Kimball Electronics, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2021; year-to-date comparisons are with the nine months ended March 31, 2020. The request metadata says “2020 Q3,” but this filing reports fiscal 2021 third-quarter results.
Business context and financial performance
Kimball Electronics provides contract electronics and diversified manufacturing services to automotive, medical, industrial, and public safety customers.
| Metric | Three months ended March 31, 2021 | Year to date |
|---|---|---|
| Net sales | $310.3 million, up 6% | $962.7 million, up 5% |
| Gross profit / margin | $26.0 million / 8.4% (6.9% prior year) | $86.3 million / 9.0% (6.9% prior year) |
| Operating income / margin | $14.6 million / 4.7% (3.6% prior year) | $48.6 million / 5.1% (3.3% prior year) |
| Net income | $10.5 million, up 67% | $42.3 million, up 117% |
| Diluted EPS | $0.41 (up from $0.25) | $1.67 (up from $0.76) |
For the nine months, operating cash flow was $103.8 million versus $51.3 million; investing cash use was $23.0 million and financing cash use was $58.7 million. Cash rose to $89.7 million from $65.0 million at June 30, 2020. The cash-flow improvement included working-capital cash benefits, notably a $37.6 million inventory reduction and $17.2 million lower contract assets, partly offset by a $23.0 million receivables increase.
At March 31, 2021, total borrowings under credit facilities were $60.5 million, down from $118.1 million at June 30, 2020. Shareholders’ equity was $425.0 million; management reported a 2.0 current ratio, 0.1 debt-to-equity ratio, and $225.6 million of short-term liquidity, including cash and available credit. Working capital was $274.9 million.
Material changes and drivers
- Automotive sales rose 12% in the quarter and 7% year to date, supported by program ramps, recovery from COVID-related shutdowns, and favorable currency effects. Medical sales fell 2% in the quarter but increased 9% year to date. Industrial sales rose 5% in both periods; public safety rose 9% in the quarter but declined 16% year to date.
- Improved operating execution, automotive product mix, and favorable currency contributed to stronger gross margins. Higher profit-sharing expense partly offset the improvement; selling and administrative expenses increased 22% in the quarter.
- Year-to-date other income included $5.6 million of non-operating income, compared with $0.7 million of expense in the prior-year period, primarily reflecting foreign currency/derivative and SERP investment results. The SERP investment revaluation is offset by a related liability revaluation in selling and administrative expense, according to the company.
- Other general income included $0.4 million in the quarter and $0.7 million year to date from class-action settlement payments; none was recorded in the comparable prior-year periods.
Outlook, risks, and contingencies
- No quantified earnings or revenue guidance is provided. Management expects automotive demand to remain strong through the rest of fiscal 2021 and into fiscal 2022, while monitoring semiconductor availability.
- Open orders were $649.1 million, up 27% year over year; substantially all were expected to be filled within 12 months. The company cautions orders may be delayed or canceled and may not predict future sales.
- Semiconductor shortages and component allocations were disrupting global manufacturing, particularly automotive, and could raise costs, interrupt production, and impair customer commitments. COVID-19 effects on demand, supply chains, and workforce availability remain uncertain and could be material.
- Management believes available liquidity and operating cash generation will meet needs for at least 12 months. Capital expenditure commitments were approximately $10 million. The secondary $30 million revolving facility was scheduled to mature May 18, 2021; the filing reports no borrowings under it at quarter-end.
- Other risks include customer and program concentration, customer cancellations or sourcing changes, foreign-exchange movements, raw-material availability, and LIBOR transition. Nexteer Automotive and Philips represented 18% and 13% of quarterly sales, respectively. The company reported compliance with credit-facility covenants and no legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Whether semiconductor shortages, COVID-related disruptions, and the large open-order balance affect shipment timing, costs, and future revenue.
- How much operating cash flow is repeatable after working-capital releases, and the continuing effect of receivables factoring (the company sold $246.3 million without recourse year to date).
- The status of the secondary credit facility after its May 18, 2021 maturity, as well as ongoing covenant headroom and debt repayment plans.
- Whether margin gains persist as program mix, profit-sharing costs, new-program ramp-up costs, and currency movements change.
- The implications of customer concentration and the company’s stated intent to keep most foreign earnings permanently invested abroad, including the remaining $9.8 million deemed-repatriation tax liability.