Business context and reporting period
Kimball Electronics, Inc. filed this Form 10-K for the fiscal year ended June 30, 2015; the filing also reports fourth-quarter results. The company provides engineering, manufacturing, and supply-chain services for durable electronics in automotive, medical, industrial, and public-safety markets. It became an independent public company on October 31, 2014, following its spin-off from Kimball International. Pre-spin-off results were derived from the former parent’s records and include allocated costs; they may not represent results as a standalone company.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $819.4 million | $741.5 million |
| Gross profit / margin | $72.4 million / 8.8% | $61.0 million / 8.2% |
| Operating income / margin | $36.4 million / 4.4% | $29.9 million / 4.0% |
| Net income | $26.2 million | $24.6 million |
| Diluted EPS | $0.89 | $0.84 |
| Cash from operations | $28.1 million | $39.3 million |
| Cash used for investing | $36.5 million | $20.0 million |
Sales increased 10% year over year, with growth in each of the four principal markets. Gross margin improved 0.6 percentage point, attributed mainly to higher-revenue leverage and lower incentive compensation costs. Net income rose 6%, with the increase partly limited by higher tax expense and foreign-currency/derivative losses. FY2015 included $2.6 million of spin-off expenses; net income included $2.4 million of after-tax spin-off expense.
For the fourth quarter, net sales were $201.1 million versus $198.9 million a year earlier; gross profit was $17.7 million versus $18.1 million; net income was $7.4 million versus $5.4 million; and diluted EPS was $0.25 versus $0.18.
Liquidity, debt, and balance sheet
At June 30, 2015, cash and cash equivalents were $65.2 million, working capital was $194.2 million, and the current ratio was 2.2. Total debt was zero. The company had $59.9 million of available borrowing capacity across its credit facilities, subject to facility terms, and reported compliance with its primary facility covenants. Short-term liquidity, including cash and unused facilities, was $125.1 million. Management said available funds, operating cash flow, and borrowing capacity should meet needs for at least 12 months.
Operating cash flow fell to $28.1 million, primarily reflecting $22.5 million of cash use from working-capital changes, particularly receivables and inventory. Investing used $36.5 million, including $33.0 million of capital expenditures and $3.9 million of capitalized software spending. Cash increased by $38.9 million, significantly influenced by $44.3 million of net cash distributions from the former parent in connection with the spin-off. Foreign operations held $35.7 million of cash that management intended to keep invested abroad.
Material changes and management outlook
- Sales to Johnson Controls declined materially: one program fell from about $46 million in FY2014 to $6 million in FY2015 as programs reached end of life; additional in-sourced programs generated about $16 million in FY2015 versus $33 million in FY2014. JCI represented 3.6% of FY2015 sales, down from 13.0%.
- Medical sales rose 15%, public-safety sales 16%, automotive sales 9%, and industrial sales 5%. China sales increased substantially, while the company continued to diversify customers and replace declining programs.
- Management expected moderate but mixed EMS market growth, citing stable medical demand, improving industrial demand, stabilizing public-safety demand, and strength in automotive markets tempered by a forecast slowdown in China. The filing provides no specific company revenue or earnings guidance.
- The company began construction of a greenfield manufacturing facility in Romania, expected to be completed in the first half of FY2016, with operations anticipated to begin mid-year. Capital-expenditure commitments were approximately $11 million at year-end.
- FY2014 included $5.7 million of pre-tax antitrust lawsuit settlement income, which did not recur in FY2015. FY2015 foreign currency/derivative loss was $1.4 million; currency translation also reduced accumulated other comprehensive income.
Risks, contingencies, and other notable matters
- Key risks include customer concentration and program cancellations or in-sourcing, competitive pricing and excess EMS capacity, program-startup losses, uncertain demand and capacity utilization, component supply disruptions, working-capital volatility, foreign-exchange exposure, and international operating risks.
- The spin-off created standalone costs and operational transition risks. The company’s historical results include former-parent allocations, and post-spin-off costs may differ. The company elected emerging-growth-company reporting exemptions; the 10-K includes no management assessment or auditor attestation on internal control over financial reporting. Management reported disclosure controls were effective.
- The company’s tax-free spin-off treatment depends on factual assumptions and compliance with the Tax Matters Agreement. A taxable determination or certain transactions could trigger tax liabilities and indemnification obligations.
- Contractual obligations totaled $209.9 million, mostly purchase obligations ($198.7 million), substantially due in FY2016; these include commitments for materials and other purchases, some of which may be cancellable. No long-term debt or capital-lease obligations were reported.
- Management reported no material environmental liabilities and no pending legal proceedings expected to materially affect the company; routine litigation was ongoing. Product-warranty liability was $0.6 million at year-end.
Important facts for investors to verify
- Whether new customer awards and programs are replacing the lost JCI business at comparable sales and margins, and how customer concentration is evolving.
- Whether improved gross margin is sustainable amid pricing pressure, program startups, and utilization changes.
- Cash conversion and working-capital trends, especially receivables, inventory, and the use of banker’s acceptance drafts in China.
- Romania startup timing, spending, utilization, and contribution to results; also compare actual capital expenditures with commitments and plans.
- Standalone cost trends, tax and spin-off indemnity exposures, and progress establishing internal-control reporting as a newly public company.