UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended March 31, 2023
OR
For the transition period from to
Commission File Number 001-36454
| (Exact name of registrant as specified in its charter) | ||
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |||||||||||||
| incorporation or organization) | ||||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
(812 ) 634-4000
| Registrant’s telephone number, including area code | ||
| Not Applicable | ||
| Former name, former address and former fiscal year, if changed since last report | ||
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||
| Title of each Class | Trading Symbol | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ☒ | Emerging growth company | ||||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The number of shares outstanding of the Registrant’s common stock as of April 24, 2023 was 24,724,281 shares.
KIMBALL ELECTRONICS, INC.
FORM 10-Q
INDEX
| Page No. | |||||||||||
| PART I FINANCIAL INFORMATION | |||||||||||
| PART II OTHER INFORMATION | |||||||||||
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KIMBALL ELECTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except for Share Data)
| (Unaudited) | |||||||||||
| March 31, 2023 | June 30, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Receivables, net of allowances of $ | |||||||||||
| Contract assets | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
Property and Equipment, net of accumulated depreciation of $ | |||||||||||
| Goodwill | |||||||||||
Other Intangible Assets, net of accumulated amortization of $ | |||||||||||
| Other Assets | |||||||||||
| Total Assets | $ | $ | |||||||||
LIABILITIES AND SHARE OWNERS’ EQUITY | |||||||||||
| Current Liabilities: | |||||||||||
| Current portion of borrowings under credit facilities | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued expenses | |||||||||||
| Total current liabilities | |||||||||||
| Other Liabilities: | |||||||||||
| Long-term debt under credit facilities, less current portion | |||||||||||
| Long-term income taxes payable | |||||||||||
| Other long-term liabilities | |||||||||||
| Total other liabilities | |||||||||||
| Share Owners’ Equity: | |||||||||||
Preferred stock- | |||||||||||
Shares authorized: Shares issued: | |||||||||||
Common stock- | |||||||||||
Shares authorized: Shares issued: | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Treasury stock, at cost: | |||||||||||
Shares: | ( | ( | |||||||||
| Total Share Owners’ Equity | |||||||||||
| Total Liabilities and Share Owners’ Equity | $ | $ | |||||||||
3
KIMBALL ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except for Per Share Data)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31 | March 31 | ||||||||||||||||||||||
| (Unaudited) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net Sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of Sales | |||||||||||||||||||||||
| Gross Profit | |||||||||||||||||||||||
| Selling and Administrative Expenses | |||||||||||||||||||||||
| Other General Income | ( | ||||||||||||||||||||||
| Operating Income | |||||||||||||||||||||||
| Other Income (Expense): | |||||||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Non-operating income (expense), net | ( | ( | |||||||||||||||||||||
| Other income (expense), net | ( | ( | ( | ( | |||||||||||||||||||
| Income Before Taxes on Income | |||||||||||||||||||||||
| Provision for Income Taxes | |||||||||||||||||||||||
| Net Income | $ | $ | $ | $ | |||||||||||||||||||
| Earnings Per Share of Common Stock: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Average Number of Shares Outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
4
KIMBALL ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
| Three Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
| March 31, 2023 | March 31, 2022 | ||||||||||||||||||||||||||||||||||
| (Unaudited) | Pre-tax | Tax | Net of Tax | Pre-tax | Tax | Net of Tax | |||||||||||||||||||||||||||||
| Net income | $ | $ | |||||||||||||||||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | $ | $ | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||
| Postemployment actuarial change | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Derivative gain (loss) | ( | ( | |||||||||||||||||||||||||||||||||
| Reclassification to (earnings) loss: | |||||||||||||||||||||||||||||||||||
| Derivatives | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Amortization of actuarial change | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | $ | $ | ( | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||
| Total comprehensive income | $ | $ | |||||||||||||||||||||||||||||||||
| Nine Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| March 31, 2023 | March 31, 2022 | ||||||||||||||||||||||||||||||||||
| (Unaudited) | Pre-tax | Tax | Net of Tax | Pre-tax | Tax | Net of Tax | |||||||||||||||||||||||||||||
| Net income | $ | $ | |||||||||||||||||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | $ | $ | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||
| Postemployment actuarial change | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Derivative gain (loss) | ( | ( | |||||||||||||||||||||||||||||||||
| Reclassification to (earnings) loss: | |||||||||||||||||||||||||||||||||||
| Derivatives | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Amortization of actuarial change | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | $ | $ | ( | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||
| Total comprehensive income | $ | $ | |||||||||||||||||||||||||||||||||
5
KIMBALL ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
| Nine Months Ended | |||||||||||
| March 31 | |||||||||||
| (Unaudited) | 2023 | 2022 | |||||||||
| Cash Flows From Operating Activities: | |||||||||||
| Net income | $ | $ | |||||||||
Adjustments to reconcile net income to net cash used for operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| (Gain) loss on sales of assets | ( | ||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Stock-based compensation | |||||||||||
| Other, net | |||||||||||
| Change in operating assets and liabilities: | |||||||||||
| Receivables | ( | ( | |||||||||
| Contract assets | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Prepaid expenses and other assets | ( | ( | |||||||||
| Accounts payable | |||||||||||
| Accrued expenses and taxes payable | ( | ||||||||||
| Net cash used for operating activities | ( | ( | |||||||||
| Cash Flows From Investing Activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Proceeds from sales of assets | |||||||||||
| Purchases of capitalized software | ( | ( | |||||||||
| Other, net | ( | ||||||||||
| Net cash used for investing activities | ( | ( | |||||||||
| Cash Flows From Financing Activities: | |||||||||||
| Proceeds from credit facilities | |||||||||||
| Net change in revolving credit facilities | |||||||||||
| Repurchases of common stock | ( | ||||||||||
| Payments related to tax withholding for stock-based compensation | ( | ( | |||||||||
| Debt issuance costs | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of Exchange Rate Change on Cash and Cash Equivalents | ( | ( | |||||||||
| Net Decrease in Cash, Cash Equivalents, and Restricted Cash | ( | ( | |||||||||
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period (1) | |||||||||||
Cash, Cash Equivalents, and Restricted Cash at End of Period (1) | $ | $ | |||||||||
| Supplemental Disclosure of Cash Flow Information | |||||||||||
| Cash paid during the period for: | |||||||||||
| Income taxes | $ | $ | |||||||||
| Interest expense | $ | $ | |||||||||
| Non-cash investing activity: | |||||||||||
| Unpaid purchases of property and equipment at the end of the period | $ | $ | |||||||||
| (Unaudited) | March 31, 2023 | June 30, 2022 | |||||||||
| Cash and Cash Equivalents | $ | $ | |||||||||
| Restricted Cash included in Prepaid expenses and other current assets | $ | $ | |||||||||
| Total Cash, Cash Equivalents, and Restricted Cash at end of period | $ | $ | |||||||||
6
KIMBALL ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHARE OWNERS’ EQUITY
(Amounts in Thousands, Except for Share Data)
| Three Months Ended | |||||||||||||||||||||||||||||
| Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Share Owners’ Equity | ||||||||||||||||||||||||||
| (Unaudited) | Additional Paid-In Capital | ||||||||||||||||||||||||||||
| Amounts at December 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) | |||||||||||||||||||||||||||||
Issuance of non-restricted stock ( | |||||||||||||||||||||||||||||
| Compensation expense related to stock compensation plans | |||||||||||||||||||||||||||||
| Amounts at March 31, 2023 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
| Amounts at December 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | |||||||||||||||||||||||||||
| Compensation expense related to stock compensation plans | |||||||||||||||||||||||||||||
Restricted share units issuance ( | ( | ( | |||||||||||||||||||||||||||
Deferred share issuance ( | ( | ||||||||||||||||||||||||||||
Repurchase of Common Stock ( | ( | ( | |||||||||||||||||||||||||||
| Amounts at March 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||||||||
| Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Share Owners’ Equity | ||||||||||||||||||||||||||
| (Unaudited) | Additional Paid-In Capital | ||||||||||||||||||||||||||||
| Amounts at June 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) | |||||||||||||||||||||||||||||
Issuance of non-restricted stock ( | |||||||||||||||||||||||||||||
| Compensation expense related to stock compensation plans | |||||||||||||||||||||||||||||
Performance share issuance ( | ( | ( | |||||||||||||||||||||||||||
| Amounts at March 31, 2023 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
| Amounts at June 30, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | |||||||||||||||||||||||||||
Issuance of non-restricted stock ( | |||||||||||||||||||||||||||||
| Compensation expense related to stock compensation plans | |||||||||||||||||||||||||||||
Performance share issuance ( | ( | ( | |||||||||||||||||||||||||||
Restricted share units issuance ( | ( | ( | |||||||||||||||||||||||||||
Deferred share issuance ( | ( | ||||||||||||||||||||||||||||
Repurchase of Common Stock ( | ( | ( | |||||||||||||||||||||||||||
| Amounts at March 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
7
KIMBALL ELECTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Business Description and Summary of Significant Accounting Policies
Business Description:
Kimball Electronics, Inc. (also referred to herein as “Kimball Electronics,” the “Company,” “we,” “us,” or “our”) is a global, multifaceted manufacturing solutions provider. We provide contract electronics manufacturing services (“EMS”) and diversified manufacturing services, including engineering and supply chain support, to customers in the automotive, medical, and industrial safety end markets. We deliver a package of value that begins with our core competency of producing durable electronics and has expanded into diversified contract manufacturing services for non-electronic components, medical disposables, precision molded plastics, and production automation, test, and inspection equipment. Our design and manufacturing expertise coupled with robust processes and procedures help us ensure that we deliver the highest levels of quality, reliability, and service throughout the entire life cycle of our customers’ products. We deliver award-winning service across our highly integrated global footprint, which is enabled by our largely common operating system, procedures, and standardization. We are well recognized by customers and industry trade publications for our excellent quality, reliability, and innovative service.
Basis of Presentation:
The Condensed Consolidated Financial Statements presented herein reflect the consolidated financial position as of March 31, 2023 and June 30, 2022, results of operations for the three and nine months ended March 31, 2023 and 2022, cash flows for the nine months ended March 31, 2023 and 2022, and share owners’ equity for the three and nine months ended March 31, 2023 and 2022. The financial data presented herein is unaudited and should be read in conjunction with the annual Consolidated Financial Statements as of and for the year ended June 30, 2022 and related notes thereto included in our Annual Report on Form 10-K. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted, although we believe that the disclosures are adequate to make the information presented not misleading. Intercompany transactions and balances have been eliminated. Management believes the financial statements include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly the financial statements for the interim periods. The results of operations for the interim periods shown in this report are not necessarily indicative of results for any future interim period or for the entire fiscal year.
Change in Estimates:
The Company reviews the estimated useful lives of its fixed assets on an ongoing basis. In evaluating useful lives, the Company considers how long assets will remain functionally efficient and effective, given levels of technology, competitive factors, and the economic environment. If the assessment indicates that the assets will continue to be used for a longer period than previously anticipated, the useful life of the assets is revised, resulting in a change in estimate. Changes in estimates are accounted for on a prospective basis by depreciating the assets’ current carrying values over their revised remaining useful lives.
Revenue Recognition:
Our revenue from contracts with customers is generated primarily from manufacturing services provided for the production of electronic assemblies, components, medical devices, medical disposables, precision molded plastics, and automation, test, and inspection equipment built to customers’ specifications. Our customer agreements are generally not for a definitive term but continue for the relevant product’s life cycle. Typically, our customer agreements do not commit the customer to purchase our services until a purchase order is provided, which is generally short term in nature. Customer purchase orders primarily have a single performance obligation. Generally, the prices stated in the customer purchase orders are agreed upon prices for the manufactured product and do not vary over the term of the order, and therefore, the majority of our contracts do not contain variable consideration. In limited circumstances, we may enter into a contract which contains minimum quantity thresholds to cover our capital costs, and we may offer our customer a rebate for specific volume thresholds or other incentives; in these cases, the rebates or incentives are accounted for as variable consideration.
8
The majority of our revenue is recognized over time as manufacturing services are performed as we manufacture a product to customer specifications with no alternative use and we have an enforceable right to payment for performance completed to date. The remaining revenue for manufacturing services is recognized when the customer obtains control of the product, typically either upon shipment or delivery of the product dependent on the terms of the contract, and the customer is able to direct the use of and obtain substantially all of the remaining benefits from the asset. We generally recognize revenue over time using costs based input methods, in which judgment is required to evaluate assumptions including anticipated margins to estimate the corresponding amount of revenue to recognize. Costs used as a basis for estimating anticipated margins include material, direct and indirect labor, and appropriate applied overheads. Anticipated margins are determined based on historical or quoted customer pricing. Costs based input methods are considered a faithful depiction of our efforts and progress toward satisfying our performance obligations for manufacturing services and for which we believe we are entitled to payment for performance completed to date. The cumulative effect of revisions to estimates related to net contract revenues or costs are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated.
We have elected to account for shipping and handling activities related to contracts with customers as costs to fulfill our promise to transfer the associated services and products. Accordingly, we record customer payments of shipping and handling costs as a component of net sales and classify such costs as a component of cost of sales. We recognize sales net of applicable sales or value add taxes. Based on estimated product returns and price concessions, a reserve for returns and allowances is recorded at the time revenue is recognized, resulting in a reduction of net revenue.
Direct incremental costs to obtain and fulfill a contract are capitalized as a contract asset only if they are material, expected to be recovered, and are not accounted for in accordance with other guidance. Incidental items that are immaterial in the context of the contract are recognized as expense in the period incurred.
Trade Accounts Receivable:
The Company’s trade accounts receivable are recorded per the terms of the agreement or sale, and accrued interest is recognized when earned. Our policy for estimating the allowance for credit losses on trade accounts receivable includes analysis of such items as aging, credit worthiness, payment history, and historical bad debt experience. Management uses these specific analyses in conjunction with an evaluation of the general economic and market conditions to estimate expected credit losses. Management believes that historical loss information generally provides a basis for its assessment of expected credit losses. Trade accounts receivable are written off after exhaustive collection efforts occur and the receivable is deemed uncollectible. Adjustments to the allowance for credit losses are recorded in Selling and Administrative Expenses on our Condensed Consolidated Statements of Income.
Goodwill and Other Intangible Assets:
9
We perform our annual goodwill impairment test of our Global Equipment Services (“GES”) reporting unit in the fourth quarter. As of March 31, 2023, GES has $5.8 million of goodwill. In our latest annual test performed as of April 30, 2022, the fair value of the GES reporting unit exceeded its carrying value by 9 %. We are in the process of developing our long-range plan, which will support our annual test. Our test will consider GES’s recent performance and trends in the semiconductor and consumer electronics capital equipment markets which GES serves. If our test indicates a decline in GES’s fair value, there could be a non-cash charge for impairment.
Leases:
Non-operating Income (Expense), net:
Non-operating income (expense), net includes the impact of such items as foreign currency rate movements and related derivative gain or loss, fair value adjustments on supplemental employee retirement plan (“SERP”) investments, amortization of actuarial gains (losses), and other miscellaneous non-operating income and expense items that are not directly related to operations. The gain (loss) on SERP investments is offset by a change in the SERP liability that is recognized in Selling and Administrative Expenses.
Components of Non-operating income (expense), net:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31 | March 31 | ||||||||||||||||||||||
| (Amounts in Thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Foreign currency/derivative gain (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Gain (loss) on SERP investments | ( | ( | |||||||||||||||||||||
| Other | ( | ( | ( | ( | |||||||||||||||||||
| Non-operating income (expense), net | $ | $ | ( | $ | $ | ( | |||||||||||||||||
Income Taxes:
In determining the quarterly provision for income taxes, we use an estimated annual effective tax rate which is based on expected annual income, statutory tax rates, and available tax planning opportunities in the various jurisdictions in which we operate. Unusual or infrequently occurring items are separately recognized in the quarter in which they occur.
Deferred income tax assets and liabilities, recorded in Other Assets and Other long-term liabilities, respectively, in the Condensed Consolidated Balance Sheets, are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. We evaluate the recoverability of deferred tax assets each quarter by assessing the likelihood of future taxable income and available tax planning strategies that could be implemented to realize our deferred tax assets. If recovery is not likely, we provide a valuation allowance based on our best estimate of future taxable income in the various taxing jurisdictions and the amount of deferred taxes ultimately realizable. Future events could change management’s assessment.
10
The U.S. Tax Cuts and Jobs Act (“Tax Reform”) was enacted into law on December 22, 2017, making broad and complex changes to the U.S. tax code, for which complete guidance may have not yet been issued. Tax Reform, in addition to other changes, required a one-time transition tax on certain unremitted earnings of foreign subsidiaries that is payable over an eight-year period. As of March 31, 2023 and June 30, 2022, the remaining provision recorded for the one-time deemed repatriation tax was $7.8 million and $8.9 million, respectively, payable through fiscal year 2026, with the long-term portion recorded in Long-term income taxes payable on the Condensed Consolidated Balance Sheets. As of March 31, 2023, $1.9 million of the remaining deemed repatriation tax is short term and is recorded in Accrued expenses on the Condensed Consolidated Balance Sheet.
Note 2. Revenue from Contracts with Customers
Our revenue from contracts with customers is generated primarily from manufacturing services provided for the production of electronic assemblies, electronic and non-electronic components, medical devices, medical disposables, precision molded plastics, and automation, test, and inspection equipment in automotive, medical, and industrial applications, to the specifications and designs of our customers. Beginning in fiscal year 2023, the Company changed its presentation of revenue for the industrial and public safety end market verticals by combining them into the industrial end market vertical. Prior year periods have been recast to conform to the current year presentation.
The following table disaggregates our revenue by end market vertical for the three and nine months ended March 31, 2023 and 2022.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31 | March 31 | ||||||||||||||||||||||
| (Amounts in Millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Vertical Markets: | |||||||||||||||||||||||
| Automotive | $ | $ | $ | $ | |||||||||||||||||||
| Medical | |||||||||||||||||||||||
| Industrial | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total net sales | $ | $ | $ | $ | |||||||||||||||||||
For the three months ended March 31, 2023 and 2022, approximately 96 % and 95 % of our net sales, respectively, were recognized over time as manufacturing services were performed under a customer contract on a product with no alternative use and we have an enforceable right to payment for performance completed to date. For the nine months ended March 31, 2023 and 2022, approximately 96 % and 95 % of our net sales, respectively, were recognized over time. The remaining sales revenues were recognized at a point in time when the customer obtained control of the products.
The timing differences of revenue recognition, billings to our customers, and cash collections from our customers result in billed accounts receivable and unbilled accounts receivable. Contract assets on the Condensed Consolidated Balance Sheets relate to unbilled accounts receivable and occur when revenue is recognized over time as manufacturing services are provided and the billing to the customer has not yet occurred as of the balance sheet date, which are generally transferred to receivables in the next fiscal quarter due to the short-term nature of the manufacturing cycle. Contract assets were $75.7 million and $64.1 million as of March 31, 2023 and June 30, 2022, respectively.
11
Note 3. Inventories
| (Amounts in Thousands) | March 31, 2023 | June 30, 2022 | |||||||||
| Finished products | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Raw materials | |||||||||||
| Total inventory | $ | $ | |||||||||
Note 4. Accumulated Other Comprehensive Income (Loss)
During the nine months ended March 31, 2023 and 2022, the changes in the balances of each component of Accumulated Other Comprehensive Income (Loss), net of tax, were as follows:
| Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||
| (Amounts in Thousands) | Foreign Currency Translation Adjustments | Derivative Gain (Loss) | Post Employment Benefits Net Actuarial Gain (Loss) | Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||
Balance at June 30, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ||||||||||||||||||||||
| Reclassification to (earnings) loss | ( | ( | ( | ||||||||||||||||||||
| Net current-period other comprehensive income (loss) | ( | ||||||||||||||||||||||
Balance at March 31, 2023 | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
Balance at June 30, 2021 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | ( | ||||||||||||||||||||
| Reclassification to (earnings) loss | ( | ||||||||||||||||||||||
| Net current-period other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||
Balance at March 31, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
The following reclassifications were made from Accumulated Other Comprehensive Income (Loss) to the Condensed Consolidated Statements of Income:
| Reclassifications from Accumulated Other Comprehensive Income (Loss) | Three Months Ended | Nine Months Ended | Affected Line Item in the Condensed Consolidated Statements of Income | ||||||||||||||||||||||||||
| March 31 | March 31 | ||||||||||||||||||||||||||||
| (Amounts in Thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
Derivative gain (loss) (1) | $ | $ | $ | $ | ( | Cost of Sales | |||||||||||||||||||||||
| ( | ( | ( | Benefit (Provision) for Income Taxes | ||||||||||||||||||||||||||
| $ | $ | ( | $ | $ | ( | Net of Tax | |||||||||||||||||||||||
| Postemployment Benefits: | |||||||||||||||||||||||||||||
Amortization of actuarial gain (2) | Non-operating income (expense), net | ||||||||||||||||||||||||||||
| ( | ( | ( | ( | Benefit (Provision) for Income Taxes | |||||||||||||||||||||||||
| $ | $ | $ | $ | Net of Tax | |||||||||||||||||||||||||
| Total reclassifications for the period | $ | $ | $ | $ | ( | Net of Tax | |||||||||||||||||||||||
Amounts in parentheses indicate reductions to income.
(1) See Note 8 - Derivative Instruments of Notes to Condensed Consolidated Financial Statements for further information on derivative instruments.
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Note 5. Commitments and Contingent Liabilities
Changes in the product warranty liability for the nine months ended March 31, 2023 and 2022 were as follows:
| Nine Months Ended | |||||||||||
| March 31 | |||||||||||
| (Amounts in Thousands) | 2023 | 2022 | |||||||||
| Product warranty liability at the beginning of the period | $ | $ | |||||||||
| Additions to warranty accrual (including changes in estimates) | ( | ||||||||||
| Settlements made (in cash or in kind) | ( | ( | |||||||||
| Product warranty liability at the end of the period | $ | $ | |||||||||
Note 6. Credit Facilities
Credit facilities consisted of the following:
| Available Borrowing Capacity at | Borrowings Outstanding at | Borrowings Outstanding at | |||||||||||||||
| (Amounts in Millions, in U.S Dollar Equivalents) | March 31, 2023 | March 31, 2023 | June 30, 2022 | ||||||||||||||
Primary credit facility (1) | $ | $ | $ | ||||||||||||||
Secondary credit facility (2) | |||||||||||||||||
Thailand overdraft credit facility (3) | |||||||||||||||||
China revolving credit facility (4) | |||||||||||||||||
| Netherlands revolving credit facility | |||||||||||||||||
Poland revolving credit facility (5) | |||||||||||||||||
Vietnam credit facility (6) | |||||||||||||||||
| Total credit facilities | $ | $ | $ | ||||||||||||||
| Less: current portion | $ | ( | $ | ( | |||||||||||||
Long-term debt under credit facilities, less current portion (7) | $ | $ | |||||||||||||||
(1) The Company maintains a U.S. primary credit facility (the “primary credit facility”) among the Company, the lenders party thereto, and JPMorgan Chase Bank, N. A., as Administrative Agent, and Bank of America, N.A., as Documentation Agent, scheduled to mature May 4, 2027. The primary credit facility provides for $300 million in borrowings, with an option to increase the amount available for borrowing to $450 million upon request, subject to the consent of each lender participating in such increase. This facility is maintained for working capital and general corporate purposes of the Company. A commitment fee is payable on the unused portion of the credit facility at a rate that ranges from 10.0 to 25.0 basis points per annum as determined by the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA, as defined in the primary credit facility. Types of borrowings available on the primary credit facility include revolving loans, multi-currency term loans, and swingline loans.
The interest rate on borrowings is dependent on the type and currencies of borrowings and will be one of the following options:
•any Term Benchmark borrowing denominated in U.S. Dollars will utilize the Secured Overnight Financing Rate (“SOFR”), which is a rate per annum equal to the secured overnight financing rate for such business day published by the SOFR Administrator, the Federal Reserve Bank of New York, on the immediately succeeding business day, plus the Revolving Commitment Term Benchmark spread which can range from 100.0 to 175.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA;
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•any Term Benchmark borrowing denominated in Euros will utilize the Euro Interbank Offered Rate (“EURIBOR”) in effect two target days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period as defined in the agreement, plus the Revolving Commitment Term Benchmark spread which can range from 100.0 to 175.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA; or
•the Alternate Base Rate (“ABR”), which is defined as the highest of the fluctuating rate per annum equal to the higher of:
a.Prime Rate in the U.S. last quoted by the Wall Street Journal, and if this is ceased to be quoted, the highest bank prime loan rate or similar loan rate quoted by the Federal Reserve Board;
b.1/2 of 1% per annum above the Federal Funds Effective Rate (as defined under the primary credit facility); or
c.1 % per annum above the Adjusted SOFR Rate (as defined under the primary credit facility);
plus the Revolving Commitment ABR spread which can range from 0.0 to 75.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA.
The Company’s financial covenants under the primary credit facility require:
•a ratio of consolidated total indebtedness minus unencumbered U.S. cash on hand in the United States in excess of $15 3.0 3.5
•an interest coverage ratio, defined as that ratio of consolidated EBITDA for such period to cash interest expense for such period, for any period of four consecutive fiscal quarters, to not be less than 3.5
The Company had $0.4
(2) The Company entered into a 364-day multi-currency revolving credit facility agreement on February 3, 2023 (the “secondary credit facility”), which allows for borrowings up to $50 million, among the Company, as borrower, certain subsidiaries of the Company as guarantors, the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Bank of America, N.A., as Documentation Agent. The secondary credit facility has a maturity date of February 2, 2024. The proceeds of the loans are to be used for working capital and general corporate purposes of the Company. A commitment fee on the unused portion of principal amount of this secondary credit facility is payable at 30.0 basis points per annum.
The interest rate on borrowings is dependent on the type of borrowings and will be one of the following options:
•any Term Benchmark borrowing denominated in U.S. Dollars will utilize the Secured Overnight Financing Rate (“SOFR”), which is a rate per annum equal to the secured overnight financing rate for such business day published by the SOFR Administrator, the Federal Reserve Bank of New York, on the immediately succeeding business day, plus a Revolving Commitment Term Benchmark spread of 175.0 basis points;
•any Term Benchmark borrowing denominated in Euros will utilize the Euro Interbank Offered Rate (“EURIBOR”) in effect two target days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period as defined in the agreement, plus a Revolving Commitment Term Benchmark spread of 175.0 basis points; or
•the Alternate Base Rate (“ABR”), which is defined as the highest of the fluctuating rate per annum equal to the higher of:
a.Prime Rate in the U.S. last quoted by the Wall Street Journal, and if this is ceased to be quoted, the highest bank prime loan rate or similar loan rate quoted by the Federal Reserve Board;
b.1/2 of 1% per annum above the Federal Funds Effective Rate (as defined under the primary credit facility); or
c.1 % per annum above the Adjusted SOFR Rate (as defined under the primary credit facility);
plus a Revolving Commitment ABR spread of 75.0 basis points.
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(3) During the first quarter of fiscal year 2023, the Company expanded the borrowing capacity of the Thailand credit facility to $10.1 million.
(4) The Company entered into a foreign credit facility for its EMS operation in China during the first quarter of fiscal year 2023 which allows for borrowings up to $7.5 million.
(5) The Company entered into a foreign credit facility for its operation in Poland which allows for borrowings up to 5.0 million Euro (approximately $5.4 million equivalent).
(6) The Company entered into a foreign credit facility for its operation in Vietnam which allows for borrowings up to $5.0 million.
The weighted-average interest rate on borrowings outstanding under the credit facilities at March 31, 2023 and June 30, 2022 were 6.6 % and 2.7 %, respectively.
Note 7. Fair Value
The Company categorizes assets and liabilities measured at fair value into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas level 3 generally requires significant management judgment. The three levels are defined as follows:
•Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.
•Level 2: Observable inputs other than those included in level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
•Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
There were no changes in the inputs or valuation techniques used to measure fair values during the nine months ended March 31, 2023. For more information on inputs and fair valuation techniques used, refer to our Annual Report on Form 10-K for the year ended June 30, 2022.
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Recurring Fair Value Measurements:
| March 31, 2023 | |||||||||||||||||
| (Amounts in Thousands) | Level 1 | Level 2 | Total | ||||||||||||||
| Assets | |||||||||||||||||
| Cash equivalents | $ | $ | $ | ||||||||||||||
| Derivatives: foreign exchange contracts | |||||||||||||||||
| Trading securities: mutual funds held in nonqualified SERP | |||||||||||||||||
| Total assets at fair value | $ | $ | $ | ||||||||||||||
| Liabilities | |||||||||||||||||
| Derivatives: foreign exchange contracts | $ | $ | $ | ||||||||||||||
| Total liabilities at fair value | $ | $ | $ | ||||||||||||||
| June 30, 2022 | |||||||||||||||||
| (Amounts in Thousands) | Level 1 | Level 2 | Total | ||||||||||||||
| Assets | |||||||||||||||||
| Cash equivalents | $ | $ | $ | ||||||||||||||
| Derivatives: foreign exchange contracts | |||||||||||||||||
| Trading securities: mutual funds held in nonqualified SERP | |||||||||||||||||
| Total assets at fair value | $ | $ | $ | ||||||||||||||
| Liabilities | |||||||||||||||||
| Derivatives: foreign exchange contracts | $ | $ | $ | ||||||||||||||
| Total liabilities at fair value | $ | $ | $ | ||||||||||||||
We had no
The nonqualified supplemental employee retirement plan (“SERP”) assets consist primarily of equity funds, balanced funds, bond funds, and a money market fund. The SERP investment assets are offset by a SERP liability which represents the Company’s obligation to distribute SERP funds to participants. See Note 9 - Employee Benefit Plans of Notes to Condensed Consolidated Financial Statements for further information regarding the SERP.
Financial Instruments Not Carried At Fair Value:
Financial instruments that are not reflected in the Condensed Consolidated Balance Sheets at fair value that have carrying amounts which approximate fair value include notes receivable and borrowings under credit facilities. There were no changes to the inputs and valuation techniques used to assess the fair value of these financial instruments during the nine months ended March 31, 2023. For more information on inputs and fair valuation techniques used, refer to our Annual Report on Form 10-K for the year ended June 30, 2022.
The carrying values of our cash deposit accounts, trade accounts receivable, and trade accounts payable approximate fair value due to the relatively short maturity and immaterial non-performance risk.
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Note 8. Derivative Instruments
Foreign Exchange Contracts:
We operate internationally and are therefore exposed to foreign currency exchange rate fluctuations in the normal course of business. Our primary means of managing this exposure is to utilize natural hedges, such as aligning currencies used in the supply chain with the sale currency. To the extent natural hedging techniques do not fully offset currency risk, we use derivative instruments with the objective of reducing the residual exposure to certain foreign currency rate movements. Factors considered in the decision to hedge an underlying market exposure include the materiality of the risk, the volatility of the market, the duration of the hedge, the degree to which the underlying exposure is committed to, and the availability, effectiveness, and cost of derivative instruments. Derivative instruments are only utilized for risk management purposes and are not used for speculative or trading purposes.
Based on fair values as of March 31, 2023, we estimate that approximately $3.4 million of pre-tax derivative gain deferred in Accumulated Other Comprehensive Loss will be reclassified into earnings, along with the earnings effects of related forecasted transactions, within the next 12 months. Gains on foreign exchange contracts are generally offset by losses in operating income in the income statement when the underlying hedged transaction is recognized in earnings. Because gains or losses on foreign exchange contracts fluctuate partially based on currency spot rates, the future effect on earnings of the cash flow hedges alone is not determinable, but in conjunction with the underlying hedged transactions, the result is expected to be a decline in currency risk. The maximum length of time we had hedged our exposure to the variability in future cash flows was 12
See Note 7 - Fair Value of Notes to Condensed Consolidated Financial Statements for further information regarding the fair value of derivative assets and liabilities and Note 4 - Accumulated Other Comprehensive Income (Loss) of Notes to Condensed Consolidated Financial Statements for the changes in deferred derivative gains and losses.
17
Information on the location and amounts of derivative fair values in the Condensed Consolidated Balance Sheets and derivative gains and losses in the Condensed Consolidated Statements of Income are presented below.
Fair Value of Derivative Instruments on the Condensed Consolidated Balance Sheets
| Asset Derivatives | Liability Derivatives | ||||||||||||||||||||||||||||||||||
| Fair Value As of | Fair Value As of | ||||||||||||||||||||||||||||||||||
| (Amounts in Thousands) | Balance Sheet Location | March 31, 2023 | June 30, 2022 | Balance Sheet Location | March 31, 2023 | June 30, 2022 | |||||||||||||||||||||||||||||
| Derivatives Designated as Hedging Instruments: | |||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | Prepaid expenses and other current assets | $ | $ | Accrued expenses | $ | $ | |||||||||||||||||||||||||||||
| Derivatives Not Designated as Hedging Instruments: | |||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | Prepaid expenses and other current assets | Accrued expenses | |||||||||||||||||||||||||||||||||
| Total derivatives | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
The Effect of Derivative Instruments on Other Comprehensive Income (Loss)
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
| March 31 | March 31 | |||||||||||||||||||||||||||||||
| (Amounts in Thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||
| Amount of Pre-Tax Gain or (Loss) Recognized in Other Comprehensive Income (Loss) (OCI) on Derivatives: | ||||||||||||||||||||||||||||||||
| Foreign exchange contracts | $ | $ | $ | $ | ||||||||||||||||||||||||||||
The Effect of Derivative Instruments on Condensed Consolidated Statements of Income
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
| (Amounts in Thousands) | March 31 | March 31 | ||||||||||||||||||||||||||||||
| Derivatives in Cash Flow Hedging Relationships | Location of Gain or (Loss) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||
| Amount of Pre-Tax Gain or (Loss) Reclassified from Accumulated OCI into Income: | ||||||||||||||||||||||||||||||||
| Foreign exchange contracts | Cost of Sales | $ | $ | $ | $ | ( | ||||||||||||||||||||||||||
| Derivatives Not Designated as Hedging Instruments | ||||||||||||||||||||||||||||||||
| Amount of Pre-Tax Gain or (Loss) Recognized in Income on Derivatives: | ||||||||||||||||||||||||||||||||
| Foreign exchange contracts | Non-operating income (expense) | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||||||||||
| Total Derivative Pre-Tax Gain (Loss) Recognized in Income | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||
Note 9. Employee Benefit Plans
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Note 10. Stock Compensation Plans
A stock compensation plan was created and adopted by the Company’s Board of Directors (the “Board”) on October 3, 2014. The Kimball Electronics, Inc. 2014 Stock Option and Incentive Plan (the “Plan”) allows for the issuance of up to 4.5 million shares and may be granted in the form of incentive stock options, stock appreciation rights, restricted shares, unrestricted shares, restricted share units, or performance shares and performance units. The Plan is a ten-year plan with no further awards allowed to be made under the Plan after October 1, 2024.
On October 20, 2016, the Board approved a nonqualified deferred stock compensation plan, the Kimball Electronics, Inc. Non-Employee Directors Stock Compensation Deferral Plan (the “Deferral Plan”), which allows Non-Employee Directors to elect to defer all, or a portion of, their retainer fees in stock until retirement or termination from the Board or death. The Deferral Plan allows for issuance of up to 1.0 million shares of the Company’s common stock. For more information on the Plan and the Deferral Plan, refer to our Annual Report on Form 10-K for the year ended June 30, 2022.
During the first nine months of fiscal year 2023, the following stock compensation was granted under the Plan and the Deferral Plan.
| Stock Compensation Granted | Quarter Granted | Shares/Units | Grant Date Fair Value (2) | |||||||||||||||||
Long-Term Performance Shares (1) | 1st Quarter | $ | ||||||||||||||||||
Restricted Shares (3) | 1st Quarter | $ | ||||||||||||||||||
Long-Term Performance Shares (4) | 1st Quarter | $ | ||||||||||||||||||
Unrestricted Shares (5) | 2nd Quarter | $ | ||||||||||||||||||
Deferred Share Units (6) | 2nd Quarter | $ | ||||||||||||||||||
Unrestricted Shares (5) | 3rd Quarter | $ | ||||||||||||||||||
Deferred Share Units (6) | 3rd Quarter | $ | ||||||||||||||||||
Long-Term Performance Shares (1) | 3rd Quarter | $ | ||||||||||||||||||
Restricted Shares (3) | 3rd Quarter | $ | ||||||||||||||||||
Total Shareholder Return Performance Shares (7) | 3rd Quarter | $ | ||||||||||||||||||
(1) Long-term performance share awards were granted to officers and other key employees. These annual performance share awards were approved by the Talent, Culture, and Compensation Committee of the Board. The awards granted in fiscal year 2023 will cliff vest at the third anniversary of the award date in fiscal year 2026.
(2) The grant date fair value is the weighted average stock price based on the dates of the grants.
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(3) Restricted shares were granted to officers and other key employees. These restricted shares were approved by the Talent, Culture, and Compensation Committee of the Board. The contractual life of the restricted shares is three years , with one-third of the interest in the restricted shares vested after year one of the grant, another one-third after year two of the grant, and the final one-third after year three of the grant. Restricted shares are expensed over the contractual vesting period as earned. If the employment of a holder of restricted shares terminates before the RSU has vested for any reason other than death, retirement, or disability, the restricted shares not yet vested will be forfeited.
(4) Long-term performance share awards were granted to a key employee. This award granted in fiscal year 2023 will cliff vest at the first anniversary of the award date in fiscal year 2024. Shares will be issued to this participant based on the performance metrics described in (1) above.
(5) Unrestricted shares were awarded to non-employee members of the Board as compensation for the portion of their annual retainer fees resulting from their elections to be paid in unrestricted shares in lieu of cash payment or deferred share units. Director’s fees are expensed over the period that directors earn the compensation. Unrestricted shares do not have vesting periods, holding periods, restrictions on sales, or other restrictions.
(6) Deferred share units were awarded to non-employee members of the Board as compensation for the portion of their annual retainer fees resulting from their elections to receive deferred share units in lieu of cash payment or unrestricted shares. Director’s fees are expensed over the period that directors earn the compensation. Deferred share units are participating securities and are payable in common stock in a lump sum or installments in accordance with deferral elections upon a Director’s retirement or termination from the Board or death .
(7) Total shareholder return (“TSR”) performance shares were awarded to our CEO during fiscal year 2023. This award was approved by the Talent, Culture, and Compensation Committee of the Board. The participant will earn from 0 % to 100 % of the target award based on the total shareholder return ranking of the Company compared to the performance peer group at the end of the -year performance period. The shares will vest on March 1, 2026.
Note 11. Goodwill and Other Intangible Assets
A summary of goodwill is as follows:
| (Amounts in Thousands) | March 31, 2023 | June 30, 2022 | |||||||||
| Goodwill | $ | $ | |||||||||
| Accumulated impairment | ( | ( | |||||||||
| Goodwill, net | $ | $ | |||||||||
A summary of other intangible assets subject to amortization is as follows:
| March 31, 2023 | June 30, 2022 | ||||||||||||||||||||||||||||||||||
| (Amounts in Thousands) | Cost | Accumulated Amortization | Net Value | Cost | Accumulated Amortization | Net Value | |||||||||||||||||||||||||||||
| Capitalized Software | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Customer Relationships | ( | ( | |||||||||||||||||||||||||||||||||
| Technology | ( | ( | |||||||||||||||||||||||||||||||||
| Trade Name | ( | ( | |||||||||||||||||||||||||||||||||
| Other Intangible Assets | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
During the three months ended March 31, 2023 and 2022, amortization expense of other intangible assets was $0.9 million and $0.8 million, respectively. During the nine months ended March 31, 2023 and 2022, amortization expense of other intangible assets was $2.6
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Note 12. Share Owners’ Equity
The Company has a Board-authorized stock repurchase plan (the “Plan”) allowing the repurchase of up to $100 million of our common stock. Purchases may be made under various programs, including in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions, all in accordance with applicable securities laws and regulations. The Plan has no expiration date but may be suspended or discontinued at any time.
During the nine months ended March 31, 2023, the Company had no share repurchases under the Plan. Since the inception of the Plan, the Company has repurchased $88.8 million of common stock at an average cost of $15.27 per share.
Note 13. Earnings Per Share
Basic and diluted earnings per share were calculated as follows under the two-class method:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31 | March 31 | |||||||||||||||||||||||||
| (Amounts in thousands, except per share data) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Basic and Diluted Earnings Per Share: | ||||||||||||||||||||||||||
| Net Income | $ | $ | $ | $ | ||||||||||||||||||||||
| Less: Net Income allocated to participating securities | ||||||||||||||||||||||||||
| Net Income allocated to common Share Owners | $ | $ | $ | $ | ||||||||||||||||||||||
| Basic weighted average common shares outstanding | ||||||||||||||||||||||||||
| Dilutive effect of average outstanding stock compensation awards | ||||||||||||||||||||||||||
| Dilutive weighted average shares outstanding | ||||||||||||||||||||||||||
| Earnings Per Share of Common Stock: | ||||||||||||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||||||||||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements contained within this document are considered forward-looking under the Private Securities Litigation Reform Act of 1995. The statements may be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “forecasts,” “likely,” “future,” “may,” “should,” “would,” “could,” “will,” “potentially,” and similar expressions. These forward-looking statements are subject to risks and uncertainties including, but not limited to, global economic conditions, geopolitical environment and conflicts such as the war in Ukraine, global health emergencies including the COVID-19 pandemic, availability or cost of raw materials and components, foreign exchange fluctuations, and our ability to convert new business opportunities into customers and revenue. Additional cautionary statements regarding other risk factors that could have an effect on the future performance of Kimball Electronics are contained in our Annual Report on Form 10-K for the year ended June 30, 2022.
Business Overview
We are a global, multifaceted manufacturing solutions provider. We provide contract electronics manufacturing services (“EMS”) and diversified manufacturing services, including engineering and supply chain support, to customers in the automotive, medical, industrial, and public safety end markets. Our core competency is producing durable electronics, and we further offer diversified contract manufacturing services for non-electronic components, medical devices, medical disposables, drug delivery devices and solutions, precision molded plastics, and production automation, test, and inspection equipment. Our manufacturing services, including engineering and supply chain support, utilize common production and support capabilities globally. We are well recognized by our customers and the industry for our excellent quality, reliability, and innovative service. CIRCUITS ASSEMBLY, a leading brand and technical publication for electronics manufacturers worldwide, has recognized us four times in the past five years for achieving the Highest Overall Customer Rating in their Service Excellence Awards, and we received awards in all categories in 2022.
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The contract manufacturing services industry is very competitive. As a mid-sized player, we can expect to be challenged by the agility and flexibility of the smaller, regional players, and we can expect to be challenged by the scale and price competitiveness of the larger, global players. We enjoy a unique market position between these extremes which allows us to compete with the larger scale players for high-volume projects, but also maintain our competitive position in the generally lower volume durable electronics market space. We expect to continue to effectively operate in this market space; however, one significant challenge will be maintaining our profit margins while we continue our revenue growth. Price increases are uncommon in the market as production efficiencies and material pricing advantages for most projects drive costs and prices down over the life of the projects. This characteristic of the contract electronics marketplace is expected to continue.
The Worldwide Manufacturing Services Market - 2022 Edition, a comprehensive study on the worldwide EMS market published by New Venture Research (“NVR”), provided worldwide forecast trends through 2026. NVR projects the worldwide assembly market for electronics products to grow at a compound annual growth rate (“CAGR”) of 4.3% over the next five years, with the EMS industry projected to grow at a CAGR of 5.5%.
We continue to monitor the current economic and industry conditions for uncertainties that may pose a threat to our future growth or cause disruption in business strategy, execution, and timing in the markets in which we compete. The COVID-19 pandemic continues to impact the global economy, and we are actively monitoring its impact on all our operations. We cannot reasonably estimate the financial impact of the uncertainties and risks of the COVID-19 pandemic on our future results, though they could be material. The well-being and safety of our employees remains our number one priority, and we are following guidelines suggested by applicable authorities as appropriate for our operations.
The EMS industry continues to experience component shortages, component allocations, and shipping delays, particularly with semiconductors, which were especially challenging in the prior fiscal year. Component shortages or allocations could continue to increase component costs and potentially interrupt our operations and negatively impact our ability to meet commitments to customers. We have taken various actions to mitigate the risk and minimize the impact to our customers as well as the adverse effect component shortages, component allocations, or shipping delays could have on our results; however, the duration or severity of the components shortages is unknown.
COVID-19 interruptions and supply chain restraints have also resulted in an industry-wide inflation of components, labor, freight, and other operating costs. Through contractual pricing arrangements and negotiations with our customers, we have been able to mitigate a majority of these cost increases; however, our profitability has been impacted, and necessary extended lead times on inventory purchases has negatively impacted our working capital. The financial impact on our future results cannot be reasonably estimated but could be material.
We experienced record quarterly net sales in the third quarter of the current fiscal year as sales increased 32% from the prior fiscal year third quarter, with double-digit increases and quarterly records in all three of our end market verticals. Beginning in fiscal year 2023, we changed our presentation of revenue for the industrial and public safety end market verticals by combining them into the industrial end market vertical. Prior year periods have been recast to conform to the current year presentation. The increase in sales to customers in the automotive market in the third quarter of fiscal year 2023 were largely driven by the supply chain catching up with the demand, the continued ramp-up of certain programs, and the launch of new programs. In the medical market, sales increased due to the launch and ramp-up of new programs in addition to improved component availability. In the industrial market, sales increased in large part due to improved component availability and new product launches.
We have a strong focus on cost control balanced with managing the future growth prospects of our business and growing backlog of orders due to the global component shortage and logistical challenges. We expect to make investments that will strengthen or add new capabilities to our package of value as a multifaceted manufacturing solutions company, including through our recently announced and completed capacity expansions. Managing working capital in conjunction with fluctuating demand levels is likewise key. In addition, a long-standing component of our profit-sharing incentive bonus plan is that it is linked to our financial performance which results in varying amounts of compensation expense as profits change.
We continue to maintain a strong balance sheet, which included a current ratio of 1.9, a debt-to-equity ratio of 0.6, and Share Owners’ equity of $503 million at March 31, 2023. Recently, we have invested to support our expansions and growth in Mexico and Thailand. At the same time, we have supported our customers through strategic inventory purchases to mitigate parts shortages. We expect our balance sheet to normalize as parts shortages abate and our expansions continue to ramp up production. Refer to the Future Liquidity section of Liquidity and Capital Resources below for further discussion of our liquidity.
22
In addition to the above discussion related to the current market conditions, management currently considers the following events, trends, and uncertainties to be most important to understanding our financial condition and operating performance:
•Employees throughout our business operations are an integral part of our ability to compete successfully, and the stability of the management team is critical to long-term Share Owner value. Our talent management and succession planning processes help to maintain stability in management.
•Due to the contract and project nature of the contract manufacturing industry, fluctuation in the demand for our products and variation in the gross margin on those programs is inherent to our business. Effective management of manufacturing capacity is, and will continue to be, critical to our success.
•The nature of the EMS industry is such that the start-up of new customers and new programs to replace expiring programs occurs frequently. As such, our ability to continue contractual relationships with our customers, including our principal customers, is not certain. While our agreements with customers generally do not have a definitive term and thus could be canceled at any time with little or no notice, we generally realize relatively few cancellations prior to the end of the product’s life cycle. We attribute this to our focus on long-term customer relationships, meeting customer expectations, required capital investment, and product qualification cycle times. New customers, program start-ups, and facility expansions generally cause margin dilution early in their respective lifecycles, which we generally recover as the customer relationship, program, or facility becomes established and matures.
•Risk factors within our business include, but are not limited to, general economic and market conditions, component availability, logistical challenges, customer order delays, globalization, global health emergencies including the COVID-19 pandemic, geopolitical conflicts such as the war in Ukraine, impact related to tariffs and other trade barriers, foreign currency exchange rate fluctuations, rapid technological changes, supplier and customer financial stability, the contract nature of this industry, the concentration of sales to significant customers, and the potential for customers to choose a dual sourcing strategy or to in-source a greater portion of their manufacturing. The continuing success of our business is dependent upon our ability to replace expiring customers/programs with new customers/programs. We monitor our success in this area by tracking the number of customers and the percentage of our net sales generated from them by years of service as depicted in the table below. While variation in the size of program awards makes it difficult to directly correlate this data to our sales trends, we believe it does provide useful information regarding our customer loyalty and new business growth. Additional risk factors that could have an effect on our performance are located within the “Risk Factors” section of our Annual Report on Form 10-K for the year ended June 30, 2022.
| Nine Months Ended | ||||||||||||||
| March 31 | ||||||||||||||
| Customer Service Years | 2023 | 2022 | ||||||||||||
| More than 10 Years | ||||||||||||||
| % of Net Sales | 78 | % | 79 | % | ||||||||||
| # of Customers | 31 | 34 | ||||||||||||
| 5 to 10 Years | ||||||||||||||
| % of Net Sales | 17 | % | 17 | % | ||||||||||
| # of Customers | 19 | 21 | ||||||||||||
| Less than 5 Years | ||||||||||||||
| % of Net Sales | 5 | % | 4 | % | ||||||||||
| # of Customers | 12 | 11 | ||||||||||||
| Total | ||||||||||||||
| % of Net Sales | 100 | % | 100 | % | ||||||||||
| # of Customers | 62 | 66 | ||||||||||||
23
Financial Overview
| At or for the | |||||||||||||||||||||||||||||
| Three Months Ended | |||||||||||||||||||||||||||||
| March 31 | |||||||||||||||||||||||||||||
| (Amounts in Millions, Except for Per Share Data) | 2023 | as a % of Net Sales | 2022 | as a % of Net Sales | % Change | ||||||||||||||||||||||||
| Net Sales | $ | 484.7 | $ | 368.1 | 32 | % | |||||||||||||||||||||||
| Gross Profit | $ | 43.0 | 8.9 | % | $ | 33.9 | 9.2 | % | 27 | % | |||||||||||||||||||
| Selling and Administrative Expenses | 17.8 | 3.7 | % | 13.6 | 3.7 | % | 30 | % | |||||||||||||||||||||
| Operating Income | 25.2 | 5.2 | % | 20.3 | 5.5 | % | 24 | % | |||||||||||||||||||||
| Other Income (Expense) | (3.3) | (2.2) | |||||||||||||||||||||||||||
| Provision for Income Taxes | 5.5 | 4.5 | 21 | % | |||||||||||||||||||||||||
| Net Income | $ | 16.4 | $ | 13.6 | 20 | % | |||||||||||||||||||||||
| Diluted Earnings per Share | $ | 0.65 | $ | 0.54 | 20 | % | |||||||||||||||||||||||
| Open Orders | $ | 882 | $ | 930 | (5) | % | |||||||||||||||||||||||
For the Nine Months Ended | |||||||||||||||||||||||||||||
| March 31 | |||||||||||||||||||||||||||||
| (Amounts in Millions, Except for Per Share Data) | 2023 | as a % of Net Sales | 2022 | as a % of Net Sales | % Change | ||||||||||||||||||||||||
| Net Sales | $ | 1,327.3 | $ | 976.0 | 36 | % | |||||||||||||||||||||||
| Gross Profit | $ | 106.5 | 8.0 | % | $ | 70.4 | 7.2 | % | 51 | % | |||||||||||||||||||
| Selling and Administrative Expenses | 50.2 | 3.8 | % | 39.8 | 4.0 | % | 26 | % | |||||||||||||||||||||
| Other General Income | — | 1.4 | |||||||||||||||||||||||||||
| Operating Income | 56.3 | 4.2 | % | 32.0 | 3.3 | % | 76 | % | |||||||||||||||||||||
| Other Income (Expense) | (8.1) | (3.6) | |||||||||||||||||||||||||||
| Provision for Income Taxes | 11.6 | 7.1 | 64 | % | |||||||||||||||||||||||||
| Net Income | $ | 36.6 | $ | 21.3 | 72 | % | |||||||||||||||||||||||
| Diluted Earnings per Share | $ | 1.46 | $ | 0.84 | 74 | % | |||||||||||||||||||||||
| Net Sales by Vertical Market | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||
| March 31 | March 31 | ||||||||||||||||||||||||||||||||||
| (Amounts in Millions) | 2023 | 2022 | % Change | 2023 | 2022 | % Change | |||||||||||||||||||||||||||||
| Automotive | $ | 216.0 | $ | 161.5 | 34 | % | $ | 600.5 | $ | 429.8 | 40 | % | |||||||||||||||||||||||
| Medical | 134.0 | 102.9 | 30 | % | 373.5 | 277.7 | 34 | % | |||||||||||||||||||||||||||
| Industrial | 126.9 | 98.2 | 29 | % | 332.8 | 255.8 | 30 | % | |||||||||||||||||||||||||||
| Other | 7.8 | 5.5 | 42 | % | 20.5 | 12.7 | 61 | % | |||||||||||||||||||||||||||
| Total Net Sales | $ | 484.7 | $ | 368.1 | 32 | % | $ | 1,327.3 | $ | 976.0 | 36 | % | |||||||||||||||||||||||
Third quarter and year-to-date fiscal year 2023 consolidated net sales increased compared to the third quarter and year-to-date period of fiscal year 2022, with a new quarterly record set in the third quarter of fiscal year 2023. The impact from foreign currency fluctuations on net sales was an unfavorable 2% in the current quarter and an unfavorable 4% in the current year-to-date period compared to the third quarter and the year-to-date period of fiscal year 2022, respectively. By end market vertical, our market verticals fluctuated as follows:
•Sales to customers in the automotive market experienced record net sales during the third quarter of fiscal year 2023, increasing 34% compared to the third quarter of fiscal year 2022 and increasing 40% in the year-to-date period of fiscal year 2023 compared to the year-to-date period of fiscal year 2022. This double-digit increase is largely due to the continued ramp-up of certain programs, new product launches, and improved component availability.
24
•Sales to customers in the medical market experienced record net sales during the third quarter of fiscal year 2023, increasing 30% compared to the third quarter of fiscal year 2022 and increasing 34% in the year-to-date period of fiscal year 2023 when compared to the year-to-date period of fiscal year 2022. This double-digit increase is primarily due to launch and ramp-up of new programs and overall improved component availability.
•Beginning in fiscal year 2023, the Company changed its presentation of revenue for the industrial and public safety end market verticals by combining them into the industrial end market vertical. Prior year periods have been recast to conform to the current year presentation. Sales to customers in the industrial market also experienced record net sales during the third quarter of fiscal year 2023, increasing 29% when compared to the third quarter of fiscal year 2022 largely due to improved component availability and new product launches. Sales to customers in the industrial market also had a double-digit increase in the year-to-date period of the current fiscal year when compared to the year-to-date period of the prior fiscal year primarily due to higher end market demand for climate control products which was supported by overall improved component availability.
Sales to Nexteer Automotive, Philips, and ZF accounted for the following portions of our net sales:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31 | March 31 | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Nexteer Automotive | 15% | 18% | 15% | 17% | |||||||||||||||||||
| Philips | 14% | 15% | 15% | 15% | |||||||||||||||||||
| ZF | 12% | * | 12% | * | |||||||||||||||||||
| * amount is less than 10% of total | |||||||||||||||||||||||
Open orders were down 5% as of March 31, 2023 compared to March 31, 2022. The decrease in open orders from March 31, 2022 is driven by the overall improvement in component availability, which has increased our ability to fulfill customer orders. Open orders are the aggregate sales price of production pursuant to unfulfilled customer orders, which may be delayed or canceled by the customer subject to contractual termination provisions. The majority of open orders as of March 31, 2023 are expected to be filled within the next twelve months. Open orders at a point in time may not be indicative of future sales trends due to the contract nature of our business and the variability of order lead times among our customers.
Gross profit as a percent of net sales in the third quarter of fiscal year 2023 declined when compared to the third quarter of fiscal year 2022 as we continue to optimize operating performance levels following recent facility expansions.
Gross profit as a percent of net sales in the first nine months of fiscal year 2023 improved when compared to the first nine months of fiscal year 2022 primarily due to the leverage gained on higher revenue. Additionally, we experienced lost absorption in the first half of fiscal year 2022 as the prior fiscal year was impacted to a much greater degree than the current fiscal year by component shortages, and as we retained our workforce, our gross profit as a percent of net sales was negatively impacted.
Selling and administrative expenses as a percent of net sales remained flat but increased in absolute dollars in the third quarter of fiscal year 2023 when compared to the third quarter of fiscal year 2022. The selling and administrative expenses increase was driven by the increase in the fair value of the liability for the supplemental employee retirement plan (“SERP”), increased factoring fees due to higher factoring fee rates coupled with increased accounts receivable factoring activity, added resources to support our significant growth, wage inflation, and higher incentive-based compensation.
Selling and administrative expenses declined as a percent of net sales but increased in absolute dollars in the first nine months of fiscal year 2023 when compared to the first nine months of fiscal year 2022. The selling and administrative expenses increase was driven by increased factoring fees due to higher factoring fee rates coupled with increased accounts receivable factoring activity, added resources to support our significant growth, wage inflation, and higher incentive-based compensation.
Other General Income in the nine months ended March 31, 2022 included $1.4 million of pre-tax income resulting from payments received related to the class action lawsuits in which Kimball Electronics was a class member. These lawsuits alleged that certain suppliers to the EMS industry conspired over a number of years to raise and fix the prices of electronic components, resulting in overcharges to purchasers of those components. No Other General Income was recorded in the three and nine month periods ended March 31, 2023 and in the three month period ended March 31, 2022.
We perform our annual goodwill impairment test of our Global Equipment Services (“GES”) reporting unit in the fourth quarter. As of March 31, 2023, GES has $5.8 million of goodwill. In our latest annual test performed as of April 30, 2022, the fair value of the GES reporting unit exceeded its carrying value by 9%. We are in the process of developing our long-range plan, which will support our annual test. Our test will consider GES’s recent performance and trends in the semiconductor and consumer electronics capital equipment markets which GES serves. If our test indicates a decline in GES’s fair value, there could be a non-cash charge for impairment.
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Other Income (Expense) consisted of the following:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31 | March 31 | |||||||||||||||||||||||||
| (Amounts in Thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Interest income | $ | 45 | $ | 31 | $ | 88 | $ | 66 | ||||||||||||||||||
| Interest expense | (4,822) | (669) | (10,790) | (1,537) | ||||||||||||||||||||||
| Foreign currency/derivative gain (loss) | 1,328 | (625) | 2,581 | (1,325) | ||||||||||||||||||||||
| Gain (loss) on SERP investments | 353 | (719) | 458 | (404) | ||||||||||||||||||||||
| Other | (248) | (121) | (380) | (361) | ||||||||||||||||||||||
| Other income (expense), net | $ | (3,344) | $ | (2,103) | $ | (8,043) | $ | (3,561) | ||||||||||||||||||
Interest expense has increased in the three and nine months ended March 31, 2023 compared to the three and nine months ended March 31, 2022 due to higher interest rates and higher borrowings on credit facilities. Foreign currency/derivative gains (losses) result from net foreign currency exchange rate movements during the periods. The revaluation to fair value of the SERP investments recorded in Other Income (Expense) is offset by the revaluation of the SERP liability recorded in Selling and Administrative Expenses, and thus there is no effect on net income.
Our provision for income taxes for the first nine months ended March 31, 2023 and March 31, 2022 was $11.6 million, or 24.1% of income before taxes on income, and $7.1 million, or 25.0% of income before taxes on income, respectively.
Comparing the balance sheet as of March 31, 2023 to June 30, 2022, receivables increased $76.5 million largely due to higher sales volumes. Our inventory balance increased $92.5 million due to the component shortages as we continue to purchase material not impacted by the shortages so we can fulfill our customer orders once the impacted components are received, as well as to support production at our newly expanded facilities. Property and Equipment, net increased $51.2 million for expansions at our Mexico, Thailand, and Poland facilities and to support new business awards. Accounts payable increased $52.9 million primarily due to the increased inventory purchases. Borrowings on credit facilities increased $108.8 million primarily for working capital purposes and capital expenditures supporting our expansions.
Liquidity and Capital Resources
Working capital at March 31, 2023 was $441.8 million compared to working capital of $352.3 million at June 30, 2022. The current ratio was 1.9 at both March 31, 2023 and June 30, 2022. The debt-to-equity ratio was 0.6 at March 31, 2023 and 0.4 at June 30, 2022. Our short-term liquidity available, represented as cash and cash equivalents plus the unused amount of our credit facilities, some of which are uncommitted, totaled $128.5 million at March 31, 2023 and $178.6 million at June 30, 2022.
Cash Conversion Days (“CCD”) are calculated as the sum of Days Sales Outstanding plus Contract Asset Days plus Production Days Supply on Hand less Accounts Payable Days and less Advances from Customers Days. CCD, or a similar metric, is used in our industry and by our management to measure the efficiency of managing working capital. The following table summarizes our CCD for the quarterly periods indicated. Beginning in the third quarter of fiscal year 2023, we included Advances from Customers Days in our CCD calculation as these are customer deposits related to inventory. Prior periods have been recast to conform to the current quarter presentation.
| Three Months Ended | ||||||||||||||||||||
| March 31, 2023 | December 31, 2022 | March 31, 2022 | ||||||||||||||||||
| Days Sales Outstanding | 54 | 56 | 51 | |||||||||||||||||
| Contract Asset Days | 14 | 14 | 14 | |||||||||||||||||
| Production Days Supply on Hand | 101 | 108 | 89 | |||||||||||||||||
| Accounts Payable Days | 69 | 72 | 71 | |||||||||||||||||
| Advances from Customers Days | 8 | 9 | 4 | |||||||||||||||||
| Cash Conversion Days | 92 | 97 | 79 | |||||||||||||||||
We define Days Sales Outstanding as the average of monthly trade accounts and notes receivable divided by an average day’s net sales, Contract Asset Days as the average monthly contract assets divided by an average day’s net sales, Production Days Supply on Hand as the average of monthly gross inventory divided by an average day’s cost of sales, Accounts Payable Days as the average of monthly accounts payable divided by an average day’s cost of sales, and Advances from Customers Days as the total customer deposits divided by an average day’s cost of sales. Over the past several quarters, we have supported our customers through strategic inventory builds to mitigate parts shortages, which adversely impacted our PDSOH and CCD metrics. We expect inventory levels and working capital to normalize as the part shortages abate and our expansions continue to ramp up production.
26
Cash Flows
The following table reflects the major categories of cash flows for the first nine months of fiscal years 2023 and 2022.
| Nine Months Ended | ||||||||||||||
| March 31 | ||||||||||||||
| (Amounts in Millions) | 2023 | 2022 | ||||||||||||
| Net cash used for operating activities | $ | (57.9) | $ | (84.7) | ||||||||||
| Net cash used for investing activities | $ | (66.5) | $ | (50.0) | ||||||||||
| Net cash provided by financing activities | $ | 107.1 | $ | 64.9 | ||||||||||
Cash Flows from Operating Activities
Net cash used for operating activities for the first nine months of fiscal year 2023 and the first nine months of the prior year was driven by changes in operating assets and liabilities. Changes in operating assets and liabilities used $122.3 million of cash in the first nine months of fiscal year 2023 compared to $133.3 million of cash used in the first nine months of the prior year.
The cash used of $122.3 million from changes in operating assets and liabilities in the first nine months of fiscal year 2023 is largely due to an increase in inventory, which used cash of $88.6 million, driven by investment to support our expansions and growth in Mexico and Thailand, as well as supporting our customers through strategic inventory purchases to mitigate parts shortages, and an increase in accounts receivable, which used cash of $74.0 million primarily resulting from increased sales volumes. Partially offsetting cash used by inventory was an increase in accounts payable, which provided cash of $45.1 million largely resulting from increased inventory purchases.
The cash used of $133.3 million from changes in operating assets and liabilities in the first nine months of fiscal year 2022 is largely due to an increase in inventory, which used cash of $142.5 million primarily due to the component shortages as we continue to purchase material not impacted by the shortages so we can fulfill our customer orders once the impacted components are received, and an increase in accounts receivable, which used cash of $25.2 million primarily resulting from increased sales volumes. Partially offsetting cash used by inventory was an increase in accounts payable, which provided cash of $61.1 million largely resulting from increased inventory purchases.
Cash Flows from Investing Activities
For the first nine months of fiscal years 2023 and 2022, net cash used for investing activities was $66.5 million and $50.0 million, respectively. During the first nine months of fiscal year 2023, we invested $66.8 million into capital expenditures primarily for expansions at our Mexico, Thailand, and Poland facilities and to support new business awards. During the first nine months of fiscal year 2022, we invested $50.1 million into capital expenditures primarily for expansions at our Thailand and Mexico facilities and to support new business awards.
Cash Flows from Financing Activities
For the first nine months of fiscal year 2023, net cash provided by financing activities of $107.1 million resulted largely from net borrowings on our credit facilities of $108.7 million primarily for working capital purposes and capital expenditures supporting our expansions. For the first nine months of fiscal year 2022, net cash provided by financing activities of $64.9 million resulted largely from net borrowings on our credit facilities of $71.2 million.
Credit Facilities
The Company maintains a U.S. primary credit facility (the “primary credit facility”) among the Company, the lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, and Bank of America, N.A., as Documentation Agent, scheduled to mature May 4, 2027. The primary credit facility provides for $300 million in borrowings, with an option to increase the amount available for borrowing to $450 million at the Company’s request, subject to the consent of each lender participating in such increase.
The proceeds of the loans on the primary credit facility are to be used for working capital and general corporate purposes of the Company. A portion of the credit facility, not to exceed $15 million of the principal amount, will be available for the issuance of letters of credit. A commitment fee on the unused portion of the principal amount of the credit facility is payable at a rate that ranges from 10.0 to 25.0 basis points per annum as determined by the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA, as defined under the primary credit facility.
27
The interest rate on borrowings is dependent on the type and currencies of borrowings and will be one of following options:
•any Term Benchmark borrowing denominated in U.S. Dollars will utilize the Secured Overnight Financing Rate (“SOFR”), which is a rate per annum equal to the secured overnight financing rate for such business day published by the SOFR Administrator, the Federal Reserve Bank of New York, on the immediately succeeding business day, plus the Revolving Commitment Term Benchmark spread which can range from 100.0 to 175.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA;
•any Term Benchmark borrowing denominated in Euros will utilize the Euro Interbank Offered Rate (“EURIBOR”) in effect two target days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period as defined in the agreement, plus the Revolving Commitment Term Benchmark spread which can range from 100.0 to 175.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA; or
•the Alternate Base Rate (“ABR”), which is defined as the highest of the fluctuation rate per annum equal to the higher of:
a.Prime Rate in the U.S. last quoted by the Wall Street Journal, and if this is ceased to be quoted, the highest bank prime loan rate or similar rate quoted by the Federal Reserve Board;
b.1/2 of 1% per annum above the Federal Funds Effective Rate (as defined under the primary credit facility); or
c.1% per annum above the Adjusted Term SOFR Rate (as defined under the primary credit facility);
plus the Revolving Commitment ABR spread which can range from 0.0 to 75.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA.
At March 31, 2023, we had $279.0 million in borrowings under the primary credit facility and $0.4 million in letters of credit against the primary credit facility, and $235.0 million of the borrowings were classified as long-term as the Company intends, and has the ability, to refinance for a period longer than twelve months. At June 30, 2022, we had $171.4 million in borrowings under the primary credit facility and $0.4 million in letters of credit against the primary credit facility, and $145.0 million were classified as long-term.
The Company’s financial covenants under the primary credit facility require:
•a ratio of consolidated total indebtedness minus unencumbered U.S. cash on hand in the United States in excess of $15 million to adjusted consolidated EBITDA, determined as of the end of each of its fiscal quarters for the then most recently ended four fiscal quarters, to not be greater than 3.0 to 1.0, provided, however, that for each fiscal quarter end during the four quarter period following a material permitted acquisition, as defined in the Credit Agreement, the Company will not permit this financial covenant to be greater than 3.5 to 1.0 for each such fiscal quarter end, and
•an interest coverage ratio, defined as that ratio of consolidated EBITDA for such period to cash interest expense for such period, for any period of four consecutive fiscal quarters, to not be less than 3.5 to 1.0.
We were in compliance with the financial covenants during the nine-month period ended March 31, 2023.
The Company entered into a 364-day multi-currency revolving credit facility agreement on February 3, 2023 (the “secondary credit facility”), which allows for borrowings up to $50 million, among the Company, as borrower, certain subsidiaries of the Company as guarantors, the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Bank of America, N.A., as Documentation Agent. The secondary credit facility has a maturity date of February 2, 2024. The proceeds of the loans are to be used for working capital and general corporate purposes of the Company. A commitment fee on the unused portion of principal amount of this secondary credit facility is payable at 30.0 basis points per annum.
The interest rate on borrowings is dependent on the type of borrowings and will be one of the following options:
•any Term Benchmark borrowing denominated in U.S. Dollars will utilize the Secured Overnight Financing Rate (“SOFR”), which is a rate per annum equal to the secured overnight financing rate for such business day published by the SOFR Administrator, the Federal Reserve Bank of New York, on the immediately succeeding business day, plus a Revolving Commitment Term Benchmark spread of 175.0 basis points;
•any Term Benchmark borrowing denominated in Euros will utilize the Euro Interbank Offered Rate (“EURIBOR”) in effect two target days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period as defined in the agreement, plus a Revolving Commitment Term Benchmark spread of 175.0 basis points; or
•the Alternate Base Rate (“ABR”), which is defined as the highest of the fluctuating rate per annum equal to the higher of:
a.Prime Rate in the U.S. last quoted by the Wall Street Journal, and if this is ceased to be quoted, the highest bank prime loan rate or similar loan rate quoted by the Federal Reserve Board;
b.1/2 of 1% per annum above the Federal Funds Effective Rate (as defined under the primary credit facility); or
28
c.1% per annum above the Adjusted SOFR Rate (as defined under the primary credit facility);
plus a Revolving Commitment ABR spread of 75.0 basis points.
The Company’s financial covenants under this secondary credit facility are the same as the financial covenants for its primary credit facility.
Kimball Electronics has foreign credit facilities available to satisfy short-term cash needs at specific foreign locations rather than funding from intercompany sources. These foreign credit facilities can be canceled at any time by either the bank or us. As of March 31, 2023, we maintained the following foreign credit facilities:
•A Thailand overdraft credit facility which allows for borrowings up to $10.1 million. We had no borrowings under this foreign credit facility as of March 31, 2023 or June 30, 2022. During the first quarter of fiscal year 2023, the borrowing capacity was expanded.
•We entered into an uncommitted credit facility for its EMS operation in China which allows for borrowings up to $7.5 million that can be drawn in either U.S. dollars or China Renminbi during the first quarter of the current fiscal year. We had no borrowings under this foreign credit facility as of March 31, 2023.
•An uncommitted revolving credit facility for our Netherlands subsidiary, which allows for borrowings of up to 9.2 million Euro (approximately $9.9 million at March 31, 2023 exchange rates) that can be drawn in Euro, U.S. dollars, or another optional currency. We had $9.3 million in borrowings outstanding under this Netherlands revolving credit facility at March 31, 2023 and $9.2 million at June 30, 2022.
•The Company entered into a foreign credit facility for its operation in Poland during the current quarter which allows for borrowings up to 5.0 million Euro (approximately $5.4 million equivalent). We had no borrowings under this foreign credit facility as of March 31, 2023.
•The Company entered into a foreign credit facility for its operation in Vietnam during the current quarter which allows for borrowings up to $5.0 million. We had $1.1 million in borrowings outstanding under this foreign credit facility as of March 31, 2023.
Factoring Arrangements
The Company utilizes factoring arrangements for certain of our accounts receivables with third-party financial institutions in order to extend terms for the customer without negatively impacting our cash flow. These arrangements in all cases do not contain recourse provisions which would obligate us in the event of our customers’ failure to pay. Receivables are considered sold when they are transferred beyond the reach of Kimball Electronics and its creditors, the purchaser has the right to pledge or exchange the receivables, and we have surrendered control over the transferred receivables. In the nine months ended March 31, 2023 and 2022, we sold, without recourse, $357.1 million and $201.5 million of accounts receivable, respectively. See Note 1 - Business Description and Summary of Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements for more information regarding the factoring arrangements.
Future Liquidity
We believe our principal sources of liquidity from available funds on hand, cash generated from operations, and the availability of borrowing under our credit facilities, will be sufficient to meet our working capital and other operating needs for at least the next 12 months. The unused borrowings in USD equivalent under all of our credit facilities totaled $98.1 million at March 31, 2023, including the $50 million secondary credit facility expiring in February 2024. Additionally, accounts receivable factoring arrangements could provide flexible access to cash as needed. While our primary credit facility includes a covenant that limits the amount of sold receivables outstanding at any time, currently and historically, we have been considerably below this limit.
We expect to continue to prudently invest in capital expenditures, including for capacity expansions and potential acquisitions, that would help us continue our growth as a multifaceted manufacturing solutions company. We recently completed our Thailand facility expansion in the third quarter of fiscal year 2022 and our Mexico facility expansion in the first quarter of fiscal year 2023. Our Poland expansion is expected to be completed in early fiscal year 2024.
At March 31, 2023, our capital expenditure commitments were approximately $16 million, consisting primarily of equipment for the Mexico and Thailand facility expansions, capital related to new program wins, and commitments for the expansion of our Poland facility. We anticipate our available liquidity will be sufficient to fund these capital expenditures.
We have purchase obligations that arise in the normal course of business for items such as raw materials, services, and software acquisitions/license commitments. In certain instances, such as when lead times dictate, we enter into contractual agreements for material in excess of the levels required to fulfill customer orders to help mitigate the potential impact related to component shortages, which require longer lead times. In turn, our material authorization agreements with customers cover a portion of the exposure for material which is purchased prior to having a firm order.
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At March 31, 2023, our foreign entities held cash totaling $30.1 million. Most of our accumulated unremitted foreign earnings have been invested in active non-U.S. business operations, and it is not anticipated such earnings will be remitted to the United States. Our intent is to permanently reinvest the remaining funds outside of the United States, and our current plans do not demonstrate a need to repatriate these funds to our U.S. operations. However, if such funds were repatriated, a portion of the funds remitted may be subject to applicable non-U.S. income and withholding taxes.
The Company has a Board-authorized stock repurchase plan (the “Plan”) allowing the repurchase of up to $100 million of our common stock. Purchases may be made under various programs, including in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions, all in accordance with applicable securities laws and regulations. The Plan has no expiration date but may be suspended or discontinued at any time. The extent to which the Company repurchases its shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements, and other corporate considerations, as determined by the Company’s management team. The Company expects to finance the purchases with existing liquidity. The Company has repurchased $88.8 million of common stock under the Plan through March 31, 2023.
Our ability to generate cash from operations to meet our liquidity obligations could be adversely affected in the future by factors such as general economic and market conditions, lack of availability of raw material components in the supply chain, a decline in demand for our services, loss of key contract customers, unsuccessful integration of acquisitions and new operations, global health emergencies such as the COVID-19 pandemic, the duration and severity of the COVID-19 pandemic and the related uncertainties around the financial impact, and other unforeseen circumstances. In particular, should demand for our customers’ products and, in turn, our services decrease significantly over the next 12 months, the available cash provided by operations could be adversely impacted. Additional cautionary statements regarding our risk factors are contained in our Annual Report on Form 10-K for the year ended June 30, 2022.
Fair Value
During the third quarter of fiscal year 2023, no level 1 or level 2 financial instruments were affected by a lack of market liquidity. For level 1 financial assets, readily available market pricing was used to value the financial instruments. Our foreign currency derivative assets and liabilities, which were classified as level 2, were independently valued using observable market inputs such as forward interest rate yield curves, current spot rates, and time value calculations. To verify the reasonableness of the independently determined fair values, these derivative fair values were compared to fair values calculated by the counterparty banks. Our own credit risk and counterparty credit risk had an immaterial impact on the valuation of the foreign currency derivatives. See Note 7 - Fair Value of Notes to Condensed Consolidated Financial Statements for additional information.
Off-Balance Sheet Arrangements
As of March 31, 2023, we do not have any material off-balance sheet arrangements.
Critical Accounting Policies
Kimball Electronics’ Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the Condensed Consolidated Financial Statements and related notes. Actual results could differ from these estimates and assumptions. Management uses its best judgment in the assumptions used to value these estimates, which are based on current facts and circumstances, prior experience, and other assumptions that are believed to be reasonable.
There have been no material changes to our critical accounting policies since our Annual Report on Form 10-K for the year ended June 30, 2022. For further information regarding our critical accounting policies, refer to “Note 1 - Business Description and Summary of Significant Accounting Policies” of Notes to Consolidated Financial Statements and “Critical Accounting Policies” in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended June 30, 2022.
New Accounting Standards
New accounting standards which have been issued but not yet adopted are typically disclosed in Note 1 - Business Description and Summary of Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements for information regarding New Accounting Standards. Currently, there are no issued but not yet adopted accounting standards that are expected to have a material impact on the Company.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in our exposure to market risks for changes in foreign currency exchange rates and interest rates as compared to the fiscal year ended June 30, 2022.
Comprehensive disclosures of quantitative and qualitative market risk can be found in our Annual Report on Form 10-K for the year ended June 30, 2022.
Item 4. Controls and Procedures
(a)Evaluation of disclosure controls and procedures.
Kimball Electronics maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation of those controls and procedures performed, the Chief Executive Officer and Chief Financial Officer of the Company concluded that the disclosure controls and procedures were effective as of March 31, 2023.
(b)Changes in internal control over financial reporting.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2023 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We and our subsidiaries are not parties to any pending legal proceedings, other than ordinary routine litigation incidental to the business. The outcome of current routine pending litigation and claims, individually and in the aggregate, is not expected to have a material adverse impact on our business or financial condition.
Item 1A. Risk Factors
We are subject to various risks and uncertainties in the course of our business. A comprehensive disclosure of risk factors related to Kimball Electronics can be found in our Annual Report on Form 10-K for the year ended June 30, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On October 21, 2015, our Board of Directors (the “Board”) approved an 18-month stock repurchase plan (the “Plan”), authorizing the repurchase of up to $20 million worth of our common stock. Then, separately on each of September 29, 2016, August 23, 2017, November 8, 2018, and November 10, 2020, the Board extended and increased the Plan to allow the repurchase of up to an additional $20 million worth of common stock with no expiration date, which brought the total authorized stock repurchases under the Plan to $100 million.
During the three months ended March 31, 2023, the Company did not purchase any common stock. The Company’s maximum value of remaining shares that may be purchased under the Plan was $11.2 million at March 31, 2023.
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Item 6. Exhibits
Exhibits (numbered in accordance with Item 601 of Regulation S-K)
| Incorporated by Reference | ||||||||||||||||||||
| Exhibit No. | Description | Form | Period Ending | Exhibit | Filing Date | |||||||||||||||
| 3.1 | 8-K | 3.1 | 2/18/2021 | |||||||||||||||||
| 3.2 | 8-K | 3.2 | 11/15/2022 | |||||||||||||||||
| 31.1 | Filed Herewith | |||||||||||||||||||
| 31.2 | Filed Herewith | |||||||||||||||||||
32.1(a) | Furnished Herewith | |||||||||||||||||||
32.2(a) | Furnished Herewith | |||||||||||||||||||
| 101.INS | Inline XBRL Instance Document - The instance document does not appear in the Interactive Data File because its Inline XBRL tags are embedded within the Inline XBRL document | Filed Herewith | ||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | Filed Herewith | ||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | Filed Herewith | ||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | Filed Herewith | ||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | Filed Herewith | ||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | Filed Herewith | ||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) | Filed Herewith | ||||||||||||||||||
(a) In accordance with Item 601(b)(32)(ii) of Regulation S-K, the certifications furnished in Exhibit 32.1 and 32.2 will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. | ||||||||||||||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| KIMBALL ELECTRONICS, INC. | ||||||||
| By: | /s/ RICHARD D. PHILLIPS | |||||||
| Richard D. Phillips Chief Executive Officer | ||||||||
| May 5, 2023 | ||||||||
| By: | /s/ JANA T. CROOM | |||||||
| Jana T. Croom Chief Financial Officer | ||||||||
| May 5, 2023 | ||||||||
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