Kimball Electronics, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months of fiscal 2021 ended December 31, 2020. The unaudited filing covers a global contract manufacturing business serving automotive, medical, industrial, and public safety markets.
Financial performance and position
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $320.6 million | $307.1 million | $652.4 million | $620.5 million |
| Gross profit / margin | $29.7 million / 9.3% | $20.5 million / 6.7% | $60.2 million / 9.2% | $42.7 million / 6.9% |
| Operating income / margin | $16.2 million / 5.0% | $8.7 million / 2.8% | $34.0 million / 5.2% | $19.8 million / 3.2% |
| Net income | $15.1 million | $6.6 million | $31.9 million | $13.2 million |
| Diluted EPS | $0.60 | $0.26 | $1.26 | $0.52 |
For the six months, operating cash flow was $72.3 million, capital expenditures were $14.2 million, and cash increased by $28.6 million to $93.6 million. Cash from working-capital changes was $23.2 million, chiefly from a $46.5 million inventory reduction, partly offset by a $34.1 million use of cash from higher receivables.
At December 31, cash and cash equivalents were $93.6 million and borrowings under credit facilities totaled $86.1 million, down from $118.1 million at June 30, 2020. Working capital was $290.9 million; the current ratio was 2.1 and debt-to-equity was 0.2. Management reported short-term liquidity of $204.6 million, including cash and unused credit facilities, some of which are uncommitted.
Changes versus comparable periods
- Q2 sales rose 4% year over year; six-month sales rose 5%. Favorable foreign-exchange movements contributed 3% to quarterly sales growth and 2% to six-month growth.
- Profitability improved substantially. Management attributed higher gross margins to operating execution, product mix, foreign exchange, progress at the GES acquisition, and comparison with prior-year disruption from a UAW labor strike; higher profit-sharing expense partly offset the gains.
- Q2 automotive sales increased 13% to $151.9 million, a record quarter for the vertical. Medical sales rose 2% in Q2 and 15% year to date; industrial sales rose 2% and 5%, respectively. Public safety declined 28% in Q2 and 25% year to date, mainly reflecting program phase-outs.
- Open orders were $433.8 million, up 9% from a year earlier; substantially all were expected to be filled within 12 months, but orders may be delayed or canceled.
Outlook, risks, and unusual items
- Management expected automotive demand to remain strong for the rest of FY2021, while noting potential disruption from semiconductor shortages. Medical sales had returned to pre-pandemic levels in Q2 after elevated first-quarter demand for respiratory-care and patient-monitoring products.
- No specific full-year revenue or earnings guidance was provided. Management said available liquidity, operating cash flow, and credit facilities should meet working-capital and other operating needs for at least 12 months, while acknowledging that COVID-19 impacts could be material and could not be reasonably estimated.
- Key risks include COVID-19 and macroeconomic uncertainty, component availability and cost, customer order variability or cancellations, customer and program concentration, foreign-exchange movements, and the need to replace expiring programs. Philips represented 14% of Q2 sales and Nexteer Automotive 19%; no other Q2 customer listed exceeded 10%.
- Non-operating income was $2.4 million in Q2 versus $0.1 million a year earlier, including foreign currency/derivative gains and SERP investment gains. SERP investment gains are offset by liability revaluation in selling and administrative expense. Six-month non-operating income was $6.0 million versus $0.1 million. The six-month results also included $0.3 million of class-action settlement income and $0.3 million of acquisition-related settlement charges.
- The $30 million secondary credit facility matures May 18, 2021 and had no borrowings at period end. The company reported compliance with credit-facility covenants. It had $4 million of capital expenditure commitments and $3.3 million of deferred employer payroll taxes under the CARES Act.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The company disclosed no pending legal matters expected to have a material adverse impact.
Important facts for investors to verify
- Whether automotive momentum persists and semiconductor constraints affect customer production, component costs, or Kimball’s ability to fulfill orders.
- How much of the earnings improvement reflects sustainable operating performance versus foreign-exchange and other non-operating gains.
- Whether working-capital needs, especially receivables and inventory, continue to support operating cash generation.
- The renewal or replacement of the secondary credit facility before its May 2021 maturity, and the availability of uncommitted foreign facilities included in liquidity.
- Customer and program concentration, open-order conversion, and the ongoing decline in public safety sales.