Kimball Electronics, Inc. — Form 10-Q Summary
Business context and period: Global manufacturing solutions provider serving automotive, medical, industrial, and public safety markets. This unaudited report covers the three months ended September 30, 2020, the first quarter of fiscal 2021; comparisons are with the three months ended September 30, 2019 unless noted.
Financial performance
| Metric | Quarter ended Sep. 30, 2020 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $331.7 million | $313.4 million | +6% |
| Gross profit / margin | $30.6 million / 9.2% | $22.2 million / 7.1% | Margin +2.1 percentage points |
| Operating income / margin | $17.8 million / 5.4% | $11.1 million / 3.5% | +60% |
| Net income | $16.8 million | $6.6 million | +155% |
| Diluted EPS | $0.66 | $0.26 | +154% |
| Operating cash flow | $20.7 million | $39.6 million | Down $18.9 million |
| Capital expenditures | $8.5 million | $11.7 million | Lower year over year |
Revenue growth included an approximately 1% favorable foreign-exchange effect. Gross-margin improvement reflected higher revenue leverage, favorable mix, improved material costs, manufacturing efficiencies, and progress at the acquired GES business; higher profit-sharing expense partly offset these gains. Selling and administrative expense rose 18% to $13.1 million, including higher incentive compensation and SERP-related expense.
Net income also benefited from $2.4 million of foreign currency/derivative gains, compared with a $1.1 million loss in the prior-year quarter. A $0.3 million class-action settlement payment was recorded as other general income. The effective tax rate was 15.7%, versus 24.3%, reflecting a favorable state tax valuation-allowance adjustment and earnings mix.
Balance sheet, debt and liquidity
At September 30, 2020, cash was $73.4 million and borrowings under credit facilities totaled $110.5 million, implying net debt of approximately $37.1 million. Total debt was down from $118.1 million at June 30, 2020. Shareholders’ equity was $400.7 million; management reported a 0.3 debt-to-equity ratio, a 2.2 current ratio, and working capital of $303.0 million. Cash plus unused credit-facility capacity was $159.3 million, including $85.9 million of unused facility borrowings, some of which are uncommitted.
Operating cash flow was lower year over year, mainly because working-capital changes used $3.8 million in cash, versus providing $25.0 million in the prior-year quarter. Receivables growth and payments on accounts payable consumed cash, partly offset by inventory reduction. Cash increased to $73.4 million from $65.0 million at June 30. The company reported compliance with its credit-facility covenants.
Market changes and outlook
- Medical sales rose 25% to $127.1 million, driven by respiratory-care and patient-monitoring demand related to COVID-19. Management expected medical sales to return to pre-pandemic levels in fiscal Q2 2021.
- Automotive sales fell 5% year over year to $118.3 million, but increased 61% sequentially from fiscal Q4 2020. Management anticipated a return to pre-COVID levels beginning in fiscal Q2 and improvement through the fiscal year.
- Industrial sales increased 8% to $70.0 million, supported by GES and climate-control demand; public safety sales declined 23% to $13.3 million, primarily due to program phase-outs.
- Open orders were $349.8 million, down 10% year over year. Substantially all were expected to be filled within 12 months, but orders may be delayed or canceled and may not predict future sales.
- Management said available liquidity and cash generation should meet working-capital and operating needs for at least 12 months. Capital-expenditure commitments were approximately $4 million.
Risks, contingencies and notable items
Management stated that the duration and financial effects of COVID-19 could not be reasonably estimated and could be material. Risks include demand volatility, supply-chain and component availability, workforce disruption, customer concentration or cancellations, competitive pricing, foreign exchange, tariffs, and acquisition integration. Philips represented 23% of quarterly sales and Nexteer Automotive 15%; ZF was below 10%. Customer agreements generally do not guarantee purchases and may be canceled with little or no notice.
The company had $9.8 million remaining in deemed repatriation tax payable through fiscal 2026 and deferred $2.3 million of employer payroll taxes under the CARES Act. Banker’s acceptance drafts transferred and outstanding carried $1.3 million of recourse exposure; no transferee had exercised recourse. No material pending legal proceedings were reported. The share-repurchase plan was temporarily suspended in the COVID-19 environment; no shares were repurchased in the quarter, and $3.3 million remained authorized.
Most important facts for investors to verify
- Whether the elevated medical demand is sustained or reverts as management expected, and whether automotive recovery continues.
- How the 10% decline in open orders and concentrated customer exposure translate into subsequent revenue.
- Whether operating cash flow improves as receivables, inventory, and payable balances normalize.
- Debt, covenant headroom, and availability of credit facilities, particularly the secondary facility maturing May 18, 2021 and uncommitted foreign lines.
- The extent to which reported earnings growth depends on foreign-exchange/derivative gains, favorable tax items, or other nonrecurring effects.
- COVID-19, supply-chain, customer-program, and acquisition risks; management cautioned that interim results are not necessarily indicative of full-year results.