Kimball Electronics, Inc.

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. All lines have been placed in a listen-only mode to prevent any background noise. After the completion of the prepared remarks from the Kimball Electronics leadership team, there will be a question and answer period. To ask a question, simply press star and the number one on your telephone keypad. Today's call, February 5th, 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 Redruth, Vice President, Investor Relations, Strategic Development, and Treasurer. Mr. Redruth, you may begin.

Thank you, and good morning, everyone. Welcome to our second quarter conference call. Our Chief Executive Officer and Jana Kroon, Chief Financial Officer. We issued a press release yesterday afternoon with our results for the second quarter of fiscal 2026 into December 31st, 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 risk and uncertainty and are subject to our safe harbor provisions as stated in our press release in 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 2026, and Rick will complete our prepared remarks before taking your questions. I'll now turn the call over to Rick. 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 healthcare, 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 light 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 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 Renosa 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 plan level. 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 pad, 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 Rick 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 sub-market. The growth 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 FY26 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 FY26 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 evaluation 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 28 cents per diluted share, compared to last year's adjusted results of $7.4 million, or 29 cents per diluted share. Turning now to the balance sheet. Cash and cash equivalents at December 31st, 2025, were $77.9 million. Cash generated by operating activities in the quarter were $6.9 million, our eighth consecutive quarter of positive cash flow. Cash conversion days were 91 days, an eight-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 phase by actively managing the component 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 31st, 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 share owners by purchasing 6.8 million shares of common stock. We have $10.5 million remaining on the repurchase program. As Rick mentioned, we are raising our guidance for fiscal 26 with net sales expected to be in the range of $1.4 to $1.46 billion, which compares to our previous guidance of $1.35 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% in 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 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 to 60 million dollars for the fiscal year. I'll now turn the call back over to Rick.