Kimball Electronics, Inc. — Form 10-Q Summary
Business and period. Kimball Electronics provides contract electronics and diversified manufacturing services to automotive, medical, industrial, and public safety customers. This unaudited report covers the first quarter of fiscal 2022, the three months ended September 30, 2021, compared with the three months ended September 30, 2020. Balance-sheet comparisons are with June 30, 2021. Amounts below are in U.S. dollars.
Key financial results
- Sales: $292.7 million, down 12% year over year. Automotive sales rose 9% to $129.4 million; medical fell 33% to $85.0 million; industrial fell 9% to $63.9 million; public safety fell 16% to $11.1 million.
- Profitability: Gross profit was $15.6 million versus $30.6 million, and gross margin declined to 5.3% from 9.2%. Operating income was $4.8 million versus $17.8 million; operating margin was 1.6% versus 5.4%. Net income was $2.6 million versus $16.8 million. Diluted EPS was $0.10 versus $0.66.
- Cash flow: Operating cash flow was a use of $8.2 million, compared with $20.7 million provided a year earlier. Investing activities used $12.9 million, including $12.7 million of capital expenditures. Financing activities provided $5.0 million. Cash declined $17.1 million during the quarter to $89.3 million.
- Liquidity and debt: Working capital was $275.6 million and the current ratio was 1.8. Borrowings under credit facilities totaled $72.6 million ($32.6 million current and $40.0 million long-term); weighted-average borrowing cost was 2.1%. Short-term liquidity, including cash and unused facility capacity (some uncommitted), was $182.8 million. The company reported compliance with its credit-facility covenants.
- Other metrics: Open orders were $749.3 million, up 114% year over year. Cash conversion days increased to 73 from 64 at June 30, 2021. Nexteer Automotive and Philips represented 17% and 14% of quarterly sales, respectively. The effective tax rate was 27.4%, versus 15.7%.
Material changes and drivers
- Sales declined principally because the prior-year medical comparison benefited from unusually high COVID-related demand for respiratory-care and patient-monitoring products. Automotive growth from program ramp-ups, including electric-vehicle programs, was partly offset by semiconductor shortages.
- Management attributed lower gross margin primarily to reduced volume, higher freight costs from component shortages, wage inflation, and higher labor costs as a percentage of sales while retaining employees. Lower profit-sharing expense partly offset these pressures.
- Inventory rose $61.7 million from June 30, largely as the company purchased available materials while awaiting shortage-affected components; accounts payable rose $30.6 million. The inventory build was the main reason operating cash flow was negative.
- Other General Income included $1.4 million of class-action settlement proceeds, versus $0.3 million a year earlier. Foreign currency and derivative results shifted to a $0.6 million loss from a $2.4 million gain, contributing to weaker non-operating results.
Outlook, risks, and contingencies
- Management expects automotive demand to remain strong in fiscal 2022 and anticipates a stronger second half than first half, assuming supply catches up with demand. It cited a long-term company sales-growth target of 8% CAGR; the filing does not provide specific quarterly or full-year fiscal 2022 revenue or earnings guidance.
- Component shortages, allocations, and shipping delays—particularly for semiconductors—were especially challenging in the quarter. Management said their duration and financial impact cannot be reasonably estimated and could remain material. Shortages may raise costs, disrupt production, delay order fulfillment, and affect the timing or certainty of open orders.
- COVID-19, labor availability and wage costs, customer demand and cancellations, customer and program concentration, foreign-exchange movements, and supplier and logistics constraints remain risks. The company noted that customer agreements may generally be canceled with little or no notice.
- Management expects available liquidity to meet operating needs for at least 12 months. Capital expenditure commitments were approximately $30 million, primarily for Thailand and Mexico expansions and new programs. The Thailand expansion was expected to finish in the second half of fiscal 2022 and the Mexico expansion in early fiscal 2023.
- The primary credit facility matures July 27, 2023. Management is monitoring the transition from LIBOR, which could affect borrowing costs. No material off-balance-sheet arrangements were reported; routine litigation was not expected to have a material adverse impact.
Important facts for investors to verify
- Whether component availability improves as anticipated and the substantial open-order balance converts into shipments and sales.
- Whether gross margins recover despite freight, wage, labor, and pricing pressures, and whether operating cash flow improves as inventory normalizes.
- Progress, spending, and completion timing for the Thailand and Mexico expansions, including funding needs against the stated capital commitments.
- Customer concentration and order exposure, particularly to Nexteer and Philips, and the effect of any customer changes or cancellations.
- Available borrowing capacity, covenant headroom, and the company’s LIBOR-transition arrangements; the filing does not state covenant ratios achieved.