Kimball Electronics, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended June 30, 2018; filed August 28, 2018. The filing is an annual report, not a standalone Q4 filing. Fourth-quarter figures below are unaudited.
Business context
Kimball Electronics is a global contract electronics manufacturer serving automotive, medical, industrial, and public safety markets, with additional capabilities in medical disposables, plastics, precision metals, and other manufacturing services. It reports as one segment and operates facilities in the United States, China, Mexico, Poland, Romania, and Thailand.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $1,072.1 million | $930.9 million |
| Gross profit / margin | $86.2 million / 8.0% | $75.6 million / 8.1% |
| Operating income / margin | $42.3 million / 4.0% | $43.1 million / 4.6% |
| Net income | $16.8 million | $34.2 million |
| Diluted EPS | $0.62 | $1.24 |
| Operating cash flow | $40.2 million | $46.8 million |
| Capital expenditures | $25.9 million | $33.3 million |
- Sales grew 15%, driven primarily by new product ramps, stronger demand, and favorable foreign exchange. Automotive sales rose 24% to $469.3 million; medical rose 22% to $313.3 million; industrial rose 6% to $217.0 million. Public safety declined 13% to $61.3 million.
- Operating income fell 2% despite higher sales. Gross margin edged down as new-product support costs, lower yields, and unfavorable mix offset some benefit from higher volume.
- Net income fell 51%, principally because of $17.9 million of provisional tax expense from U.S. Tax Reform: $13.4 million for deemed repatriation and $4.4 million for deferred-tax-asset remeasurement. The effective tax rate was 62.6%, versus 22.8% in FY2017. Management expects the lower U.S. statutory rate to benefit future results, but estimates remained subject to adjustment through December 2018.
- Fourth-quarter sales were $276.8 million versus $241.3 million a year earlier; net income was $5.8 million versus $8.1 million. The FY2018 December quarter recorded a net loss of $8.3 million, including $16.6 million of Tax Reform expense.
- At year-end, cash was $46.4 million; working capital was $208.4 million; current ratio was 1.9. Short-term liquidity, defined as cash plus unused credit facilities, was $108.7 million. Credit-facility borrowings were $8.3 million, with no long-term debt. Shareholders’ equity was $355.5 million.
- Operating cash flow was below FY2017, with inventory growth using $55.8 million of cash, partly offset by higher accounts payable. Inventory rose $57.0 million year over year, to $201.6 million. Open orders increased 37% to $293.1 million, but may be canceled and are not necessarily predictive of sales.
Material changes, outlook, and notable items
- Management’s organic growth goal is 8% annually; its EMS-market expectation is moderate growth with mixed demand. Management cited continued growth opportunities in automotive, medical, and industrial markets, while public safety demand was weaker.
- Management warned that margins remain pressured by competitive pricing, excess industry capacity, program start-up costs, and product mix. Component shortages and allocations, and newly imposed or proposed tariffs, could raise costs or disrupt production.
- The company agreed to acquire substantially all assets and assume certain liabilities of GES for approximately $50 million plus assumed liabilities. At filing, closing was expected in early FY2019, subject to customary conditions and approvals. The company planned to fund the acquisition through its credit facility; it borrowed $20.2 million in August 2018 for escrow pending closing.
- On July 27, 2018, the company amended and restated its primary credit facility, increasing capacity from $50 million to $150 million, with an option to increase to $225 million, and extending maturity to July 2023. Management stated available liquidity and operating cash flows should cover needs for at least 12 months.
- The company repurchased $9.4 million of shares in FY2018; $15.5 million remained authorized under its $60 million repurchase program. It had not paid dividends and had no current plan to do so.
- Other significant risks include reliance on major customers (ZF, Philips, and Nexteer Automotive represented 15%, 13%, and 13% of FY2018 sales), customer cancellation or insourcing, foreign-exchange exposure, labor availability, cybersecurity, regulatory and environmental compliance, and acquisition integration. The filing reports no material pending litigation and no material environmental liabilities known to management.
- Adoption of the new revenue-recognition standard in FY2019 was expected to change most manufacturing contracts to over-time recognition. The company estimated an opening contract asset of about $43 million, an inventory reduction of about $39 million, and an approximately $3 million after-tax reduction to opening retained earnings; it did not expect a material ongoing impact on revenue or operating results.
- Management and the independent auditor concluded internal control over financial reporting was effective; the auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Confirm the final Tax Reform adjustments, including deemed-repatriation tax, deferred-tax remeasurement, and any GILTI accounting effects.
- Verify whether the GES acquisition closed, its final purchase price and assumed liabilities, and subsequent operating and financing effects.
- Track gross margin and operating profitability against revenue growth, especially start-up costs, yields, mix, and pricing pressure.
- Monitor inventory, cash conversion days, and operating cash flow; assess whether higher inventory and purchase commitments are supported by customer demand.
- Review customer concentration and open-order quality, including potential cancellations, program run-offs, and changes in major customer volumes.
- Assess tariff and component-supply developments and the company’s ability to offset related cost increases.