Kimball Electronics, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended June 30, 2022. Although the request metadata refers to “2021 Q4,” this filing reports FY2022 annual results, not a standalone quarter. Amounts below are in U.S. dollars.
Business context and performance
Kimball Electronics is a global contract manufacturing provider serving automotive, medical, industrial, and public safety markets. It reported one aggregated operating segment. Automotive represented 43% of FY2022 sales, medical 29%, industrial 23%, and public safety 4%. Nexteer Automotive and Philips each represented 17% and 15% of sales, respectively.
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net sales | $1,349.5 million | $1,291.8 million | +4% |
| Gross profit / margin | $104.6 million / 7.8% | $118.0 million / 9.1% | Profit down 11% |
| Operating income / margin | $52.5 million / 3.9% | $65.7 million / 5.1% | Down 20% |
| Net income | $31.3 million | $56.8 million | Down 45% |
| Diluted EPS | $1.24 | $2.24 | Down 45% |
| Cash from operations | $(83.2) million | $130.1 million | Declined $213.3 million |
| Capital expenditures | $74.0 million | $38.4 million | Increased |
Sales increased in automotive (+6%), medical (+2%), industrial (+5%), public safety (+4%), and other (+27%). Management cited automotive program ramp-ups and new launches, including electric-vehicle programs, and stronger industrial demand for climate-control products. Medical sales rose modestly despite the prior-year benefit from pandemic-related demand.
Cash, debt, and liquidity
- Operating cash flow was negative, mainly due to a $203.2 million inventory cash outflow amid component shortages and strategic inventory purchases. Receivables used $26.5 million; higher accounts payable provided $96.8 million.
- Inventory reached $395.6 million, up $195.2 million year over year. Cash and cash equivalents were $49.9 million, versus $106.4 million.
- Total borrowings under credit facilities were $180.6 million, versus $66.2 million; net debt was approximately $130.7 million. The debt-to-equity ratio rose to 0.4 from 0.1.
- Working capital was $352.3 million, and the current ratio was 1.9. Management reported $178.6 million of short-term liquidity, including cash and unused facility capacity, some of which is uncommitted.
- The primary credit facility was amended to provide $300 million of capacity, with a potential increase to $450 million subject to lender consent, and maturity extended to May 2027. The company reported compliance with its financial covenants.
Material changes and unusual items
- Margins were pressured by higher materials, freight, labor, and other costs, unfavorable foreign exchange, and lost absorption in the first half. Management said customer pricing arrangements and negotiations offset a majority, but not all, of cost inflation.
- Management changed the estimated useful lives of certain surface-mount technology equipment from five or seven years to ten years, effective November 1, 2021. The change reduced FY2022 depreciation expense by $6.3 million and increased net income by $4.9 million, or $0.19 per diluted share.
- Other income/expense shifted from a $4.4 million gain in FY2021 to an $8.8 million expense in FY2022, including foreign currency and derivative losses. SERP investment valuation changes were offset by corresponding liability changes and did not affect net income.
- Open orders were $1.192 billion, up 59%, driven by higher demand and parts shortages. Orders may be delayed or canceled and are not necessarily indicative of future sales.
- Capital investment was $73.96 million, principally for Thailand and Mexico expansions and new business. Thailand’s expansion was completed; management expected Mexico’s expansion in Q1 FY2023 and the Poland expansion in early FY2024. Capital expenditure commitments were approximately $22 million.
Outlook, risks, and contingencies
Management expected automotive demand to remain strong in FY2023 as supply catches up, programs ramp, and new programs launch. The filing provides no specific FY2023 revenue or earnings guidance. Management stated that liquidity should meet working-capital and operating needs for at least 12 months, while noting that the future effects of supply constraints, inflation, COVID-19, and geopolitical developments could be material and were not reasonably estimable.
- Key risks include semiconductor and other component shortages, shipping delays, cost inflation, labor availability and wage pressure, customer concentration and program cancellations, and the need to replace expiring programs.
- International operations expose the company to currency, political, trade, tax, and regulatory risks. The Russia-Ukraine war may further disrupt supply chains and increase commodity and energy costs.
- Other identified risks include cybersecurity and data privacy, product quality and liability, environmental and ESG compliance, customer credit risk, and interest-rate exposure on variable-rate debt.
- The company reported no material pending legal proceedings beyond routine claims. It stated that it had no material off-balance-sheet arrangements. FY2023 dividends were not planned; FY2022 repurchases totaled $9.1 million.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Revenue recognition over time was identified as a critical audit matter because it involves estimates of anticipated contract margins and related contract assets.
Investor verification priorities
- Check whether inventory and open orders convert into shipments and cash as component availability improves; evaluate inventory obsolescence and customer cancellation exposure.
- Track operating cash flow, working-capital days, facility borrowings, interest expense, and covenant headroom.
- Assess whether cost inflation, foreign exchange, product mix, and program start-up costs continue to pressure gross margin.
- Separate reported earnings from the $0.19-per-share benefit of the revised equipment useful-life estimate.
- Monitor delivery and returns on the Mexico and Poland expansions and the company’s ability to meet its growth and capacity plans.
- Review customer concentration, particularly Nexteer and Philips, and the durability of the elevated open-order balance.