Business context and reporting period
Kimball Electronics, Inc. filed this Form 10-K for the fiscal year ended June 30, 2016. The request metadata labels the period “2015 Q4,” but this filing covers the full fiscal year 2016; it also reports fourth-quarter results. The company is a global contract electronics manufacturer serving automotive, medical, industrial, and public safety markets, with one reportable segment and eight manufacturing facilities.
Kimball Electronics became a standalone public company in October 2014. Results before the spin-off include allocations from former parent Kimball International and may not be directly comparable with results as a standalone company.
Key financial metrics
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $842.1 million | $819.4 million |
| Gross profit / gross margin | $64.5 million / 7.7% | $72.4 million / 8.8% |
| Operating income / margin | $29.7 million / 3.5% | $36.4 million / 4.4% |
| Net income | $22.3 million | $26.2 million |
| Diluted EPS | $0.76 | $0.89 |
| Operating cash flow | $36.8 million | $28.1 million |
| Capital expenditures | $33.7 million | $33.0 million |
| Cash and cash equivalents | $54.7 million | $65.2 million |
| Borrowings under credit facilities | $9.0 million | None |
| Working capital / current ratio | $187.4 million / 2.1 | $194.2 million / 2.2 |
Long-term debt was zero at year-end. Available short-term liquidity, defined as cash plus unused credit facilities, was $105.4 million, down from $125.1 million. Shareholders’ equity was $324.4 million. The company repurchased $13.2 million of stock during FY2016; $6.8 million remained under its authorized repurchase plan. It had not paid dividends and had no current plan to do so.
Material changes versus the prior comparable period
- Sales increased 3%, but gross profit fell 11%, operating income fell 18%, and net income fell 15%. Margin pressure reflected product mix, foreign exchange, new-product introduction costs, and contracted customer price reductions.
- Automotive sales rose 9% to $326.7 million and medical sales rose 3% to $249.2 million. Industrial sales fell 7% to $186.6 million; public safety sales were essentially flat at $61.1 million.
- Open orders declined 12% to $171.0 million at June 30, 2016. The filing cautions that open orders may not predict future sales.
- Sales declined approximately $22 million from the completion of the Johnson Controls (JCI) exit; management said a significant portion of that volume had been replaced. JCI represented 1% of FY2016 sales, compared with 4% in FY2015.
- Operating cash flow rose to $36.8 million, while investing cash outflow increased to $42.6 million, including $33.7 million of capital expenditures and $8.3 million paid for the Medivative acquisition.
- The effective tax rate fell to 20.3% from 24.6%, partly due to a $1.8 million foreign tax benefit associated with a favorable ruling on capitalization of the Romania subsidiary.
Outlook, management commentary, risks and unusual items
Management described the EMS outlook as moderate growth with mixed demand. It cited relative strength in automotive, stable medical demand, softer public safety demand, and weaker climate-control demand within industrial, partly offset by demand for smart metering and energy-efficient lighting. The company expects Romania facility capacity to ramp up through FY2017. It stated that cash on hand, operating cash generation, and credit availability should meet operating and working-capital needs for at least 12 months; this is management’s assessment, not a guarantee.
- Demand and customer risks: Customers generally do not commit to minimum purchases and can cancel programs. Replacement programs can incur losses during startup. Philips and ZF TRW represented 15% and 11% of FY2016 sales, respectively.
- Operating and market risks: Price competition, excess industry capacity, customer insourcing, changing product mix, capacity utilization, component shortages, labor turnover, and foreign-exchange movements may pressure margins or disrupt production.
- Liquidity and covenants: The $50 million primary credit facility matures in October 2019. At year-end, $9.0 million was drawn and $40.6 million remained available under that facility. The company reported compliance with its financial covenants, including a maximum leverage ratio of 3.0 to 1.0 and minimum fixed-charge coverage of 1.10 to 1.00.
- Investments and commitments: Capital expenditure commitments were approximately $13 million. Contractual purchase obligations totaled $184.7 million, largely due within FY2017. Foreign subsidiaries held $33.2 million of cash that management intended to keep invested abroad; repatriation could trigger taxes.
- Acquisitions and unusual items: The May 2016 Medivative acquisition added medical-market engineering and assembly capabilities; its results had an immaterial FY2016 effect. In July 2016, the company acquired Aircom assets for approximately $3.5 million. It also disclosed a $4.0 million antitrust class-action distribution received after year-end; the filing does not include that receipt in FY2016 results.
- Other contingencies: The company disclosed $2.7 million of transferred Chinese banker’s acceptance drafts outstanding with recourse provisions; none had been called. Management did not expect routine litigation or environmental matters to have a material adverse effect. The spin-off tax arrangements may create indemnification exposure if specified transactions cause the distribution to become taxable.
Most important facts for investors to verify
- Whether FY2017 sales growth and the Romania ramp can offset the lower gross margin and reduced backlog.
- How much of the lost JCI volume was replaced, and whether replacement programs achieve mature-program profitability.
- Customer concentration and dependence on Philips, ZF TRW, and other large customers, including their order patterns and cancellation rights.
- Whether operating cash flow can fund capital expenditures, working capital, acquisition plans, and repurchases while preserving liquidity and covenant headroom.
- The sustainability of FY2016 earnings after separating the $1.8 million tax benefit and other unusual or nonrecurring items.
- The final purchase accounting and integration outcomes for Medivative and Aircom, and the accounting period for the post-year-end $4.0 million settlement receipt.