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Introduction & Market Context
Kimball Electronics (NASDAQ:KE) reported its third quarter fiscal 2025 results on May 7, 2025, showing signs of sequential improvement despite continued year-over-year revenue challenges. The company’s shares jumped 7.41% in premarket trading to $15.80, suggesting investors responded positively to the results and strategic initiatives.
While total net sales declined 12% year-over-year to $375 million, the company demonstrated progress in its financial position with continued debt reduction, positive cash flow generation, and inventory management. Notably, Kimball announced a significant strategic move with a new medical manufacturing facility in Indianapolis, signaling its pivot toward higher-margin medical contract manufacturing.
Quarterly Performance Highlights
Kimball Electronics’ third quarter net sales of $375 million represented a 12% decrease compared to the same period last year, though sales increased 5% sequentially from the second quarter. The company’s performance varied significantly across its three main segments.
As shown in the following chart of quarterly net sales:
The medical segment was the lone bright spot, with sales increasing 2% year-over-year to $115 million, now representing 31% of total company sales. This growth was partially driven by a non-recurring consigned inventory sale of approximately $24 million to the company’s largest medical customer, associated with an FDA recall.
The following chart illustrates medical segment performance:
Meanwhile, the automotive segment, which accounts for 46% of total sales, declined 14% year-over-year to $173 million. The company noted strong performance in China for the third consecutive quarter, along with increased sales in Europe as a new braking program in Romania began ramping production. However, North American sales declined, driven by challenges with an electronic braking program in Reynosa.
The automotive segment performance is visualized here:
The industrial segment, representing 23% of total sales, saw a 15% year-over-year decline (excluding AT&M) to $86 million. The decrease occurred across all regions, with the largest decline in Europe, followed by Asia, and a modest decrease in North America.
Industrial segment performance is shown in this chart:
Detailed Financial Analysis
Kimball Electronics’ gross margin rate in the third quarter was 7.2%, representing a 70 basis point decline compared to the same period last year. Nearly half of this decrease was driven by the consigned inventory sale, with the balance coming from lower absorption. On a sequential basis, however, the gross margin rate increased due to the impact of restructuring efforts.
The following chart shows the gross margin rate trend:
Adjusted operating income was $15.7 million, or 4.2% of net sales, compared to last year’s adjusted result of $18.7 million, or 4.4% of net sales. The company has made significant progress in reducing selling and administrative expenses, which totaled $11.2 million in Q3, a 24% reduction compared to the $14.8 million reported in the same quarter last year.
The adjusted operating income trend is illustrated here:
The company’s effective tax rate was 46.6% in the third quarter, compared to 52.4% in Q3 of fiscal 2024. The elevated rate was driven by limitations on tax deductibility of interest expense and withholding taxes on global cash repatriation. Management expects a tax rate of around 30% for the full fiscal year.
Strategic Initiatives
A key highlight of Kimball’s third quarter presentation was the announcement of a new, larger medical manufacturing facility in Indianapolis. This 300,000 square foot leased facility reflects the company’s commitment to expanding its Contract Manufacturing Organization (CMO) capabilities beyond electronics and printed circuit board assemblies.
The new facility will support production of medical disposables, surgical instruments, and selected drug delivery devices such as auto-injectors. It will also enable operations including precision injected molded plastics, complete device assembly, and cold chain management. The company plans to transfer existing programs from its current Indianapolis facility over time and sell that property, with the new facility providing ample space for future growth.
This strategic move aligns with Kimball’s stated goal of elevating its prominence as a medical CMO with expanded manufacturing capabilities, new adjacencies, and additional vertical integration in medical device production. Management noted that the margin profile on higher-level assemblies and finished medical devices could be accretive to the returns that are customary with contract manufacturing EMS.
Financial Position
Kimball Electronics continues to strengthen its financial position, with cash and cash equivalents of $51.4 million as of March 31, 2025. The company generated $30.9 million in cash flow from operating activities in the quarter, marking its fifth consecutive quarter of positive cash flow.
Inventory levels have been a key focus area, with inventory ending the quarter at $296.6 million, representing a $9.6 million reduction compared to Q2 and approximately $100 million (25%) lower than a year ago. Cash conversion days improved to 99 days, compared to 110 days in Q3 of FY2024 and 107 days in the previous quarter.
The inventory reduction trend is shown in this chart:
Debt reduction has been another area of significant progress. Borrowings at the end of the third quarter were $178.8 million, a $26.2 million reduction from the second quarter and down $116 million, or 40%, from the beginning of the fiscal year. Short-term liquidity available totaled $304.6 million at the end of the third quarter.
Capital expenditures were modest at $4.0 million for the quarter, with management indicating that full-year capex will likely be at the low end of the guidance range of $40-50 million.
Forward-Looking Statements
Kimball Electronics reiterated its guidance for fiscal year 2025, with net sales expected to be in the range of $1.4 to $1.44 billion and adjusted operating income of 3.4% to 3.6% of net sales. Management expects to be at the high end of the ranges for both sales and adjusted operating income.
The company continues to estimate total exit costs associated with the closing of its Tampa facility in the range of $6.5 to $8.5 million, though it fully expects the proceeds from the sale of the property to exceed these exit costs.
Management acknowledged the uncertainty in the current tariff environment, noting that they continue to monitor the situation to understand potential impacts and possible solutions for both the short and longer term. Options could include changing final delivery locations, shifting production to different Kimball facilities, or paying the tariff.
Looking ahead, the company is focused on returning to growth through emerging medical technologies, high-level assemblies, and a variety of drug-device combinations, while acknowledging that the timing of a recovery in its core EMS business remains difficult to predict given the current economic uncertainty.
Full presentation:
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