Kimball Electronics, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended June 30, 2021. Although the request metadata says “2020 Q4,” this filing reports FY2021 annual results, with FY2020 as the principal comparison.
Business context
Kimball Electronics is a global contract electronics and diversified manufacturing services provider serving automotive, medical, industrial, and public safety markets. It reports one aggregated segment. Manufacturing operations span the U.S., China, Mexico, Poland, Romania, Thailand, and Vietnam; software design services are primarily performed in India.
Key financial metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Net sales | $1,291.8 million | $1,200.6 million | +8% |
| Gross profit / margin | $118.0 million / 9.1% | $83.8 million / 7.0% | Margin +2.1 percentage points |
| Operating income / margin | $65.7 million / 5.1% | $32.0 million / 2.7% | +105% |
| Net income | $56.8 million | $18.2 million | +212% |
| Diluted EPS | $2.24 | $0.71 | — |
| Operating cash flow | $130.1 million | $72.8 million | — |
| Capital expenditures | $38.4 million | $38.4 million | — |
At June 30, 2021, cash and cash equivalents were $106.4 million and borrowings under credit facilities totaled $66.2 million, down from $118.1 million a year earlier. Unused credit-facility capacity was $100.3 million; stated short-term liquidity, including cash, was $206.7 million. Working capital was $282.6 million, the current ratio 1.9, and debt-to-equity 0.1. Shareholders’ equity was $442.0 million.
Net cash from investing activities was $38.8 million used, largely reflecting capital spending. Financing activities used $53.1 million, mainly from net credit-facility repayments. The company sold $306.3 million of receivables without recourse through factoring arrangements during FY2021.
Material changes versus FY2020
- Automotive sales rose 21% to $551.5 million; medical sales fell 3% to $384.8 million; industrial sales rose 8% to $293.7 million; public safety sales fell 14% to $48.1 million.
- Management attributed improved gross margin mainly to stronger execution, favorable automotive mix as programs matured, and favorable foreign exchange, partly offset by increased profit-sharing expense.
- Operating cash flow increased, supported by lower contract assets and inventory and higher accounts payable; increased receivables partly offset these sources.
- FY2020 included a $7.9 million non-cash goodwill impairment charge and a $3.8 million GES acquisition working-capital adjustment. Neither was recorded in FY2021. FY2021 net income also benefited from improved other income, including $4.8 million in net foreign-currency and derivative gains.
Outlook, commentary, and risks
- Management expects automotive demand to remain strong in FY2022, with a stronger second half than first half as component supply is expected to catch up. This is subject to substantial uncertainty; no numeric revenue or earnings guidance is provided.
- Open orders were $749.0 million, up 78% year over year, primarily in automotive. The company cautions that orders may be delayed or canceled and may not predict future sales.
- Semiconductor and other component shortages, allocations, and shipping delays were constraining production and customer fulfillment. Management could not reasonably estimate their duration or financial impact, which could be material.
- COVID-19 continued to create uncertainty around end-market demand, supply chains, workforce availability, and operations. Management said its full financial impact could not be reasonably estimated.
- Other key exposures include dependence on large customers and replacement of expiring programs, pricing and margin pressure, labor availability, international and foreign-exchange risks, customer credit and working-capital swings, cybersecurity, regulatory and product-quality compliance, and environmental obligations.
- Capital expenditure commitments were approximately $28 million, primarily for Mexico and Thailand expansions, new programs, and productivity projects. Management expects available liquidity to fund these commitments and operating needs for at least 12 months. The company does not plan to pay a dividend in FY2022.
- The independent auditor issued unqualified opinions on the financial statements and internal controls. Revenue recognition for contracts recognized over time was identified as a critical audit matter, particularly the estimates of anticipated program margins and related contract assets.
Important facts for investors to verify
- Whether semiconductor availability and customer order fulfillment support the projected FY2022 automotive recovery, and how much of the open-order backlog converts to sales.
- Whether margin improvement persists as new programs ramp, pricing remains competitive, and product and customer mix changes.
- Customer concentration and exposure: Nexteer represented 17% of FY2021 sales and 24% of trade receivables; Philips represented 15% of sales.
- The assumptions underlying over-time revenue recognition: 89% of FY2021 sales used this method, and year-end contract assets were $45.9 million.
- Liquidity quality and geographic availability: $105.2 million of cash was held by foreign operations, and most foreign earnings are intended to remain invested abroad.
- Credit-facility covenant compliance, refinancing needs, and the effect of the scheduled July 2023 maturity and the transition away from LIBOR.