Kimball Electronics, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended September 30, 2022, the first quarter of fiscal 2023; comparisons are with the three months ended September 30, 2021. Kimball Electronics provides contract electronics and diversified manufacturing services for automotive, medical, and industrial markets.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $405.9 million | $292.7 million |
| Gross profit / margin | $29.3 million / 7.2% | $15.6 million / 5.3% |
| Operating income / margin | $13.6 million / 3.3% | $4.8 million / 1.6% |
| Net income | $9.5 million | $2.6 million |
| Diluted EPS | $0.38 | $0.10 |
| Net cash used in operating activities | $60.2 million | $8.2 million |
| Capital expenditures | $19.3 million | $12.5 million |
Net sales increased 39%; foreign currency movements were an unfavorable 5% impact. Sales grew in automotive (43%), medical (35%), and industrial (35%). Management cited program ramps and launches, improved component availability, and higher demand for climate-control products. Gross margin improvement reflected higher-volume leverage, lower depreciation following a useful-life estimate change, and less severe component-shortage effects than in the prior-year quarter.
Operating cash outflow principally reflected working-capital investment: inventory used $57.6 million and receivables used $33.3 million, partly offset by a $17.5 million source from accounts payable. Cash and equivalents declined to $19.7 million from $49.9 million at June 30, 2022. Net cash from financing was $50.8 million, largely from borrowings; investing cash outflow was $19.3 million.
Balance sheet, liquidity, and material changes
At September 30, 2022, total borrowings under credit facilities were $232.5 million, versus $180.6 million at June 30, 2022. The weighted-average borrowing rate rose to 4.4% from 2.7%. Shareholders’ equity was $456.2 million. Management reported a 1.9 current ratio, 0.5 debt-to-equity ratio, and $113.4 million of short-term liquidity, defined as cash plus unused credit capacity, some of which is uncommitted. The company reported compliance with its credit-facility covenants.
Working capital increased to $380.1 million from $352.3 million. Inventory rose $53.9 million, primarily due to strategic purchases amid component shortages and increased demand. Cash conversion days increased to 99 from 91 in the prior quarter and 73 a year earlier, with inventory days particularly elevated. Open orders were $1.069 billion, up 43% year over year but down 10% from June 30, 2022; orders may be delayed or canceled.
Outlook, risks, and unusual items
Management said available liquidity should meet working-capital and other operating needs for at least the next 12 months. It expects continued investment in capacity and new capabilities; capital expenditure commitments were approximately $26 million, principally for the Poland expansion and facility and program-related equipment. No numerical revenue or earnings guidance was provided.
Key risks include persistent component shortages and shipping delays, inflation in materials, labor and freight, customer order variability and concentration, COVID-related disruption (including restrictions in China), geopolitical effects from the war in Ukraine, foreign-exchange movements, higher interest rates, and the ability to replace expiring programs. Management said cost increases had been mitigated to a majority through pricing arrangements and negotiations, but profitability remained affected and future impacts could be material.
A change in estimated useful lives for surface-mount production equipment, effective November 1, 2021, reduced Q1 FY2023 depreciation expense by $2.0 million and increased net income by $1.6 million, or $0.06 per diluted share. The prior-year quarter included $1.4 million of litigation-related proceeds in other general income; none was recorded this quarter. The company sold $97.6 million of receivables without recourse during the quarter, versus $62.1 million a year earlier. No material pending legal proceedings or material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Verify the credit-facility maturity: the filing gives May 4, 2027 in one section but also states July 27, 2023 elsewhere.
- Assess whether working-capital needs, elevated inventory, and negative operating cash flow persist as component availability and order fulfillment change.
- Evaluate earnings excluding the $0.06-per-share benefit from the depreciation estimate change and the prior-year litigation proceeds.
- Monitor borrowing costs, covenant headroom, and the availability of unused credit capacity, including uncommitted foreign facilities.
- Track customer concentration: Philips, Nexteer Automotive, and ZF represented 17%, 15%, and 12% of quarterly sales, respectively.