Kimball Electronics, Inc. Price & Performance (KE)

And SEC filings. And that actual results can differ materially from the forward looking statements. Our commentary today will be focused on adjusted non GAAP results reconciliations of GAAP to non GAAP amounts are available in our press release. This morning, Rick will start the call with a few opening comments, Jana will review the financial results for the quarter and guidance for fiscal twenty twenty five, and Rick will complete our prepared remarks before taking your questions. I'll now turn the call over to Rick. Thanks, Andy, and good morning, everyone. Results for the second quarter were in line with while focusing on what is controllable. For the fourth consecutive quarter, cash flow generated from operating activities was positive Inventory levels were reduced and debt was paid down with borrowings nearly 40% lower than a year ago. Our improved balance sheet provides ample liquidity to weather our current challenges along with the necessary dry powder to opportunistically and meaningfully invest in growing the business. The company is being strategically repositioned for return to growth. With restructuring plan that includes the divestiture of the non core assets from the AT and M business, Improved facility utilization with the planned closing of our plant in Tampa and increased focus on the medical CMO.

Our efforts in all three vertical markets have been sharpened to target attractive new spaces that align with our capabilities. While we remain optimistic for the future, we acknowledge that the necessary changes won't happen overnight. As a result, we have revised our expectations for the full fiscal year as we anticipate more time will be needed to stabilize the business and return to our historical growth pattern. Net sales in the second quarter totaled $357,000,000 a 13% decline year over year when excluding AT and M. With an increase in Asia offset by double digit declines in North America and Europe. From an end market perspective, each of the three verticals we serve were down in the quarter. Starting with automotive. Net sales were $193,000,000 a 4% decrease compared to the second quarter of last year and representing 54% of total company sales. Our automotive business is heavily concentrated in North America in China. And for the second consecutive quarter results in China were strong. With monthly production rates reaching record high levels in support of our largest customer. Strength however was offset in North America where volumes continue to soften from overstocking lower demand and end of life production.

In addition, we continue to support the wind down of the electronic braking program in Reynosa, where our customer, a Tier one supplier, is no longer producing the system for the OEM. Operating activities associated with this program are scheduled to conclude in short order is in line with our original expectations. Sales in the automotive vertical were also down year over year in Europe as that market continues to experience challenges. On the positive side, we're in the process of ramping up the new breaking program in Romania, where we saw our first shipments in January. Next is medical. With net sales in Q2 of 8400000022% decrease compared to the same period last year and 23% of total company. Decline in the quarter predominantly occurred in North America and Asia related to a program that is going end of life in Thailand and continued revenue decline as a result of adjacent impacts of an FDA recall related to our largest medical customer. If you recall, the bulk of revenue loss for this customer occurred in FY 'twenty four, However, we are still seeing declines related to our production of parts and repair kits for existing machines. As part of return to growth, we're encouraged by the longer term prospects in this vertical with our focus on higher level assemblies and finished medical devices.

As we mentioned last quarter, we were recently selected as the sole supplier of respiratory care final assembly and HLA business for our largest medical customer. And we are working toward the launch of this program in late fiscal twenty twenty six. Our manufacturing capabilities as a CMO extend beyond electronic and printed circuit board assemblies and include operations such as precision injected molded plastics, complete device assembly, and cold chain management all of which support the production of selected drug delivery devices such as auto injectors. These capabilities are a differentiator in an overall very attractive market. And we expect similar growth opportunities to continue to emerge as access and affordability to healthcare increases medical devices get smaller in size and require higher levels of and connected drug delivery systems become more common as consumer adoption increases. To keep pace with the industry growth, we are looking to elevate our prominence as a CMO. With an expanded manufacturing footprint through adjacencies and additional vertical integration of our production capabilities. Finally, Industrial with net sales of $81,000,000 down 20% year over year when excluding AT and M. And representing 23% of total company sales. The decrease occurred in North America and Europe sales in Asia were slightly lower, experiencing continued market share loss from commoditization, and moderate reductions in climate controls and public safety.

I'll now turn the call over to Jana, who to provide more details on the financial results for Q2 and our updated guidance for the full year.

Thank you, Rick, and good morning, everyone. As Rick highlighted, net sales in the second quarter were $357,400,000 a 15% decrease year over year 13% when excluding AT and M. Foreign exchange had a near zero impact on sales in Q2. On a sequential basis, however, sales were down 5% compared to Q1, driven by declines in both the medical and industrial verticals partially offset by a low single digit increase in automotive. Gross margin rate in Q2 was 6.6% a 160 basis point decline compared to the second quarter of Adjusted selling and administrative expense in the second quarter $10,100,000 a $5,300,000 or 34% reduction compared to the $15,400,000 we reported in Q2 last year. The decrease was driven by our efforts with current demand lower bonus expense, along with no AT and M expense this year compared to a full quarter in fiscal In addition, if you recall, a year ago, we recorded a $2,000,000 allowance for credit losses which was not required again. When measured as a percentage of sales, adjusted selling and administrative expenses were 2.9% an 80 basis point improvement compared to 3.7% in Q2 last year. Our expectation for SG and A as a percentage of net sales remains 3.5% although there will be fluctuations at times, as we look to rightsize expense prudently, while we work through the current environment.

Adjusted operating income for the second quarter was $13,300,000 or 3.7% of net sales. Which compares to last year's adjusted results of $19,100,000 or 4.5% of net sales.

As a reminder, we have adopted the industry norm of the excluding stock compensation expense from the calculation on this metrics. The result from last year has been recast to reflect this change. Other income and expense was expense of $4,800,000 $5,300,000 of expense last year. With the reduction being driven by lower interest expense, down 31% year over year. The effective tax rate was 1.2% in the second quarter, compared to 26.5% in Q2 of fiscal twenty twenty four. This is due primarily to the reversal of evaluation allowance We expect the tax rate in the mid-20s for the full fiscal year. Adjusted net income in the second quarter of fiscal twenty twenty five was $7,400,000 or $0.29 per diluted share. Compared to adjusted net income in Q2 last year of $9,800,000 or $0.39 per diluted share. Turning now to the balance sheet. Cash and cash equivalents at 12/31/2024 fifty three point nine million dollars Cash flow generated by operating activities in the quarter was $29,500,000 our fourth consecutive quarter of positive cash flow. Cash conversion days were one hundred and seven days compared to one hundred and seventeen days in Q2 of fiscal twenty twenty four and one hundred and eight days last quarter.

We are continuing to focus on improving cash conversion days by actively managing the components and are pleased with our progress thus far. Inventory ended the quarter at $306,200,000 which represents a $29,000,000 reduction compared to Q1. And $149,000,000 or 33% lower than a year ago.

Again, we're pleased with our progress in reducing inventory and we'll continue to work with our customers to right size the current demand outlook. Capital expenditures in the second quarter were $6,500,000 balanced between maintenance investment and long term growth. Borrowings at 12/31/2024 were $2.00 $5,000,000 a $41,000,000 reduction from the first quarter and down 90,000,000 or 30% from the beginning of the fiscal year. Short term liquidity available represented as cash and cash equivalents plus the unused portion of our credit facilities totaled $280,300,000 at the end of the second quarter. This is a great example of controlling what we can control and setting up our balance sheet for future growth. It is important to highlight that during Q2, we significantly enhanced our capital structure with the amendment of the credit facility replacing the $100,000,000 sidecar that was up for renewal in January, with a term loan A of the same amount and with a The and other operating needs as well as supporting our efforts to grow the business through organic and inorganic channels. The term loan A has a tenure that is off cycle from the revolver and we added a new lender to the syndicate. I would like to thank all of our banking partners for their ongoing support as well as our team here at Jasper for their hard work, diligence and patience needed on this transaction.

Particularly given much of the heavy lift occurred during the holiday season. In the second quarter, we invested $3,000,000 to repurchase 160,000 shares.

Since October 2015, under our Board authorized share repurchase program, a total of $97,700,000 has been returned to our shareholders by purchasing 6,300,000.0 shares of We have $22,300,000 remaining on the repurchase program.

During the November meeting of the Board of Directors, the Board unanimously increased the share repurchase program by $20,000,000 As Rick mentioned, we are updating our guidance for fiscal year twenty twenty five with net sales now expected to be in the range of $1,400,000,000 to $1,440,000,000 compared to the previous guidance of 1.44 to $1,554,000,000 Adjusted operating income is estimated at 3.4% to 3.6% of net sales compared to our previous guidance of 4% to 4.5% of net sales. The outlook for capital expenditures remains unchanged at $40,000,000 to $50,000,000 And in addition, we now estimate total exit costs of associated to the closing of the facility in Tampa in the range of $6,500,000 to $8,500,000 and we fully expect the proceeds from the sale of the property to exceed the exit cost.

I'll now turn the call back over to Rick. Thanks, Gianna. As you know, President Trump issued three executive orders implementing tariffs on February 1, on virtually all goods from China, Mexico and Canada, which have now been paused thirty days in the case of Mexico and Canada.

Are partnering with our customers to understand the impacts and to determine the best solutions in the short term and the long term their supply chains. Our Mexico facility exports approximately 25% to 30 of its production into The United States. Our U. S. Facilities import certain components from China Mexico and Canada on our customers' behalf. To use in manufacturing their products. There are a variety of options we will continue to review with our customers. Our customers may be able to change Kimball's final delivery location shift production to another Kimball facility or pay the tariffs. Are also evaluating the impact to our supply chains. Including the goods we import into The U. S. That support manufacturing in our U. S. Locations. As you would expect, given our guiding principles and our reputation for customer service, Kimbell stands ready to support our overall supply chain and our customers as they navigate these significant developments. Lastly, I'd like to recognize our team for once again being honored by Circuit's Assembly Service Excellence Awards. November, we achieved the highest overall customer ratings in all seven categories, of dependability and timely delivery, manufacturing quality, [indiscernible] technology, Value for the price flexibility, and overall satisfaction.

These awards are based solely on direct customer input and I'm very proud of our team's consistent focus on building long term relationships with all customers Regardless of whether they are new, or those we've worked with for a decade or more. The Kimball team is well known for our culture driven by our guiding principles and a common set of priorities that have allowed us to continuously improve and to keep our promises even during the most challenging of times. With customer demand continuing to soften in the markets we support, and the timing of a recovery in our core EMS business becoming increasingly more difficult to predict and likely continuing through calendar year twenty twenty five. We have intensified our efforts to broaden our capabilities and role as a CMO. With a strong balance sheet pursuing different paths of growth, focused on emerging medical technologies, high level assemblies, and a variety of drug device combinations. But I'm excited for the future of the company and thank you Daryl, we would now like to open the lines for questions. Our first questions come from the line of Derek Soderbergh with Cantor Fitzgerald. Please proceed with your questions. Yes. Hey, everyone.

Thanks for taking my questions.

It seems like you're continuing to navigate this environment pretty well here. Congrats on reducing those borrowings. Just a question on tariffs to start. Is there a level of tariffs where it wouldn't make sense to move production back even at 25% Is it still better to manufacture there versus Jasper How should we think about that 25% number, even at 25%, would you still consider moving some of that production to Jasper And then on top of that, what sort of the utilization rate in Jasper today and how much free capacity do you have there in that event? And then I've got a follow-up. Hey, Derek. This is Steve Korn.

Let me try to answer that for you.

We've done some analysis for a few customers on that 25% with the tariffs coming from China additional tariffs there, plus the ones that were there previous first Trump administration what the Biden administration did it's still more cost effective for more most products to be done in Mexico.

With those additional tariffs. If required, we would see a better solution potentially moving business to Thailand.

In eliminating both the tariffs from Mexico and China at that time.

Got it. That's helpful. It is, it is. And then, Jana, so inventory is getting reduced Like I said, you're paying down some of that debt. Immaterial inventory to work with? How do you expect that to trend over the next few quarters here? And then where do you see cash conversion days moving towards How is that trending? Thanks.

Well, Steve and I will tag this one together because what I was going to say is at this point, the focus is on days more than it is absolute dollars of reduction. Your inventory, if you think about it this way, should be a function of revenue in terms. And so we've done a great job of rightsizing the we're bringing it down as we've seen our revenues come down. Obviously, sitting at one hundred and seven days isn't where we want to be, but we're very, very pleased with the progress we've made thus far. Pulling ten days out versus a year ago. A day lower than we were last quarter. We're continuing to work with our customers to see what the right sizing is going to continue to look like. At some point, we're going to start to grow again and you may inventory and absolute dollars increase but it's really about the days management I would like it if it was not a three digit number, if it was a two digit number.

I don't know what you have to add with that. Yes. I think what we see Derek is our internal data shows the inventory is going to continue to drop over the next six and twelve months. As we burn through some of the inventory that we bought, some of that was with the agreements that our customers had with the suppliers. So we continue to see positive trend going forward on the inventory reducing. That's great. Really appreciate it. Thanks. Thank you. Our next question comes from the line of Mike Crawford with B. Riley Securities.

Please proceed with your questions.

Thank you. How should we track what you're doing to start winning the winnables? Like, is there a bid in proposal pipeline you can quantify [indiscernible] on bids submitted or anything like that?

So Mike, we are in the process now of working with our Chief Commercial Officer to begin disclosing more information on the funnel and win rates. We're looking at what our competitors disclose and how we can capture our data in a way that would be more valuable. To you. So we hear you loud and clear and that is something that we are actively in the coming quarters. I don't know if it will be Q3 or if we might roll it out in Q4 along with FY 2026 guidance. [indiscernible] win rates and future opportunity for Kimbell for modeling purposes.

And so in that regard, you might not give us that answer three months from now and then we might not we might have to wait six months before we get fiscal twenty six guidance.

Is that what you're saying?

So I'm interpreting that as, Jana, hurry up. And we hear you. And so we'll we will definitely work on that for next quarter.

Okay. And I know you're not providing fiscal twenty twenty six guidance, right now, but where we stand today without knowing what your funnel is, and seeing programs drop off, it's hard to model fiscal twenty twenty six being any higher than fiscal twenty twenty five, how would How do you how would you look at that logic?

Follow the logic, Mike. I think the as you know, the and as we mentioned earlier in the call, this sustained customer demand weakness has has been longer than we anticipated and it's been more difficult to predict the stabilization. So as you can imagine, we're all over it. We spend a ton of time as a team on the funnel and the future and not just the future funnel of wins, but the return to more stable levels on the programs that we already won. That are just happen to be delivering at lower numbers of demand than are there. But I don't think you're way off and we hope to update that over the coming months. But the softness has sustained. To your point.

Calendar '25 is going to be difficult.

What we're looking at now, which would take you through the first half of of fiscal twenty twenty. What we're looking at now is as of fiscal twenty six, which would be calendar '26. In terms of [indiscernible] and then return to growth. And we're not prepared to get into the details of that now. Because we still got more data coming in as we're trying to shore up the twelve month forecast.

But we'll continue to give you the information as we know it in the coming Okay. Thank you. And then don't think I heard the answer to the Jasper. You told us In terms of ships or potential incremental investment there. Yes. I think in the Jasper utilization is probably right now around 65% utilization, we've pared down some shifts. We basically work there 20 fourseven. Mike, but we do have space and capacity available Obviously, we're moving some of the Tampa work into Jasper as we speak. And then we do have space for other customers and and had been reached out to by other customers about potentially doing some of the work they do in Mexico that we're not doing for them right now, but that they do in Okay. Well, that sounds like a good potential increase to the funnel. So thank you very much.

Thank you. Our next question is coming from the line of Jay Schmidt with Lake Street Capital Markets. Please proceed with your questions. Hey guys, thanks for taking my questions. Just looking at the revised guidance for fiscal twenty five, is this being driven by one particular vertical or is it just broad based softness across the entire business?

We're seeing broad based softness, but autos is holding in even with the exit of the EV100 program, autos is holding in quite well, driven by strength in Asia. We're still waiting for our medical and our verticals to sort of get their C legs around them. And I would say that, that is likely to continue over the next few quarters.

Got you. And Jenna, I know you just laid out that you're going to be providing some additional metrics in the future. But just curious, when you look at the bookings activity in the December quarter, if it was in line with your guys' internal ex [indiscernible] both in December and now here in the March?

Jason, I'll answer that. What we've seen over the last six months is our bookings have been in line with our expectations both with new business as well as some extensions of current business. So they are in line with what our expectations were in the first six months of the [indiscernible] Okay. That's really helpful.

And then last question from me and I'll jump back into queue. When we think of about sort of the restructuring and the OpEx rationalization, Is this sort of $10,500,000 in selling and administration expenses for the newer run rate going forward.

We're likely not going to be able to hold it that low for us to period of time. What we're trying to figure out is what is the discretionary balance. So part of the challenge quite honestly is There are some real inflationary pressures related to our business for costs like insurance, healthcare, etcetera. And so we've done a lot of discretionary cuts to try and offset those and reduce them down further. But there are limitations to all of the things that we can take off the table as those costs continue to mount. Our goal is 3.5% of net sales But we as a leadership team also feel very, very strongly that it can't just be all on the facilities to reduce costs, right? So Corporate spending has to be tamed as well. And we have to be really, really good partners globally as we look to contain costs.

Okay. That's really helpful. Thank you. Our next question comes from the line of Anya Sadrzyw with Sidoti.

Hi.

Thank you for taking my questions.

And most of them have been answered already, but I'm just curious you talk about the refocus on the medical vertical, are you making any changes to your organization for that or Yes. So we hi, Anya, it's Rick. Good to to hear from you. Yes. So at the time when we made the decision that we were going to move forward with the position of the AT and M business. At that same time, we actually took what at that point was a third pillar of the company which is our drug delivery business that's really focused on CMO. And we moved that together with our core EMS medical vertical. And that was we felt like a really important roof for for multiple reasons, both in terms of leadership talent and collaboration and engagement, and also to bring together the very complementary capabilities of those two in a pretty differentiated way. So So we did make that change from going to market there. And so we've got the full force of our business development team in EMS now collaborating to help target that space. So yes, we did make a structural change and we're excited about what we're seeing there.

And as you know, it takes time from wins to convert to dollars on the P and L, but we're really encouraged and we're investing there and we like the profile that business as well as the market growth rates that we see over time in that business in medical.

Okay. Thank you. And then in the industrial commoditization is still hurting you. When do we think that's kind of bottomed out? And how much of How much of our revenue contribution was that? Once? And where do you think we will end up?

Let me try to answer that for you, Anya. I I think from a total revenue standpoint, the smart metering business, if you look at our total revenue Kimball, based off of $1,400,000,000 $1,500,000,000 run rate, That smart metering business might have been 2% to 3% of that number We think where we're running today is the bottom from where we're at. We're seeing a little bit of positive activity there, but I would say we're at the bottom and but it's still very competitive. Don't know if we'll see significant amount of growth in that part of our industrial but we have other opportunities in the industrial where we see growth.

Okay. Thank you. And then have you seen any changes to the competitive environment at all?

That's a really good question. I think what we've seen recently both in the competitive environment and other environments is in which has been a little bit different is some of our our automotive customers providing opportunity to move product from some of our competitors to us. So a little quicker ramp. We're seeing more of that activity right now. Not quite environment, depending upon where we're at in the world, It's like it's been, I've been in EMS for thirty seven years.

It's as competitive as it's always been. Sometimes it's a little bit more competitive if somebody has excess capacity somewhere. So I wouldn't say it's significantly different than what we saw before.

And just in general, the outsourcing trend, did see that appetite increasing now? And maybe you were talking about some people wanting to move their production in Mexico to your facility in Jasper.

I mean, Yes. And I think as Rick stated earlier, early with the medical HLA, we're seeing more in that opportunity of of opportunities of people moving out, not wanting to do the full requirements, the GMP, I think is what we're seeing more activity I think this opportunity with Mexico, who knows where it's going to land on March 1 and and I think we all got to take the current administration serious when they say something. We learned that in the first time they were in place with tariffs in China that those opportunities are going to happen as people look at their own manufacturing footprint and where is the right place to put it. And where Kimball can help them be successful. So I think that's going to continue. Until we get through some of these potential tariffs and trade wars and where is the right place to put manufacturing. And some are going to offset that with and some are going to offset it with, hey, we want to do a portion of it in The U. S. To be prepared and we're going to keep the rest in Mexico or somewhere else, I think that's where we're going to see some activity.

Okay. Thank you. That was all for me. [indiscernible] Our next question comes from the line of Hendi Susanto with Gabelli Funds. Good morning. My first question is, would you be able to remind us like how much exposure you have in China automotive market between low Yes. So what we've seen a lot as Rick stated, Hendi, we had a fantastic fourth quarter of the calendar year, our highest revenue ever. What we're seeing is we're continuing to to grow with the local OEMs, the local Chinese manufacturers is where we see that growth with our customers. So today, I would say we're probably somewhere around fifty-fifty of of foreign versus local, but it's the fastest growth for us is with the local manufacturer.

Yes. And then some companies do express confidence that their automotive business in China can continue to demonstrate positive growth despite of weaknesses in North America and Europe. Do you share that similar confidence We're competing in our China operations, competing and continuing to support the China auto market.

Have done a great job and we see ourselves continuing to be a great supplier there for those customers. And Hany, I know it's we say this all time and I'm sure you're aware of it, but it's maybe worth restating because our Board certainly asks us about it. But we're China for China, right? So that that product is staying in country. While we're manufacturing there. So it's a different risk profile, right, than thinking about that as a major export market, which is not for us.

Yes. And then I would like to learn more about the ramp up of breaking program in Romania. Which end market and what geography and what vehicle categories will it serve when it launch? This year, No, we can share all that information with Andy but it is launched in it launched in January as Rick said and continues to grow. It's in its first month but we see a good trend there.

It's for the European market. Today, it's on ice vehicles. There is a portion that will go to EV, but the EV sales in Europe similar to North America are down. So today most of what we're supporting are ICE vehicles with that new braking platform.

Okay. That's very helpful.

Then The end customer is a German manufacturer.

That's what we can share. There you go. All your Okay. Thank you for that data point. And then the next question is about tariff. If tariff takes place, much room of negotiation considering that pricing is part of the annual contract with customers? Yes, that's a good question, Andy. For the Mexico operation and what we manufacture in Mexico, as we shared in the release, 75% of what we do in Mexico stays in Mexico. So there's no tariffs for us on any of that product. And it goes to end customers facility in Mexico, which they will add value to. And then import it in or export it into The U. S. For us, for what we ship into The U. S. Is an export to The U. S. And the customer will take ownership at the border and they would be responsible for the tariff cost on that portion of it. For the component side of things, that's where the negotiation would come for the products that we build in Jasper Indianapolis or Tampa today That's where the negotiations would come. And we learned a lot eight years ago with the first group of tariffs that the administration did with China.

We have very good processes and we've had really good discussions with our customers with that. So we build confident that we'll be able to negotiate those costs with them Got it. Yes. And then one last question. If you need to move a production to Thailand, how long the qualification process will take? In general?

Yes, that's different by customer. So one of the products we just moved out is Tampa as part of their tow is going to Thailand. That took us about three point five months to move that product. And it's fully qualified now.

Okay.

So maybe even a little bit shorter than that, but we started in November and here we sit in February and we're done. So it's a little about three months is a safe number. Dependent upon the product, the specific tooling for that product, and any qualification on the customer side.

Thank you so much. That does conclude our question with that, ladies and gentlemen, thank you for joining today's call.

A replay of the call will be made available on the Investor Relations page on the Kimball Electronics website, You can access the replay by dialing (877) 660-6853 or (201) 612-7415. The replay will be available until 02/19/2025. The access ID is 3751109 Thank you again.