Kimball Electronics, Inc. — Q2 FY2018 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2017. Unaudited results; dollar amounts below are in millions unless stated otherwise. Kimball Electronics is a global electronics manufacturing services company serving automotive, medical, industrial, and public safety markets.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Net sales | $258.2 | $230.3 | $511.4 | $456.7 |
| Gross profit / margin | $21.0 / 8.1% | $20.6 / 8.9% | $40.5 / 7.9% | $38.9 / 8.5% |
| Operating income / margin | $10.2 / 3.9% | $12.2 / 5.3% | $19.8 / 3.9% | $25.1 / 5.5% |
| Net income (loss) | $(8.3) | $7.8 | $0.1 | $17.9 |
| Diluted EPS | $(0.31) | $0.28 | $0.00 | $0.65 |
- Q2 revenue rose 12%, while operating income fell 17%; first-half revenue increased 12% and operating income declined 21%.
- Sales growth reflected new product introductions, increased demand, and favorable foreign exchange. Q2 automotive sales rose 21%, medical 15%, and industrial 7%; public safety fell 13%. First-half sales grew in all four core markets.
- Cash from operations was $11.4 for the six months, down from $26.1 a year earlier. Investing cash outflow was $14.7, primarily reflecting capital expenditures of $14.8; financing cash outflow was $7.0, including share repurchases. Cash declined $8.9 to $35.6.
- At December 31, working capital was $196.5 and the current ratio was 1.9. Borrowings were $11.0, all short-term, with no long-term debt. Available short-term liquidity, including unused credit facilities, was $95.5. Equity was $341.1.
- Inventory increased $35.3 from June 30, principally to support higher production and open orders and a customer inventory-management program. Accounts payable rose $23.7, largely alongside inventory purchases.
Changes, outlook, and risks
- Tax Reform: The quarter included a large discrete tax charge following enactment of the U.S. Tax Cuts and Jobs Act. Kimball recorded approximately $12.8 of deemed repatriation tax and $3.8 from revaluing deferred tax assets, contributing to the Q2 net loss and a 99.4% first-half effective tax rate. These were provisional estimates that could be adjusted through December 2018. Management expects the lower U.S. corporate tax rate to benefit future net income.
- Gross margin declined because of yield impacts and higher costs supporting new product introductions, higher domestic healthcare costs, and unfavorable product mix. Selling and administrative costs rose, including higher payroll, stock compensation, and SERP-related expenses.
- Management expects moderate but mixed EMS-market growth and targets an 8% sales CAGR over the three years ending June 30, 2020. Open orders were $241.7, up 27% year over year; substantially all were expected to ship within 12 months, but orders may be canceled and are not necessarily predictive of sales.
- Management believes available cash, operating cash flow, and credit facilities can meet operating and working-capital needs for at least 12 months. Capital expenditure commitments were approximately $9. The company had $11.8 of long-term income taxes payable and intended to keep most accumulated foreign earnings invested abroad.
- Key risks include customer/program cancellations and concentration, demand and order volatility, margin pressure and competition, component availability, foreign-exchange fluctuations, and successful integration and ramp-up of acquisitions and new operations. Three customers—Philips, ZF, and Nexteer Automotive—each represented approximately 12%–14% of first-half sales.
- The company repurchased $6.3 of common stock in the first half; $18.6 remained available under its $60 authorization at December 31. No material changes to the prior annual-report risk factors or material pending legal proceedings were reported.
Important facts for investors to verify
- Whether the provisional Tax Reform charges, including the deemed repatriation liability and deferred-tax revaluation, change as additional guidance is evaluated.
- Whether lower gross margins and new-program start-up costs improve as programs mature, and whether revenue growth translates into operating profit.
- Whether inventory growth, open orders, and customer payment patterns convert into cash without further pressure on working capital.
- Whether order growth persists given customer cancellation rights and significant reliance on three large customers.
- Whether planned capital spending and share repurchases remain supportable alongside liquidity needs, tax payments, and business expansion.