Kimball Electronics, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended June 30, 2017. Although the request metadata says “2016 Q4,” this filing reports FY2017 results, with FY2016 as the principal comparison.
Business context
Kimball Electronics is a global contract electronics manufacturer serving automotive, medical, industrial, and public safety markets. It reported one aggregated operating segment and operated nine manufacturing facilities across the U.S., China, Mexico, Poland, Romania, and Thailand.
Financial results and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $930.9 million | $842.1 million |
| Gross profit / margin | $75.6 million / 8.1% | $64.5 million / 7.7% |
| Operating income / margin | $43.1 million / 4.6% | $29.7 million / 3.5% |
| Net income | $34.2 million | $22.3 million |
| Diluted EPS | $1.24 | $0.76 |
| Cash from operations | $46.8 million | $36.8 million |
| Capital expenditures | $33.3 million | $33.7 million |
| Cash and cash equivalents at year-end | $44.6 million | $54.7 million |
Revenue increased 11%; net income increased 53%. Operating cash flow improved, though working-capital changes used $14.1 million, principally from higher receivables and inventory. Year-end working capital was $188.9 million, versus $187.4 million; the current ratio was 1.9, versus 2.1.
Borrowings were $10.0 million, all current under the primary credit facility; the filing reports no long-term debt. Cash plus unused credit facilities totaled $104.8 million, including $60.2 million of borrowing availability. Shareholders’ equity was $342.3 million. The company repurchased $21.9 million of shares during FY2017.
Changes and drivers
- Sales grew in all four principal markets: automotive +16%, medical +3%, industrial +10%, and public safety +15%. Automotive accounted for 41% of sales.
- Gross margin improved from 7.7% to 8.1%, reflecting higher-volume leverage, productivity, and favorable mix, partly offset by Romania start-up and new-product introduction costs.
- Open orders rose 25% to $214.3 million, but the company cautioned that orders may be canceled and are not necessarily predictive of future sales.
- Philips, ZF, and Nexteer represented 14%, 12%, and 12% of FY2017 sales, respectively.
Outlook, commentary, and risks
- Management described expected EMS market growth as moderate with mixed demand. It cited improving automotive, industrial, and public-safety demand and stable medical demand. No specific company revenue or earnings guidance was provided.
- Romania operations had begun, with capacity expected to continue ramping in FY2018. Year-end capital expenditure commitments were approximately $5 million.
- Management highlighted pricing pressure, excess industry capacity, customer insourcing, program start-up costs, and the need to replace expiring programs. Customer purchase commitments are generally not guaranteed.
- Other significant risks include customer concentration, component shortages, foreign exchange and international operating exposure, labor availability, acquisition integration, cybersecurity, and changes in trade or tax rules. Foreign cash was $43.4 million and was intended to remain invested abroad; repatriation could incur taxes.
- The filing reported $4.0 million of class-action settlement income and a $0.9 million bargain-purchase gain from the Aircom acquisition. These unusual items boosted FY2017 results; the settlement contributed approximately $2.5 million of after-tax income.
- Management expected the forthcoming revenue-recognition standard to materially affect financial statements, including recognition of contract assets and reduced inventory balances; the company anticipated over-time recognition for most manufacturing contracts. Adoption was expected in FY2020 under its emerging-growth-company transition election.
Investor verification priorities
- Assess earnings quality by separating recurring operating performance from the $4.0 million settlement and Aircom bargain-purchase gain.
- Track whether higher open orders convert to sales and whether receivables, inventory, and cash conversion remain controlled.
- Monitor customer and end-market concentration, program renewals, cancellations, and customer insourcing.
- Verify Romania ramp costs, acquisition integration, and the returns on capital spending and repurchases.
- Review the expected effects and transition method for the new revenue-recognition standard, as well as the company’s foreign-cash and tax position.