer session. A replay of this event can be accessed via the live webcast link or via phone replay by dialing (877) 660-6853 or (201) 612-7415. When prompted, enter ID 13761318 followed by the pound sign. The phone replay will be available for 2 weeks, and the webcast archive will be available for 6 months. Both options will be available in approximately 1 hour.

This concludes today's event. You may disconnect your lines and log off the webcast at this time. Thank you for your interest in Kimball Electronics. Enjoy the rest of your day.

Good morning, ladies and gentlemen. Welcome to Kimball Electronics' Third Quarter Fiscal 2026 Earnings Conference Call. My name is Rob and I'll be your facilitator for today's call.

[Operator Instructions] Today's call, May 6, 2026, is being recorded. A replay will be available on the Investor Relations page of Kimball Electronics' website.

At this time, I'd like to turn the call over to Andy Regrut, Vice President, Investor Relations, Strategic Development and Treasurer. Mr. Regrut, you may now begin.

Thank you, and good morning, everyone. Welcome to our third 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 third quarter of fiscal 2026 ended March 31, 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'd like to remind you that we will be making forward-looking statements that involve risks and uncertainty and are subject to 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, Ric will start the call with a few opening comments, Jana will review the financial results for the quarter and guidance for fiscal 2026, and Ric will complete our prepared remarks, before taking your questions. I'll now turn the call over to Ric.

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 3 end market verticals were down. It's important to highlight, however, that the third quarter of fiscal '25 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 1/3 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 the overall market growth. And 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 2 locations were up 20% in Automotive sales in the quarter, and we expect this strength to continue for the balance of '26.

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 the overall market, which unfortunately has significantly reduced the demand for EV programs we have 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'll now turn the call over to Jana for more detail on third quarter results and our guidance for fiscal 2026. Jana?

Thank you, and good morning, everyone. As Ric 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 Q3 of fiscal 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 Q3 of FY '25 had very little margin. We expect gross margin to remain under some pressure in FY '27 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 the 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 FY '26 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 the third quarter of fiscal 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 and cash equivalents at March 31, 2026 were $82.5 million. Cash generated by operating activities in the quarter was $14.9 million, our ninth consecutive quarter of positive cash flow.

Cash conversion days were 90, a 1-day improvement compared to last quarter and a 9-day improvement compared to Q3 of fiscal 2025. For clarity, our CCD calculation in Q3 FY '25 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 March 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 facilities, 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 165,000 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 Ric 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 Q 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'll now turn the call back over to Ric.

Thanks, Jana. Before we open the lines for questions, I'd like to share a few thoughts in closing. We're 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 2 verticals, as we monitor the impacts of the war in 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 and 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'm very excited for what's ahead for the company. Thank you for your ongoing support.

Operator, we would now like to open the lines for questions.

[Operator Instructions] The first question comes from the line of Mike Crawford with B. Riley Securities.

I was hoping you can give us some more details on your new 300,000 square foot manufacturing facility and how your ramp of new programs in there is going to affect potential revenue growth and also margins, and like when you kind of hit that level where you're covering fixed costs and the margins start to layer in better on incremental revenue from there.

Mike, yes, we're continuing to be really excited about Indianapolis, and actually just connected with our GM there in the last couple of days. The work continues to ramp up. Obviously, there's some approvals that we need, that we're working on, and the clean rooms are going in there and a lot of exciting things.

We expect that we'll be actually producing in there by the end of the calendar year as we ramp toward that. It will be a combination of, of course, we're taking lots of customers through there, as you can imagine, right now, existing and new potential customers, but we'll also be moving over all of our current production in Indianapolis to that facility.

So there'll be a combination of existing programs that are moving over, new programs that are coming. And we're 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 want to 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'll 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.

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 '27 related to the costs associated with ramping that facility. Because remember, we still have all the costs associated with the current facility. We have not closed that facility, it's continuing to operate. And so you're going to feel it -- we will feel it in FY '27 while we're bringing on new production. The expectation is that by FY '28, those -- the impact on margin starts to abate as you're bringing in more and more revenue to cover those fixed costs.

Okay. And just to continue on that, is that going to be most acute in the September, December and then start to abate in March?

In terms of calendar -- it depends on the timing of the -- it depends on the timing and speed of the ramp of new business, which is difficult to predict, and so I'm hesitant to give you for sure. But first half, we'll definitely feel it because there won't 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.

Okay. 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 brought up by your customers like next year, but is that something that seems like has maybe turned, unless there's an unexpected program loss to no one's fault, absent that, is that a vertical that you would expect to grow? Or is that really still overly dependent on the global macro economy?

You just nailed it, Mike. Global macro. So we continue to feel like we're well positioned in both steering and braking. We're really focused on ensuring that we win those next-generation programs. We don't see major changes or losses, as you mentioned, we've experienced in the past at this point. But as I had 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 hasn't been where we anticipated it to be.

So as we look forward, and obviously, as Jana said, we'll give more insight here as we get to year-end across the whole business and also, of course, in Automotive, on what we're 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've won. We're just waiting to see what the demand for those programs is going to look like in the short term.

Our next questions are from the line of Derek Soderberg with Cantor Fitzgerald.

Yes, and congrats on returning to organic growth here. So starting with another question on the Medical facility. Ric, you mentioned you plan on moving existing programs into that facility. And then when you sort of take into account the Medical deals you've signed over the past 12 to 18 months or so, can you quantify how much of the facility's capacity you've booked already? Can you quantify that at all?

No, Derek, I think we're early on that. I mean we've got -- as you know, it's a leased facility. We ensure that we have lots of space for growth. And I can tell you, I've personally taken customers through there, 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've had. But I would say that we're early given the ramp to estimate capacity there.

I will say we've had customers ask us, can you expand? And the answer is yes. But I think we're a little early on those moves.

Got it. And then just on the pricing environment within the medical space specifically, we've seen some of your private peers mention intensifying competition in the medical and aerospace segments. Are you guys seeing aggressive pricing and competitive bids for new medical opportunities? Seeing anything like that in the market?

So the pricing is always competitive, that -- especially in the CMO/CDMO space, the pricing is always competitive. What I would say is it's still rational. And there are other areas of the market where we've seen where the pricing is not rational. But in the medical CMO space, we would say, aggressive, fair, but still rational.

And part of that is driven by just 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 so that is keeping everything rational right now.

Got it. And then my last question, just I was wondering if you could mention or talk about the M&A environment. It looks like your balance sheet just continues to improve here, debt coming down. I was wondering if your ability to go out and do a larger inorganic agreement to something that's increasingly on the table or maybe that those plans haven't changed. And then just broadly on the M&A space, how are valuations trending, getting more expensive? Anything sort of to note on that front?

Yes, Derek. I mean, yes, very much part of our strategy. I'll 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, is at a high level. So definitely part of our strategy.

We think about it, as Jana had mentioned in her comments, around tuck-ins, opportunities 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, opportunities that will advance our capabilities and expand what we're 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're very comfortable with the cash that we've generated and our situation from a debt standpoint, that we can act decisively in M&A.

Our next questions are from the line of Max Michaelis with Lake Street Capital Markets.

First one for me, I think I read an article saying that you guys were targeting 5 new customers annually in the Medical side of the business. Maybe give us a few comments on maybe where you stand there in adding new customers this year?

So you did read that. Our targeted goal is to add 5 new customers annually. This year -- am I allowed to say how many customers we've added? We're on target for goal, is what I will say.

Now the question becomes, you bring the customers on, how big is the initial program that you've 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 could 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 plate to the Kimball strategy, and not just for Medical, but that's our strategy for all 3 of our verticals.

Okay. And were any of these new applications or are they all things you guys have done before?

So some are new applications and then some are work that we've done for other customers that we're now going to be doing for the new customers that we're bringing onboard. It's both.

Great. And then last one for me, I'll stick to Medical. I think you said in the prepared remarks, Europe grew low single digits. Is there any way you can share us the growth rate from the Asian market? And then kind of how you expect that to trend going forward into fiscal year '27, if you can share?

Yes. Let me get that. We have that information.

As Jana pulls the specifics, Max, maybe just a general comment. As you I know are aware, our Thailand facility does a lot of our Medical work overseas and is an export facility. So I think you'll find that the Asia growth will likely be consistent with overall company growth because as, again, as an export facility, it's responding to growth opportunities globally.

Our next question is from the line of Anja Soderstrom with Sidoti.

Congrats on the performance here in the quarter. I'm just curious, you're talking about the meaningful growth in the CMO business. But how dependent are you on new logos to drive that growth?

Anja, we couldn't quite hear you. Could you say it one more time?

Yes. So you were talking about driving meaningful growth in the CMO business. But I'm just curious, how dependent are you on adding new logos to be able to drive that growth?

Got it. Yes. No, great question, Anja. I would say that's an important part of our strategy. So what we have -- what we knew and what we've found, since we have announced the Indianapolis facility, is you've got to have that space. You've got to have a modern, ready-to-go medical facility in order to attract those new logos.

So the conversations that we're having have accelerated. We do have existing customers that are really excited about what we're doing and we're talking about programs with them. But I would say if you fast-forward to the future, we'll be adding a number of new logos as part of that CMO growth strategy for sure.

Okay. 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's sort of the time frame of completing that move?

So we don't disclose the revenue of that facility specifically. We disclose revenue of North America. So unfortunately -- and I know we need to think about that because as we're talking about the CMO more, we need to be able to give you some of that. We're just -- we're not going to give that information today.

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

I'd say both.

Yes.

I'd say both. Yes. It's a combination of capabilities, customers, geographies. One of the things that I had mentioned on the call today is it's interesting that we have customers that we talk to who are looking for U.S. footprint, and that's 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.

Okay. And then one last one on inventories. So that came down for the quarter. But with the growth you're expecting, how should we think about that? Was that some inventory you were -- that had built up that you're building down, or?

I was going to say, that's just us working through days inventory. We are getting better and tighter with managing our inventory and our supply chain. So it doesn't necessarily have anything to do with revenue or top line. It's much more just working capital management that's improving.

Okay. Great. Good to hear.

And that's been a goal of ours over time. Yes.

I want to go back to Max's question and answer it because he asked specifically about Medical in Asia. And that growth for Q3 was over 20%. It was offset by some movement that we've had in other areas, but it was over 20%.

Thank you. Ladies and gentlemen, this will conclude today's Q&A session and will also conclude today's conference.

Before we go, we'd like to remind you that a telephone replay will be available of this call approximately 3 hours after the end of the conference. To access the conference replay, you may dial 1-877-660-6853. International callers, please dial 1-201-612-7415. You may use -- Access ID is 13759805.

Thank you for joining us today. Have a wonderful day.

Thank you.

Good morning, ladies and gentlemen, and welcome to the Kimball Electronics Second Quarter Fiscal 2026 Earnings Conference Call. My name is Alicia, and I'll be your facilitator for today's call. [Operator Instructions]. Today's call, February 5, 2026, is being recorded. A replay of the call will be available on the Investor Relations page of the Kimball Electronics website. At this time, I'd like to turn the call over to Andy Regrut. Vice President, Investor Relations, Strategic Development and Treasurer. Mr. Regrut, you may begin.

Thank you, and good morning, everyone. Welcome to our second 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 second quarter of fiscal 2026 ended December 31, 2025.

To accompany today's call presentation has been posted to the Investor Relations page on our company website. Before we get started, I'd like to remind you that we will be making forward-looking statements that involve risks and uncertainties 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, Ric will start the call with a few opening comments. Jana will review the financial results for the quarter and guidance for fiscal 2026 and Ric will complete our prepared remarks before taking your questions.

I will now turn the call over to Ric.

Thank you, Andy, and good morning, everyone. I'm pleased with the results for the second quarter and our updated guidance for fiscal 2026.

Sales in Q2 were in line with expectations, highlighted by another quarter of strong double-digit year-over-year growth in the Medical vertical. Margins improved compared to the same period last year and cash from operations was positive for the eighth consecutive quarter. Our focus as a Medical CMO continues to gain momentum as we leverage our unique capabilities in the industry. We expect top line growth in Medical to outpace our other two verticals as we balance our portfolio across the markets we serve.

Our recent announcement to rebrand as Kimball Solutions and the grand opening of the new medical manufacturing facility in Indianapolis reflects this strategy and our expanded offering of capabilities and services.

Turning to the second quarter. Net sales for the company were $341 million, a 5% decline compared to Q2 last year. From an end market perspective, the strong results in Medical were offset by declines in North American automotive and industrial and continued softness in China.

Starting with Medical. Sales in the second quarter were $96 million, up 15% compared to the same period last year and 28% of total company sales. This represents our fourth consecutive quarter of year-over-year revenue growth in this vertical. Approximately half of our medical business is in North America, the other half is roughly split between Asia and Europe.

The increase in Q2 was driven by growth in Poland and Thailand. North America was flattish in the quarter. We continue to view the Medical vertical as a compelling opportunity to diversify our top line and leverage our core strengths as a trusted partner in a complex and highly regulated industry.

Megatrends such as an aging population, increasing access and affordability to health care, and smaller medical devices requiring higher levels of precision and accuracy are expected to fuel future growth. Our strategy is to align with new and existing blue-chip customers in need of manufacturing capacity for products with long life cycles and high degrees of visibility. A great example of this strategy coming to life is our new facility in Indianapolis. Tomorrow, we will be celebrating the grand opening with a ribbon-cutting ceremony and plant tour showcasing our state-of-the-art facility that adds capacity to our U.S. footprint for manufacturing medical products, single-use surgical instruments and drug delivery devices such as auto-injectors. Indy, however, is not the only example. Thailand, Poland, Mexico and Jasper also serves the medical market with HLAs and finished medical products.

To complement our organic growth, we're actively pursuing our discipline in acquisitions that could bring new customers, increase exposure to faster-growing end markets, expand our geographic reach and add manufacturing capabilities, including opportunities for vertical integration. Together, these strategies strengthen our global platform and position the company for a sustainable return to profitable growth.

Next is Automotive, with sales of $162 million, down 13% compared to the second quarter of last year and 48% of the total company. The decline in Q2 was driven by lower sales in North America. The result of the electronic braking program transferred out of Reynosa in mid fiscal '25 and recent pressure in the U.S. related to tariffs. The combined impact represented the majority of the decrease in the quarter, although Automotive sales were also down in China. This was partially offset by strong growth in both Poland and Romania with programs in steering and braking, respectively.

Our company has supported the automotive market since the mid-80s and has become a very good business for us, generating strong cash flow when production volumes are at or above planned levels. Electronic steering and braking applications continue to be our sweet spot with advances such as steer by wire and brake by wire, or electronic mechanical braking, increasing the electronic content on vehicles.

We are also seeing early stages of growth from the full assembly of an EPP or Electronic Power Pack, a steering system HLA that integrates the motor and the ECU. In addition, OEMs are starting to design-in a second steering system in vehicles, this one in the rear of certain higher-end cars and trucks.

Finally, sales in Industrial totaled $83 million, a 5% decrease compared to Q2 last year and 24% of total company sales. Our Industrial business is heavily concentrated in North America, where the majority of the decline occurred with lower demand for HVAC systems. This was partially offset by higher sales in Europe, a result of a rebound of the smart meter business for us in that region.

I'll now turn the call over to Jana for more detail on Q2 and our updated outlook with raised guidance for fiscal 2026. Jana?

Thank you, and good morning, everyone. As Ric highlighted, net sales in the second quarter were $341.3 million, a 5% decrease year-over-year. Foreign exchange had a 2% favorable impact on consolidated sales in the quarter. On a sequential basis, sales were down just over 6% compared to Q1, with the decline primarily occurring in the Industrial vertical market driven by reduced sales in the North American climate control submarket.

The gross margin rate in the second quarter was 8.2%, a 160 basis point improvement compared to 6.6% in the same period of fiscal 2025, with the increase resulting from favorable mix, the closure of our Tampa facility, favorable FX rates and our global restructuring efforts. Adjusted selling and administrative expenses in the second quarter were $12.6 million, a $2.5 million increase year-over-year. When measured as a percentage of sales, the rate was 3.7% this year compared to 2.9% last year. As we previously indicated, expense will be higher in FY '26 as we make strategic investments in business transformation, IT solutions and business development for the future.

Adjusted operating income in Q2 was $15.3 million or 4.5% of net sales, which compares to last year's adjusted results of $13.3 million or 3.7% of net sales. Our improved guidance for adjusted income reflects the impact of higher sales as well as the S&A investments I just spoke about and the grand opening of our new CMO facility in Indianapolis, where we will incur higher depreciation and other expenses related to the plant opening. We have worked hard to balance the needs of the business against the backdrop of declining sales. We will continue our restructuring efforts in FY '26 and beyond as we align our cost structure to end market demand.

Other income and expense was expense of $3.8 million compared to $4.8 million of expense last year. Once again this quarter, interest expense drove the decrease, down 50% year-over-year. The effective tax rate in Q2 was 47.9% compared to 1.2% last year with a higher rate driven by the impact of a provision to tax return adjustment and the valuation allowance adjustment associated with the expected sale of the Tampa facility. For the full year of fiscal '26, we continue to expect an effective tax rate in the high 20s to low 30s.

Adjusted net income in the first quarter was $6.9 million or $0.28 per diluted share compared to last year's adjusted results of $7.4 million or $0.29 per diluted share.

Turning now to the balance sheet. Cash and cash equivalents at December 31, 2025, were $77.9 million. Cash generated by operating activities in the quarter was $6.9 million, our eighth consecutive quarter of positive cash flow. Cash conversion days were 91 days, an 8-day increase compared to last quarter, but a 16-day improvement compared to Q2 of fiscal '25. We are continuing to focus on improving cash conversion days by actively managing the components and are pleased by our progress thus far.

Inventory ended the quarter at $281.7 million, marginally higher than Q1, but down $24.5 million or 8% from a year ago. Capital expenditures in Q2 were $18.2 million, with much of the spend once again this quarter on leasehold improvements in the new facility in Indianapolis.

Borrowings at December 31, 2025, were $154 million, up $16 million from the first quarter, but down $51 million or roughly 25% from a year ago. Short-term liquidity available represented as cash and cash equivalents plus the unused portion of our credit facilities totaled $363 million at the end of the second quarter.

We invested $4.3 million in Q2 to repurchase 149,000 shares. Since October 2015, under our Board authorized share repurchase program, a total of $109.5 million has been returned to our shareowners by purchasing 6.8 million shares of common stock. We have $10.5 million remaining on the repurchase program.

As Ric mentioned, we are raising our guidance for fiscal '26 with net sales expected to be in the range of $1.4 billion to $1.46 billion, which compares to our previous guidance of $1.35 billion to $1.45 billion. The improvement is driven by strength in the Medical vertical as well as the ramp of Automotive programs at both European facilities.

Adjusted operating income now estimated to be 4.2% to 4.5% of net sales versus our prior estimate of 4.0% to 4.25% with the improvement driven by higher sales balanced against investments in our Indianapolis CMO facility, business development needs and business transformation and IT solutions to further innovations and enhance our capabilities. The guidance for capital expenditures did not change with a range of $50 million to $60 million for the fiscal year.

I'll now turn the call back over to Ric.

Thanks, Jana. Before we open the lines for questions, I'd like to share a few thoughts in closing. As Jana detailed, we are pleased to raise the outlook for the fiscal year, driven by strength in the Medical vertical. We continue to monitor the outlook for FY '27, particularly in the North America automotive and industrial verticals as the consumer continues to respond to tariff impacts, changes in U.S. tax subsidies and economic concerns. We'll provide more color on our outlook as the year progresses.

2026 is a year of milestones for our company, with our facility in Romania celebrating 10 years of operations; China, 20 years; and it's the 65th anniversary for the enterprise. As we previously announced, we are celebrating this anniversary and embracing our future with a new company name, Kimball Solutions. This rebrand is a strategic move that reflects our evolution beyond traditional electronics manufacturing services with an expanded portfolio of capabilities that includes design and engineering support, supply chain management, precision plastics for medical applications and high-level and final product assemblies for the verticals we serve.

It also embodies our customer-centric approach to long-lasting partnerships, providing end-to-end solutions from design and prototyping to new product introduction, to manufacturing and aftermarket support. The rebrand will occur in a phased rollout at locations across the global footprint beginning in July of 2026 and will be completed when the company officially changes its name a year later, pending shareowners' approval. This change, along with the recent investments in Indianapolis, demonstrates our commitment to innovation and the vision to deliver comprehensive solutions worldwide.

While the name of the company is changing, our core values of integrity, quality and continuous improvement remain steadfast. These steps are a celebration of our heritage and a move toward the future, building tomorrow together. I've never been more excited about the company, and thank you for your support. Operator, we would now like to open the lines for questions.

[Operator Instructions]

Our first question comes from the line of Mike Crawford with B. Riley Securities.

Jana, starting with Automotive, and I believe it's primarily Nexteer driving your steer-by-wire growth. Is that -- they remain your largest customer. It was a 19% customer in the September quarter. What percent was Nexteer in December?

20%.

20%?

Yes.

And then are your other customers also expanding that? Or is it more braking that's driving some of the recovery there?

So we are seeing steering and braking with our largest automotive customers now being Nexteer, ZF and] HL Mondo ]. So it's not exclusive to Nexteer, but obviously, globally, Nexteer is our largest customer.

Okay. Yes. Well, it's great to see that flattening out. And then on the growth side, can you remind us what the capacity is and ramp expectations are for this new facility in Indianapolis?

Yes. So the new facility in Indianapolis is 300,000 square feet under roof. And so considerably larger than our current footprint. We're not yet -- it depends on the makeup of the volume of work we got to be able to tell you exactly what that's going to equate to in terms of revenue dollars, but significant opportunity for growth there. And we needed to demonstrate that for the types of business that we are quoting for that facility.

And then I mean, I think Philips remains your largest Medical customer to date, but I imagine much of the work that you're doing in Indianapolis would be with some of your emerging growing Medical customers? Or do I have that wrong?

No, you have that correct. And as an example, if you look at the growth in Q2 and the year-to-date growth, it was split fairly evenly amongst North America, Europe and Asia and fairly evenly in the subverticals within Medical, meaning it was not driven by respiratory care. And so Medical for Kimball is growing. And you're right, that CMO space would likely not have Philips content just because that's not the makeup of the business that we perform for them. It would be new customers and expanded opportunities there.

Okay. And just a final question. Would -- is it more plastic injection molding? Or what are some of the value-added CMO applications that drive your fastest-growing parts of the business?

Yes, Mike, it's Ric. Great question. Yes. So we expect that facility. And again, as Jana said, we'll be working with customers. We're excited about our funnel and some of the discussions that we're having. But we could imagine, think of single-use surgical instruments, drug delivery devices such as an auto-injector. Certainly, as you said, plastic injection molding, we expect to be very significant, and we'll have significant capacity there. So all of those are expected to be housed at least partially in that CMO facility in Indy.

Our next question comes from the line of Derek Soderberg with Cantor Fitzgerald.

So I wanted to start with automotive. So a little bit of softness in China and North America. Just given that you guys won't be comping against quarters in the past with the braking program in North America. Just going forward, how should we think about sort of growth in the Automotive piece for Q3 and Q4, sort of flattish declines year-on-year, sort of down single-digit percentages. What's sort of the right way to think about Automotive for the rest of the year?

Yes. So great question. We will finally anniversary the end of the EV100 program in Q3. And so what we would expect is Q3 Automotive to be flat to potentially up just a little bit because we finally work that through the system. And we've got the 2 new programs in Europe and Europe has been rebounding nicely for us. And so in terms of Automotive and the sluggishness, the worst of it is past us in Q1 and Q2.

Got it. That's helpful. And then, Ric, just if you could comment on some of the win rates you're seeing across the business. Any sort of change in the size of the wins? What sort of gets you excited for what you're seeing in the portfolio as we sort of kind of look forward here?

Yes. We're really excited, Derek, looking forward and appreciate the question. We're seeing pretty consistent win rates. I mean, not that it's not very competitive out there. And there are certainly situations where we have -- program bidding situations where we decide we're not willing to accept a level of margin that's not for us. So it's certainly -- I wouldn't characterize it as anything but very competitive.

However, we feel the strengths that we have in those long-term customer relationships, our capabilities, our flexibility and quality and operations record, all of those things that we've talked about in the past continue to serve us very well.

In terms of programs going forward, particularly in Medical, but also in Industrial, there's maybe a couple of things that are worth to note. One is that we've always been open to and seeking what we call lift and shift opportunities. So where we're working with a customer who's currently doing their own manufacturing and has a desire to exit that for whatever reason to focus on R&D or marketing or sales or whatever is appropriate for them and have us take that over in our existing facility network.

So we're seeing that activity in terms of those conversations increase, and those tend to be large programs because this would be an example of a customer potentially shutting down an entire plant and moving that all into our footprint. So those are larger to the extent that we close those, and we're excited about those discussions. And then the CMO discussions that we're having also, those programs tend to be significantly larger than our typical average medical program just because of the nature of that business, the growth in that business and the scope and scale of what those customers are doing. But great question.

Our next question comes from the line of Anja Soderstrom with Sidoti. [Operator Instructions]

So I'm just curious, first, with this new facility that you're opening, as you ramp up, how should we think about that having an impact on the margin?

We certainly think over time that the CMO space has an opportunity for margins accretive to what you've seen from us historically. That's going to depend program by program and customer by customer and again, all competitive situations. But we think that, that space and our capabilities lends itself for that to be accretive in the long term.

But Anja, I will tell you, in the near term, it's going to drag, right, because we have all the depreciation expense, all the additional expense associated with the opening of that facility. We're currently running both facilities, right, because we've got to move everything over and then we'll have to close the facility.

So for the next 6 to 9 months or 2 to 3 quarters, it's going to be a drag. And the reason that I want to point that out is the operating income margin that we produced in Q2, considering the fact that we had $16 million less sales and the impact of the grand opening of the Indy facility and other investments that we made, I think, is a testament to our commitment as a leadership team to deliver value to the organization and to our shareholders. It was a lot of work and while we feel very confident in the strategy for the future, we're working hard to offset that drag in other areas of the business.

Okay. And then how do you see the cash cycle days play out in the coming quarters? It was quite elevated for the quarter.

Yes. So for the last 2 years, we've really been after cash conversion, cash cycling. We've got a pretty aggressive PDSOH goal. We saw it tick up from 85 days to 90 days, primarily driven by North America and the impact of autos and industrial. We saw inventory tick up a little bit. That remains a key focus of the organization.

We worked really, really hard to get working capital solid and inventory reductions and corresponding impact in debt on the balance sheet. You can expect that to continue to be a laser focus of us as a leadership team. So said more plainly, I would expect Q3 to come back down from where it was in Q2.

I would like to -- and I know no one asked, but I think it would just be helpful to give a little bit more color specifically on the remainder of the year. So if you take the midpoint of our revenue guide at $1,430 million and you strip out the full year or what we've done so far at $707 million, that leaves you with $723 million roughly to go. What that would insinuate is that Q3 and Q4 are going to be roughly in line with Q1 in terms of revenue growth. And we already talked about autos and the fact that we've anniversaried EV100.

From a Medical perspective, I would like to remind everyone that we had the consigned inventory sale in Q3 of FY '25 of $24 million. So when we report Q3, we're going to give you the results. We will tell you what growth was in Medical, including the inventory sales and excluding the inventory sales. So we won't make you do that math, but I just wanted to remind everybody of that.

And then it's Industrial, North America, and that's where our focus is going to continue to be in terms of seeing how that's going to shake out. So just as everybody is fine-tuning their models, some additional color, I thought might be helpful for you.

Our next question comes from the line of Max Michaelis with Lake Street Capital Markets.

Thanks for the color on the model, too. So if we look at Automotive, I was just hoping if you could provide some more color on maybe the opportunity with the EPP, the Electronic Power Pack program, and then kind of some of the opportunities around the OEMs with the second steering design. I mean, can these become similar in size to the old braking program that ended up going away? Or kind of just help me out with where the potential is with these 2 programs?

So we were really excited about the EPP program because it's our first higher-level assembly in Automotive where you're combining the motor and the printed circuit board assembly, and so that's really exciting.

In terms of size of the program, the EPP is not as big as the braking program was. It's probably about 2/3 of that size. But from a future strategic focus in Automotive, it's really excited. The other thing that I'll say is as you think about the continuum of opportunity in Automotive, particularly as it relates to ADAS, right? So you've got steering programs now, you've got braking programs now, steer-by-wire, brake-by-wire, that's all really excited. But you also have ADAS where it's, "Hey, there's going to be a central brain functioning in the car that's going to be controlling all of the electronics in there," and that's something that Kimball is also interested in pursuing in the future.

We would expect as EPP becomes more common in vehicles, as second steering column becomes more common in vehicles and ADAS, those are strategic areas that we would want to participate in, right? So I remember when autonomous driving lane departure features were only available in very, very high-end cars. Now they're everywhere, right? You're -- a Nissan-centric has got it. So everybody everywhere is offering that feature, and it's exciting in terms of the strategic opportunities for Automotive.

Awesome. Next one, if we look at the Medical space, you talked about inorganic opportunities last quarter, I don't think you have in the prepared remarks in this call. But we look at some of the things you guys provide with the auto-injectors, sleep therapy, drug delivery. I mean when you're looking at acquisitions, I mean, what are some of the other spaces or let's call them sub verticals that you guys are looking at where you're seeing some great opportunities?

Max, it's Andy. We have done a fairly deep dive on end market exposures. And in vitro diagnostics is really interesting to us. Cardiology is really interesting to us. So we would certainly consider opportunities or adjacencies to expand into those areas, especially if it provided a chance to either expand our relationship with an existing customer or add a new customer and the same for manufacturing capabilities.

There are no further questions at this time. A replay of this call will be available beginning later today and will remain available through February 19, 2026. To access the replay, please dial (877) 660-6853 and enter the access ID 13757544. And with that, this concludes today's conference call. Thank you, everyone, for your participation. You may now disconnect.

Good morning, ladies and gentlemen and welcome to the Kimball Electronics First Quarter Fiscal 2026 Earnings Conference Call. My name is John and I'll be your facilitator for today's call.

[Operator Instructions] Today's call, November 6, 2025, is being recorded. A replay of the call will be available on the Investor Relations page of the Kimball Electronics website.

At this time, I would like to turn the call over to Andy Regrut, Treasurer and Investor Relations Officer. Mr. Regrut, please begin.

Thank you and good morning, everyone. Welcome to our first 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 first quarter of fiscal 2026 ended September 30, 2025. To accompany today's call, a presentation has been posted to the Investor Relations page on our company website.

Before we get started, I'd 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, Ric will start the call with a few opening comments. Jana will review the financial results for the quarter and guidance for fiscal 2026 and Ric will complete our prepared remarks before taking your questions.

I'll now turn the call over to Ric.

Thank you, Andy and good morning, everyone. I'm pleased with the results for the first quarter and start to the new fiscal year. Sales were in line with expectations, driven by strength in the medical vertical. Margins improved year-over-year. Cash from operations was positive for the seventh consecutive quarter and debt at the end of Q1 was the lowest level in over 3 years. We have ample liquidity to navigate the current operating environment and plenty of dry powder to opportunistically invest in growth. I continue to be impressed with our team's progress in positioning the company for the future. Our solid footing as an EMS provider and our capabilities as a medical CMO are unique in the industry and we look to expand upon them through organic and possibly inorganic channels. We remain confident this powerful combination will result in a return to profitable top line growth next year and we are reiterating our guidance for fiscal 2026.

Turning now to the first quarter. Net sales for the company were $366 million, a 2% decline compared to Q1 fiscal '25. From an end market perspective, strong results in Medical were offset by declines in Automotive and Industrial. Starting with Medical. Sales in the first quarter were $102 million, up 13% compared to the same period last year and 28% of total company revenue. Nearly half our medical sales were in North America, the other half roughly split between Asia and Europe. The increase in Q1 was driven by robust sales growth of approximately the same amount in both Asia and Europe, while North America was up mid-single digits. We expect the growth to continue as we lean further into the medical space with production capabilities beyond electronics and printed circuit boards, expanding into higher-level assemblies and finished medical devices. Our new medical facility in Indianapolis will add capacity for manufacturing medical products, single-use surgical instruments and drug delivery devices such as autoinjectors.

This is also where we are focusing our efforts on inorganic growth, potentially adding new end markets, customers or even new geographies. We continue to view the medical market as a compelling opportunity to diversify revenue and leverage our core strengths as a trusted partner in a complex and highly regulated industry, particularly as the population ages, access and affordability to health care increases, medical devices get smaller in size and require higher levels of precision and accuracy and the adoption by patients and end users increases.

Next is Automotive, with sales of $164 million, down 10% compared to the first quarter of last year and 45% of the total company. The decline in Q1 was driven by lower sales in North America, a result of the electronic braking program transferred out of Reynosa in mid-fiscal '25 and a decline in Asia. This combined impact was partially offset by strong sales growth in Europe as the new braking program in Romania continues to ramp up. Longer term, we expect to return to growth in this vertical, particularly as new systems and technologies such as steer-by-wire and brake-by-wire or electronic mechanical braking continue to increase the electronic content being added to vehicles.

Finally, sales in Industrial totaled $100 million, a 1% decrease compared to Q1 last year and 27% of total company sales. Our industrial business is heavily concentrated in North America and the decline this quarter was in the low single-digit range, where we are seeing softening demand for HVAC driven by the slowing housing market. Europe, which is a much smaller business for us, was down more significantly, while Asia reported strong sales growth in Q1. Before I turn the call over to Jana, I would like to provide a brief update on tariffs. As you know, beginning in February 2025, the U.S. implemented tariffs on a variety of countries and commodities. The global tariff landscape is evolving at a rapid pace with changes impacting businesses and markets around the world.

While these increased tariffs have and may continue to impact end consumer demand, we expect that we will recover the tariff costs by passing them on to our customers. If we're unable to fully recover these costs, our operating results and cash flows could be adversely impacted. We are working closely with manufacturing constituents and lawmakers to address the challenges real time. As we monitor the progression of tariffs, reciprocal tariffs and the geopolitical economic environment broadly, we are committed to profitability and expect to incur additional restructuring costs over the course of the fiscal year as necessary.

I'll now turn the call over to Jana for more detail on Q1 and our guidance for fiscal 2026. Jana?

Thank you and good morning, everyone. As Ric highlighted, net sales in the first quarter were $365.6 million, a 2% decrease year-over-year. Foreign exchange had a 1% favorable impact on consolidated sales in Q1. One housekeeping item on our split of sales by vertical. Beginning this quarter, certain customers previously included in automotive were reclassified to industrial. This was done because our work for these customers is more aligned with commercial vehicle applications versus passenger vehicles. All prior periods have been recast for comparability. The gross margin rate in the first quarter was 7.9%, a 160 basis point increase compared to 6.3% in the same period of fiscal 2025, with the improvement driven by favorable product mix, the closure of our Tampa facility and global restructuring efforts.

Adjusted selling and administrative expenses in the first quarter were $11.3 million, nearly flat year-over-year. When measured as a percentage of sales, the rate was 3.1% this year compared to 2.9% last year. In the first quarter of fiscal year 2026, following a customer termination of a program, an agreement was reached for the customer to compensate us for incurred costs, resulting in recognition of a $2 million recovery recorded in selling and administrative expenses. As I indicated in the last earnings call, we anticipate adjusted S&A will increase as a percentage of sales over the course of the year as we make strategic investments to support our long-term needs as we return to growth. Adjusted income for the first quarter was $17.5 million or 4.8% of net sales, which compares to last year's adjusted results of $12.6 million or 3.4% of net sales.

We expect Q1 to be our strongest quarter from an adjusted operating income perspective as demand and costs related to tariffs and softening in the U.S. housing market pressure margins in North America. Other income and expense was expense of $3.5 million compared to $6.2 million of expense last year. Once again, this quarter, interest expense drove the decrease, down 50% year-over-year. The effective tax rate in Q1 was 8.3% compared to a tax benefit of 9.4% last year. The lower rate in Q1 of this fiscal year is driven by tax opportunity related to OBBA. As you may recall, last year's negative rate was a result of a favorable ruling on a prior period tax audit. For the full year of fiscal '26, we continue to expect an effective tax rate in the low 30s. Adjusted net income in the first quarter was $12.3 million or $0.49 per diluted share, up 2x from last year's adjusted results of $5.5 million or $0.22 per diluted share.

We are pleased that despite top line declines, we have made efforts across the business to rightsize expenses, reduce debt and take advantage of tax opportunities, all of which meaningfully contribute to net income and EPS. Turning now to the balance sheet. Cash and cash equivalents at September 30, 2025, were $75.7 million. Cash generated by operating activities in the quarter was $8.1 million, our seventh consecutive quarter of positive cash flow. Cash conversion days were 83 days, a 2-day improvement compared to Q4 of fiscal '25 and a 25-day improvement year-over-year. This represents our lowest CCD in over 3 years with receivables and payables posting the largest improvement within the quarter. Inventory ended the quarter at $272.7 million, roughly flat versus Q4 but down $62.6 million or 19% from a year ago. Capital expenditures in the first quarter were $10.6 million, with much of the spend on leasehold improvements in the new facility in Indianapolis.

Borrowings at September 30, 2025 were $138 million, a $9.5 million reduction from the fourth quarter and down $108 million or 44% from a year ago. Short-term liquidity available, represented as cash and cash equivalents plus the unused portion of our credit facility totaled $370 million at the end of the first quarter. We invested $1.5 million in Q1 to repurchase 49,000 shares. Since October 2015, under our Board-authorized share repurchase program, a total of $105.2 million has been returned to our shareowners by purchasing 6.7 million shares of common stock. We have $14.8 million remaining on the repurchase program. As Ric mentioned, we are reiterating our guidance for fiscal '26 with net sales expected to be in the range of $1.35 billion to $1.45 billion and adjusted operating income of 4% to 4.25% of net sales. We continue to estimate capital expenditures of $50 million to $60 million in the fiscal year.

I'll now turn the call back over to Ric.

Thanks, Jana. Before we open the lines for questions, I'd like to share a few thoughts. It is customary at the beginning of the fiscal year that I complete a profit sharing bonus tour. It's an opportunity to travel to each location in our global footprint, connect with the teams and experience real time the strides we're making to return to profitable growth. I'm very pleased with our progress. Whether it's in the new business we're winning in all verticals, improvements in our operations, quality, on-time delivery or cost initiatives. The engagement and accomplishments are evident.

I'm also very encouraged by the early impacts on the top line in the medical business. This is expected to continue. As we evaluate the medical CMO space, we see an opportunity for accelerated growth and higher margins over time. Our strategy to pursue growth with blue-chip customers with long product life cycles and a high degree of visibility. We're building a scalable platform that supports the work we already do well, creates opportunities for vertical integration and positions us to take on more of the complex programs that align with our strengths. A great example is the new facility in Indianapolis, adding production capabilities and capacity but it's not the only. Our medical businesses in Thailand and Poland focused on HLAs and finished devices are also having a meaningful impact. As I noted earlier, we are looking to augment this growth with a tuck-in acquisition strategy that will add new end markets, manufacturing capabilities and new customer relationships. I'm confident in this strategy and have never been more excited about the future of the company.

In closing, I am proud of how our entire organization addressed the challenges of the past 2 years while remaining keenly focused on our strategic future. We look forward to a return to growth in FY '27 centered on the medical space, aligning with our goal to even out our verticals and improve margins over time. We will continue to provide updates as the year progresses.

Operator, we'd now like to open the line for questions.

[Operator Instructions] Your first question comes from the line of Mike Crawford from B. Riley.

And I really appreciate the working capital management. But as Kimball starts -- resumes top line growth, is that around the same time we should also expect to see an increase in the working capital? Or is there still more work -- progress you can make there?

Mike, that's a great question. So yes, I would not expect a significant amount of increased working capital management and debt reduction. To your point, as we prepare for growth in FY '27, we're going to have to buy all the inventory. We're going -- and so I would actually take that as a good sign. So to your point, we've done a lot to wring out the excess inventory in the balance sheet and improve working capital. But as we return to growth, you're going to see us have to spend some dollars and you're going to see those numbers start to move.

And Jana, the cash conversion days, would that -- I mean, is this a good level to think about it remaining stable at?

Ideally, I would like it to have a 7 in front of it. But realistically, if we just stay where we are in the very low 80s, particularly as we start to grow the business again, I think stabilizing it here is pretty good.

Okay. And then we like the 7.2% EBITDA margin in the quarter. We do have the message and as modeled, have that stepping down for the rest of this year. But we also have that declining further next year. And I would -- is that the wrong way to be thinking about your business given where you are? Or is it too early to tell?

Well, so it is early days to think about FY '27. But I will say this, I would not expect a deterioration, right? As we return to growth, as we get better absorption in our facilities and we're going to work to do some additional restructuring over FY '26, we would actually expect EBITDA in FY '27 to be better, right? We need to get to a consistent adjusted operating income margin of 5% and then corresponding EBITDA margin on top of that. So I would not be projecting declines next fiscal year.

Your next question comes from the line of Max Michaelis from Lake Street.

Nice quarter. I want to jump to the Medical segment here. And I know you talked about some inorganic opportunities. So what's sort of the focus around potential acquisitions and maybe expanding already current platform offerings or kind of heading into new markets? And then can you also touch on some of those new markets that are kind of at the top of the charts?

Max, thanks for your question. Yes, definitely an area from an M&A standpoint that we are continuing to explore. It would be focused in the medical CMO space specifically. We like our differentiated capabilities there with our ability to handle drug and have significant experience with the FDA and so on. But there's always additional extensions of that, that we could think about. And as I mentioned, that could include new technologies that extend us and allow us to play a bigger role with our customers there. It could include new customers. It could include new geographies. So we look quite broadly at those potential opportunities but again, very focused only on the medical CMO space at this point.

All right. Perfect. And then looking at my notes from last quarter, I think outside of medical growth, I think you guys maybe had expected some modest industrial growth. And I know sort of the HVAC softness kind of hindered that this quarter. But do you see any sort of maybe breakeven or maybe low single-digit growth in the industrial? Or should we kind of think of kind of the declining 1% as a solid cadence throughout the rest of the year?

You could take Q1 results in terms of percentage of sales increase as sort of a proxy for full year FY '26. So industrial is going to be softer than we had previously anticipated. Medical is going to be much stronger. And automotive is going to come in roughly as expected.

Okay. Perfect. And then just sort of your largest customer on the medical side in the respiratory care, the assembly and in higher-level assemblies, how did that perform in the quarter up to your expectations or compared to your expectations?

It's been very good. It's been very good. Our relationship with that customer has probably never been better. We expect continued growth and the partnership in that program that we talked about has been very strong. So we feel good about that.

Your next question comes from the line of Derek Soderberg from Cantor.

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So I want to start with the Medical segment, ramping up really nicely here on an organic basis. To me, it feels like you guys have been signing on new programs for over a year now, meaning these programs are starting to reach production and revenue. Can you talk about that pipeline of medical projects sort of turning into revenue over the next 6 months? Maybe how that compares to where we were sort of at a year ago and how it sort of sets up the company for accelerated growth? How does that pipeline of those projects turning on look over the next 6 months?

Thanks, Derek. Yes, we're really pleased with our funnel. I mean we're very focused across our leadership team on driving growth in medical. And so we have very regular reviews of what new is coming in the funnel, what did we win? What can we add? And so the outcome of those things in the funnel are uncertain, of course. But I would say the volume of that, particularly in medical, as you asked, is as high as it's been. So we're really pleased about that and we're hoping to close those as we move throughout the year. And again, we track it really closely but good funnel.

And I think it's important to note the growth in medical was not centered in one customer or one program. It wasn't even centered in one geography, right? And so the growth that you saw in medical was split between Europe, Asia, with a smaller piece in North America. So to your point and Ric's point, multiple programs and customers.

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Yes, that's great to hear. And then just a quick one on the Automotive segment. Can you maybe talk about the core automotive business? What's maybe the run rate of high visibility revenue, revenue with long-standing customers on your core products? Can you talk about that? Are we sort of bottoming here in automotive? It sounds like we're going to be kind of flattish from here.

It's hard to say, Derek. I mean I actually just met with our top 4 automotive customers in a week. And I'd say that they anticipate challenges over the next couple of years in the overall automotive market. So again, we really like where we're positioned and electronic content being added to vehicles is huge for us. Our relationships are strong. We're continuing to be strategically focused in those areas of automotive that work for us and that are not commoditized. But we anticipate continued pressure, whether it's from tariffs or the impacts on the economies around the world that put pressure on people buying cars.

Got it. Got it. That's helpful. And then, Jana, a couple for you. Just with the balance sheet where it's at, you guys are buying shares back, paying down debt, much leaner company than you had been in the past. How are you feeling about -- there was a question on inorganic growth. How do you feel about making a move like that? And how do you balance just continuing to improve operations organically, using your new capacity in medical, continuing to generate cash flow, et cetera. How are you guys thinking about that?

Yes, that's a really great question. And capital allocation has been top of mind for probably the last 9 months as we were looking at the strengthening balance sheet and how we were going to deploy capital to grow the business most efficiently. What I can tell you right now is, given the 18-month growth pattern we had in terms of organic expansion with Thailand, Poland and Mexico from just a pure organic growth, we've got a really great footprint. You're seeing us now put capital to work in [ India ] for the CMO. And so we need to grow into that body of manufacturing facilities. And so we have plenty of dry powder for an inorganic opportunity. If there was something that came to this leadership team that was going to augment the CMO in a meaningful way, allow us to improve our EBITDA margins for the business, we would definitely take advantage of that.

But nobody has got a burning hole in their pocket to spend cash. So we're not going to do something foolish. This company is very, very disciplined. And I think you guys know I'm a balance sheet CFO. And so it would have to be really thoughtful. We wouldn't want to issue equity to do it unless it was something absolutely compelling. And quite honestly, I don't see that being feasible. And so it's how much debt can you spend and still keep your balance sheet strong enough to support the working capital needs of the organization while it returns to growth.

Yes. Yes. Got it. And one final one, Jana. Can you talk about the accelerated depreciation within the latest, the Big Beautiful Bill? Is that impactful for you guys at all? That's my last question.

It is. And so the bigger impact for us, for OBBA is, I mean, certainly accelerated depreciation but some things that we were able to take advantage of related to specifically interest expense deductions on domestic income. That for us was actually a slightly bigger benefit. We're looking specifically at R&D credits and some other things that we can take advantage of for sure as well. And also to be honest, we're still working through it. Yes.

[Operator Instructions] Your next question comes from the line of Anja Soderstrom from Sidoti.

I'm just curious with the gross margin expansion despite the lower revenue, what's the puts and takes for that?

Sorry, you just caught me having a big drink of water. So a few things related to gross margin. The first was we had favorable product mix. And that was driven across geographies with the ramping of certain programs coming online and just better absorption and utilization. As you know, we spent much of FY '25 and FY '24 doing restructuring. We're seeing some of the benefits of that come through. But the biggest benefit is closing our Tampa facility and all of the fixed costs associated with that facility that are no longer part of our cost structure. And one of the things that we're doing is continuing to evaluate cost structure, restructuring efforts, S&A needs as we grow to figure out timing of some of those things so that we can hold not just gross margin but S&A at a level that we're delivering solid operating income margin and EBITDA to our shareholders. And that's really important.

Okay. And then did you say you expect the SG&A to increase as a percentage of sales for the rest of the year?

We do. It was artificially low in FY '25 purposefully and that was a result of us being really mindful about the challenges that we were having and the need to tighten the belt. But similar to working capital needs, there's S&A that we are going to have to spend in order to prepare for the growth.

Okay. And then that should come down then into 2027 as you expand your revenue and [indiscernible].

Yes. And the focus areas for S&A are really going to be around things like technology, business development, areas where we just need to grow so that we can support the business.

Okay. And then how do you -- you touched on it a little bit already in terms of debt reduction but how should we think about further debt reduction?

So I actually think next quarter, debt is going to climb just a little bit and it's going to be due to some of the needs that we have to fulfill. So think about FY '27 return to growth NPI launch. We had to order all of that inventory. It's got to come in now so that we can be prepared for it. And so you're going to see us spending a little bit in support of the growth that's coming. But I actually take that as a really good sign.

And then in terms of M&A opportunities, it seems like you are quite actively looking for opportunities there. How would you say the market has changed over the recent quarter?

So M&A has been really interesting, especially as a strategic buyer, right? And so what you saw probably for the last 3, 4 years was the PE companies being prepared to pay what I would consider to be somewhat absorbent multiples to buy up some of these companies. What you're seeing now is a much more rational market, people being able to have the confidence to walk away if something just seems overly expensive. And so because of that rationality, we actually feel better about being able to buy the right opportunity at the right price point and then integrate it and grow it as part of our CMO strategy. But we are very disciplined as a strategic. We don't want to get in over our skis. We've got a solid organic growth strategy. Nobody's got a burning hole in their pocket where we're going to do something that is not going to drive shareholder value, first and foremost.

[Operator Instructions] There are no further questions at this time. This concludes today's conference call. A telephone replay of the call can be accessed by dialing (877) 660-6853 or (201) 612-7415 with the access code 13756429.