Kimball Electronics, Inc. — Q2 FY2024 Form 10-Q
Reporting period: Three and six months ended December 31, 2023. The unaudited results cover the quarter and first half of fiscal 2024; comparisons are with the corresponding periods of fiscal 2023. Kimball Electronics provides manufacturing and engineering services primarily to automotive, medical, and industrial customers.
Financial performance
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Net sales | $421.2 million | $436.7 million | $859.3 million | $842.6 million |
| Gross profit | $34.4 million; 8.2% margin | $34.2 million; 7.8% margin | $70.0 million; 8.1% margin | $63.5 million; 7.5% margin |
| Operating income | $16.6 million; 3.9% margin | $17.5 million; 4.0% margin | $36.1 million; 4.2% margin | $31.1 million; 3.7% margin |
| Interest expense | $6.1 million | $4.0 million | $11.6 million | $6.0 million |
| Net income | $8.3 million | $10.7 million | $19.0 million | $20.2 million |
| Diluted EPS | $0.33 | $0.43 | $0.75 | $0.81 |
Cash flow, first six months: Operating cash flow was negative $17.9 million, versus negative $71.9 million a year earlier. Investing cash flow was negative $24.4 million, including $24.4 million of capital expenditures. Financing cash flow was positive $38.9 million, primarily reflecting $40.3 million of net credit-facility borrowings. Cash and cash equivalents were $39.9 million at December 31, 2023; cash, cash equivalents, and restricted cash totaled $40.8 million.
Balance sheet and liquidity: Total assets were $1.277 billion and shareholders’ equity was $547.0 million. Credit-facility borrowings totaled $321.8 million, comprising $86.8 million current and $235.0 million long-term; the weighted-average borrowing rate was 7.1%. Available liquidity, defined by the company as cash plus unused credit-facility capacity, was $105.7 million. Working capital was $457.7 million and the current ratio was 2.0. The filing reports a debt-to-equity ratio of 0.6.
Changes and operating context
- Q2 sales declined 4% year over year, while first-half sales increased 2%. Q2 gross margin improved, supported by favorable product mix and lower material costs, but operating income fell 5% and net income fell 23% as sales and earnings below operating income were pressured.
- Q2 automotive sales decreased 2%, medical sales decreased 14%, and industrial sales increased 7%. The medical decline was primarily attributed to lower sales to a large customer addressing a recall; the filing says the recall was unrelated to Kimball’s products. Industrial growth reflected demand for charging, public safety, and climate-control products.
- For the first half, automotive sales rose 5%, medical sales fell 13%, and industrial sales rose 14%. Open orders were $836 million, down 19% year over year, primarily due to reduced orders from the medical customer addressing the recall. The company cautions that open orders may be delayed or canceled and may not predict future sales.
- Cash conversion days increased to 117 from 97 a year earlier, reflecting working-capital pressures. Inventory was $455.7 million, up from $450.3 million at June 30, 2023. Management cited customer delivery pushouts, softening demand, and component lead times; it is seeking customer deposits and consignment arrangements to manage excess inventory.
Outlook, risks, and unusual items
- The filing gives no specific sales, earnings, or margin guidance. Management expects available funds, operating cash flow, and credit facilities to cover operating and working-capital needs for at least the next 12 months, and expects working capital and inventory to normalize as customer negotiations progress and component shortages subside.
- On January 5, 2024, after quarter-end, the company amended its secondary revolving facility, increasing its limit from $50 million to $100 million and extending maturity from February 2, 2024, to January 3, 2025. The company reported compliance with its credit-facility covenants at December 31, 2023.
- Management identifies macroeconomic and industry risks including inflation, higher interest rates, geopolitical uncertainty, supply-chain availability and cost, foreign-exchange movements, and weaker customer demand. Pricing competition and the need to replace expiring customer programs are also risks. The company states that the financial impact of current demand headwinds cannot be reasonably estimated and could be material.
- A $2.0 million allowance for expected credit losses was recorded in Q2 for a customer whose expected payment timing and default risk had changed. The customer was not in bankruptcy; the company continues to pursue full recovery. A related $2.9 million noncurrent receivable, net of the allowance, and $2.3 million current receivable remained at December 31.
- Capital expenditure commitments were approximately $14 million at quarter-end. The company reported no material off-balance-sheet arrangements and no material expected adverse impact from routine litigation.
Important facts for investors to verify
- Whether the medical customer’s recall remediation and reduced orders continue to affect sales, open orders, and receivable collections.
- Progress in reducing inventory and cash conversion days, and whether customer deposits or consignment arrangements offset working-capital demands.
- The status and recovery of the customer receivable associated with the $2.0 million credit-loss allowance.
- Borrowings, interest costs, liquidity, covenant headroom, and use of the amended $100 million secondary facility.
- Whether demand, program ramps, and product mix support the company’s stated expectations for normalization and growth; the filing provides no quantified earnings or sales outlook.