Kimball Electronics, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended June 30, 2019; the fourth quarter ended June 30, 2019. The filing is an annual report, not a standalone quarterly filing. Kimball Electronics provides contract electronics and diversified manufacturing services to automotive, medical, industrial, and public safety markets.
Financial results and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $1,181.8 million | $1,072.1 million | +10% |
| Gross profit / margin | $88.4 million / 7.5% | $86.0 million / 8.0% | Margin down 0.5 percentage points |
| Operating income / margin | $42.1 million / 3.6% | $42.0 million / 3.9% | Operating income essentially flat |
| Net income | $31.6 million | $16.8 million | +88% |
| Diluted EPS | $1.21 | $0.62 | Up from prior year |
| Operating cash flow | $(6.7) million | $40.2 million | Down $46.9 million |
Fourth-quarter FY2019 sales were $318.6 million, gross profit $23.2 million, operating income $10.3 million, net income $7.5 million, and diluted EPS $0.29.
Gross margin declined mainly from unfavorable product mix, higher material costs amid component shortages, and the GES acquisition; higher revenue provided a partial offset. Net income increased principally because FY2018 included $17.8 million of tax expense associated with the U.S. Tax Cuts and Jobs Act. FY2019 effective tax rate was 18.0%, versus 62.6% in FY2018.
At June 30, 2019, cash and cash equivalents were $49.3 million, total borrowings under credit facilities were $126.2 million, and shareholders’ equity was $369.9 million. The company reported a 2.0 current ratio, 0.3 debt-to-equity ratio, and $110.7 million of short-term liquidity, including cash and unused credit availability. Working capital was $280.4 million. Operating cash use reflected working-capital demands, including increases in receivables and inventory; cash conversion days rose to 77 from 63.
- Investing cash outflow was $68.7 million, including $43.9 million for the GES acquisition, net of cash acquired, and $25.8 million for capital investments.
- Financing cash inflow was $79.4 million, reflecting increased credit-facility borrowings, partly offset by $23.4 million of share repurchases.
- The primary credit facility matures July 2023 and provides $150 million of borrowing capacity, with an option to increase it to $225 million subject to lender consent. The company reported compliance with its financial covenants.
Material changes and business developments
- Sales rose 10%; GES contributed approximately 2% to sales growth, while foreign exchange reduced sales by approximately 2%. Medical and industrial sales rose 17% and 18%, respectively; automotive sales increased 1%.
- Kimball acquired GES on October 1, 2018, adding automation, test, and inspection equipment capabilities. The preliminary net purchase price was $42.4 million; the seller-disputed working-capital adjustment remained unresolved, so the final purchase price allocation was not complete.
- Open orders increased 43% to $417.8 million; substantially all were expected to be filled within the next fiscal year. The filing cautions that open orders may be canceled and are not necessarily indicative of future sales.
- The company adopted the new revenue standard using the modified retrospective method. About 70% of FY2019 sales were recognized over time. Adoption increased FY2019 net income by $0.8 million and created $51.9 million of contract assets; prior periods were not restated.
- Sales concentration remained significant: Philips accounted for 14% of sales, ZF 12%, and Nexteer Automotive 12%.
Outlook, risks, and unusual items
Management described the contract manufacturing market as having moderate growth and mixed demand, and stated a goal of 8% annual organic growth. It emphasized disciplined cost control, working-capital management, and investment in capabilities, including potential acquisitions. No specific earnings or revenue guidance was provided.
- Key risks include short-term and cancellable customer orders, customer and program concentration, pricing pressure, and the need to replace expiring programs. New program starts can initially generate losses.
- Component shortages, longer lead times, higher material costs, and tariffs or trade tensions could disrupt production or pressure margins. Management said it was taking steps to mitigate component-shortage effects.
- International operations expose the company to currency, political, regulatory, tax, and trade risks. Foreign cash was $47 million; management intended to keep accumulated foreign earnings invested abroad. A $9.8 million deemed-repatriation tax liability remained payable.
- GES integration, preliminary purchase accounting, and estimated pre-acquisition Vietnam tax liabilities are items to monitor. Management recorded related tax liabilities and an indemnification asset; final resolution could differ materially from estimates.
- FY2019 operating cash flow was negative despite higher earnings, underscoring working-capital and cash-conversion risks. Contractual purchase obligations totaled $621.6 million, largely related to materials and other operating commitments.
- The company reported no material pending litigation. Management and the auditor concluded internal control over financial reporting was effective, although GES was excluded from the assessment and represented 9% of consolidated assets and 2% of sales.
Important facts for investors to verify
- Whether the GES acquisition achieves expected returns and how the disputed working-capital adjustment and purchase-price allocation are resolved.
- Whether gross margins stabilize as component shortages, material costs, product mix, and GES-related costs evolve.
- Whether operating cash flow and cash conversion improve as receivables, inventory, and contract assets are managed.
- Whether open orders convert to sales and customer concentration or program cancellations affect demand.
- Future borrowing levels, covenant headroom, the $9.8 million tax payment, and the company’s ability to fund commitments while maintaining liquidity.
- The effect of adopting revenue-recognition guidance when comparing FY2019 with periods that were not restated.