Kimball Electronics, Inc. (KE) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Kimball Electronics Strategic Update Conference Call and Webcast. My name is Donna, and I will be the facilitator for today's event. [Operator Instructions] Today's call, July 1, 2026, is being recorded. A replay will be available on the Investor Relations page of the Kimball Electronics website. At this time, I will turn the call over to Andy Regrut, Vice President, Investor Relations, Strategic Development and Treasurer. Mr. Regrut, please begin.

Thank you, and good morning, everyone. Welcome to our strategic update. We appreciate you joining us on short notice. With me here today is Ric Phillips, our Chief Executive Officer; and Jana Croom, Chief Financial Officer. Earlier this morning announcing the acquisition of Helvoet Polymer Technologies, a wholly owned subsidiary of Hydratec Industries. To accompany today's discussion, a 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 and SEC filings and that actual results can differ materially from the forward-looking statements. This morning, Ric will start the call with a few opening comments on the strategic fit of the acquisition. Jana will provide insights on the financial profile Helvoet and to discuss the terms of the transaction and Ric will complete our prepared remarks before opening the lines for questions. I'll now turn the call over to Ric.

Good morning, everyone, and thank you for joining us. As Andy noted, we are excited to announce that we have acquired Helvoet Polymer Technologies, a contract development and manufacturing organization, or CDMO, based in Europe and with operations in India, focused on microfluidics, diagnostics and drug delivery applications. The transaction was valued at a purchase price of EUR 90 million or approximately $103 million which represents approximately 9x the expected adjusted EBITDA for Helvoet in calendar 2026. This is another meaningful step in our journey to expand our CMO capabilities and strategically position the company with an increased presence and penetration in the medical industry. Over the past 3 years, we have made deliberate decisions that involve divesting noncore assets, streamlining our manufacturing network, strengthening our balance sheet and most notably, opening a new state-of-the-art facility in Indianapolis exclusively focused on the medical so. These actions were not taken in isolation they were part of an effort to focus on medical manufacturing opportunities and establish the foundation for a differentiated global medical CMO platform. The acquisition of Helvoet is a direct extension of that strategy, a high-quality business with a strong leadership team at an attractive valuation. For some time, we have communicated our intention to expand our medical manufacturing capabilities with an acquisition strategy that we deepened relationships with leading health care customers and build a broader global footprint that is capable of reporting medical companies across the full product life cycle. Helvoet is a good start towards reaching those objectives while bringing additional capabilities that we believe will strengthen our competitive position for years to come. Based in the Netherlands, Helvoet was founded in 1939 and has been operating most recently as a wholly owned subsidiary of Hydratec industries with manufacturing facilities in Tilburg, Netherlands and Pune, India. Approximately 70% of Helvoet revenue supports medical end markets, while the remainder is derived outside of medical in areas such as food and beverage dosing, and distribution and plastic injection molded parts for industrial and automotive applications. These products generate healthy margins and have supported ongoing investments to grow the medical business. Under the leadership of CEO, Eveline Hogenkamp, Helvoet has established itself as a world-class provider of advanced medical manufacturing solutions that include highly automated micromole and precision injected molding technologies that serve microfluidics, diagnostics and drug delivery. 3 areas that are among the most attractive and fastest-growing segments within health care and where competitive differentiation can agree from engineering expertise, manufacturing precision and quality systems. What makes these markets particularly attractive is that success is driven less by manufacturing scale and more by technical capability, aligning very well with the core competencies of Kimball. For example, in microfluidics, product dimensions are measured in microns where even minor variations can impact fluid flow, accuracy and overall device performance. These products require specialized tooling, advanced process controls, highly automated manufacturing environments and deep materials expertise to consistently achieve the precision and repeatability of the customers demand. The same is true across drug delivery applications where reliability, consistency, and regulatory compliance are critical given the direct impact these devices can have on patient outcomes. As a result, customers prioritize proven engineering expertise quality systems and long-term manufacturing partners over simply selecting the lowest-cost supplier. These dynamics create higher barriers to entry, longer customer relationships and more durable revenue streams, which we find attractive. Helvoet has a blue-chip customer base that is highly complementary to our existing portfolio. We see meaningful opportunities to expand customer engagements, pursue larger and more complex programs and leverage the combined capabilities of the platform to support customers throughout the entire development and manufacturing life cycle. Finally, the geographic footprint offers future growth potential with a strength and presence in Europe, immediate access to the rally growing medical market in India and a clear pathway to accelerate growth to our facility in Indianapolis by providing help with a much-needed manufacturing location in the United States. We believe this combination creates a real-time opportunity to leverage Helvoet's technologies, customer relationships and engineering expertise while utilizing Kimball's manufacturing capacity, operational structure, commercial relationships and access to capital to support future growth. I'll now turn the call over to Jana to provide additional insights on the financial profile of Helvoet and discuss terms of the transaction. Jana?

Thank you, Ric. In calendar 2025, Helvoet revenue totaled approximately $56 million with an EBITDA margin rate in the mid-teens. Geographically, nearly 60% of revenue shipped to customers in Europe and almost 40% to Asia, demonstrating the opportunity for future expansion, particularly in the United States. From a medical end market perspective, over 50% of revenue is derived from in vitro diagnostics, including diagnostics and microfluidic applications such as point-of-care testing cartridges, blood warming cartridges and blood filtration solutions. Approximately 10% of revenue comes from drug delivery, including disposable syringes, proprietary syringe technologies inhalers, pen injectors and glucose monitoring solutions. These categories represent some of the most attractive segments within health care and are aligned closely with our strategic priorities. Customer concentration is manageable with the top 10 customers representing approximately 70% of total revenue. Helvoet has maintained an average relationship tenure over 10 years consistent with our focus on long-standing customer relationships. Based on our estimates for calendar 2026 and projections for future years, we believe this transaction will be accretive to our fiscal 2027 adjusted earnings with sales in the Kimball Medical vertical increasing in the low digit range. These dynamics create a unique opportunity to acquire a highly attractive medical manufacturing assets at a valuation below typical medical CDMO transaction multiples. At the same time, our existing customer relationships, manufacturing footprint and medical capabilities could further expand the medical portion of the combined businesses. As Ric mentioned, the purchase price was EUR 90 million or approximately $103 million. Excluding working capital adjustment, customary purchase price adjustments and transaction-related costs. We funded the acquisition through a combination of cash and available borrowing capacity on our existing line of credit. Our pro forma leverage profile remains consistent with the capital allocation priorities of the company. Overall, the transaction is strategically compelling financially attractive and positions Kimball for long-term value creation. I'll now turn the call back over to Ric for a few closing remarks. Ric?

Thanks, Jana. In closing, we are extremely excited about the opportunity ahead. We've been talking about our medical CMO strategy for quite some time, and we are pleased with the execution of our teams and partners to get this across the finish line. From a strategic standpoint, Helvoet possesses the characteristics we look for in an acquisition. A differentiated medical CDMO platform with expertise in material science, precision manufacturing, automation and customer development, an accretive expansion opportunity that deepens our presence in Europe provides access to the emerging market in India and potentially accelerates growth in the U.S. by leveraging our facility in Indianapolis, meaningfully expands our exposure to highly attractive medical end markets such as microfluidics, diagnostics and drug delivery. A well-run operation with an excellent management team that brings approximately 8 years of combined industry experience. And finally, possible vertical integration sometime down the road as Helvoet currently outsources electronics manufacturing activities. This transaction brings together 2 organizations that share a commitment to engineering excellence, operational quality, customer partnership and long-term value creation. We are extremely excited to welcome Helvoet to the Kimball family. Over time, we will rebrand the Tilburg and Pune facilities as Kimball Solutions, but this will occur at a measured and thoughtful pace. Our #1 priority is to grow our medical CMO business by unlocking the synergies that exist between the organizations. And while today marks an important milestone, we view it as another step in the journey, not the destination. Operator, we would now like to open the lines for questions.

[Operator Instructions] Our first question today is coming from Mike Crawford of B. Riley Securities.

Was this a competitive transaction? Or could you describe the process a little more in detail?

Mike, yes, it was -- they actually ran a process. They had sell-side representation, and it was a competitive process, multiple that are so strategic NPE.

Okay. And have you pursued similar processes in the recent future where you have it one out? Or are there any similar opportunities in your pipeline?

So I'll answer both questions. First, we've been at this in terms of M&A opportunity for the right strategic for some time now. I mean we've been talking about this for probably the better part of 2 years. Was this the first acquisition we looked at? No. Have we been in other process? Yes. But we didn't lose out on anything at price points that we sell badly about. So I'll just -- I'll say that. Some of the best deals are the ones you don't do because they, at some point, don't make sense. And in terms of future pipeline, it remains really strong. And so what we have said historically is what we intend to do, which is strategic tuck-in acquisitions over time that really create a thoughtful portfolio of assets for the medical CMO CDMO business. So this is the first, it will likely not be the last.

Mike, this is Andy. And we are very disciplined. I mean, disciplined in prior processes to know when to walk away and discipline in our screening. So we have set out series of criteria, and we are very much closely monitor how the target aligns with what we think we need an acquisition.

Okay. And then just one final one for me is how long do you expect it to take to port some of the IP and CDMO processes to a new facility in Indiana?

We're going to start that process immediately. As a matter of fact, the Helvoet team has already been to our Indianapolis facility and we'll have members from our MD team over visiting Helvoet and short order immediately.

They actually have a 6-hour head start on us today. And after the local announcement started a customer outreach around the new ownership and around the opportunities for top line synergies. So that process has started.

The next question is coming from Max Michaelis of Lake Street Capital Markets.

Jason on for Max. Congrats on the announcement this morning. Just curious if you could provide some info on their growth rate and gross margin profile recently?

Yes. Very attractive growth rate. They've been growing double digits, and we expect double-digit growth into the future on the top line. gross margin is in keeping with what you would expect for a medical CDMO. So really robust gross margin rate significantly higher than Kimball, but in keeping with industry average for CDMO and [indiscernible].

Yes. And Jason, Eveline, the CEO, has very much executed a strategy that, in some ways, mirrors Kimball. In that when she joined the company 3, 4 or 5 years ago, she started to lean more and more into medical end markets and to reduce or divest non-medical end market products. So she moved away from some food and beverage. She still has quite a bit. but she very much honed in on the best food and beverage opportunities to keep those in the portfolio free up space and equipment for future medical opportunities, and that's reflected in the top line projections that Jana mentioned.

Got you. That's really helpful. And I know you mentioned sort of the customer concentration, but curious if there are a couple kind of chunky programs that make up a large part of their revenue?

Yes. So their top customer represents less than 10% of their revenue. and the top 2 customers are about 70% of their revenue. We're really comfortable with the customer diversification because, again, it's not just customers also any programs within that customer. So very similar to Kimball where you might have a customer like next year, that's our #1 comer representing 10% of our revenue, but it's made up of 18 different programs. Their profile is similar.