Kimball Electronics and Kimball International Spin Off Analysis

Kimball International is both a manufacturer and seller of furniture in addition to being an electronic parts assembler. Just to keep things confusing, it was originally the world’s largest piano and organ manufacturer with electric organs leading to electronic assembly. It started in 1857 and went public in 1975. The many pivots of this company over time has left the company with the two distinct products that are being split now.  While disconnected business elements in a small market capitalization business held a lot of promise, there were a number of items that prevent the profit of this separation. Instead of doing a full analysis for Kimball International (KBALB) and the spin off Kimball Electronics, the decision was made to show how this spin off received three strikes out.

Both entities provide consumer discretionary products, which naturally leads itself to cyclical sales and income amounts. It is undetermined if the furniture segment will regain life or will remained depressed due to the competition of La-Z-Boy LZB) and Ethan Allen Interiors (ETH). The electronics segment shows an upswing, but to prior highs. It appears to be a barrier they have to grow beyond this point and is well above the average, which would be a strike as both businesses do not have growth projected and have a long history of losses.

As a majority of the profit is from the electronics segment, the second strike comes from the disclosure that the largest customer, Johnson Controls, Inc. (JCI) is moving their electronics assembly in house in the fourth quarter of this year, which would result in an approximate 17% loss in revenues.

The final strike was more of a business model problem. Kimball Electronics moved their work overseas, but their management is still US based. Therefore they will still have higher overhead than their oversea competitors. Without a product in a commoditized services in a cyclical industry, it will be a difficult to sustain any growth. The furniture manufacturer faces a similar uphill battle as they have also manufactured abroad, but have the added value charges of shipping those items to the US. It is hard to see how these businesses will turn around soon and management has made no indications of a plan other than spinning off the electronics segment.

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