Kimball Electronics, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2019 (fiscal first quarter 2020); unaudited. Comparisons are with the three months ended September 30, 2018 unless otherwise noted. Kimball Electronics provides electronics and diversified contract manufacturing services across automotive, medical, industrial, and public safety markets.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $313.4 million | $265.6 million | +18% |
| Gross profit / margin | $22.2 million / 7.1% | $18.2 million / 6.8% | +22% |
| Operating income / margin | $11.1 million / 3.5% | $7.0 million / 2.6% | +58% |
| Net income | $6.6 million | $5.1 million | +30% |
| Diluted EPS | $0.26 | $0.19 | +37% |
| Operating cash flow | $39.6 million | ($10.0) million | Improved |
| Capital expenditures | $11.6 million | $4.7 million | Higher investment |
Net sales rose across automotive (+17%), medical (+23%), and industrial (+13%); public safety was flat. Medical sales reached a quarterly record. Management attributed overall growth to program ramp-ups, new product introductions, and higher demand. GES, acquired October 1, 2018, contributed about 2% to current-quarter sales, offset by an approximately 2% unfavorable foreign-exchange effect.
Balance sheet, debt, and liquidity
- At September 30, 2019, cash was $55.4 million; total assets were $739.9 million; and share owners’ equity was $369.3 million.
- Total credit-facility borrowings were $109.6 million, down from $126.2 million at June 30, 2019. The weighted-average borrowing rate was 4.1%. The company reported $76.8 million of unused facility capacity and $132.2 million of short-term liquidity, including cash.
- Management reported a 2.1 current ratio and 0.3 debt-to-equity ratio. It stated liquidity should be sufficient for working capital and other needs for at least the next 12 months. The company was in compliance with its credit-facility covenants.
- Operating cash flow benefited substantially from working-capital movements, especially $38.9 million of cash from lower receivables, primarily related to greater use of non-recourse factoring. Factored receivables were $76.0 million versus $60.7 million a year earlier. Increased contract assets used $8.9 million of cash.
Material changes and notable items
- Gross margin improved through higher-revenue leverage, efficiencies at certain locations, and lower domestic healthcare costs; these benefits more than offset an unfavorable GES acquisition impact.
- Other expense increased to $2.4 million from $0.6 million, including higher interest expense ($1.2 million versus $0.4 million) and foreign-currency/derivative losses ($1.1 million versus $0.7 million). The prior-year quarter included $0.5 million of foreign-government subsidies and $0.1 million of lawsuit-related income.
- The effective tax rate was 24.3%, versus 21.8%. The current-quarter rate was unfavorably affected by excess tax expense on stock-based compensation, partly offset by the U.S. R&D tax credit.
- Cash and cash equivalents increased by $6.1 million during the quarter. Investing cash use was $11.7 million, mainly capital spending; financing cash use was $20.6 million, mainly debt repayment and share repurchases.
- Lease-accounting adoption added $2.6 million of right-of-use assets and lease liabilities at adoption; management said the change had no material effect on earnings or cash flows.
Outlook, commentary, and risks
- Management described contract-manufacturing demand as moderate with mixed demand by market and stated an ongoing goal of 8% annual organic growth. This is a stated goal, not specific quarterly or full-year earnings guidance.
- Open orders were $389.5 million, up 40% year over year; substantially all were expected to be filled within 12 months. The company cautioned that orders may be canceled and may not predict future sales.
- Key risks cited include customer demand fluctuations and program cancellations, concentration in large customers, component shortages or allocations, tariffs and trade barriers, pricing pressure, foreign-exchange movements, and successful integration of acquisitions. Philips, Nexteer Automotive, and ZF represented 14%, 14%, and 10% of sales, respectively.
- The GES purchase-price working-capital adjustment remains disputed with the sellers. The company recorded a $3.8 million net receivable due from the seller; resolution could affect earnings. It also recorded $4.2 million of estimated pre-closing GES tax-related liabilities, with a corresponding indemnification asset; ultimate tax resolution could differ materially from estimates.
- The remaining one-time U.S. deemed-repatriation tax liability was $9.8 million. The company also noted that foreign earnings are intended to remain invested outside the United States.
Important facts for investors to verify
- How much of the operating-cash-flow improvement is repeatable, given the increased factoring of receivables and changes in working capital.
- Whether higher open orders convert to sales, and whether program ramps sustain growth without pressuring margins.
- Progress in resolving the GES working-capital dispute and the recoverability of the seller receivable and tax indemnification asset.
- Debt levels, borrowing costs, covenant headroom, and the effect of continued capital spending and share repurchases on liquidity.
- Exposure to major customers, component availability, tariffs, and foreign-exchange volatility.