Business context and reporting period
Kimball Electronics, Inc. is a global contract electronics manufacturer serving automotive, medical, industrial, and public safety markets. This Form 10-Q covers the quarter and nine months ended March 31, 2015 (fiscal 2015 Q3), with comparisons to the same periods in 2014. The request metadata says “2014 Q3,” but the filing itself is for 2015 Q3.
The company became an independent public company in an October 31, 2014 spin-off from Kimball International. Results before the spin-off include allocations from the former parent and may not reflect the costs of operating independently.
Financial results and liquidity
| Metric | Three months ended Mar. 31, 2015 | Three months ended Mar. 31, 2014 | Nine months ended Mar. 31, 2015 | Nine months ended Mar. 31, 2014 |
|---|---|---|---|---|
| Net sales | $206.9m | $185.7m | $618.2m | $542.6m |
| Gross profit; gross margin | $19.0m; 9.2% | $16.6m; 8.9% | $54.7m; 8.9% | $42.9m; 7.9% |
| Operating income; operating margin | $10.8m; 5.2% | $8.0m; 4.3% | $27.3m; 4.4% | $22.2m; 4.1% |
| Net income | $7.2m | $6.4m | $18.8m | $19.3m |
| Diluted EPS | $0.25 | $0.22 | $0.64 | $0.66 |
For the nine months, operating cash flow was $11.3m (vs. $32.9m), investing cash flow was negative $22.7m (vs. negative $13.1m), and financing cash flow was positive $50.2m (vs. negative $0.8m), primarily reflecting transfers from the former parent and spin-off-related cash distribution. Cash increased to $61.7m from $26.3m at June 30, 2014; the company received a $44.3m net cash distribution at the spin-off. Working-capital changes used $23.2m of cash, particularly receivables and inventory.
At March 31, 2015, total assets were $464.5m, total liabilities $160.9m, and equity $303.7m. The company had no borrowings under its $50m primary revolving facility (with an option to increase it to $75m); $0.3m of letters of credit were outstanding. It reported total short-term liquidity of $114.2m, including cash and unused credit facilities, and compliance with its financial covenants. Capital expenditure commitments were approximately $15m.
Material changes versus the prior comparable period
- Quarterly sales rose 11%; nine-month sales rose 14%. Quarter sales growth came from all four core verticals. Nine-month medical and public safety sales each increased 20%, industrial 12%, and automotive 9%.
- Gross margin improved 0.3 percentage point in the quarter and 1.0 point year to date, attributed to higher-volume leverage and, year to date, cost productivity. Operating income increased 35% for the quarter and 23% year to date.
- Nine-month net income declined 2% despite higher operating income. The 2014 comparison included $5.7m of antitrust lawsuit settlements in Other General Income, absent in 2015; the 2015 effective tax rate also increased to 27.9% from 15.9%.
- JCI sales declined as programs reached end-of-life and JCI brought other production in-house. JCI represented 4% of nine-month 2015 sales versus 14% a year earlier; management said much of the lost volume had been or was expected to be replaced by new business.
- Foreign currency translation reduced nine-month other comprehensive income by $16.5m before tax; accumulated other comprehensive income moved from $1.6m to a loss of $12.6m.
Outlook, commentary, risks, and unusual items
Management expected moderate but mixed EMS market growth, citing relative strength in automotive demand in the U.S. and China, improving industrial demand, stabilizing public safety demand, and stable medical demand. It gave no specific revenue or earnings guidance. Management planned prudent capital spending and a new greenfield manufacturing facility in Romania, with completion expected in the first half of fiscal 2016 and operations anticipated to begin mid-fiscal 2016.
Management said liquidity, cash generation, and available credit should meet operating needs for at least the next 12 months. Risks highlighted include demand and program fluctuations, customer cancellations or insourcing, customer concentration, competition and pricing pressure, component availability, foreign-exchange movements, and global economic conditions. The company uses foreign-exchange derivatives for risk management, not speculation; a hypothetical 10% adverse currency move on unhedged non-functional-currency monetary balances was not expected to materially affect annual profitability.
Spin-off costs were $2.6m for the nine months. The year-to-date tax rate was affected by largely nondeductible spin-off costs, geographic earnings mix, and domestic tax credits. The company disclosed $0.3m maximum exposure under unused standby letters of credit and no material pending legal proceedings. Management reported effective disclosure controls; some stand-alone internal-control processes were newly implemented or still being implemented after the spin-off.
Important facts for investors to verify
- Whether sales growth and margin improvement persist as programs mature and the company replaces declining JCI volume.
- Whether working-capital investment, receivables collection (DSO was 58.6 days versus 57.0), and capital spending convert into stronger operating cash flow.
- The sustainability of earnings after the absence of prior-year antitrust settlement income, and the effect of tax-rate and currency volatility.
- Execution, cost, and demand assumptions for the Romania facility and the approximately $15m of capital commitments.
- How stand-alone costs and internal controls evolve as transition services from Kimball International end.