Kimball Electronics, Inc. — Form 10-Q Summary
Period clarification: Although the request identifies “2018 Q3,” this filing covers the fiscal third quarter ended March 31, 2019, and the nine months then ended. The financial statements are unaudited.
Business context and reporting period
Kimball Electronics is a global electronics manufacturing services company serving automotive, medical, industrial, and public safety markets. The company acquired GES on October 1, 2018, expanding into equipment design, contract manufacturing, and related industrial services. Unless otherwise stated, amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | 2019: $313.5 million; 2018: $283.9 million; up 10% | 2019: $863.2 million; 2018: $795.3 million; up 9% |
| Gross profit / margin | $26.6 million / 8.5%; prior year $22.9 million / 8.1% | $65.2 million / 7.6%; prior year $63.3 million / 8.0% |
| Operating income / margin | $14.5 million / 4.6%; prior year $11.1 million / 3.9% | $31.7 million / 3.7%; prior year $30.8 million / 3.9% |
| Net income | $11.8 million; prior year $10.8 million, up 9% | $24.0 million; prior year $11.0 million, up 119% |
| Diluted EPS | $0.46; prior year $0.40 | $0.92; prior year $0.41 |
For the nine-month comparison, the sharp net income and EPS increase largely reflects the prior-year tax burden from U.S. Tax Reform: the 2018 period included approximately $12.8 million of deemed repatriation tax and $3.7 million from revaluing deferred tax assets. The effective tax rate was 19.3% in 2019 versus 68.3% in 2018.
Operating cash flow was negative $19.0 million in the first nine months of fiscal 2019, compared with positive $20.9 million in the prior-year period. Investing cash outflow was $59.5 million, including $43.9 million for GES and $15.2 million of capital expenditures. Financing cash inflow was $80.3 million, principally reflecting borrowing. Cash increased $0.7 million to $47.2 million.
At March 31, 2019, total credit-facility borrowings were $127.0 million, including $91.5 million classified as long-term. The weighted-average borrowing rate was 4.39%. Working capital was $277.5 million and the current ratio was 2.0. Management reported $107.2 million of short-term liquidity, defined as cash plus unused credit facilities. The company was in compliance with its credit covenants.
Material changes and drivers
- Quarterly sales growth reflected program ramp-ups, new product introductions, stronger demand, GES sales, and a favorable revenue-recognition adoption effect; foreign exchange was a headwind. Management attributed approximately 2% of quarterly sales to GES and 1% to the new revenue guidance, offset by a 3% unfavorable foreign-exchange effect.
- Medical sales increased 27% and industrial sales increased 27% year over year in the quarter. Automotive sales fell 7%, reflecting weakness in China and, to a lesser extent, Europe; North America was stronger.
- Quarterly gross margin improved on favorable mix, program ramp-ups, and revenue leverage, partly offset by component shortages and GES. Nine-month gross margin declined because of unfavorable mix, higher material costs, and GES.
- Open orders were $379.5 million at quarter-end, up 60% from a year earlier. The company cautioned that orders may be canceled and are not necessarily indicative of future sales.
- Adoption of the new revenue standard changed the timing of recognition, with most revenue now recognized over time as manufacturing occurs. It increased reported nine-month sales by $9.0 million and net income by $0.6 million versus amounts excluding the adoption effects. Contract assets were $52.2 million at March 31.
- GES’s preliminary net purchase price was $40.1 million; the purchase-price allocation and working-capital adjustment were not final. Acquisition funding contributed to the increase in debt.
Outlook, risks, and unusual items
Management described the EMS outlook as moderate growth with mixed demand and stated an annual organic growth goal of 8%; the filing does not provide formal earnings or revenue guidance. Management expects available liquidity to meet working-capital and other operating needs for at least the next 12 months. Romania facility capacity was expected to continue ramping during the remainder of fiscal 2019.
Key risks cited include component shortages and allocations, higher input costs, tariffs and U.S.-China trade tensions, foreign-exchange movements, demand fluctuations, customer concentration and potential cancellations, competitive pricing pressure, and successful integration of acquisitions. Management also noted China automotive weakness and fluctuating public-safety demand as the company winds down ITAR-related programs.
Unusual or noteworthy items include the GES acquisition; the prior-year Tax Reform charges affecting comparisons; $0.1 million of nine-month 2019 other general income from a component-supplier class-action settlement; and $23.4 million of share repurchases during the nine-month period. The repatriation-tax provision remaining at March 31 was $11.9 million, including $10.9 million recorded as long-term tax payable.
Important facts for investors to verify
- Whether GES integration, its preliminary purchase-price allocation, and acquired tax exposures are resolved as expected.
- Whether operating cash flow improves as receivables, inventory, and contract assets convert to cash; cash conversion days rose to 75 from 63 at June 30, 2018.
- Whether debt levels, borrowing costs, and covenant headroom remain manageable while the company funds operations, investment, and buybacks.
- Whether component availability, tariffs, China automotive weakness, and customer order patterns affect margins and the reported open-order pipeline.
- How much reported growth reflects underlying demand versus acquisition contribution, currency movements, and the revenue-recognition timing change.