Kimball Electronics, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended December 31, 2022 (fiscal 2023). Unaudited results. Kimball Electronics provides contract electronics and diversified manufacturing services to automotive, medical, and industrial customers.
Financial performance
| Metric | Three months ended Dec. 31, 2022 | Six months ended Dec. 31, 2022 |
|---|---|---|
| Net sales | $436.7 million; +39% year over year | $842.6 million; +39% |
| Gross profit / margin | $34.2 million / 7.8% (prior year: 6.6%) | $63.5 million / 7.5% (prior year: 6.0%) |
| Operating income / margin | $17.5 million / 4.0% (prior year: $6.9 million / 2.2%) | $31.1 million / 3.7% (prior year: $11.7 million / 1.9%) |
| Net income | $10.7 million; diluted EPS $0.43 (prior year: $5.1 million; $0.20) | $20.2 million; diluted EPS $0.81 (prior year: $7.7 million; $0.30) |
For the six months, operating cash flow was negative $71.9 million, investing cash flow negative $41.9 million, and financing cash flow positive $91.4 million. Capital expenditures were $41.7 million. Cash and cash equivalents were $26.3 million at December 31, 2022, down from $49.9 million at June 30, 2022.
Total credit-facility borrowings were $273.5 million, versus $180.6 million at June 30; the weighted-average borrowing rate rose to 5.9% from 2.7%. Shareholders’ equity was $481.1 million. Management reported a 2.0 current ratio, 0.6 debt-to-equity ratio, and $79.8 million of short-term liquidity (cash plus unused credit capacity). The company was in compliance with its credit covenants.
Material changes and drivers
- Sales reached a quarterly record, with year-over-year increases in automotive (+44%), medical (+39%), and industrial (+27%) in the quarter. Management cited new program launches and ramps, stronger demand, and improved component availability. Foreign exchange reduced sales by approximately 5%.
- Management attributed improved gross margins primarily to greater revenue leverage and a less severe component-shortage impact than in the prior-year period. Selling and administrative costs increased in dollars, including from added growth-support resources, wage inflation, and higher receivables-factoring fees.
- Inventory increased $91.9 million from June 30, and receivables increased $42.3 million. The company said inventory purchases supported customer orders amid shortages and expanded production capacity. Cash conversion days rose to 103 from 81 a year earlier.
- Borrowings increased $93.0 million from June 30, primarily to fund working capital and capital spending. Property and equipment increased $32.0 million, including investments in Mexico, Thailand, and Poland.
Outlook, risks, and unusual items
The filing provides no quantified financial guidance. Management expects working capital and inventory to normalize as component shortages ease and expansions ramp, and believes liquidity will cover operating needs for at least 12 months. It expects continued capital investment; commitments were approximately $23 million at quarter-end, principally for Poland expansion and equipment. The Poland expansion was expected to be completed in early fiscal 2024.
Management identified risks including component shortages and shipping delays, inflation in materials, labor and freight, customer demand and order volatility, customer/program concentration and cancellations, foreign-exchange movements, geopolitical conflict, and COVID-19-related uncertainty. Open orders were $1.037 billion, up 35% year over year but down 13% from June 30; orders may be delayed or canceled and are not necessarily indicative of future sales.
Other notable items: a change in estimated useful lives of certain production equipment reduced six-month depreciation expense by $2.6 million and increased net income by $2.0 million (or $0.08 per share). Prior-year six-month results included $1.4 million of class-action settlement income. The company sold $225.1 million of receivables without recourse during the six months. Subsequent to quarter-end, it entered into a $50 million, 364-day revolving credit facility and a separate Poland facility of up to €5 million.
Important facts for investors to verify
- Whether revenue growth and improved margins persist as component availability improves and new programs mature.
- Whether inventory, receivables, and cash conversion improve as shortages abate, given negative operating cash flow.
- Debt levels, borrowing costs, available credit capacity, and continued compliance with credit covenants.
- Execution and returns from Mexico, Thailand, and Poland expansions, alongside customer and order concentration risks.