Kimball Electronics, Inc. — Form 10-Q Summary
Reporting period: Unaudited quarter and nine months ended March 31, 2022. Although the request metadata says “2021 Q3,” this filing covers fiscal 2022’s third quarter.
Business context and financial performance
Kimball provides electronics and diversified manufacturing services to automotive, medical, industrial, and public safety markets. Dollar amounts below are in millions except per-share data.
| Metric | Quarter ended Mar. 31, 2022 | Quarter ended Mar. 31, 2021 | Nine months ended Mar. 31, 2022 | Nine months ended Mar. 31, 2021 |
|---|---|---|---|---|
| Net sales | $368.1 | $310.3 | $976.0 | $962.7 |
| Gross profit / margin | $33.9 / 9.2% | $26.0 / 8.4% | $70.4 / 7.2% | $86.3 / 9.0% |
| Operating income / margin | $20.3 / 5.5% | $14.6 / 4.7% | $32.0 / 3.3% | $48.6 / 5.1% |
| Net income | $13.6 | $10.5 | $21.3 | $42.3 |
| Diluted EPS | $0.54 | $0.41 | $0.84 | $1.67 |
Cash, debt, and liquidity
- Nine-month operating cash flow was a use of $84.7 million, versus $103.8 million provided a year earlier. The main driver was working capital, including a $142.5 million inventory cash use; accounts payable provided $61.1 million.
- Investing cash use was $50.0 million, mainly capital spending of approximately $50.1 million, including Thailand and Mexico expansions. Financing provided $64.9 million, largely from net credit-facility borrowings.
- Cash was $35.6 million at March 31, 2022, down from $106.4 million at June 30, 2021. Credit-facility borrowings totaled $137.1 million ($42.1 million current and $95.0 million long-term), compared with $66.2 million at June 30, 2021. The weighted-average borrowing rate was 2.3%.
- Working capital was $316.6 million; current ratio was 1.8 and debt-to-equity was 0.3. Management reported $78.4 million of short-term liquidity, including cash and unused facility capacity. It said available liquidity and expected cash generation should cover operating needs for at least 12 months.
Material changes and management commentary
- Quarterly sales rose 19%, with record quarterly sales. Automotive sales increased 16%, medical 20%, and industrial 22%; public safety sales increased 2%. Year-to-date sales increased just 1%: automotive and industrial grew, while medical and public safety declined.
- Quarterly gross margin improved from the prior-year quarter due partly to higher revenue leverage and reduced depreciation. Year-to-date gross margin fell amid first-half lost absorption, higher materials, freight and labor costs, and component shortages.
- Management changed the estimated useful lives of certain surface-mount production equipment from five or seven years to ten years, effective November 1, 2021. The change reduced depreciation by $2.4 million and increased net income by $1.9 million, or $0.07 per share, in the quarter; year to date it reduced depreciation by $4.1 million and increased net income by $3.2 million, or $0.13 per share.
- Open orders were $929.6 million, up 43% year over year, largely reflecting constrained fulfillment from component shortages. Management cautioned that orders may be delayed or canceled and may not predict future sales.
- Management described demand as strong entering the fiscal-year fourth quarter and expected automotive demand to remain strong, supported by program ramps and new launches. No specific full-year financial guidance was provided.
Risks, contingencies, and unusual items
- Component shortages and shipping delays, COVID-19 disruptions including renewed restrictions in China, and inflation in materials, labor, and freight could impair production, margins, and order fulfillment. Management said cost recovery through customer pricing had mitigated most increases, but near-term profitability remained affected.
- The war in Ukraine and related sanctions could add supply-chain, commodity-price, currency, logistics, and security risks. The company reported no direct material procurement from Ukraine or Russia, but noted possible indirect impacts, particularly in automotive.
- Customer/program concentration and contract-manufacturing risks remain relevant: Nexteer Automotive and Philips represented 18% and 15% of quarterly sales, respectively. Customer agreements generally do not have definitive terms and may be canceled subject to contractual provisions.
- Other income/expense included foreign-currency and derivative losses; the nine-month comparison also reflects prior-year gains. Class-action settlement receipts contributed $1.4 million of other general income year to date. Executive succession-planning charges also increased selling and administrative expense.
- On May 4, 2022, after quarter-end, the company replaced its primary credit facility with a $300 million facility maturing May 4, 2027, with an option to increase capacity to $450 million. The secondary $20 million facility was terminated. The company reported compliance with prior-facility covenants during the period.
- Capital expenditure commitments were approximately $16 million. The Thailand expansion was completed; Mexico was expected to finish in early fiscal 2023 and the Poland expansion in early fiscal 2024. Routine litigation was not expected to have a material adverse effect; no material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- How much of the reported earnings improvement reflects the useful-life estimate change, and how would margins look absent that benefit?
- Whether component availability improves enough to convert the elevated open orders into shipments and cash collections, without further inventory accumulation.
- Whether pricing recovers ongoing cost inflation and margins improve from the 7.2% year-to-date gross margin.
- Facility borrowing, covenant headroom, and liquidity after the May 2022 refinancing; the filing does not provide a clear numerical covenant headroom value.
- Execution, cost, and timing of the Mexico and Poland expansions, alongside the company’s working-capital and capital-spending needs.