Kimball Electronics, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, the three months ended September 30, 2017. The company provides global electronics manufacturing services for automotive, medical, industrial, and public safety markets. Unless stated otherwise, comparisons are with the quarter ended September 30, 2016.
Financial performance
- Revenue: $253.2 million, up 12%. Sales increased in all four primary markets: automotive $102.0 million (+11%), medical $76.2 million (+17%), industrial $54.8 million (+6%), and public safety $17.2 million (+31%).
- Gross profit and margin: $19.5 million and 7.7%, versus $18.3 million and 8.1%. Management attributed the margin decline primarily to yield impacts and higher costs supporting new product introductions.
- Operating income and margin: $9.6 million and 3.8%, versus $12.8 million and 5.7%. The prior-year quarter included $4.0 million of litigation-settlement income; none was recorded this quarter.
- Net income and EPS: Net income was $8.5 million, down 16%; diluted EPS was $0.31, versus $0.36. The year-over-year comparison also reflects the prior-year $4.0 million litigation-related income and $0.9 million Aircom bargain purchase gain. The current quarter included a $0.6 million discrete tax benefit from stock-based compensation accounting, or $0.02 per diluted share.
- Cash flow: Operating activities used $0.2 million, versus providing $14.0 million. Working-capital changes used $14.5 million, mainly from a $19.2 million inventory increase and $4.3 million increase in receivables, partly offset by a $12.6 million increase in accounts payable. Investing used $6.1 million, including $6.1 million of capital expenditures; financing used $0.9 million, including stock repurchases and employee-share tax withholding, partly offset by $4.0 million of additional borrowing. Cash ended the quarter at $38.3 million, down $6.2 million.
- Liquidity and debt: Working capital was $194.8 million and the current ratio was 1.9. Short-term liquidity, defined as cash plus unused credit facilities, was $95.0 million. Credit-facility borrowings were $14.0 million, up from $10.0 million at June 30; management reported no long-term debt and compliance with facility covenants. Shareholders’ equity was $349.0 million.
- Other indicators: Open orders were $217.2 million, up 21%; substantially all were expected to be filled within 12 months, though orders may be canceled. The three largest named customers represented 14% (Philips), 14% (ZF), and 11% (Nexteer Automotive) of sales.
Material changes and management commentary
- Revenue growth was driven by new product launches and higher demand across the four core markets. Automotive demand rose in North America and Europe, more than offsetting a decline in China.
- Selling and administrative expense rose to $9.9 million from $9.5 million, but declined as a percentage of sales to 3.9% from 4.2%; higher salary and employee-benefit costs drove the dollar increase.
- Foreign currency and derivative movements produced a $1.1 million gain, versus a $0.3 million loss in the prior-year quarter. Interest expense increased to $0.1 million from less than $0.1 million.
- The Board increased authorized repurchases by $20 million in August, bringing total authorization to $60 million. The company repurchased $3.3 million of common stock during the quarter; $38.4 million had been repurchased under the plan cumulatively through September 30.
Outlook, risks, and contingencies
- No specific quarterly or full-year revenue or earnings guidance was provided. Management described the EMS market outlook as moderate growth with mixed demand, cited a company goal of approximately 8% sales CAGR over the next few years, and referenced industry forecasts of 4.2% worldwide EMS growth over five years.
- Management believes available cash, operating cash flow, and borrowing capacity will cover working-capital and other operating needs for at least 12 months. Capital expenditure commitments were approximately $7 million. Capacity at the Romania facility was expected to continue ramping up in fiscal 2018.
- Key risks include demand fluctuations, customer order delays or cancellations, dependence on replacing expiring programs, customer concentration, competition and pricing pressure, component availability and cost, foreign exchange movements, and successful integration of acquisitions and new operations. Customer agreements may be canceled with little or no notice.
- Foreign operations held $32.7 million of cash that management intended to keep invested abroad; repatriation could trigger U.S. and applicable foreign taxes. Outstanding transferred Chinese banker’s acceptance drafts with recourse totaled $1.3 million. Standby letters of credit exposure was $0.4 million; management did not expect a material impact from these arrangements or ordinary-course legal proceedings.
- The company expects the forthcoming revenue-recognition standard to materially affect its financial statements, primarily through contract assets for unbilled receivables and a corresponding reduction in inventory; adoption timing and transition method were still under evaluation. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether gross-margin pressure from new-program start-up costs and yields improves as programs mature.
- Whether elevated inventory and receivables convert to cash and operating cash flow recovers.
- Whether open orders translate into shipments, given cancellation rights and uneven market demand.
- How customer concentration, foreign-exchange movements, and the tax treatment of foreign cash affect results and liquidity.
- The eventual financial-statement effects and transition method for the new revenue-recognition standard.