Business context and reporting period
Kimball Electronics, Inc. filed this Form 10-K for the fiscal year ended June 30, 2020. The company provides contract electronics and diversified manufacturing services to automotive, medical, industrial, and public safety markets. It reports one aggregated segment and operates manufacturing facilities across the United States, China, Mexico, Poland, Romania, Thailand, and Vietnam.
Fiscal 2020 results include the GES acquisition, completed October 1, 2018, which expanded automation, test, and inspection equipment capabilities. Fiscal 2019 therefore included GES for only part of the year.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $1,200.6 million | $1,181.8 million |
| Gross profit / margin | $83.8 million / 7.0% | $88.4 million / 7.5% |
| Operating income / margin | $32.0 million / 2.7% | $42.1 million / 3.6% |
| Net income | $18.2 million | $31.6 million |
| Diluted EPS | $0.71 | $1.21 |
| Cash from operations | $72.8 million | $(6.7) million |
| Capital expenditures | $38.4 million | $24.7 million |
Net sales rose 2%, while gross margin fell 0.5 percentage points and net income declined 42%. FY2020 included a $7.9 million non-cash GES goodwill impairment charge and a $3.8 million pre-tax final GES working-capital adjustment; the company reported their after-tax effects as $6.9 million and $2.9 million, respectively.
Fiscal fourth-quarter sales were $286.2 million, gross profit $20.9 million, operating income $1.6 million, and net loss $1.3 million. The quarter included the goodwill impairment; the GES working-capital adjustment also affected annual results.
At June 30, 2020, cash and cash equivalents were $65.0 million, total borrowings were $118.1 million, and share owners’ equity was $379.4 million. Working capital was $285.8 million, the current ratio was 2.0, and debt-to-equity was 0.3. Available short-term liquidity, including cash and unused credit facilities, was $142.5 million; unused credit facilities totaled $77.5 million. The company generated operating cash flow mainly through earnings and working-capital movements, including lower receivables partly supported by increased factoring.
Material changes versus the prior year
- Revenue increased modestly, but profitability and margins declined, reflecting unfavorable product mix, higher depreciation, COVID-related costs, and GES-related charges.
- Operating cash flow improved by $79.6 million year over year, from cash use to cash generation. Investing cash use fell to $38.5 million from $68.7 million, as FY2019 included the GES acquisition.
- Medical sales grew 8% to $397.8 million and industrial sales grew 6% to $271.0 million. Automotive sales fell 4% to $457.4 million; public safety sales fell 15% to $56.2 million.
- Receivables fell $45.4 million, while contract assets rose $18.4 million and inventory rose $15.2 million, primarily to support medical demand and pandemic-related forecast changes.
- The company established a $30 million, 364-day secondary revolving credit facility in May 2020. It had no borrowings outstanding on that facility at year-end.
Outlook, risks, and unusual items
Management anticipated automotive sales returning to pre-COVID-19 levels by the middle of fiscal 2021 and expected medical-market growth to continue in upcoming quarters. These are expectations, not formal financial guidance; the filing provides no clear numerical consolidated revenue or earnings forecast. Management stated that the financial impact of COVID-19 could not be reasonably estimated and could be material.
COVID-19 disrupted automotive production and supply chains, while increasing demand for respiratory-care and patient-monitoring assemblies. Management cited continuing uncertainty around the pandemic, customer demand, component availability, workforce availability, capacity utilization, and global economic conditions. Other key risks include customer concentration and cancellations, pricing pressure, supplier disruptions, tariffs, foreign exchange and interest-rate exposure, acquisition integration, and credit-facility covenant compliance.
The GES goodwill impairment followed a reduction in anticipated future revenues. Its valuation depended on projected growth, margins, and a 20% weighted-average cost of capital. Management cautioned that missed program awards or growth and margin assumptions could lead to further material impairment. GES long-lived assets passed the recoverability test, but management noted impairment could result if projected cash flows are not achieved.
Management believed available cash, operating cash generation, and borrowing capacity would cover working-capital and operating needs for at least 12 months. Contractual purchase obligations totaled $452.9 million, of which $441.2 million was due in fiscal 2021; these include raw-material and other commitments. The company suspended its share-repurchase plan in March 2020 and had no plan to pay dividends. No material pending litigation was reported. The company and auditor reported effective internal control over financial reporting, and the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether medical demand and the forecast recovery in automotive sales materialized after fiscal year-end, and how COVID-19 affected subsequent orders and margins.
- Whether GES achieved the revenue growth, new program awards, and improved margins underlying its valuation, and whether additional impairment was recorded.
- The sustainability and cash-conversion quality of FY2020 operating cash flow, including receivables factoring, rising contract assets and inventory, and customer payment trends.
- Debt repayment, covenant headroom, and refinancing needs, particularly the $30 million facility maturing May 18, 2021 and the $118.1 million year-end borrowings.
- Exposure to major customers—Philips represented 16% of sales and Nexteer Automotive 14%—and the effect of any customer or program losses.