Executive Summary / Key Takeaways

• Kimball Electronics is strategically repositioning itself, divesting non-core assets and focusing on higher-value opportunities, particularly expanding its Medical Contract Manufacturing Organization (CMO) capabilities.
• Despite facing significant near-term headwinds from broad-based end-market demand softness, specific program losses, and tariff uncertainty, the company has demonstrated strong operational execution in controlling costs and significantly improving working capital and cash flow.
• A strengthened balance sheet, marked by substantial debt reduction and increased liquidity, provides the necessary financial flexibility to weather current challenges and fund strategic investments in growth areas like the new Indianapolis medical facility.
• While fiscal year 2025 is expected to see continued revenue lag compared to the prior year, management is guiding towards the high end of their revised sales and operating income ranges, signaling confidence in their cost control and strategic initiatives taking hold.
• The long-term investment thesis hinges on successful execution of the Medical CMO expansion, realization of benefits from restructuring and facility consolidations, a rebound in core EMS markets, and the ability of technological differentiation to drive profitable growth against larger competitors.

Setting the Scene: A Strategic Pivot in Manufacturing Solutions

Kimball Electronics, Inc. (KE) operates as a global, multifaceted manufacturing solutions provider, primarily focused on Electronics Manufacturing Services (EMS) across the automotive, medical, and industrial end markets. With over 60 years of operational history and a decade as a NASDAQ-listed entity, KE has built a reputation for producing durable electronics and delivering high levels of quality and reliability, earning consistent recognition from customers and industry publications like CIRCUITS ASSEMBLY.

In a competitive landscape dominated by larger players like Flex Ltd. (FLEX) and Jabil Inc. (JBL), and challenged by the agility of smaller, regional firms, KE has historically carved out a unique position. It aims to compete for higher-volume projects while maintaining strength in generally lower-volume, durable electronics markets. However, this positioning comes with challenges, particularly in maintaining profit margins against larger competitors who benefit from greater scale and purchasing power, and facing competitive pricing pressures that drive costs down over a project's lifecycle.

Recognizing the need to adapt to evolving market dynamics and capitalize on higher-value opportunities, KE has embarked on a significant strategic repositioning. A key step was the divestiture of its non-core Automation, Test, and Measurement (AT&M) business (GES) on July 31, 2024. This move was intended to sharpen the company's focus on core EMS operations and free up capital. Concurrently, the medical CMO business, which includes specialized capabilities beyond traditional electronics assembly, was integrated more closely with the core medical EMS vertical. This strategic alignment aims to leverage complementary capabilities and accelerate growth in attractive, higher-margin areas within the medical market.

Technological Differentiation and the Medical CMO Ambition

At the heart of Kimball's strategic pivot is an intensified focus on its Medical CMO capabilities, an area where the company possesses distinct technological advantages. Beyond standard electronics assembly, KE offers solutions like precision molded plastics, complete device assembly, and cold chain management. A particular area of differentiation highlighted by management is the company's expertise in manufacturing selected drug delivery devices, such as auto-injectors.

While specific quantitative metrics on the performance benefits of these technologies are not extensively detailed, the narrative emphasizes that these capabilities extend beyond traditional EMS and are critical for supporting the production of complex medical disposables and devices. The ability to handle drug-device combinations and provide integrated solutions from precision molding to final assembly and cold chain management positions KE to serve customers requiring higher levels of technical expertise and regulatory compliance.

Management is actively pursuing opportunities in emerging medical technologies, higher-level assemblies (HLAs), and drug-device combinations. A significant win cited is being selected as the sole supplier for the Respiratory Care Final Assembly and HLA business for their largest medical customer, expected to commence in calendar 2025 and impact fiscal 2026 results. This win underscores the value customers place on KE's capabilities in complex medical device manufacturing.

To accelerate this strategy and provide capacity for future growth, KE executed a lease in March 2025 for a new 300,000 square foot facility in Indianapolis specifically dedicated to the medical industry. This facility is intended to complement existing capabilities and provide ample space for future expansion, including transferring existing Indianapolis programs. The structure of the lease is designed to minimize upfront cost burden while committing to the growth opportunity.

For investors, these technological differentiators and the strategic focus on the Medical CMO are crucial. The margin profile on higher-level assemblies and finished medical devices is expected to be accretive to the returns customary with traditional EMS. By leveraging its specialized capabilities, KE aims to capture a larger share of a growing, attractive market (projected EMS market CAGR of 4.6% through 2028, per NVR) and potentially improve its overall profitability and return on invested capital (ROIC), which, based on industry benchmarks, currently trails some larger competitors like JBL and FLEX. Success in this area could provide a stronger competitive moat against rivals primarily focused on high-volume, lower-margin electronics assembly.

Navigating the Competitive Currents

The EMS industry is intensely competitive, with KE positioned as a mid-sized player. Larger competitors like Flex (FLEX), Jabil (JBL), Sanmina (SANM), and Celestica (CLS) offer broader scale and, in some cases, more advanced automation or vertical integration. Based on TTM data, KE's gross profit margin (7.11%) and operating profit margin (3.16%) trail those of JBL (9% gross, 7% operating) and FLEX (8% gross, 5% operating), and are more comparable to SANM (8% gross, 4% operating) and CLS (11% gross, 6% operating). This suggests that KE faces pressure on profitability relative to larger, more efficient peers.

KE's competitive advantages, such as its proprietary reliability testing technology and diversified global network, are key to its positioning. The reliability testing, particularly relevant in regulated markets like medical, offers higher accuracy in product validation, potentially leading to stronger customer loyalty and better margins in niche segments. Its global footprint enables faster product introduction and cost leadership in certain regions.

However, KE also faces disadvantages, including its smaller scale relative to industry giants, which can result in higher operating costs per unit and lower throughput. Its R&D investment, while supporting new initiatives like next-generation prototyping, may lag behind larger competitors, potentially slowing product development speed.

Recent competitive dynamics include opportunities for KE to gain business as some automotive customers look to move production from competitors, potentially leading to quicker program ramps. The outsourcing trend, particularly in medical HLAs, also presents opportunities as companies seek partners with specialized manufacturing expertise. Conversely, industry trends like the increasing adoption of AI in manufacturing could favor competitors with greater resources for technological investment.

Strategically, KE is attempting to leverage its niche strengths, particularly in medical CMO, to differentiate itself and capture higher-value business, rather than competing solely on scale or price in commoditized segments. The focus on areas like auto-injectors and complex medical assemblies positions KE in markets where its specialized capabilities provide a stronger competitive edge against rivals whose core focus might be broader, high-volume electronics.

Performance Under Pressure: Operational Discipline and Financial Strength

Fiscal year 2025 has presented a challenging operating environment for Kimball Electronics, marked by sustained end-market demand softness across its verticals. Net sales in the three months ended March 31, 2025, were $374.6 million, a 12% decrease year-over-year (10% excluding the divested AT&M business). Year-to-date net sales through March 31, 2025, were $1.11 billion, down 14% from the prior year period.

The decline was most pronounced in Industrial (down 22% in Q3, 24% YTD), partly due to the GES divestiture and weakness in smart metering (commoditization) and public safety. Automotive sales also decreased (down 14% in Q3, 10% YTD), impacted by the loss of a major program unrelated to KE and lower demand in North America and Europe, although partially offset by strength in China. Medical sales saw a modest 2% increase in Q3, but were down 11% year-to-date. The Q3 increase was favorably impacted by a $24 million non-recurring consignment inventory sale related to an FDA recall for a major customer; excluding this, medical sales declined due to the recall's adjacent impacts and program wind-downs.

Despite the revenue headwinds, KE has demonstrated strong operational execution in areas within its control. Gross profit margin in Q3 FY25 was 7.2%, down from 7.9% in Q3 FY24, impacted by lower absorption on reduced volume and dilution from the non-recurring medical sale. However, selling and administrative expenses decreased significantly, both in absolute terms and as a percentage of sales (3.6% in Q3 FY25 vs. 3.9% in Q3 FY24), reflecting cost reduction efforts, lower bonus expense, and reclassification of factoring fees. Operating income in Q3 FY25 was $11.7 million, a substantial improvement from a loss of $6.4 million in Q3 FY24, which included impairment charges. Adjusted operating income was $15.7 million or 4.2% of net sales in Q3 FY25, compared to $18.7 million or 4.4% in Q3 FY24.

A key operational focus has been working capital management. Cash conversion days (CCD) improved to 99 days in Q3 FY25, down from 110 days a year prior and 107 days sequentially, driven by improvements in Days Sales Outstanding (DSO) and Production Days Supply on Hand (PDSOH). Inventory levels have seen significant reduction, decreasing by $100 million (25%) year-over-year to $296.6 million at March 31, 2025. These efforts have translated into robust cash flow generation from operating activities, totaling $105.9 million in the first nine months of FY25.

This strong cash generation has bolstered the balance sheet. Borrowings on credit facilities decreased by $116 million (40%) from the start of the fiscal year to $178.8 million at March 31, 2025. The debt-to-equity ratio improved to 0.3 at March 31, 2025, from 0.5 at June 30, 2024. Short-term liquidity, including cash and unused credit facilities, totaled $304.6 million at March 31, 2025. This financial strength provides KE with ample flexibility to weather the current uncertain environment and fund its strategic growth initiatives. The company also continued its share repurchase program, buying back $8.9 million of common stock year-to-date through March 31, 2025, with $19.3 million remaining under the authorization.

Outlook and the Path Forward

Looking ahead, Kimball Electronics is focused on executing its strategic repositioning and returning to profitable growth, although management acknowledges that the timing of a broad recovery in core EMS markets remains difficult to predict, potentially extending through calendar year 2025.

For fiscal year 2025, the company reiterated its guidance, expecting net sales in the range of $1.4 billion to $1.44 billion and adjusted operating income between 3.4% and 3.6% of net sales. Based on performance through Q3, management anticipates achieving the high end of these ranges. Capital expenditures are expected to be at the low end of the $40 million to $50 million guidance range, balancing maintenance needs with investments in growth, particularly for new program wins and capacity expansions.

Key strategic initiatives underpinning the future outlook include:

• Medical CMO Expansion: Ramping up the Respiratory Care Final Assembly and HLA business for the largest medical customer (impacting FY26), and developing the new Indianapolis facility to support growth in higher-value medical assemblies and drug-device combinations.
• Facility Consolidation: Completing the closure of the Tampa facility by the end of FY25, transferring production to other sites (primarily Mexico and Jasper) to leverage global capacity and streamline operations. Total exit costs are estimated at $6.5 million to $8.5 million, with expected proceeds from the property sale anticipated to exceed these costs.
• Cost Control and Efficiency: Continuing restructuring efforts to align the cost structure with demand levels, targeting further improvements in operating margins.
• Targeted Growth in EMS Verticals: Ramping new automotive programs (like the braking platform in Romania) and pursuing opportunities in specific sub-verticals within Industrial (climate control rebound, factory automation, green energy, off-highway equipment) to diversify and capture growth as markets recover.

Management intends to strategically utilize the cash generated from its EMS operations to fund investments in the higher-margin Medical CMO business, both organically and potentially through opportunistic inorganic channels.

Risks and Challenges

Despite the strategic progress and operational discipline, several risks could impact Kimball's outlook and investment thesis. The most significant near-term challenge is the unpredictable end-market demand environment, exacerbated by global economic conditions and geopolitical uncertainties. The timing and strength of a recovery in the core Automotive and Industrial markets remain uncertain.

The current tariff environment poses a significant risk, potentially impacting supply chains, costs, and customer demand. While KE is evaluating options like shifting production or delivery locations, the final rules of engagement are still being determined, creating unpredictability.

Specific program risks, such as the loss of the major automotive program and the ongoing adjacent impacts from the medical customer's FDA recall, continue to weigh on revenue. While KE is working to backfill these volumes with new programs, the success and timing of these ramps are critical.

Competition in the EMS industry remains intense, with pricing pressure potentially impacting margins. KE's ability to maintain or expand profitability depends on its success in shifting the revenue mix towards higher-value Medical CMO business and realizing efficiency gains from restructuring.

Execution risk exists in transferring production from Tampa to other facilities and successfully ramping up operations at the new Indianapolis medical facility and other new program wins. Delays or unforeseen issues could impact costs and revenue.

Finally, while the balance sheet has strengthened, future demand declines or unexpected costs could pressure liquidity, although current levels appear robust.

Conclusion

Kimball Electronics is undergoing a critical strategic transformation, pivoting towards higher-value Medical CMO solutions while streamlining its core EMS operations. This repositioning, coupled with a strengthened balance sheet achieved through disciplined cost control and working capital management, provides a foundation to pursue future growth despite a challenging and uncertain near-term demand environment.

The investment thesis centers on KE's ability to successfully execute its Medical CMO expansion, leveraging its specialized technological capabilities in areas like drug-device combinations and complex assemblies to capture higher-margin business. The new Indianapolis facility and key program wins signal tangible progress in this direction. While competitive pressures and market headwinds persist, KE's operational focus on efficiency and its strategic pursuit of niche, higher-value opportunities offer a potential path to improved profitability and shareholder value. Investors should closely monitor the execution of the strategic plan, the timing of market recovery, and the company's success in converting its growth funnel into tangible revenue and margin expansion.