Kimball Electronics, Inc. — Q1 FY2017 Form 10-Q
Business and period: Global contract electronics manufacturer serving automotive, medical, industrial and public safety markets. This unaudited quarter ended September 30, 2016; comparisons are with the three months ended September 30, 2015 unless otherwise noted. Fiscal Q1 2017 corresponds to the quarter ended September 30, 2016.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net sales | $226.5 million | $200.4 million |
| Gross profit / margin | $18.3 million / 8.1% | $15.3 million / 7.6% |
| Operating income / margin | $12.8 million / 5.7% | $6.9 million / 3.5% |
| Net income | $10.1 million | $4.5 million |
| Diluted EPS | $0.36 | $0.15 |
| Operating cash flow | $14.0 million | $(0.5) million |
| Capital expenditures | $10.3 million | $10.6 million |
Sales rose 13%. By market, automotive sales increased 28% to $92.2 million, medical increased 11% to $65.0 million, industrial increased 4% to $51.5 million, and public safety declined 20% to $13.2 million. Management attributed growth to automotive demand and new product ramps, medical demand and acquisitions, and industrial demand and launches. Public safety weakness reflected lower project demand and a program reaching end of life.
Gross margin improved with higher-volume leverage and product mix, partly offset by Romania start-up costs. Reported results included $4.0 million of pre-tax other general income from a class-action settlement over alleged component supplier price-fixing. Other income also included a $0.9 million bargain-purchase gain from the Aircom acquisition. These items benefited reported earnings; the settlement proceeds were also included in operating cash flow.
Balance sheet, liquidity and capital allocation
- At September 30, 2016, cash was $50.0 million, working capital was $182.4 million, and the current ratio was 2.0. Total assets were $530.0 million and equity was $329.4 million.
- Borrowings were $9.0 million under the U.S. credit facility; the company reported no long-term debt. It was in compliance with credit-facility covenants.
- Management reported $100.7 million of short-term liquidity, defined as cash plus unused credit facilities. Available borrowing capacity under all credit facilities was $50.7 million.
- Operating cash flow was $14.0 million; working-capital changes used $2.3 million, including a $10.6 million receivables increase and $4.7 million inventory increase, partly offset by a $12.0 million accounts-payable increase. Investing activities used $12.3 million, including capital spending and the Aircom acquisition; financing activities used $6.7 million, mainly for share repurchases.
- The company repurchased $6.4 million of stock during the quarter at an average $12.64 per share. Cumulative repurchases under the plan were $19.6 million through quarter-end. The board extended the authorization by an additional $20 million with no expiration date.
Developments, outlook and risks
Kimball acquired certain Aircom Manufacturing assets and assumed liabilities on July 18, 2016. Consideration was $3.5 million, including $2.5 million cash and settlement of a $1.0 million receivable. The business’s period impact was described as immaterial; fair-value allocations were not final and the bargain-purchase gain could be adjusted. Management said Aircom adds precision metal and plastics capabilities. Romania production capacity was expected to continue ramping through FY2017. Capital expenditure commitments were approximately $9 million at quarter-end.
Management characterized EMS demand as moderately growing but mixed: automotive strength was notable in China, medical demand was stable, industrial demand was improving in selected product areas, and public safety softened. Open orders were $179.5 million, up 2% year over year, but management cautioned that open orders may not predict future sales. No specific revenue, earnings or margin guidance was provided. Management said available liquidity, operating cash generation and credit facilities should meet working-capital and other operating needs for at least 12 months.
Principal risks include variable customer demand and project margins, customer or program loss and the need to replace expiring programs, competitive pricing, component availability, customer and supplier financial stability, foreign-exchange movements, and successful integration of acquisitions and new operations. Customer concentration is material: Philips represented 15% of sales, ZF TRW 12%, and Nexteer Automotive 11% in the quarter. Foreign operations held $35.9 million of cash that management intended to keep reinvested outside the U.S.; repatriation could incur taxes. The company disclosed $2.9 million of transferred Chinese banker’s acceptance drafts subject to limited recourse provisions and $0.4 million of standby letters of credit; it reported no material pending legal proceedings.
Important facts for investors to verify
- How much of the earnings increase reflects recurring operations versus the $4.0 million settlement and $0.9 million Aircom bargain-purchase gain.
- Whether automotive and medical growth and the Romania ramp continue, and whether public safety weakness persists.
- Final Aircom acquisition fair values and any resulting adjustment to the bargain-purchase gain.
- Working-capital trends, especially receivables, inventory and payment timing, and the sustainability of operating cash flow.
- Use of the expanded share-repurchase authorization, capital spending, and any change in leverage or covenant headroom.
- Customer concentration, foreign-exchange exposure, and the risk of losing or replacing major customer programs.