Kimball Electronics, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2016; unaudited. Kimball Electronics is a contract electronics manufacturer serving automotive, medical, industrial, and public safety markets.
Financial performance
| Metric | Three months ended Dec. 31, 2016 | Year-over-year change | Six months ended Dec. 31, 2016 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $230.3 million | +11% | $456.7 million | +12% |
| Gross profit / margin | $20.6 million / 8.9% | +28%; up from 7.8% | $38.9 million / 8.5% | +24%; up from 7.7% |
| Operating income / margin | $12.2 million / 5.3% | +77%; up from 3.3% | $25.1 million / 5.5% | +81%; up from 3.4% |
| Net income | $7.8 million | +71% | $17.9 million | +98% |
| Diluted EPS | $0.28 | Prior year: $0.16 | $0.65 | Prior year: $0.31 |
Quarterly improvement in gross margin reflected higher-volume leverage, productivity, lower U.S. healthcare costs, and favorable mix, partly offset by Romania start-up and new-program ramp costs. Selling and administrative expense fell 9% in the quarter; first-half expense rose 2% in dollars but declined as a percentage of sales.
First-half operating results included $4.0 million of class-action settlement income in other general income. The Aircom acquisition generated a $0.9 million bargain-purchase gain in non-operating income. Foreign currency and derivative losses were $1.5 million for the half-year; net other expense was $0.3 million. The reported first-half effective tax rate was 27.7%, versus 28.3% in the prior period.
Cash, debt, and liquidity
- Six-month operating cash flow was $26.1 million, versus $16.3 million a year earlier. Investing cash outflow was $21.7 million, including $19.1 million of capital expenditures and $2.1 million net acquisition spending. Financing cash outflow was $15.0 million, primarily reflecting share repurchases.
- Cash declined $12.0 million during the half-year to $42.7 million. At December 31, current assets were $363.4 million and current liabilities $185.1 million; working capital was $178.3 million and the current ratio 2.0.
- Borrowings were $9.0 million, classified as short-term, with no long-term debt. The company reported $93.3 million of short-term liquidity, including cash and unused credit facilities, and stated it was in compliance with credit-facility covenants.
- Equity was $325.8 million. The company repurchased $13.8 million of common stock in the first half and had repurchased $26.9 million under its plan through December 31. Capital expenditure commitments were approximately $8 million.
Changes, outlook, and risks
- Automotive sales rose 16% in the quarter and 22% for the half-year; medical sales rose 6% and 8%, and industrial sales rose 13% and 8%. Public safety sales were down 1% for the quarter and 10% for the half-year. Management attributed growth to stronger automotive demand, new product ramps, acquisitions and medical launches, and industrial demand for climate control and smart-metering products.
- Open orders were $189.9 million, up 12% year over year, but management cautioned that orders at a point in time may not predict future sales. The company described expected EMS-market growth as moderate with mixed demand; it did not provide specific company revenue or earnings guidance.
- Management cited customer and program variability, pricing pressure, capacity management, customer concentration, order delays, component availability, competition, foreign-exchange movements, and integration of acquisitions and new operations as risks. Customer agreements may be canceled, and replacing expiring programs is important to continued growth.
- Aircom was acquired in July 2016 for $3.5 million in consideration; its results had an immaterial effect in the reported periods. Romania operations were ramping up, with capacity expected to continue increasing through fiscal 2017. Foreign operations held $39.4 million in cash, which the company intended to keep invested abroad; repatriation could incur taxes.
- The filing reported no material changes to previously disclosed risk factors and no material pending legal proceedings. Disclosure controls were deemed effective.
Important facts for investors to verify
- How much reported earnings growth depends on the $4.0 million settlement and $0.9 million bargain-purchase gain, versus ongoing operations.
- Whether automotive, medical, and industrial demand and the 12% increase in open orders translate into sustained sales and margins, given weaker public safety sales.
- Whether Romania ramp-up and acquisition integration meet expectations, and how much additional investment or cost they require.
- Cash conversion and working-capital trends, the use of foreign-held cash, and planned share repurchases alongside capital needs.
- Exposure to major customers: Philips, Nexteer Automotive, and ZF TRW represented 14%, 12%, and 11% of first-half sales, respectively.