Kimball Electronics, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, the three months ended September 30, 2018. Financial statements are unaudited. Kimball Electronics is a global contract manufacturer serving automotive, medical, industrial, and public safety markets.
Key financial metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $265.6 million | $253.2 million | +5% |
| Gross profit / margin | $18.2 million / 6.8% | $19.5 million / 7.7% | Profit down 7% |
| Operating income / margin | $7.0 million / 2.6% | $9.5 million / 3.8% | Down 26% |
| Net income | $5.1 million | $8.5 million | Down 40% |
| Diluted EPS | $0.19 | $0.31 | Down $0.12 |
| Operating cash flow | $(10.0) million | $(0.2) million | Greater cash use |
| Investing cash flow | $(4.6) million | $(6.1) million | Lower cash use |
At September 30, cash and cash equivalents were $75.0 million; credit-facility borrowings were $59.3 million, versus $8.3 million at June 30. The company reported no long-term debt. Working capital was $212.3 million, the current ratio was 1.8, and available short-term liquidity—cash plus unused credit facilities—was $186.3 million. Share owners’ equity was $358.9 million. Capital expenditures were $4.7 million; the company repurchased 276,635 shares for $5.4 million at an average $19.61 per share.
Material changes and operating results
- Sales growth reflected program ramp-ups, new product introductions, and higher demand. Automotive sales rose 4%, medical 8%, and industrial 5%; public safety sales were flat. Industrial sales reached a quarterly record.
- Profitability weakened despite higher sales. Management cited unfavorable product mix, higher material costs partly related to component shortages, unfavorable foreign-exchange movements, and higher domestic healthcare costs. Selling and administrative expense rose 13%, including higher payroll, stock compensation, consulting, and GES-related costs.
- Open orders were $278.2 million, up 28% from a year earlier; substantially all were expected to be filled within 12 months. Orders may be canceled subject to contractual terms and are not necessarily indicative of future sales.
- Operating cash use was primarily driven by a $25.9 million inventory increase and lower accrued expenses and taxes payable, partly offset by higher accounts payable. Cash provided by financing included $51.0 million of net revolving-credit borrowings.
- The company adopted new revenue guidance on July 1, 2018. Approximately 73% of current-quarter sales were recognized over time. Adoption added $43.2 million of contract assets and $3.1 million to opening retained earnings; it reduced reported September 30 inventory by $39.5 million versus the amount under prior guidance. The company reported a $91,000 increase in current-quarter net income from the change. Prior-year comparative sales were not restated.
Outlook, commentary, and risks
- Management’s organic growth goal is 8% annually and its EMS market expectation is moderate growth with mixed demand. It expects available liquidity to cover working capital and operating needs for at least 12 months.
- Management said component shortages and allocations could increase costs or disrupt production; tariffs on components, many sourced from China, could hurt the competitiveness of U.S. operations. Other cited risks include demand fluctuations, customer or program losses, pricing pressure, foreign-exchange movements, supplier stability, and acquisition integration.
- On October 1, 2018, after quarter-end, Kimball completed its acquisition of substantially all assets and certain liabilities of GES for a preliminary cash price of approximately $50 million, plus assumed liabilities and subject to working-capital adjustments. It was primarily funded through the primary credit facility. Purchase accounting was incomplete when the filing was issued.
- The amended primary credit facility permits $150 million of borrowings, with a potential increase to $225 million subject to lender consent, and matures in 2023. The company was in compliance with its financial covenants at quarter-end.
- Tax Reform-related deemed repatriation tax provision was $12.4 million, including $11.3 million in long-term income taxes payable. Approximately $1.1 million was expected to be paid within 12 months; the balance is scheduled through fiscal 2026. The company was still evaluating GILTI tax accounting.
- Unusual items included $0.1 million of lawsuit-settlement income and a $0.7 million foreign-currency/derivative loss in non-operating results. No material pending legal proceedings were reported; management said there were no material changes to the risk factors in its prior Form 10-K. Disclosure controls were deemed effective.
Investor verification priorities
- Track whether sales growth converts into margin and earnings recovery, given the year-over-year gross- and operating-margin declines.
- Assess inventory, contract assets, cash conversion days, and operating cash flow. Contract assets reflect unbilled revenue under the newly adopted revenue standard.
- Verify the GES acquisition’s final purchase price, assumed liabilities, funding, purchase accounting, and subsequent operating contribution.
- Monitor credit-facility utilization, covenant headroom, and liquidity after the acquisition and continued share repurchases.
- Follow component availability, tariff exposure, China automotive demand, customer concentration, and the timing and quality of open orders.