Kimball Electronics, Inc. — Form 10-Q Summary
Period clarification: The supplied filing covers the three and nine months ended March 31, 2020 (fiscal 2020 third quarter), not 2019 Q3 as indicated in the request metadata. Financial statements are unaudited.
Business context
Kimball Electronics provides contract electronics and diversified manufacturing services to automotive, medical, industrial, and public safety customers. It reported consolidated results across these markets; the filing does not provide a segment-level profit breakdown.
Financial results and liquidity
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $293.9 million, down 6% from $313.5 million | $914.4 million, up 6% from $863.2 million |
| Gross profit / margin | $20.2 million / 6.9%, versus $26.6 million / 8.5% | $62.9 million / 6.9%, versus $65.2 million / 7.6% |
| Operating income / margin | $10.6 million / 3.6%, versus $14.5 million / 4.6% | $30.4 million / 3.3%, versus $31.7 million / 3.7% |
| Net income | $6.3 million, down 47% from $11.8 million | $19.5 million, down 19% from $24.0 million |
| Diluted EPS | $0.25, versus $0.46 | $0.76, versus $0.92 |
- Cash flow: Nine-month operating cash flow was $51.3 million, versus cash used of $19.0 million in the prior-year period. Investing used $27.6 million, including $27.5 million of capital expenditures; financing used $13.5 million. Cash rose to $58.3 million from $49.3 million at June 30, 2019.
- Balance sheet and debt: At March 31, cash was $58.3 million and borrowings under credit facilities totaled $122.4 million, including $30.9 million current and $91.5 million long term. Shareholders’ equity was $375.4 million. The weighted-average borrowing rate was 3.4%.
- Liquidity: Current assets were $543.5 million and current liabilities $262.1 million; the reported current ratio was 2.1. Unused credit facilities were $64.1 million, making reported short-term liquidity (cash plus unused facilities) $122.4 million. Some foreign facilities are uncommitted. The company said it expected available liquidity to cover operating needs for at least 12 months and was complying with its credit covenants.
- Working capital: Contract assets increased to $69.5 million from $51.9 million at June 30, 2019. Cash-conversion days rose to 81 from 77 at June 30 and 75 a year earlier.
Material changes and management commentary
- Third-quarter sales fell amid lower demand and, to a lesser extent, COVID-19 effects. Nine-month growth reflected first-half demand, program ramp-ups, and new product introductions. Foreign exchange reduced sales by about 1% in both the quarter and year-to-date comparison.
- Quarterly sales declined in automotive (2%), medical (12%), industrial (3%), and public safety (18%). For the first nine months, automotive grew 11%, medical 3%, and industrial 5%; public safety fell 12%.
- Management attributed lower gross margin primarily to lower volume and unfavorable product mix in the quarter, and to mix and the GES acquisition year to date. Open orders were $511.0 million, up 35% year over year, but can be delayed or canceled and are not necessarily indicative of future sales.
- Management anticipated near-term automotive weakness as automakers in North America and Europe suspended production. It reported increased demand for medical respiratory-care and patient-monitoring assemblies and expected medical sales growth in coming quarters; industrial demand was expected to remain steady. These expectations were subject to substantial uncertainty, and no quantified earnings or sales guidance was provided.
- COVID-19’s duration and financial effects could not be reasonably estimated and could be material. The company described its facilities as essential or otherwise permitted to operate, while noting varying operational effects, potential facility closures, supply-chain constraints, and workforce availability risks. It planned to increase use of liquidity and potentially expand capacity to meet medical demand.
Unusual items, contingencies, and risks
- Quarterly other expense, net was $1.9 million, compared with $0.2 million of other income a year earlier. The current-quarter result included a $0.9 million loss on SERP investments and $0.7 million of non-operating expense; SERP investment valuation changes are offset by changes in the related liability in selling and administrative expense.
- The nine-month effective tax rate was 25.8%, versus 19.3%. Management cited low U.S. pretax income, discrete tax adjustments, and global intangible low-taxed income tax expense as factors in the current-period rate.
- The GES acquisition’s net working-capital adjustment remains disputed with the sellers; a $3.8 million net receivable from the seller was recorded. The purchase-price measurement period had ended, and any final adjustment would be recorded in earnings.
- The company repurchased $8.8 million of shares in the first nine months, then temporarily suspended its $80 million authorization on March 30, 2020 because of the COVID-19 environment. Approximately $3.3 million remained available under the plan at March 31.
- Other exposures include component shortages and tariffs, foreign-exchange movements, customer concentration and program cancellations, and risks to supply chains and production. Three customers—Nexteer Automotive, Philips, and ZF—each represented at least 10% of sales in at least one reported period. No material pending legal proceedings were reported.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: this is the quarter ended March 31, 2020, not 2019 Q3.
- Track whether medical order growth converts into revenue and cash, and whether automotive weakness or COVID-related operating disruptions intensify.
- Assess the quality and timing of open orders, contract-asset conversion, and operating cash flow, including the company’s use of receivables factoring ($202.0 million sold without recourse in the nine-month period).
- Monitor gross-margin recovery, GES performance and resolution of the disputed purchase-price adjustment, and compliance with debt covenants.
- Consider that $122.4 million of reported short-term liquidity includes $64.1 million of unused facilities, some of which are uncommitted, and that $56.5 million of cash was held by foreign entities.