Kimball Electronics [KE] Conference call transcript for 2021 q3
2021-11-06 16:03:12
Fiscal: 2022 q1
Operator: Good morning, ladies and gentlemen and welcome to Kimball Electronics First Quarter Fiscal 2022 Earnings Conference Call. My name is Sylvia and I will be your facilitator for today’s call. [Operator Instructions] Today’s call, November 4, 2021 is being recorded. A replay of the call will be available on the Investor Relations page of the Kimball Electronics website. At this time, I would like to turn the call over to Andy Regrut, Head of Investor Relations. Mr. Regrut, you may begin.
Andy Regrut: Thank you, Sylvia and good morning everyone. Welcome to our first quarter conference call. With me here today is Don Charron, our Chairman and CEO; and Jana Croom, Vice President, Chief Financial Officer. We issued a press release yesterday afternoon with our results for the first quarter of fiscal 2022. To accompany today’s call, presentation has been posted to the Investor Relations page on our company website. Before we get started, I’d like to remind you that we will be making forward-looking statements that involve risks and uncertainties and are subject to our safe harbor provisions as stated in our press release and SEC filings and that actual results can differ materially from forward-looking statements. All commentary today is focused on adjusted non-GAAP results. For the first quarter of fiscal 2022, this excludes onetime after-tax income totaling $1.1 million or $0.04 per diluted share associated with non-operating items. Reconciliations of GAAP to non-GAAP amounts are available in our press release. This morning, Don will start the call with a few opening comments. Jana will review the financial results for the quarter and guidance for fiscal 2022, and Don will complete our prepared remarks before taking your questions. I will now turn the call over to Don.
Don Charron: Thanks, Andy and good morning everyone. I am proud of our people, our company and results for Q1, considering the difficult operating environment caused by issues in the global supply chain. Component shortages, which are impacting companies worldwide, continue to make it challenging to keep pace with strong market demand. We were disappointed by the lack of improvement in the overall situation in the September ending quarter when we were actually expecting some level of recovery. In fact, conditions deteriorated during July, August, September period due to increasing infections in Malaysia and the resulting restrictions and the worsening of the backlog in U.S. West Coast ports. In addition, during the last week of the period, we were faced with the challenge of power outages at our China facility. The outages continued into Q2. However, we have identified a solution that will mitigate our risk to further production. As a result of these issues, our lost absorption was more significant than original estimates. It is important to note we are committed to retaining our workforce around the world as we see these disruptions as a short-term issue, and our funnel of new product introductions remains strong. For the past 10 months, our teams have been working tirelessly to navigate these challenges, and we continue to experience a shift in a significant portion of our shippable backlog as customer demand exceeds parts availability. As supply constraints ease, we are well positioned to ramp production on our record backlog and support our strong funnel of new product introduction. In fact, we are preferring to run at maximum capacity on several production lines across the company. We function as a single source for many of our customers who are relying upon us to deliver on our contractual agreements once parts become available. We are reiterating our guidance for fiscal year 2022. Although the bifurcation between the first and second half of the fiscal year will now be more pronounced, longer term, the outlook for our company continues to be strong, and the team we have in place to execute on a variety of growth opportunities is up to the challenge. Pivoting back to the first quarter, net sales were down 12% compared to the same period last year, with declines in 3 of 4 vertical markets. Automotive was the only major vertical market with sales increasing in Q1, up 9%. Based on customer demand and our backlog, this result could have been much stronger if we had the materials needed to fill these orders. But unfortunately, that was not the case. The Q1 growth in automotive resulted from popular vehicle models designated as high priority by our customers and the OEMs, receiving an allocation of components from the limited worldwide supply. When the global supply chain issues subside and industry-wide volumes normalize, we are still bullish on the growth prospects of this vertical market. Electronic content per vehicle continues to increase with advanced technologies and expanded operating systems being added to most vehicles. As I have mentioned in previous calls, the applications and architecture for these systems are largely the same for both electric vehicles and vehicles driven by internal combustion engines, and the stringent production standards in the automotive industry align well with our core competencies, which gives us confidence in the growth potential of this vertical market in the years to come. The medical vertical market was down 33% in Q1. As you will recall, our sales were strong last year with our support of respiratory care products needed to combat COVID-19 during the early months of the pandemic. This combined with raw material shortages and logistical challenges made for a difficult quarter over – a difficult quarter-over-quarter comparable. Elective procedures are still below pre-pandemic levels. And while we’re starting to see improvement as more of the population gets vaccinated and physicians’ offices and hospitals are able to resume these activities, the recovery has been gradual. Longer term, we continue to believe the megatrends in the health care industry with an aging population and increasing access and affordability to care, decreasing device sizes and connected drug delivery systems are an excellent setup for growth. Turning to the industrial vertical market, which was down 9% in the first quarter, the decline resulted from lower sales in our climate control and smart metering products, both again, largely related to parts shortages. And finally, sales in Public Safety were $11.1 million, down 16% from the first quarter of the prior year, again, largely driven by part shortages. I will now turn the call over to Jana to discuss our Q1 results in more detail and review our guidance for fiscal year 2022. Jana?
Jana Croom: Thanks, Don and good morning everyone. Net sales in the first quarter were $292.7 million, a 12% decrease compared to $331.7 million in Q1 last year. Foreign exchange rates favorably impacted sales by 1% in the first quarter of fiscal 2022. Our gross margin rate in Q1 was 5.3% a 390 basis point decrease from the first quarter of last year. The decline was driven by a combination of factors. First, certain costs have increased this year, including wage inflation and other labor costs and inbound freight. Second, and more importantly, we were challenged by lower volumes related to the continued global part shortage. This impacted our absorption rate at fixed cost and required labor levels to support the back half of our fiscal year and beyond, created margin pressure. We expect this to abate in the coming quarters and into the future as the part shortage subside, and we are able to return to normal sales volumes based on our funnel of future growth. Adjusted selling and administrative expenses were $12.3 million or 4.2% of net sales in the first quarter. This compares to $12.6 million or 3.8% of net sales in Q1 last year. The increase in the expense rate that is expenses as a percentage of sales is resulting from the lower sales volume in Q1 this year as compared to last. Adjusted operating income for the first quarter was $3.3 million or 1.1% of net sales. This compares to adjusted operating income of $18 million or 5.4% of net sales in the first quarter of fiscal 2021, with the decrease resulting from lower sales volume and the corresponding loss absorption that Don noted in his opening comments. Other income and expense was expense of $1.2 million in the first quarter, which compares to income of $2.1 million in Q1 of fiscal 2021. This change was mainly due to the impact of FX gain loss due to foreign currency remeasurement. The effective tax rate in Q1 was 27.4% compared to an effective tax rate of 15.7% in the first quarter last year. The lower effective tax rate in the prior year quarter was favorably impacted by a discrete tax benefit from a state tax valuation allowance and a favorable mix of earnings within our various tax jurisdictions. Adjusted net income in the first quarter of fiscal 2022 was $1.5 million or $0.06 per diluted share compared to adjusted net income in Q1 last year of $16.6 million or $0.65 per diluted share. Now, turning to the balance sheet, cash and cash equivalents at September 30, 2021, were $89.3 million and cash flow used for operating activities during Q1 was $8.2 million. Cash conversion days for the quarter ended September 30, 2021, were 73 days, representing a 3-day improvement from Q1 2021. However, it is a 9-day increase from last quarter. We saw a significant increase in inventory in the amount of $62 million in the quarter, a result of the current part shortage. In several cases, the majority of parts were available and arrived on time only to be held up from being released to production due to a few critical parts not arriving on time. This has caused the shift in our inventory build specific to the current environment. There is a notable correlation between the inventory build we experienced in the quarter and the absorption rate that Don noted, which resulted in lower OI margin. As the part shortage abates and we worked on the backlog of open orders, we will likely see inventory levels normalize. Capital investments in the first quarter were $12.7 million, largely for expansions at our Thailand and Mexico facilities and to support new business awards. We anticipate higher levels of CapEx over the remainder of FY ‘22 as we continue these expansions and support our strong organic growth opportunities. Borrowings on our credit facilities at September 30, 2021, were $72.6 million, down substantially from $110.5 million at September 30, 2020, and up slightly from $66.2 million at June 30, 2021. Our short-term liquidity available represented as cash and cash equivalents plus the unused amount of our credit facilities, totaled $182.8 million at September 30, 2021. There were no shares repurchased in the first quarter of fiscal year 2022. Since October 2015, under our Board authorized share repurchase program, a total of $79.7 million was returned to our shareowners by purchasing 5.3 million shares of common stock. As Don highlighted, we are reiterating our guidance for the full year of fiscal 2022. As a reminder, we estimate net sales will be in the range of $1.4 billion to $1.5 billion, an 8% to 16% increase over fiscal 2021. Operating income margin is expected to be 4.5% to 5% of net sales, and we expect to invest $60 million to $70 million in capital expenditures in the fiscal year. Finally, I want to call your attention to the Investor Relations section of our corporate website. We have recently refreshed the site to improve the navigation and increase the availability of information and hope you will find these enhancements helpful. I will now turn the call back over to Don.
Don Charron: Thanks, Jana. Before we open the lines for questions, I’d like to share a few thoughts in closing. The operating environment we are facing today is unlike any other I’ve experienced in my 35 plus year career. The impact of the pandemic and the resulting material shortages, coupled with global logistics issues and rising costs is presenting a unique set of challenges for companies in a wide variety of industries around the world. I think that it is important and apparent that we’re realizing our company reported a record fiscal year in 2021 during the height of pandemic only to face this incredibly challenging operating environment when the pandemic appears to be subsiding. There are many imbalances within the global supply chain that need to work themselves out before we can return to some type of normalcy. But as I referenced in my opening comments, we have a long-term perspective when running our business and view these headwinds as short term in nature. Our backlog of open orders is at record levels, and we are prepared for a significant ramp-up in output in the second half of fiscal year 2022. Throughout this period of uncertainty, we have never lost sight of the fact that our number one priority is the health and safety of our people. Our protocols have minimized disruptions to the business and allowed us to maintain excellent customer support. We’re well positioned for the future, and I’m so proud of the team and their efforts to deal with the challenges from this tough operating environment. We are truly focused on creating quality for life. As previously announced, our Annual Meeting of Shareowners will be held at 9:00 a.m. Eastern Time on Tuesday, November 9. This meeting will be an in-person only event at our world headquarters here in Jasper. We appreciate the support of our shareowners and look forward to seeing any that can attend. If you are unable, a copy of the presentation from the meeting will be posted to our corporate website in the Investor Relations section. With that, I would like to open the lines for questions. Sylvia, do we have any analysts with questions in the queue?
Operator: [Operator Instructions] Your first question comes from Anja Soderstrom from Sidoti.
Operator: Your next question comes from Mike Morales from Walthausen.
Operator: [Operator Instructions] Your next question comes from Hendi Susanto from Gabelli Funds.
Operator: And I show no further questions at this time. I would like to turn the call back to Mr. Don Charron for any final remarks.
Don Charron: Thank you, Sylvia. And that brings us to the end of today’s call. We appreciate your interest and look forward to speaking with you on our next call. Thank you and have a great day.
Operator: Ladies and gentlemen, this does conclude today’s conference. Thank you again for your participation. You may now all disconnect.
