Kimball Electronics, Inc. — Form 10-Q Summary
Business and reporting period. Global contract electronics manufacturer serving automotive, medical, industrial, and public safety markets. This unaudited report covers the quarter and six months ended December 31, 2014 (fiscal 2015); comparisons are with the corresponding 2013 periods. The company became a stand-alone public company on October 31, 2014. Pre-spin-off results include allocations from former parent Kimball International and may not represent the costs of operating independently.
Financial performance
| Metric | Three months ended Dec. 31, 2014 | Change vs. 2013 | Six months ended Dec. 31, 2014 | Change vs. 2013 |
|---|---|---|---|---|
| Net sales | $207.6 million | +15% | $411.4 million | +15% |
| Gross profit / margin | $17.9 million / 8.6% | $13.9 million / 7.7% | $35.8 million / 8.7% | $26.4 million / 7.4% |
| Operating income / margin | $8.7 million / 4.2% | $4.9 million / 2.7% | $16.5 million / 4.0% | $14.2 million / 4.0% |
| Net income | $6.2 million | +20% | $11.6 million | −10% |
| Diluted EPS | $0.21 | vs. $0.18 | $0.40 | vs. $0.44 |
| Operating cash flow | — | $3.5 million | vs. $20.7 million |
Margins and earnings. Quarterly gross margin improved 0.9 percentage point, primarily from higher-volume leverage and productivity improvements. First-half gross margin improved 1.3 points, also benefiting from the prior-year $0.6 million inventory write-down. First-half net income declined despite higher sales and operating income: the prior-year period included $5.0 million of antitrust settlement income, while the current period had a higher effective tax rate (28.0% vs. 12.7%). Current-period spin-off costs, largely nondeductible in the U.S., affected taxes.
Cash, liquidity, and debt. Cash was $61.7 million at December 31, 2014, up from $26.3 million at June 30, mainly reflecting a $44.3 million cash distribution from Kimball International at the spin-off. First-half operating cash flow fell to $3.5 million, with $19.3 million used by working-capital changes, including receivables and inventory growth and payment of accrued incentive compensation. Investing cash outflow was $16.6 million, including $14.0 million of capital expenditures and $2.9 million for capitalized software. Financing cash inflow was $50.2 million, primarily net transfers from the former parent.
Current assets were $342.3 million and current liabilities $152.3 million; total liabilities were $161.8 million. The company had no borrowings under its $50 million U.S. revolving facility (with an option to increase to $75 million) and no borrowings under its Thailand facility. Reported short-term liquidity, including cash and unused credit facilities, was $114.3 million. It was in compliance with its credit-facility covenants at period-end.
Material changes and business developments
- Sales grew across the four principal verticals over the first half: automotive +12%, medical +25%, industrial +6%, and public safety +24%. Quarterly growth was strongest in public safety (+36%) and medical (+25%); industrial sales were flat.
- Open orders were $164.6 million, up 9% year over year, though management cautioned that point-in-time orders may not predict future sales.
- Accounts receivable rose $7.4 million and inventory rose $8.3 million from June 30, mainly supporting higher sales and production. Net intangible assets increased $2.0 million, primarily from software purchases associated with the spin-off.
- Foreign currency translation contributed to an $8.3 million decline in accumulated other comprehensive income, which ended at a $6.7 million loss.
Outlook, risks, and contingencies
- Management expects moderate EMS-market growth but mixed demand among end markets. It described automotive demand as relatively strong in the U.S. and China, European automotive demand as stable, industrial demand as improving, public safety demand as stabilizing/improving, and medical demand as stable. The filing provides no company-specific numerical revenue or earnings guidance.
- The company expects to begin expanding European manufacturing capacity with a greenfield facility in Romania in the second half of fiscal 2015; operations were anticipated to begin in the first half of fiscal 2016. Management said liquidity should be sufficient for working capital and operating needs for at least 12 months.
- JCI accounted for 5% of quarterly sales and 6% of first-half sales, down from 14% and 16%, respectively, a year earlier. JCI program end-of-life declines and its decision to in-source certain production were expected to continue; the transition was expected to be substantially complete in the third quarter of fiscal 2015. Management said a significant portion of the volume had been or was expected to be replaced. Philips represented 16% of sales in both current periods.
- Key risks include customer or program losses, customer concentration and in-sourcing, order volatility, early program start-up losses, competition and pricing pressure, component availability and cost, foreign-exchange movements, and global economic uncertainty. The company uses foreign-exchange hedges for risk management, not speculation.
- No material pending legal proceedings were reported. Standby letters of credit totaled $0.1 million; management reported no material off-balance-sheet arrangements beyond ordinary-course letters of credit and operating leases. No material changes to the risk factors in the company’s Form 10 were reported.
Important facts for investors to verify
- How much JCI-related volume is replaced, and whether replacement programs deliver comparable margins as the in-sourcing transition concludes.
- Whether higher sales convert to operating cash flow as receivables, inventory, and other working-capital needs change.
- Actual spin-off and stand-alone operating costs versus the allocations included in historical comparative results.
- Execution, capital requirements, and timing for the planned Romania facility and other capital investments.
- Customer concentration, open-order conversion, and geographic earnings mix, including their effects on sales, margins, and the effective tax rate.