Kimball Electronics, Inc. — Form 10-Q Summary
Business context and period. This report covers the three months ended September 30, 2014, the first quarter of fiscal 2015, compared with the three months ended September 30, 2013. Kimball Electronics provides contract manufacturing services for durable electronics in automotive, medical, industrial, and public safety markets. It was a Kimball International subsidiary during the reported periods and became an independent public company on October 31, 2014. The financial statements are historical carve-out statements and include parent-company cost allocations; management cautions that these may differ from costs as a stand-alone company.
Financial performance and position
| Metric | Quarter ended Sep. 30, 2014 | Prior-year quarter | Change / context |
|---|---|---|---|
| Net sales | $203.8 million | $175.6 million | Up 16% |
| Gross profit / margin | $17.9 million / 8.8% | $12.4 million / 7.1% | Margin up 1.7 percentage points |
| Operating income / margin | $7.8 million / 3.8% | $9.3 million / 5.3% | Down 16% in dollars |
| Net income | $5.4 million | $7.7 million | Down 30% |
| Basic and diluted EPS | $0.18 | $0.26 | Share counts retrospectively restated for the spin-off share split |
| Cash from operations | $(4.5) million | $5.6 million | Working capital used $15.5 million in the current quarter |
| Capital expenditures | $7.7 million | $3.9 million | Investing cash outflow was $7.7 million versus $3.6 million |
At September 30, cash was $20.7 million, total current assets were $300.4 million, and total current liabilities were $145.1 million. Total assets were $417.4 million and total liabilities were $155.0 million. The filing reports no borrowings under the foreign credit facilities at quarter-end. Cash decreased $5.6 million during the quarter; financing provided $7.8 million, primarily net transfers from the former parent.
Changes, unusual items, and management commentary
- Sales increased across all four principal markets: automotive 13%, medical 26%, industrial 12%, and public safety 12%. Open orders were up 10% year over year, though the company cautioned that open orders may not predict future sales.
- Gross margin improved with higher-revenue leverage and comparison against a prior-year $0.6 million inventory write-down. Selling and administrative expense rose 31% to $10.1 million, reflecting approximately $1.0 million of spin-off costs, higher incentive compensation, and salary expense.
- Prior-year operating results included $5.0 million of pre-tax antitrust-settlement income; no such income was recorded in the current quarter. Prior-year results also included $0.4 million of restructuring expense. These items materially affect the year-over-year comparison.
- Net income was also affected by a $4.7 million adverse change in other comprehensive income, primarily from foreign-currency translation. Non-operating expense was $0.5 million, including foreign currency/derivative losses.
- Receivables rose $7.6 million from June 30, partly due to delayed payment by one customer, higher sales, and changed payment practices at larger customers. Inventory increased $4.4 million to support sales. DSO was 57.4 days versus 56.6 days a year earlier.
- Johnson Controls (JCI) represented 7% of sales, down from 18% a year earlier. Management expected further declines as programs reach end-of-life and JCI insources certain production; the transition was expected to be substantially complete by January 2015. Management said much of the affected volume had been or was expected to be replaced with new business.
Outlook, liquidity, and risks
Management expected moderate EMS-market growth with mixed demand. It cited improving automotive conditions in the U.S. and China, signs of improvement in Europe, stronger industrial demand for climate-control products, stabilizing public safety demand, and stable medical demand. Industry forecasts cited in the filing projected 7% EMS-market growth for calendar 2014 and 2015; these are external forecasts, not company guidance. The filing provides no specific company revenue or earnings guidance.
Following the spin-off, the company reported approximately $63 million of available cash, including cash held at foreign facilities, and stated that cash, operating cash generation, and credit availability should meet needs for at least 12 months. It entered a five-year JPMorgan revolving credit facility on October 31, 2014, with capacity of $50 million and an option to increase to $75 million subject to lender consent. The facility includes leverage and fixed-charge-coverage covenants. The Poland facility was canceled at the spin-off and was not replaced. Quarter-end cash held by foreign operations was $20.7 million; management intended to permanently reinvest these funds outside the U.S., subject to stated tax consequences if repatriated.
Key risks include customer order variability and cancellations, replacing expiring programs, customer concentration and insourcing, competitive pricing, component availability, customer and supplier financial stability, foreign-exchange movements, and the costs and execution of operating independently. New programs may incur losses during start-up. The company also had joint and several tax liabilities with its former parent for certain pre-spin-off periods, allocated between the parties under the tax matters agreement. Standby letters of credit had maximum exposure of $0.1 million; the filing identified no material off-balance-sheet arrangements beyond ordinary-course operating leases and letters of credit.
Important facts for investors to verify
- Whether new customer programs replace JCI end-of-life and insourced revenue on schedule and at comparable margins.
- Whether the working-capital cash use, customer payment delays, and increased inventory reverse or persist.
- Actual stand-alone corporate costs after transition services end; reported historical expenses include parent allocations and current-quarter spin-off costs.
- Cash availability and covenant compliance under the new revolving facility, including the status of any borrowings and the treatment of foreign cash.
- Whether management’s expected moderate market growth translates into company growth, given program volatility and customer concentration.