Kimball Electronics, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended March 31, 2016 (the third quarter of fiscal 2016), not 2015 Q3 as indicated in the request. Financial statements are unaudited.
Business context and reporting period
Kimball Electronics is a global contract electronics manufacturer serving automotive, medical, industrial, and public safety markets. Comparisons below are against the three and nine months ended March 31, 2015, as applicable.
Financial performance
| Metric | Three months ended Mar. 31, 2016 | Prior year | Nine months ended Mar. 31, 2016 | Prior year |
|---|---|---|---|---|
| Net sales | $214.1 million | $206.9 million | $621.7 million | $618.2 million |
| Gross profit / margin | $16.2 million / 7.6% | $19.0 million / 9.2% | $47.6 million / 7.7% | $54.7 million / 8.9% |
| Operating income | $7.1 million | $10.8 million | $20.9 million | $27.3 million |
| Net income | $7.5 million | $7.2 million | $16.5 million | $18.8 million |
| Diluted EPS | $0.26 | $0.25 | $0.57 | $0.64 |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $28.0 million | $11.3 million |
For the nine-month period, investing cash outflow was $27.8 million, mainly reflecting capital expenditures; financing cash outflow was $5.7 million, including share repurchases. Cash declined $5.4 million to $59.8 million. Capital expenditures were $27.1 million.
At March 31, 2016, working capital was $193.6 million and the current ratio was 2.1. Short-term liquidity, defined by the company as cash plus unused credit facilities, was $116.5 million. Borrowings were $3.0 million under the China facility; there were no borrowings under the U.S. primary facility. The U.S. facility permits up to $50 million of borrowing, subject to its terms, and the company reported compliance with its financial covenants.
Material changes versus prior comparable periods
- Quarterly sales rose 4%, but gross profit fell 15% and operating income fell 35%; margin pressure reflected customer price reductions, product mix, foreign exchange, and new-product launch costs.
- Nine-month sales increased 1%, while gross profit declined 13%, operating income 23%, and net income 12%. Lower gross margin was partly offset by reduced selling and administrative expenses.
- Automotive sales increased 14% for the quarter and 9% year to date; medical sales rose 10% for the quarter and were approximately flat year to date. Industrial sales declined 11% in both comparisons; public safety sales fell 8% for the quarter and were approximately flat year to date.
- Quarterly net income increased despite lower operating income, aided by a $1.8 million discrete foreign tax benefit from a favorable ruling regarding Romania subsidiary capitalization. The nine-month effective tax rate was 17.1%, versus 27.9% a year earlier.
Outlook, commentary, risks, and unusual items
- No specific numerical earnings or revenue guidance is provided. Management described expected EMS demand as moderate but mixed, with relative strength in automotive, stable medical demand, and weaker industrial climate-control and public safety demand.
- Management expected available funds, operating cash generation, and credit availability to meet needs for at least the next 12 months. Romania operations had begun, with capacity expected to ramp through fiscal 2017; capital expenditure commitments were approximately $8.9 million.
- On May 2, 2016, after quarter-end, the company acquired certain assets and operations of Medivative Technologies for approximately $8.3 million in cash, subject to working-capital adjustments. Purchase-price allocation was incomplete.
- The board’s $20 million, 18-month repurchase authorization had $8.2 million completed through March 31, 2016. The company cited risks including customer/program concentration and cancellations, pricing pressure, demand variability, foreign exchange, component availability, and execution of new programs and operations.
- Foreign currency contracts had $27.6 million of U.S.-dollar-related and €60.9 million of euro-related notional exposure. Management estimated a $1.6 million pre-tax derivative loss in accumulated other comprehensive income would be reclassified within 12 months, alongside the related transactions.
- Contingencies included $2.5 million of transferred Chinese banker’s acceptance drafts with recourse provisions and $0.4 million of standby letters of credit; the company reported no known circumstances requiring payment under the standby letters.
Important facts for investors to verify
- Confirm the reporting period: this is fiscal Q3 2016, ended March 31, 2016.
- Assess whether recent gross-margin declines and the associated price, mix, foreign-exchange, and start-up pressures persist.
- Review customer and market concentration, including sales shares to Philips, ZF TRW, and Nexteer Automotive, and progress replacing JCI program volume.
- Track working-capital movements, capital spending, Romania’s ramp, and liquidity after the Medivative acquisition and continuing repurchases.
- Evaluate the recurring nature of the tax benefit and the potential earnings effects of derivative reclassifications.