Kimball Electronics, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2021. The financial statements are unaudited. Kimball Electronics provides contract electronics and diversified manufacturing services to automotive, medical, industrial, and public safety customers.
Financial performance
| Metric | Three months ended Dec. 31, 2021 | Prior-year quarter | Six months ended Dec. 31, 2021 | Prior-year period |
|---|---|---|---|---|
| Net sales | $315.3 million | $320.6 million | $608.0 million | $652.4 million |
| Gross profit / margin | $20.8 million / 6.6% | $29.7 million / 9.3% | $36.4 million / 6.0% | $60.2 million / 9.2% |
| Operating income / margin | $6.9 million / 2.2% | $16.2 million / 5.0% | $11.7 million / 1.9% | $34.0 million / 5.2% |
| Net income | $5.1 million | $15.1 million | $7.7 million | $31.9 million |
| Diluted EPS | $0.20 | $0.60 | $0.30 | $1.26 |
- Second-quarter sales fell 2%; six-month sales fell 7%. Gross profit declined 30% for the quarter and 40% year to date, with margin compression reflecting component and freight costs, wage inflation, and lost factory absorption.
- Quarterly automotive sales fell 8%, primarily due to semiconductor shortages; medical sales rose 3% and industrial sales rose 6%. Year-to-date medical sales fell 18%, partly because the prior-year period benefited from pandemic-related demand for respiratory care and patient-monitoring products.
- Other income and expense was a net expense of $0.2 million in the quarter versus net income of $2.4 million a year earlier; foreign currency and derivative results were a major source of the comparison. Six-month results included $1.4 million of other general income from component-supplier class-action settlements.
Cash, debt, and liquidity
- Cash and equivalents were $56.7 million at December 31, 2021, down from $106.4 million at June 30, 2021. Six-month operating cash flow was a use of $56.5 million, compared with $72.3 million provided in the prior-year period. The main use was a $106.9 million inventory build amid component shortages.
- Investing cash use was $27.8 million, including $27.2 million in capital expenditures, mainly for Thailand and Mexico expansions, capacity, and new business. Financing provided $35.5 million, largely from increased credit-facility borrowings for working capital.
- Credit-facility borrowings totaled $103.0 million, including $63.0 million classified as current and $40.0 million as long term; weighted-average interest was 2.0%. The company reported a 1.7 current ratio, $265.3 million of working capital, a 0.2 debt-to-equity ratio, and $119.5 million of short-term liquidity, including cash and unused facilities.
- Inventory rose to $304.2 million from $200.4 million at June 30. Open orders were $770.8 million, up 78% year over year, but the filing cautions that shortages and logistics constraints may delay fulfillment and that orders may be canceled.
Outlook, risks, and notable items
- Management expects a stronger second half of fiscal 2022 than the first, citing expected automotive supply recovery and new program launches. Automotive demand is expected to remain strong. No specific revenue or earnings guidance is provided.
- Management says COVID-19, component shortages and allocations—particularly semiconductors—shipping delays, and inflation in materials, labor, and freight may continue to affect operations and profitability; the future financial impact cannot be reasonably estimated and could be material. Customer pricing arrangements and negotiations have mitigated a majority, but not all, of cost increases.
- Open orders increased partly because the company could not fulfill orders during component shortages. The company is retaining workforce capacity for anticipated growth and plans facility expansions in Thailand, Mexico, and Poland. Capital-expenditure commitments were approximately $26 million.
- A change in estimated useful lives for surface-mount production equipment, effective November 1, 2021, reduced depreciation expense by $1.7 million and increased net income by $1.3 million, or $0.05 per share, in both the quarter and six-month period.
- The primary credit facility matures July 27, 2023 and requires leverage and fixed-charge coverage covenant compliance. The company reported compliance at December 31, 2021 and amended the facility to transition applicable borrowings from LIBOR primarily to SOFR. Management believes liquidity is adequate for at least 12 months.
- Customer concentration is significant: Nexteer Automotive and Philips represented 17% and 16% of quarterly sales, respectively. Customer agreements generally have no definitive term and may be canceled, while program start-ups can initially dilute margins.
- The company reported no material off-balance-sheet arrangements and no pending legal proceedings expected to materially affect its business or financial condition. Disclosure controls were assessed as effective.
Investor verification points
- Track whether semiconductor availability and logistics improve enough to convert the elevated open orders into sales, and monitor any order delays or cancellations.
- Assess whether gross margins recover as cost inflation, lost absorption, and new-program ramp costs change; account for the $0.05-per-share benefit from the useful-life estimate change.
- Monitor inventory levels, operating cash flow, working-capital needs, and borrowing against the credit facilities and related covenants.
- Review the timing and cost of the Thailand, Mexico, and Poland expansions, and compare actual spending with the stated commitments and expected completion dates.
- Evaluate customer concentration, the contribution of class-action settlement income, and the volatility of foreign-currency and derivative results when assessing recurring earnings.