Kimball Electronics, Inc. — Form 10-Q Summary
Business and period: Global contract electronics manufacturer serving automotive, medical, industrial, and public safety markets. This unaudited report covers the quarter and six months ended December 31, 2015 (the second quarter and first half of fiscal 2016); comparisons are with the corresponding 2014 periods.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $207.1 million; down 0.2% | $407.5 million; down 0.9% |
| Gross profit / margin | $16.1 million / 7.8%, versus $17.9 million / 8.6% | $31.4 million / 7.7%, versus $35.8 million / 8.7% |
| Operating income / margin | $6.9 million / 3.3%, down 20% | $13.9 million / 3.4%, down 16% |
| Net income | $4.6 million, down 27% | $9.0 million, down 22% |
| Diluted EPS | $0.16, versus $0.21 | $0.31, versus $0.40 |
Cash flow and investment: First-half operating cash flow was $16.3 million, compared with $3.5 million a year earlier. Investing cash outflow was $19.3 million, including $18.6 million of capital expenditures; operating cash flow less capital expenditures was approximately negative $2.3 million. Cash declined $4.7 million from June 30 to $60.5 million.
Balance sheet and liquidity: At December 31, cash was $60.5 million, working capital was $190.8 million, and the current ratio was 2.2. Total liabilities were $166.9 million. Borrowings were $3.0 million on the China credit facility; there were no borrowings under the $50 million U.S. primary facility. Management reported $117.1 million of short-term liquidity, including cash and unused credit facilities, and stated that available funds and operating cash flow should meet needs for at least 12 months. Foreign operations held $42.5 million of cash, which the company intended to keep invested abroad.
Other metrics: First-half DSO was 58.7 days, versus 58.4; inventory supply on hand was 63.6 days, versus 60.1. Open orders were $169.6 million, up 3% year over year. The first-half effective tax rate was 28.3%, compared with 28.0%.
Changes and management commentary
- Automotive sales rose 12% in the quarter and 7% in the first half. Medical sales fell 4% in both periods; industrial sales fell 14% and 11%, respectively. Public safety sales fell 5% in the quarter but rose 4% in the first half.
- Management attributed near-flat sales to declines associated with the JCI program exit and foreign exchange, partly offset by new awards and demand from existing customers. Gross margin pressure reflected foreign exchange, new-program start-up costs, and higher U.S. healthcare costs.
- First-half selling and administrative expense fell 9%, partly because the prior-year period included former-parent allocations and higher spin-off costs. In the quarter, savings from the absence of prior-year spin-off expense were offset mainly by Romania start-up and higher labor costs.
- Management described expected EMS-market growth as moderate and demand as mixed. It noted relative strength in automotive, weaker industrial demand, stable medical demand, and stabilizing public safety demand. No quantified company revenue or earnings guidance was provided.
Outlook, risks, and unusual items
- The Romania greenfield facility was completed in the quarter; operations were anticipated to begin in the second half of fiscal 2016. Capital expenditure commitments were approximately $9 million.
- The board authorized an 18-month repurchase program of up to $20 million. The company repurchased $3.8 million during the quarter at an average $11.22 per share.
- Key risks include customer and program concentration or loss, order delays and demand shifts, early-stage program losses, pricing pressure, component availability, competition, foreign-exchange movements, and customer or supplier financial stability. Customers may cancel contracts, dual-source, or bring manufacturing in-house.
- Foreign currency and derivative losses contributed to non-operating expense of $0.6 million in the quarter and $1.3 million in the first half. The company reported $0.8 million of pre-tax derivative loss expected to be reclassified into earnings within 12 months, alongside the related hedged transactions.
- Contingencies include $1.2 million of transferred China banker’s acceptance drafts subject to recourse and $0.4 million of standby letters of credit; management reported no current claims requiring payment. No material pending legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether margin pressure from foreign exchange, new-program launches, and operating costs persists, and whether sales growth replaces the exited JCI business.
- Whether demand and open orders convert into revenue, particularly across automotive, industrial, medical, and public safety markets.
- Whether the Romania start-up meets its expected timing and cost profile, and how committed capital spending affects cash generation.
- The level and use of foreign-held cash, credit-facility availability, covenant compliance, and the effect of repurchases on liquidity.
- Customer concentration: Philips, ZF TRW, and Nexteer Automotive represented 14%, 10%, and 9% of first-half sales, respectively.