Kimball Electronics, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended March 31, 2023; comparative periods ended March 31, 2022. The filing is dated May 5, 2023. Although the request metadata says “2022 Q3,” the filing covers fiscal Q3 2023.
Business context and performance
Kimball Electronics provides contract electronics and diversified manufacturing services, including engineering and supply-chain support, primarily to automotive, medical, and industrial customers. The company reported record quarterly sales, citing improving component availability, new program launches, and production ramp-ups.
- Quarterly sales rose 32% to $484.7 million. Sales increased in automotive (34%), medical (30%), and industrial (29%); currency movements reduced reported growth by 2 percentage points.
- Nine-month sales rose 36% to $1.327 billion. Growth was 40% in automotive, 34% in medical, and 30% in industrial; currency movements reduced growth by 4 percentage points.
- Three-month gross profit was $43.0 million, up 27%, but gross margin declined to 8.9% from 9.2%. Operating income increased 24% to $25.2 million; operating margin declined to 5.2% from 5.5%.
- Quarterly net income increased 20% to $16.4 million; diluted EPS increased to $0.65 from $0.54.
- For nine months, gross profit increased 51% to $106.5 million and gross margin improved to 8.0% from 7.2%. Operating income rose 76% to $56.3 million, and net income rose 72% to $36.6 million. Diluted EPS was $1.46 versus $0.84.
- Open orders were $882 million, down 5% year over year, which management attributed largely to improved ability to fulfill orders as component availability recovered. Most open orders were expected to be filled within 12 months, but orders may be delayed or canceled.
Cash flow, balance sheet, and liquidity
- For the first nine months, operating cash flow was negative $57.9 million, compared with negative $84.7 million a year earlier. The company attributed cash use mainly to inventory and receivables growth, partly offset by increased payables.
- Investing cash outflow was $66.5 million, including $65.5 million of capital expenditures. Financing provided $107.1 million, primarily from net borrowings. Cash, cash equivalents, and restricted cash ended at $32.3 million; balance-sheet cash and cash equivalents were $30.4 million.
- At March 31, 2023, borrowings under credit facilities totaled $289.4 million, including $54.4 million current and $235.0 million classified as long-term. The weighted-average borrowing rate was 6.6%, up from 2.7% at June 30, 2022. Total borrowings had increased $108.8 million since June 30, 2022.
- Unused capacity under credit facilities was $98.1 million. Management reported short-term liquidity of $128.5 million, defined as cash and cash equivalents plus unused facility capacity. Working capital was $441.8 million; the current ratio was 1.9 and debt-to-equity was 0.6.
- Receivables increased $76.5 million and inventory increased $92.5 million from June 30, 2022. Inventory investment supported facility growth and strategic purchases amid component shortages. Cash conversion days were 92, versus 79 a year earlier.
- Capital expenditure commitments were approximately $16 million. Management expected liquidity to cover planned spending and believed available funds, operating cash flow, and borrowing capacity would meet needs for at least 12 months. The Poland expansion was expected to be completed in early fiscal 2024.
Material changes, outlook, and risks
- Quarterly gross margin weakened despite higher sales, as the company continued optimizing operations following facility expansions. Nine-month margin improved through revenue leverage and comparison with prior-year component-shortage-related under-absorption.
- Interest expense rose to $4.8 million for the quarter and $10.8 million for nine months, reflecting higher rates and increased borrowings. The nine-month effective tax rate was 24.1%, compared with 25.0%.
- Management said inflation in components, labor, freight, and other costs had affected profitability. Customer pricing arrangements and negotiations mitigated most cost increases, but extended inventory lead times weighed on working capital. The duration and severity of supply constraints and their financial impact remained uncertain.
- Management expects inventory and working capital to normalize as shortages ease and expanded facilities ramp up. It also emphasized cost control, continued investment in capacity and capabilities, and the challenge of protecting margins in a competitive industry where prices generally decline over product lifecycles. No specific earnings or revenue guidance was provided.
- Customer concentration is notable: Nexteer Automotive represented 15% of nine-month sales and Philips 15%; ZF represented 12%. The filing cites risks from customer/program turnover, demand fluctuations, customer order delays or cancellations, component availability, logistics, inflation, foreign exchange, geopolitical events, and customer sourcing decisions.
- The company entered into a $50 million 364-day secondary revolving facility maturing February 2, 2024. It was undrawn at quarter-end; the company also had $0.4 million of letters of credit under its primary facility. The company reported compliance with its credit covenants.
- A change in estimated useful lives for certain production equipment reduced nine-month depreciation expense by $2.6 million and increased net income by $2.0 million, or $0.08 per basic and diluted share. This is an important non-cash estimate effect on reported earnings.
- Goodwill impairment testing for the Global Equipment Services reporting unit is planned for the fourth quarter. Its fair value exceeded carrying value by 9% in the April 2022 test; a decline in value could lead to a non-cash impairment charge. No material pending legal proceedings or material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether sales growth converts into stronger operating cash flow as inventory builds unwind and receivables are collected.
- Whether gross margins recover as Mexico, Thailand, and Poland expansions ramp, and how persistent inflation and customer pricing terms affect profitability.
- Debt levels, borrowing costs, available facility capacity, covenant headroom, and refinancing of the secondary facility due in February 2024.
- The effect of the useful-life estimate change on earnings comparability and the outcome of the upcoming goodwill impairment test.
- Open-order conversion, customer concentration, and whether component availability, customer demand, and program launches continue to support sales.