Kimball Electronics, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2019. Unaudited results are compared with the periods ended December 31, 2018. Kimball Electronics provides contract electronics and diversified manufacturing services to automotive, medical, industrial, and public safety customers.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $307.1 million, up 8% | $620.5 million, up 13% |
| Gross profit / margin | $20.5 million / 6.7%, versus $20.4 million / 7.2% | $42.7 million / 6.9%, versus $38.6 million / 7.0% |
| Operating income / margin | $8.7 million / 2.8%, down 15% | $19.8 million / 3.2%, up 15% |
| Net income | $6.6 million, down 7% | $13.2 million, up 8% |
| Diluted EPS | $0.26, versus $0.27 | $0.52, versus $0.46 |
Second-quarter sales growth reflected program ramp-ups, new product introductions, and higher demand. Automotive sales rose 20% for the quarter and 19% year to date; medical was flat for the quarter and up 11% year to date; industrial rose 7% and 10%, respectively. Public safety sales declined 18% for the quarter and 9% year to date.
Quarterly gross margin fell primarily because of unfavorable product mix and reduced sales to customers supporting GM during the UAW strike, which outweighed leverage from higher revenue. Selling and administrative expense increased 16% in the quarter, including higher SERP-related expense and consulting fees. Year-to-date earnings benefited from higher sales and operating income, while interest expense rose to $2.4 million from $1.5 million.
Cash flow, balance sheet, and liquidity
- Six-month operating cash flow was $39.3 million, compared with cash used of $4.4 million in the prior-year period. Cash generation included a $28.9 million reduction in receivables, primarily associated with increased factoring; higher contract assets used $15.1 million.
- Investing cash outflow was $22.0 million, including $21.9 million of capital expenditures. Financing cash outflow was $13.9 million, including $6.1 million of share repurchases and net repayments on credit facilities. Cash increased $2.9 million to $52.2 million.
- At December 31, cash was $52.2 million; total borrowings were approximately $119.4 million, including $27.9 million current and $91.5 million long-term. The weighted-average borrowing rate was 3.7%. Unused facility capacity was $67.8 million, some of it uncommitted; reported short-term liquidity, including cash, was $120.0 million.
- Working capital was $281.4 million; the current ratio was 2.1 and debt-to-equity was 0.3. Total assets were $758.0 million and shareholders’ equity was $376.8 million.
- Contract assets increased to $67.0 million from $51.9 million at June 30, 2019. Receivables declined to $196.3 million from $225.6 million, primarily due to factoring. The company sold $142.4 million of receivables without recourse during the half-year.
Outlook, risks, and notable items
- Management described market demand as mixed and expects moderate growth. Its stated goal is 8% annual organic growth. Management expects available funds, operating cash flow, and credit facilities to cover working capital and other needs for at least 12 months.
- Open orders were $399.4 million, up 24% year over year; substantially all were expected to be filled within 12 months. The filing cautions that orders may be canceled and are not necessarily indicative of future sales.
- Management cited risks from demand fluctuations, customer and program concentration, pricing pressure, component shortages, tariffs, foreign exchange, and the need to replace expiring programs. It specifically noted that the coronavirus outbreak in China could affect its two China facilities, shipments, component availability, and workforce.
- The company was in compliance with its credit-facility covenants. The primary facility requires leverage no greater than 3.0-to-1.0 and fixed-charge coverage of at least 1.1-to-1.0; actual covenant ratios were not stated.
- The GES acquisition’s net working-capital adjustment remains disputed by the sellers. The company recorded a $3.8 million net receivable due from the seller; resolution could affect earnings. The filing says the purchase price is final following the measurement period.
- The remaining one-time deemed repatriation tax payable was $9.8 million, due through fiscal 2026. The company reported no material pending legal proceedings. Lease accounting adoption added $2.6 million of right-of-use assets and liabilities without a material effect on results or cash flows.
Important facts for investors to verify
- Whether the increase in open orders converts to revenue, particularly in automotive, and how customer concentration affects sales.
- Whether margins recover from the quarter’s product-mix and GM strike-related pressures, amid component cost, availability, and tariff risks.
- How the China coronavirus disruption affected operations, shipments, workforce availability, and supply chains after the reporting date.
- Whether cash generation remains sustainable given factoring activity and rising contract assets, and how capital spending and debt evolve.
- The eventual resolution and collectability of the disputed GES working-capital adjustment and related seller receivable.