Kimball Electronics, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended March 31, 2018 (fiscal 2018 third quarter), not 2017 Q3 as indicated in the request metadata. Financial statements are unaudited; amounts below are in U.S. dollars.
Business context and results
Kimball Electronics is a global electronics manufacturing services company serving automotive, medical, industrial, and public safety markets. Third-quarter growth was driven mainly by new product introductions, stronger demand, and favorable foreign exchange effects.
| Metric | Quarter ended Mar. 31, 2018 | Year to date |
|---|---|---|
| Net sales | $283.9 million, up 22% | $795.3 million, up 15% |
| Gross profit / margin | $22.9 million / 8.1% (prior 8.0%) | $63.4 million / 8.0% (prior 8.4%) |
| Operating income / margin | $11.2 million / 3.9% (prior 4.1%) | $31.0 million / 3.9% (prior 5.0%) |
| Net income | $10.8 million, up 33% | $11.0 million, down 58% |
| Diluted EPS | $0.40 (prior $0.30) | $0.41 (prior $0.94) |
Quarterly gross margin improved slightly as higher revenue leverage was partly offset by new-program support costs and less favorable mix. Year-to-date margin declined due to yield effects, new-program costs, higher domestic healthcare costs, and mix. Year-to-date operating income also reflects the absence of $4.0 million of prior-year class-action settlement income.
Markets, cash flow, and liquidity
- Quarterly sales by market: automotive $136.2 million (+44%); medical $77.8 million (+30%); industrial $53.3 million (-1%); public safety $14.3 million (-31%). Year-to-date automotive and medical sales rose 25% and 21%; public safety fell 9%.
- Open orders were $237.0 million at quarter-end, up 24% year over year; substantially all were expected to be filled within 12 months. Orders may be canceled and are not necessarily indicative of future sales.
- Nine-month operating cash flow was $20.9 million, versus $34.7 million a year earlier. Inventory growth used $47.0 million of cash, partly offset by a $36.0 million cash source from accounts payable.
- Capital expenditures were $21.5 million; investing cash outflow was $21.8 million. Cash declined $0.3 million to $44.2 million.
- At March 31, working capital was $213.2 million and the current ratio was 1.9. Available short-term liquidity, including cash and unused credit facilities, was $99.2 million. Borrowings were $16.3 million, all short-term; the company reported no long-term debt and was compliant with credit covenants.
- Total assets were $621.1 million and shareholders’ equity was $357.1 million. Inventory was $193.2 million, up $48.6 million from June 30, 2017, principally to support higher production, open orders, and a medical-customer inventory program.
Material changes, outlook, and risks
- Year-to-date income tax expense rose to $23.6 million from $8.6 million. Tax Reform produced approximately $12.8 million of deemed-repatriation tax expense and $3.7 million of deferred-tax-asset revaluation expense, materially reducing reported net income. The company expects the lower U.S. statutory rate to benefit future results; provisional tax estimates may be adjusted through December 2018. GILTI tax treatment remained under evaluation.
- Management’s goal is an 8% sales CAGR over the three years ending June 30, 2020; it described the EMS market outlook as moderate growth with mixed demand. No specific near-term earnings or sales guidance was provided.
- Management expects available cash, operating cash flow, and credit facilities to meet needs for at least 12 months. Romania capacity is expected to ramp through the remainder of fiscal 2018 and into fiscal 2019. Capital expenditure commitments were approximately $6 million.
- Risks include component shortages or allocations, customer and program concentration, cancellations and end-of-life programs, pricing pressure, foreign-exchange movements, working-capital demands, and acquisition or new-operation integration. ZF and Nexteer each represented 15% of quarterly sales; Philips represented 12%.
- The company had $11.8 million of long-term income taxes payable related to deemed repatriation tax. It also disclosed $1.3 million of transferred Chinese banker’s drafts subject to recourse; no transferee had exercised recourse. Management reported no material pending legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the reporting-period mismatch: this is fiscal 2018 Q3, ended March 31, 2018.
- Assess how much of the year-to-date earnings decline reflects one-time Tax Reform charges and whether provisional tax estimates change.
- Track inventory, cash conversion days (62 days), operating cash flow, and the customer inventory program for effects on cash generation.
- Evaluate whether open orders and automotive and medical growth convert to sales while supporting margins; monitor public safety declines and customer concentration.
- Review component availability, new-program ramp costs, and management’s progress toward its stated 8% three-year sales CAGR goal.