Kimball Electronics, Inc. (NASDAQ:KE) Q1 2024 Earnings Call Transcript November 7, 2023
Operator: Good morning, ladies and gentlemen. Welcome to the Kimball Electronics First Quarter Fiscal 2024 Earnings Conference Call. My name is Ellen, and I will be the facilitator for today’s call. All lines play more listen-only mode to prevent any background noise. After the completion of the prepared remarks from the Kimball Electronics leadership team, there will be a question-and-answer period. [Operator Instructions] Today’s call on November 7, 2023, 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, Vice President, Investor Relations. Mr. Regrut, you may begin.
Andy Regrut : Thank you, Ellen, and good morning, everyone. Welcome to our first quarter conference call. With me here today is Ric Phillips, our Chief Executive Officer; and Jana Croom, Chief Financial Officer. We issued a press release yesterday afternoon with our results for the first quarter of fiscal 2024. To accompany today’s call, a 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 the forward-looking statements.
Reconciliations of GAAP to non-GAAP amounts are available in our press release. One other housekeeping item to mention, starting this quarter, miscellaneous sales, which previously had been reported in the other category in our vertical market breakdown are now included in the respective vertical they pertain to. All prior periods have been recast to reflect this change. This morning, Ric will start the call with a few opening comments. Jana will review the financial results for the quarter and guidance for fiscal 2024, and Ric will complete our prepared remarks before taking your questions. I’ll now turn the call over to Ric.
Ric Phillips : Thanks, Andy, and good morning, everyone. I am very pleased with our results for the first quarter, particularly in light of the current macro environment. Q1 was a strong start to the fiscal year, with record first quarter sales and operating income, year-over-year margin expansion and 13% growth in net income. While these results were in line with our expectations, we have been evaluating the impact of recent short-term market disruptions, including the UAW strike, global economic conditions and geopolitical events, and have updated our guidance for the full year of fiscal 2024 to reflect softening demand in the end market verticals we serve. We will provide more detail in just a moment. Net sales in Q1 totaled $438 million, an 8% increase compared to the first quarter last year with two of the three vertical markets posting double-digit growth.
Automotive, our largest business, reported net sales of $213 million, a 13% increase compared to the first quarter of fiscal 2023 and 49% of total company sales. To be clear, these results were not materially impacted by the UAW strike. The targeted walkouts began on September 15 and our fiscal quarter ended two weeks later at the end of that month. Based on the locations directly impacted by the strike and the vehicle models produced at those plants, we estimate a relatively small impact to our top line in October. However, this situation is fluid with possible downstream ripples to come as the OEMs and Tier 1 suppliers evaluate the current state. With over 35 years of experience producing safety critical, high-quality electronic assemblies that meet the stringent regulatory requirements of this industry, we are ideally positioned to grow as our customers grow, particularly with the continued electrification of vehicles.
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Q&A Session
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As an example, I recently had the privilege of representing our company at a celebration with the ZF Group when Kimball Electronics was awarded a new multi-year program in electronic power steering, with the work to commence in calendar year 2025 at our facilities in Poland and China. The strategic partnership between the companies dates back to our early beginnings in the automotive industry and has grown to where ZF is currently our second largest customer. Our unique manufacturing capabilities in electronic steering, electronic motor controls, braking systems, battery management and redundant safety systems align with advancements in the industry. And our support of applications in internal combustion engines, electric vehicles or a hybrid of the two position us for growth as consumer preferences and adoption rates evolve.
Net sales in medical were $102 million, a 12% decline compared to the same period last year and 23% of total company sales. This result was in line with our expectations. As a reminder, our annual guidance reflects a 100 million reduction in sales with a major customer in this vertical partially offset by growth in other programs. While there are not any updates that we can speak to with regard to this customer, it is important to emphasize that our relationship with them has never been better and we are positioned to provide support as needed. Longer term, we continue to be encouraged by mega trends in the medical industry and believe they will support future growth, particularly as medical devices get smaller in size and require higher levels of precision and accuracy and as connected drug delivery systems become more prevalent.
Our business development efforts focus on medical applications including sleep therapy, patient monitoring, AEDs and surgical systems, especially with OEMs looking to outsource higher level assemblies or HLAs, which as a category represent an opportunity for more value added content. Finally, net sales in industrial totaled $123 million, a 21% increase compared to Q1 last year, and 28% of total company sales. The increase this quarter represented the largest for any of the three verticals we support, with climate control, public safety, smart metering, factory automation and green energy charging and storage driving the growth. We expect the movement toward responsible usage of natural resources and heightened conservation to provide a meaningful tailwind in the years to come.
And we’re aligned with products that reduce environmental impacts and promote energy, efficiency, safety and carbon neutrality. This opportunity could become even more pronounced for us in EV charging as consumer adoption of electric and hybrid vehicles expands globally. So in summary, a very good quarter and strong start to fiscal 2024. I’ll now turn the call over to Jana to provide more detail on the financial results for Q1 and our guidance for the full year. Jana?
Jana Croom: Good morning, everyone. Before I start, I just wanted to let you know. We heard from some of you that our slide deck is not up. We are actively working to correct that now and it should show here shortly in a moment or two. With that, just to keep us on time, I’m going to continue with our prepared remarks. So as Ric highlighted, we are very proud of our results in Q1. Net sales in Q1 totaled $438.1 million, a first quarter record high for the company and 8% above Q1 of fiscal 2023. Foreign exchange favorably impacted consolidated sales by approximately 1% year-over-year. The gross margin rate in Q1 was 8.1%, a 90 basis point improvement compared to the same period last year. And this result was predominantly driven by higher levels of cost absorption in Mexico, as we continue to leverage our expansion there.
Adjusted selling and administrative expenses in the first quarter were $16.2 million, relatively flat to the Q1 adjusted results reported last year of $16 million. When measured as a percentage of sales, however, adjusted selling and administrative expenses were 3.7%, a 20 basis point improvement over Q1 last year. Adjusted operating income for the first quarter was $19.3 million or 4.4% of net sales, which compares to last year’s adjusted result of $13.3 million or 3.3% of net sales, a 110 basis point improvement. Other income and expense was expense of $6.3 million compared to expense of $1.4 million last year. The increase is a result of higher interest expense year-over-year, a product of our elevated debt levels and the current interest rate environment.
The effective tax rate was 18.6% in the first quarter compared to 21.9% in Q1 of fiscal 2023, with the lower rate resulting from a mix of earnings more heavily weighted and lower tax jurisdictions. Adjusted net income in the first quarter of fiscal 2024 was $10.8 million or $0.43 per diluted share, a 13% increase compared to adjusted net income in Q1 last year of $9.5 million or $0.38 per diluted share. Now turning to the balance sheet. Cash and cash equivalents at September 30, 2023, were $56.6 million and cash flow generated by operating activities in the quarter was $12.8 million. This represents our third consecutive quarter of positive cash flow generation. Cash conversion days were 103 days compared to 94 days in the first quarter of fiscal 2023 and 94 days last quarter.
As a reminder, we started including customer advances and our CCD calculation. The results from fiscal 2023 reflect this change. Inventory ended the quarter at $482.2 million compared to $450 million at the end of Q1 last year and $450 million at the end of fiscal 2023. Capital expenditures in the first quarter were $11.3 million, supporting organic growth, maintenance requirements and investments in automation and efficiencies. Borrowings on our credit facility at September 30, 2023, were $296.7 million compared to $232.5 million a year ago and $281.5 million at the end of Q4. Our short-term liquidity available represented as cash and cash equivalents, plus the unused amount of our credit facilities totaled $147.1 million at the end of the first quarter.
There were no shares repurchased in fiscal — in the first quarter of fiscal 2024. Since October, 2015 under our Board-authorized share repurchase program, a total of $88.8 million has been returned to our shareowners by purchasing 5.8 million shares of common stock. We have $11.2 million remaining on the repurchase program. As Ric highlighted, we have updated our guidance for fiscal year 2024, with net sales now expected to be flat with prior year compared to our previous estimate of 4% to 7% increase. Operating income margin is also estimated to be in line with fiscal 2023, which is within our previous guidance range of 4.7% to 5.2% of net sales. The outlook for capital expenditures did not change with a range of $70 million to $80 million.
From a top line perspective, our current outlook is approximately $100 million lower than the midpoint of our previous guidance range. The decline is spread fairly evenly between two of our verticals. First, for automotive, the EV market in North America is experiencing slower adoption as end customers wait for technology to advance, particularly in the SUV and pickup truck segments of that market. Industrial is experiencing customer pushouts occurring in climate control applications, especially in Europe as economic conditions there continue to be challenging. We expect sales in the second quarter to be roughly in line with Q2 last year and then for sequential top line growth to occur in the back half of the year. I’ll now turn the call back over to Ric.
Ric Phillips: Thanks, Jana. In closing, I am very proud of our accomplishments in the first quarter and the strong start to the fiscal year. This includes the financial results, but there were also other noteworthy awards, distinctions and achievements for the company. As an example, our facility here in Jasper was recently recognized as one of the best places to work in manufacturing in Indiana. I want to congratulate General Manager, Jason Davis, and the entire team on a job well done. With an outlook for fiscal 2024 that is carefully navigating the current macro environment, we continue to be encouraged by the longer-term growth opportunities in the three vertical end markets we serve, each supported by favorable industry megatrends.
