Kimball Electronics, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended March 31, 2017 (fiscal 2017 Q3), not calendar 2016 Q3 as stated in the request metadata. Financial statements are unaudited. Kimball Electronics is a global contract electronics manufacturer serving automotive, medical, industrial, and public safety markets.
Financial performance and position
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $232.9 million, up 9% | $689.6 million, up 11% |
| Gross profit / margin | $18.7 million / 8.0%, versus 7.6% | $57.6 million / 8.4%, versus 7.7% |
| Operating income | $9.5 million, up 35% | $34.6 million, versus $20.9 million |
| Net income | $8.1 million, versus $7.5 million | $26.1 million, versus $16.5 million |
| Diluted EPS | $0.30, versus $0.26 | $0.94, versus $0.57 |
- Cash flow: Nine-month operating cash flow was $34.7 million, versus $28.0 million. Investing activities used $27.9 million; financing activities used $20.5 million. Cash declined $14.7 million to $40.1 million.
- Liquidity and debt: Working capital was $186.5 million and the current ratio was 2.0. Short-term liquidity, defined by the company as cash plus unused credit facilities, was $93.3 million. Borrowings were $6.5 million under the U.S. facility; the company reported no long-term debt and compliance with its covenants.
- Balance sheet: Total assets were $533.1 million and equity was $334.4 million at March 31, 2017. Receivables and inventory rose $12.1 million and $11.1 million, respectively, from June 30, 2016, primarily in support of higher sales and production.
Changes and operating drivers
- Quarterly sales rose in automotive (10%), industrial (18%), and public safety (47%), but fell in medical (9%). For the nine months, sales grew across all four principal markets; automotive increased 18% and industrial 11%.
- Management attributed improved gross margin to higher-volume leverage, productivity, and favorable product mix, partly offset by Romania ramp-up and new-program start-up costs. Quarterly medical softness was attributed mainly to weaker demand.
- Results included $4.0 million of nine-month other general income from a class-action settlement concerning alleged supplier component-price fixing. The nine-month results also included a $0.9 million bargain-purchase gain from the Aircom acquisition. These items increased reported earnings and are not presented as recurring operating performance.
- Nine-month capital expenditures were $25.1 million. The company repurchased $16.8 million of shares during the period and had repurchased $29.9 million under its plan since inception.
Outlook, risks, and contingencies
- No quantified company revenue or earnings guidance was provided. Management expects moderate EMS-market growth with mixed demand; it cited stronger automotive, industrial, and public safety demand, while medical demand remained stable overall.
- Management expects available cash, operating cash generation, and credit facilities to meet working-capital and other operating needs for at least 12 months. Romania capacity is expected to continue ramping in fiscal 2018. Capital expenditure commitments were approximately $8 million at March 31.
- Key risks include demand fluctuations, customer or program loss, customer concentration, competitive pricing, component availability, foreign-exchange movements, acquisition integration, and the ramp-up of new operations. Customer contracts may be canceled, and new program starts can initially generate losses. Open orders were up 3% year over year, but the filing cautions that this may not predict future sales.
- Foreign operations held $38.9 million of cash that management intends to keep invested abroad; repatriation could trigger U.S. and non-U.S. taxes. The filing reported $3.3 million of transferred China banker’s acceptance drafts subject to recourse and $0.4 million of standby letters of credit. No material pending legal proceedings were reported.
Investor verification priorities
- Confirm how much of earnings growth reflects the $4.0 million settlement, the $0.9 million Aircom bargain gain, and other nonrecurring or currency-related items.
- Track whether gross-margin gains persist as Romania and new programs ramp, and whether medical-market demand recovers.
- Monitor working-capital conversion: cash conversion days increased to 61 from 57 a year earlier, while receivables and inventory increased.
- Assess cash deployment, including further repurchases, capital spending, acquisition integration, and the effects of holding substantial foreign cash offshore.
- Verify customer concentration and order trends; Philips, ZF TRW, and Nexteer each represented at least 12% of nine-month sales.