10-Q: Kimball Electronics Reports Lower Sales and Earnings in Q2 2025, Announces Tampa Facility Closure

Kimball Electronics' Q2 2025 net sales decreased by 15% compared to Q2 2024, with diluted earnings per share also declining.

Summary

• Kimball Electronics reported a 15% decrease in net sales for the second quarter of fiscal year 2025, totaling $357.4 million compared to $421.2 million in the same period last year.
• Diluted earnings per share decreased to $0.14 from $0.33 year-over-year.
• The company is undertaking restructuring efforts, including the closure of its Tampa facility, expected to be substantially completed by the end of the fiscal year, with total exit costs estimated between $6.5 million and $8.5 million.
• The decline in sales was most significant in the medical and industrial end markets.
• The company sold its GES business on July 31, 2024, recognizing a pre-tax gain of $1.3 million.
• Open orders decreased by 33% compared to December 31, 2023, driven by reduced orders due to cancellation of a major automotive program and demand reductions in other sectors.
• The company amended its primary credit facility, adding a $100 million term loan.
• The company maintains a stock repurchase plan, having repurchased $5.9 million of common stock during the six months ended December 31, 2024.
• The company expects consolidated net sales to continue to lag when compared to fiscal year 2024, which we expect to continue through calendar year 2025.

Sentiment

Score: 4

Explanation: The document presents a mixed picture. While there are some positives like the GES sale and cost reduction efforts, the overall tone is negative due to declining sales and earnings, restructuring activities, and a cautious outlook. The closure of the Tampa facility also contributes to the lower sentiment.

Positives

• The company recognized a $1.3 million pre-tax gain from the sale of its GES business.
• The company amended its primary credit facility, adding a $100 million term loan borrowing facility.
• The company reversed $2.4 million of deferred tax asset allowances from past capital losses, reducing income tax expense.
• Selling and administrative expenses decreased both as a percent of net sales and in absolute dollars.
• The company maintains a strong balance sheet, which included a current ratio of 2.3, a debt-to-equity ratio of 0.4, and Share Owners equity of $537 million at December 31, 2024.

Negatives

• Net sales decreased by 15% to $357.4 million in Q2 2025 compared to $421.2 million in Q2 2024.
• Diluted earnings per share decreased to $0.14 in Q2 2025 from $0.33 in Q2 2024.
• The company is closing its Tampa facility, incurring $6.5 million to $8.5 million in exit costs.
• Open orders decreased by 33% year-over-year.
• Gross profit as a percent of net sales declined due to lost absorption on lower revenue.

Risks

• Global economic conditions and geopolitical conflicts, such as the war in Ukraine, could impact the company's performance.
• Availability and cost of raw materials and components could affect profitability.
• Foreign exchange fluctuations could impact financial results.
• The company's ability to convert new business opportunities into customers and revenue is a risk.
• The loss of a major automotive program and the FDA recall impacting a major medical customer are negatively affecting sales.
• The company expects consolidated net sales to continue to lag when compared to fiscal year 2024, which we expect to continue through calendar year 2025.

Future Outlook

The company expects consolidated net sales to continue to lag when compared to fiscal year 2024, which we expect to continue through calendar year 2025. The company expects to continue its restructuring efforts, including the closure of its Tampa facility. We estimate additional pre-tax restructuring charges between $5 million to $6 million, including $4 million to $5 million for Tampa exit costs. Once Tampas operations have ceased, we expect to sell the building and land, with the proceeds from the sale anticipated to exceed the exit costs.

Management Comments

• We have a strong focus on cost control balanced with managing the future growth prospects of our business.
• The decision was another important step towards sharpening our strategic focus, while leveraging our global footprint and streamlining the operating structure.

Industry Context

The contract manufacturing services industry is very competitive, with Kimball Electronics positioned as a mid-sized player facing challenges from both smaller, regional players and larger, global players. The Worldwide Manufacturing Services Market 2024 Edition projects the worldwide assembly market for electronics products to grow at a CAGR of 4.6% over the next five years, with the EMS industry projected to grow at a CAGR of 4.6%.

Comparison to Industry Standards

• It is difficult to compare Kimball Electronics directly to industry standards without more granular data.
• Key competitors in the EMS space include Jabil, Flex, and Sanmina, which are significantly larger in scale.
• Smaller regional players offer agility and flexibility, while larger global players compete on scale and price.
• Kimball Electronics aims to compete with larger players for high-volume projects while maintaining its position in the lower-volume durable electronics market.

Corporate Governance

Legal Proceedings

• The company and its subsidiaries are not parties to any pending legal proceedings, other than ordinary routine litigation incidental to the business.

Stakeholder Impact

• Shareholders will be impacted by the decreased earnings and share price.
• Employees at the Tampa facility will be impacted by the closure.
• Customers may experience temporary disruptions as production is transferred from the Tampa facility.
• Suppliers may see changes in order volumes as production shifts.

Next Steps

• Continue executing restructuring efforts, including the closure of the Tampa facility, expected to be substantially completed by the end of the fiscal year.
• Transfer production activities on existing customer programs out of Tampa, with the majority of the work going to our plants in North America, primarily our newly expanded facility in Mexico and Jasper.
• Sell the Tampa building and land once operations have ceased.
• Prudently invest in capital expenditures, including for capacity expansions and potential acquisitions.

Key Dates