What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-04 compared with 2021-05-06 · 112 added, 156 removed, 149 unchanged (64% of the section changed)

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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 disposables, precision molded plastics, and production automation, test, and inspection equipment.

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 consistently recognized by our customers and the industry for our excellent quality, reliability, and innovative service.

We are well recognized by our customers and the industry for our excellent quality, reliability, and innovative service.

For the third time in four years, we were recognized in 2021 for achieving the Highest Overall Customer Rating in CIRCUITS ASSEMBLY’s 2021 Service Excellence Awards.

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This characteristic of the contract electronics marketplace is expected to continue.

The June 2020 edition of Manufacturing Market Insider published by NVR highlighted some key findings published in its annual report on the worldwide EMS industry, The Worldwide Electronics Manufacturing Services - 2020 Edition.

NVR projects the worldwide assembly market for electronics products to grow at a compound annual growth rate (“CAGR”) of 1.9% over the next five years, calendar years 2020 through 2024, with the EMS industry projected to grow at a CAGR of 5.6%.

The Worldwide Manufacturing Services Market - 2021 Edition , a comprehensive study on the worldwide EMS market published by New Venture Research (“NVR”), provided worldwide forecast trends through 2025.

NVR projects the worldwide assembly market for electronics products to grow at a compound annual growth rate (“CAGR”) of 3.4% over the next five years, with the EMS industry projected to grow at a CAGR of 7.1%.

We have a long-term compound annual growth rate target of 8%.

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.

The well-being and safety of our employees remains our primary focus, and we are following current guidelines suggested by applicable authorities, including utilizing protective shields, face masks, body temperature scanning, social distancing, and proper hygiene.

The well-being and safety of our employees remains our number one priority, and we are following guidelines suggested by applicable authorities, including utilizing protective shields, face masks, body temperature scanning, social distancing, and proper hygiene as appropriate for our operations.

Our response to each positive case in our facilities follows our procedures for communication to our employees, contact tracing, self-quarantining, testing, and sanitization of the affected work areas.

Because of the variety of critical medical device assemblies we manufacture around the world, our facilities were classified as “essential businesses” or otherwise had been permitted to operate under shelter in place orders or other similar orders but have been affected to varying degrees by COVID-19.

Because of the variety of critical medical device assemblies we manufacture around the world, our facilities were classified as “essential businesses” or otherwise permitted to operate under shelter in place orders or other similar orders during government-mandated COVID-19 shutdowns, but all have been affected to varying degrees by COVID-19.

We continue to maintain close contact and communication with our customers and our supply chain to ensure safety measures follow appropriate guidelines for the health and safety of all parties and to minimize disruption of operations.

While the availability of vaccines is encouraging, significant uncertainties and risks still exist related to the severity and duration of the impact of COVID-19 on our end markets, the supply chain, the health and availability of our workforce, and global macroeconomic conditions;

therefore, its financial impact on our results cannot be reasonably estimated but could be material.

The EMS industry is currently experiencing component shortages and component allocations, particularly with semiconductors driven by the strong demand in consumer electronics.

Component shortages or allocations could increase component costs and potentially interrupt our operations and negatively impact our ability to meet commitments to customers.

The semiconductor shortage has adversely impacted global manufacturing, particularly the automotive industry, leading to automakers temporarily suspending production in recent months.

We have taken various actions to mitigate the risk and minimize the impact to our customers as well as the adverse effect component shortages or allocations could have on our results;

however, the duration or severity of the semiconductor shortage is unknown, and its financial impact on our results cannot be reasonably estimated but could be material.

Sales to customers in the automotive market are gaining momentum, after recently being adversely impacted by COVID-19, as we experienced a record sales quarter in our automotive vertical in the second quarter of fiscal year 2021 and growth in the third quarter of fiscal year 2021 over the prior third quarter.

We anticipate demand from customers in the automotive market to remain strong throughout the rest of fiscal year 2021 and into fiscal year 2022.

We are monitoring, however, the current shortage of semiconductors and the continuing impact on global automobile production.

Component shortages or allocations could increase component costs and potentially interrupt our operations and negatively impact our ability to meet commitments to customers.

In the medical market, sales returned to the pre-COVID-19 pandemic levels in the second and third quarters of fiscal year 2021 after we experienced a record sales quarter in the first quarter of fiscal year 2021 due to the significant increase in demand for medical assemblies, specifically those related to respiratory care and patient monitoring products, as a direct result of COVID-19.

In the industrial market, our growth in the third quarter of fiscal year 2021 over the prior year third quarter was driven in large part due to improved sales of automation, test, and inspection equipment, partially offset by lower demand for smart metering products.

Sales to customers in the public safety market improved in the third quarter of fiscal year 2021 over the prior year third quarter due to the ramp-up of new programs.

We have a strong focus on cost control and closely monitor market changes and our liquidity in order to proactively adjust our operating costs and discretionary capital spending as needed.

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 acquisitions.

While the availability of vaccines is encouraging, significant uncertainties and risks still exist related to the effectiveness and uptake of the various vaccines and the severity and duration of the impact of COVID-19 on our end markets, the supply chain, the health and availability of our workforce, and global macroeconomic conditions;

therefore, its financial impact on our future results cannot be reasonably estimated but could be material.

The EMS industry continues to experience component shortages, component allocations, and shipping delays, particularly with semiconductors, which were especially challenging in the current quarter.

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 component shortages is unknown, and its financial impact on our future results cannot be reasonably estimated but could continue to be material.

Sales to customers in the automotive market for the current fiscal year quarter improved by 9% when compared to the first quarter of fiscal year 2021;

however, sales to customers in the automotive market experienced a 9% sequential decrease compared to the fourth quarter of fiscal year 2021, largely driven by the current shortage of semiconductors and its continuing impact on global automobile production.

We anticipate demand from customers in the automotive market to remain strong during fiscal year 2022, but we expect a stronger second half of fiscal year 2022 than the first half as we expect the supply to catch up with the demand.

In the medical market, sales were lower in the current fiscal year quarter when compared to the first quarter of fiscal year 2021, which experienced a record sales quarter due to the significant increase in demand for medical assemblies, specifically those related to respiratory care and patient monitoring products, as a direct result of COVID-19.

Sales in the medical market have since returned to the pre-COVID-19 levels.

In the industrial market, we had lower sales in the current fiscal year quarter in large part due to lower demand for smart metering products and lower end market demand for climate control products.

Sales to customers in the public safety market were lower in the current fiscal year quarter compared to the first quarter of fiscal year 2021 primarily due to material availability issues and reduced demand driven by the COVID-19 pandemic.

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 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 2.0, a debt-to-equity ratio of 0.1, and Share Owners’ equity of $425 million at March 31, 2021.

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 $226 million at March 31, 2021.

We continue to maintain a strong balance sheet, which included a current ratio of 1.8, a debt-to-equity ratio of 0.2, and Share Owners’ equity of $440 million at September 30, 2021.

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 $183 million at September 30, 2021.

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:

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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 services and variation in the gross margin on those programs is inherent to our business.

• 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.

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New customers and program start-ups generally cause margin dilution early in the life of a program, which is generally recovered as the program becomes established and matures.

• Risk factors within our business include, but are not limited to, general economic and market conditions, customer order delays, global health emergencies including the COVID-19 pandemic, component availability, 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 large customers, and the potential for customers to choose a dual sourcing strategy or to in-source a greater portion of their manufacturing.

• Risk factors within our business include, but are not limited to, general economic and market conditions, component availability, customer order delays, globalization, global health emergencies including the COVID-19 pandemic, 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 large 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.

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, 2021.

Nine Months Ended

Three Months Ended

Customer Service Years 2021 2020

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Operating Income 4.8 1.6 % 17.8 5.4 % (73) %

Other Income (Expense) (1.2) 2.1

Provision for Income Taxes 1.0 3.1

Net Income $ 2.6 $ 16.8 (85) %

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Open Orders $ 749.3 $ 349.8 114 %

For the Nine Months Ended

(Amounts in Millions, Except for Per Share Data) 2021 as a % of Net Sales 2020 as a % of Net Sales % Change

Net Sales $ 962.7 $ 914.4 5 %

Gross Profit $ 86.3 9.0 % $ 62.9 6.9 % 37 %

Selling and Administrative Expenses $ 38.3 4.0 % $ 32.5 3.6 % 18 %

Other General Income $ 0.7 $ —

Operating Income $ 48.6 5.1 % $ 30.4 3.3 % 60 %

Net Income $ 42.3 $ 19.5 117 %

Diluted Earnings per Share $ 1.67 $ 0.76 120 %

Net Sales by Vertical Market Three Months Ended Nine Months Ended

March 31 March 31

(Amounts in Millions) 2021 2020 % Change 2021 2020 % Change

Net Sales by Vertical Market Three Months Ended

(Amounts in Millions) 2021 2020 % Change

Automotive $ 129.4 $ 118.3 9 %

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Total Net Sales $ 292.7 $ 331.7 (12) %

Third quarter and year-to-date fiscal year 2021 consolidated net sales increased compared to the third quarter and year-to-date period of fiscal year 2020.

Foreign currency fluctuations had a favorable impact of 3% on net sales in both the current quarter and the current-year-to-date period compared to the third quarter and year-to-date period of fiscal year 2020.

By end market vertical, sales fluctuated as follows:

• Sales to customers in the automotive market during the third quarter of fiscal year 2021 increased 12% compared to the third quarter of fiscal year 2020.

This double-digit increase is largely due to the ramp-up of certain programs, including programs for fully electric vehicles, continued industry recovery from COVID-19 shut downs, and favorable foreign currency fluctuations.

Sales to customers in the automotive market in the year-to-date period of fiscal year 2021 also increased, but by a smaller percentage when compared to the year-to-date period of fiscal year 2020, as the COVID-19 pandemic had a negative impact on the first quarter of the current fiscal year.

• Sales to customers in the medical market declined slightly in the third quarter of fiscal year 2021 when compared to the third quarter of fiscal year 2020.

However, sales to customers in the medical market increased 9% in the year-to-date period of fiscal year 2021 when compared to the year-to-date period of fiscal year 2020, driven by the increase in demand for medical assemblies, specifically those related to respiratory care and patient monitoring products.

Partially offsetting this year-over-year increase is lower demand for non-critical medical products.

• Sales to customers in the industrial market increased in the third quarter and year-to-date period of the current fiscal year when compared to the third quarter and year-to-date period of the prior fiscal year, primarily due to improved sales of automation, test, and inspection equipment as our recent acquisition is gaining traction, higher end market demand for climate control products, and favorable foreign currency fluctuations, which were partially offset by decreased demand for smart metering products.

• Sales to customers in the public safety market improved in the third quarter of fiscal year 2021 compared to the third quarter of fiscal year 2020 due to the ramp-up of new programs, but sales to customers in the public safety market decreased in the year-to-date period of fiscal year 2021 compared to the year-to-date period of fiscal year 2020 primarily due to the phase out of certain programs.

First quarter fiscal year 2022 consolidated net sales decreased compared to the first quarter fiscal year 2021.

Foreign currency fluctuations had a favorable impact of 1% on net sales in the current quarter compared to the first quarter of fiscal year 2021.

All end market verticals have been unfavorably impacted by the component shortages.

By end market vertical, our market verticals fluctuated as follows:

• Sales to customers in the automotive market during the first quarter of fiscal year 2022 increased 9% compared to the first quarter of fiscal year 2021.

This increase is largely due to the ramp-up of certain programs, including programs for fully electric vehicles, which was partially offset by the unfavorable impact of component shortages.

• Sales to customers in the medical market declined in the first quarter of fiscal year 2022 when compared to the first quarter of fiscal year 2021 as first quarter fiscal year 2021 sales benefited from the temporary increase in demand for medical assemblies, specifically those related to respiratory care and patient monitoring products as a direct result of the COVID-19 pandemic and related global shortage of respiratory equipment.

Partially offsetting this decrease is an increase in demand for non-critical medical products.

• Sales to customers in the industrial market decreased in the first quarter of fiscal year 2022 when compared to the first quarter of fiscal year 2021, primarily due to lower demand from smart metering products and lower end market demand for climate control products, which were partially offset by the ramp-up of certain products.

• Sales to customers in the public safety market declined in the first quarter of fiscal year 2022 compared to the first quarter of fiscal year 2021 due to material availability issues and reduced demand driven by the COVID-19 pandemic.

A significant amount of sales to Nexteer Automotive and Philips accounted for the following portions of our net sales:

Three Months Ended Nine Months Ended

March 31 March 31

2021 2020 2021 2020

Three Months Ended

Nexteer Automotive 17% 15%

Philips 14% 23%

Open orders were up 27% as of March 31, 2021 compared to March 31, 2020, primarily from an increase in the automotive vertical.

The increase in open orders in the automotive market is driven by the overall increase in demand coupled with the global semiconductor shortage, which has limited our ability to fulfill customer orders.

Open orders were up 114% as of September 30, 2021 compared to September 30, 2020, primarily from an increase in the automotive and medical verticals.

The increase in open orders in both the automotive market and the medical market is driven by the component shortages, which has limited 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.

Substantially all of the open orders as of March 31, 2021 are expected to be filled within the next twelve months.

Substantially all of the open orders as of September 30, 2021 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.

Additionally, COVID-19 and the semiconductor shortage could impact the timing and certainty of fulfillment of open orders.

Gross profit as a percent of net sales in the third quarter and the year-to-date period of fiscal year 2021 improved when compared to the third quarter and the year-to-date period of fiscal year 2020 primarily due to improved operating execution, favorable product mix within our automotive vertical driven by a shift to more mature and larger programs, and favorable foreign currency fluctuations, which were partially offset by higher profit-sharing incentive bonus expense.

Selling and administrative expenses increased as a percent of net sales and in absolute dollars in the third quarter and the year-to-date period of fiscal year 2021 when compared to the third quarter and the year-to-date period of fiscal year 2020.

The selling and administrative expenses increased primarily from an increase in profit-sharing incentive bonus expense, the increase in the fair value of the liability for the supplemental employee retirement plan (“SERP”), and higher salary and related payroll costs.

Other General Income in the three and nine months ended March 31, 2021 included $0.4 million and $0.7 million, respectively, of pre-tax income resulting from payments received related to the settlement of a class action lawsuit in which Kimball Electronics was a class member.

No Other General Income was recorded during the three and nine months ended March 31, 2020.

Additionally, COVID-19 and the component shortages could impact the timing and certainty of fulfillment of open orders.

Gross profit as a percent of net sales in the first quarter of fiscal year 2022 declined when compared to the first quarter of fiscal year 2021 primarily due to lower volume, increased freight cost driven by the component shortages, wage inflation, and higher labor costs as a percent of sales as we are retaining our workforce to be well-positioned for the anticipated growth this fiscal year.

The factors were partially offset by lower profit-sharing incentive bonus expense.

Selling and administrative expenses increased as a percent of net sales but decreased in absolute dollars in the first quarter of fiscal year 2022 when compared to the first quarter of fiscal year 2021.

The selling and administrative expenses decreased in absolute dollars primarily from lower profit-sharing incentive bonus expense and the decrease in the fair value of the liability for the supplemental employee retirement plan (“SERP”).

The lower net sales and higher salary and related payroll costs were the primary drivers for the increase as a percent of net sales in the current fiscal year first quarter.

Other General Income in the three months ended September 30, 2021 and 2020 included $1.4 million and $0.3 million, respectively, 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.

Other Income (Expense) consisted of the following:

Three Months Ended Nine Months Ended

March 31 March 31

Three Months Ended

(Amounts in Thousands) 2021 2020

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Gain (loss) on SERP investments (87) 550

Adjustments after measurement period of GES acquisition 335 — 53 —

Other (219) (21)

Other income (expense), net $ (1,249) $ 2,135

Interest expense has decreased in the three and nine months ended March 31, 2021 compared to the three and nine months ended March 31, 2020 due to lower interest rates and lower borrowings on credit facilities.

Interest expense has decreased in the three months ended September 30, 2021 compared to the three months ended September 30, 2020 due to lower interest rates and lower borrowings on credit facilities.

The foreign currency/derivative gain (loss) resulted from net foreign currency exchange rate movements during the period.

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 income before income taxes and effective tax rate were comprised of the following U.S.

and foreign components:

For the Nine Months Ended

March 31, 2021 March 31, 2020

(Amounts in Thousands) Income Before Taxes Effective Tax Rate Income Before Taxes Effective Tax Rate

United States $ 11,064 14.9 % $ 1,858 49.8 %

Foreign 41,465 20.6 % 24,377 24.0 %

Total $ 52,529 19.4 % $ 26,235 25.8 %

When compared to the statutory rate, the domestic effective tax rate for the first nine months of fiscal year 2021 was favorably impacted by research and development credits and a discrete income tax adjustment related to the reduction in our state tax valuation allowance for research and development credit carryforwards.

The consolidated effective tax rate was favorably impacted by the mix of taxable earnings within our various tax jurisdictions, including foreign exchange rate movements.

When compared to the statutory rate, the domestic effective tax rate for the first nine months of fiscal year 2020 was substantially higher as the relatively low profit before tax magnified the impact of certain discrete adjustments and tax expense due to the global intangible low-taxed income provisions of Tax Reform.

Comparing the balance sheet as of March 31, 2021 to June 30, 2020, Receivables increased $17.6 million largely due to increased sales volumes and customer sales mix.

Contract assets decreased $17.2 million as a result of our lower inventory balance and the related impact of timing of shipments and related billings to our customers.

Our inventory balance decreased $37.9 million primarily due to the consumption of the inventory build at the end of the prior fiscal year to support the increased

demand for medical assemblies and changes in customers’ forecasts as a result of COVID-19.

Also contributing to the inventory balance decrease was the reimbursement from certain customers for the excess raw material inventory we purchased based on their forecasts during the ramp-up due to COVID-19.

Borrowings under credit facilities decreased $57.6 million largely due to payments on the U.S.

primary credit facility.

Our provision for income taxes for the first three months ended September 30, 2021 and September 30, 2020 was $1.0 million, or 27.4% of income before taxes on income, and $3.1 million, or 15.7% of income before taxes on income, respectively.

The increase in the effective tax rate was driven by the lower rate in the prior fiscal year first quarter, which was favorably impacted by a discrete income tax adjustment related to the reduction in our state tax valuation allowance for research and development credit carryforwards and a favorable mix of earnings in jurisdictions with rates lower than the U.S.

statutory rate of 21.0%.

Comparing the balance sheet as of September 30, 2021 to June 30, 2021, Receivables decreased $26.5 million largely due to lower sales volumes.

Our inventory balance increased $61.7 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.

Accounts payable increased $30.6 million due to the increased inventory purchases.

Accrued expenses decreased $11.2 million primarily from a significant portion of accrued incentive compensation payments occurring during the first quarter.

Liquidity and Capital Resources

Working capital at March 31, 2021 was $274.9 million compared to working capital of $285.8 million at June 30, 2020.

The current ratio was 2.0 at both March 31, 2021 and June 30, 2020.

The debt-to-equity ratio was 0.1 at March 31, 2021 and 0.3 at June 30, 2020.

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 $225.6 million at March 31, 2021 and $142.5 million at June 30, 2020.

Working capital at September 30, 2021 was $275.6 million compared to working capital of $282.6 million at June 30, 2021.

The current ratio was 1.8 at September 30, 2021 and 1.9 at June 30, 2021.

The debt-to-equity ratio was 0.2 at September 30, 2021 and 0.1 at June 30, 2021.

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 $182.8 million at September 30, 2021 and $206.7 million at June 30, 2021.

Cash Conversion Days (“CCD”) are calculated as the sum of Days Sales Outstanding (“DSO”) plus Contract Asset Days (“CAD”) plus Production Days Supply on Hand (“PDSOH”) less Accounts Payable Days (“APD”).

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Three Months Ended

March 31, 2021 June 30, 2020 March 31, 2020

September 30, 2021 June 30, 2021 September 30, 2020

PDSOH 77 61 64

We define DSO as the average of monthly trade accounts and notes receivable divided by an average day’s net sales, CAD as the average monthly contract assets divided by an average day’s net sales, PDSOH as the average of monthly gross inventory divided by an average day’s cost of sales, and APD as the average of monthly accounts payable divided by an average day’s cost of sales.

The following table reflects the major categories of cash flows for the first nine months of fiscal years 2021 and 2020.

Nine Months Ended

The following table reflects the major categories of cash flows for the first three months of fiscal years 2022 and 2021.

Three Months Ended

(Amounts in Millions) 2021 2020

Net cash provided by operating activities $ 103.8 $ 51.3

Net cash (used for) provided by operating activities $ (8.2) $ 20.7

Net cash used for investing activities $ (12.9) $ (8.3)

Net cash used for financing activities $ (58.7) $ (13.5)

Net cash provided by (used for) financing activities $ 5.0 $ (5.8)

Cash Flows from Operating Activities

Net cash provided by operating activities for the first nine months of fiscal year 2021 was driven both by net income adjusted for non-cash items and changes in operating assets and liabilities.

Net cash provided by operating activities in the first nine months of the prior year was largely driven by net income adjusted for non-cash items.

Additionally, changes in operating assets and liabilities provided $37.4 million of cash in the first nine months of fiscal year 2021 and provided $5.7 million of cash in the first nine months of the prior year.

The cash provided of $37.4 million from changes in operating assets and liabilities in the first nine months of fiscal year 2021 is largely due to a decrease in inventory, which provided cash of $37.6 million primarily due to the consumption of the inventory build at the end of the prior fiscal year in addition to the reimbursement from certain customers for the excess raw material inventory we purchased based on their forecasts during the ramp-up due to COVID-19, and the decrease in contract assets, which provided cash of $17.2 million as a result of our lower inventory balance and the related impact of timing of shipments and related billings to our customers.

Partially offsetting cash provided by inventory and contract assets was an increase in accounts receivable, which used cash of $23.0 million primarily resulting from increased sales volumes and customer sales mix.

The cash provided of $5.7 million from changes in operating assets and liabilities in the first nine months of fiscal year 2020 was primarily due to a decrease in accounts receivable, which provided cash of $33.6 million primarily due to the increased utilization of accounts receivable factoring arrangements.

Partially offsetting cash provided by accounts receivable was an increase in contract assets, which used cash of $17.5 million as a result of the timing of shipments and related billings, increased production volumes, and certain contracts with customers beginning to meet the criteria to recognize revenue over time during the current fiscal year, and cash used of $8.1 million as accrued expenses and taxes payable decreased, driven largely by a significant portion of accrued incentive compensation being paid during the first nine months of fiscal year 2020 and the reduction of advance payments from customers recognized as contract liabilities as the performance obligations were completed.

Net cash used for operating activities for the first three months of fiscal year 2022 was driven by changes in operating assets and liabilities.

Net cash provided by operating activities in the first three months of the prior year was largely driven by net income adjusted for non-cash items.

Changes in operating assets and liabilities used $20.9 million of cash in the first three months of fiscal year 2022 compared to $3.8 million of cash used in the first three months of the prior year.

The cash used of $20.9 million from changes in operating assets and liabilities in the first three months of fiscal year 2022 is largely due to an increase in inventory, which used cash of $62.8 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 the decrease in accrued expenses and taxes payable, which used cash of $13.6 million from a significant portion of accrued incentive compensation payments occurring during the first quarter.

Partially offsetting cash used by inventory and accrued expenses was an increase in accounts payable, which provided cash of $32.3 million largely resulting from increased inventory purchases, and a decrease in accounts receivable, which provided cash of $25.7 million primarily resulting from decreased sales volumes.

The cash used of $3.8 million from changes in operating assets and liabilities in the first three months of fiscal year 2021 was largely due to an increase in accounts receivable, which used cash of $15.1 million primarily resulting from increased sales volumes, and a decrease in accounts payable, which used cash of $9.9 million primarily from the payments on the higher inventory purchases at the end of the prior fiscal year to support increased production volumes.

Partially offsetting cash used by accounts receivable and accounts payable was a decrease in inventories, which provided cash of $18.7 million primarily from the consumption of the higher inventory level at the end of the prior fiscal year to support the increased demand for medical assemblies and changes customers’ forecasts as a result of COVID-19.

Cash Flows from Investing Activities

For the first nine months of fiscal years 2021 and 2020, net cash used for investing activities was $23.0 million and $27.6 million, respectively.

During the first nine months of fiscal year 2021, we invested $23.4 million into capital expenditures for capacity purposes, to support new business awards, and replacement of older machinery and equipment.

During the first nine months of fiscal year 2020, we invested $27.8 million into capital expenditures for the future primarily for machinery and equipment for capacity purposes and to support new business awards.

For the first three months of fiscal years 2022 and 2021, net cash used for investing activities was $12.9 million and $8.3 million, respectively.

During the first three months of fiscal year 2022, we invested $12.7 million into capital expenditures for expansions at our Thailand and Mexico facilities, capacity purposes, and to support new business awards.

During the first three months of fiscal year 2021, we invested $8.5 million into capital expenditures primarily for machinery and equipment for capacity purposes and to support new business awards.

Cash Flows from Financing Activities

For the first nine months of fiscal year 2021, net cash used by financing activities of $58.7 million resulted largely from net payments on our credit facilities of $57.9 million and the repurchases of our common stock under an authorized stock repurchase plan, partially offset by the receipt of $3.0 million for the final net working capital adjustment from the GES acquisition.

For the first nine months of fiscal year 2020, net cash used by financing activities of $13.5 million resulted from net payments on our primary credit facility of $7.0 million, repurchases of our common stock under an authorized stock repurchase plan, and the remittance of tax withholdings on share-based payments, which were only partially offset by additional borrowings of $3.3 million on our Netherlands credit facility.

For the first three months of fiscal year 2022, net cash provided by financing activities of $5.0 million resulted largely from net borrowings on our credit facilities of $6.5 million, partially offset by remittance of tax withholdings on share-based payments.

For the first three months of fiscal year 2021, net cash used by financing activities of $5.8 million resulted largely from net payments on our credit facilities of $8.0 million and the remittance of tax withholdings on share-based payments, which were partially offset by the receipt of $3.0 million for the final net working capital adjustment from the GES acquisition.

Credit Facilities

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plus the ABR Loans spread which can range from 25.0 to 75.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA.

At March 31, 2021, we had $57.0 million in borrowings under the primary credit facility and $0.4 million in letters of credit against the primary credit facility.

Borrowings under the primary credit facility were used as the primary source of funding for the GES acquisition as well as for domestic cash needs.

At March 31, 2021, $40.0 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.

We are not contractually obligated to repay the short-term borrowings under the primary credit facility during the next twelve months.

At June 30, 2020, we had $111.4 million in borrowings under the primary facility and $0.4 million in letters of credit against the primary facility.

Our debt classified as long-term at March 31, 2021 declined $51.5 million from June 30, 2020 as we remitted payment of $34.5 million for borrowings under the primary credit facility and reclassified $17.0 million of the borrowings under the primary credit facility to short term as we have the intent and the ability to repay within twelve months.

At September 30, 2021, we had $68.0 million in borrowings under the primary credit facility and $0.4 million in letters of credit against the primary credit facility, and $40.0 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, 2021, we had $62.7 million in borrowings under the primary facility and $0.4 million in letters of credit against the primary facility, and $40.0 million were classified as long-term.

The Company’s financial covenants under the primary credit facility require:

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• a fixed charge coverage ratio, determined as of the end of each of its fiscal quarters for the then most recently ended four fiscal quarters, to not be less than 1.1 to 1.0.

We were in compliance with the financial covenants during the nine-month period ended March 31, 2021.

The Company also maintains a 364-day multi-currency revolving credit facility (the “secondary credit facility”) among the Company, as borrower, certain subsidiaries of the Company as guarantors, the lenders party thereto, JPMorgan Chase Bank, National Association, as Administrative Agent, and Bank of America, N.A., as Documentation Agent, which allows for borrowings of up to $30.0 million and has a maturity date of May 18, 2021.

This secondary credit facility is to be used for working capital and general corporate purposes, and it is intended to provide additional domestic liquidity at the enterprise level to help support the increased demand in medical assemblies that is attributable to the COVID-19 pandemic.

A commitment fee on the unused portion of principal amount of this secondary credit facility is payable at 50.0 basis points per annum.

We had no borrowings under this secondary credit facility as of March 31, 2021 or June 30, 2020.

We were in compliance with the financial covenants during the first quarter ended September 30, 2021.

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, 2021, we maintained the following foreign credit facilities:

• A Thailand overdraft credit facility which allows for borrowings up to 2.4 million Thai Baht (approximately $0.1 million at March 31, 2021 exchange rates).

We had no borrowings under this foreign credit facility as of March 31, 2021 or June 30, 2020.

• An uncommitted revolving credit facility for our Netherlands subsidiary, which allows for borrowings of up to 9.2 million Euro (approximately $10.8 million at March 31, 2021 exchange rates) that can be drawn in Euro, U.S.

dollars, or other optional currency.

We had $3.5 million in borrowings outstanding under this Netherlands revolving credit facility as of March 31, 2021 and $6.7 million as of June 30, 2020.

• An uncommitted revolving credit facility for our Poland operation, which allows for borrowings of up to 5 million Euro (approximately $5.9 million at March 31, 2021 exchange rates) that can be drawn in Euro, U.S.

As of September 30, 2021, we maintained the following foreign credit facilities:

• A Thailand overdraft credit facility which allows for borrowings up to 2.4 million Thai Baht (approximately $0.1 million at September 30, 2021 exchange rates).

We had no borrowings under this foreign credit facility as of September 30, 2021 or June 30, 2021.

• An uncommitted revolving credit facility for our Netherlands subsidiary, which allows for borrowings of up to 9.2 million Euro (approximately $10.6 million at September 30, 2021 exchange rates) that can be drawn in Euro, U.S.

dollars, or another optional currency.

We had $4.6 million in borrowings outstanding under this Netherlands revolving credit facility as of September 30, 2021 and $3.5 million as of June 30, 2021.

• An uncommitted revolving credit facility for our Poland operation, which allows for borrowings of up to 5 million Euro (approximately $5.8 million at September 30, 2021 exchange rates) that can be drawn in Euro, U.S.

dollars, or Polish Zloty.

We had no borrowings under this foreign credit facility as of March 31, 2021 or June 30, 2020.

We had no borrowings under this foreign credit facility as of September 30, 2021 or June 30, 2021.

Factoring Arrangements

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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, 2021 and 2020, we sold, without recourse, $246.3 million and $202.0 million of accounts receivable, respectively.

Factoring fees were $0.2 million and $0.4 million for the three months ended March 31, 2021 and 2020, respectively, and $1.0 million and $1.5 million during the nine months ended March 31, 2021 and 2020, respectively.

In the three months ended September 30, 2021 and 2020, we sold, without recourse, $62.1 million and $91.1 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.

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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 $135.9 million at March 31, 2021.

We expect to continue to invest in capital expenditures prudently, including for capacity expansions and potential acquisitions, that would help us continue our growth and development as a multifaceted manufacturing solutions company.

In fiscal year 2021, we have approved capacity expansions at our Thailand and Mexico facilities.

The unused borrowings in USD equivalent under all of our credit facilities totaled $93.5 million at September 30, 2021.

We expect to continue to prudently invest in capital expenditures, including for capacity expansions and potential acquisitions, that would help us continue our growth and development as a multifaceted manufacturing solutions company.

In fiscal year 2021, we approved capacity expansions at our Thailand and Mexico facilities.

We anticipate our Thailand facility expansion will be complete in the second half of fiscal year 2022 and the Mexico facility expansion will be complete in the beginning of fiscal year 2023.

We are in a solid financial position to be able to weather the continuing impact of COVID-19;

however, significant uncertainties and risks exist related to the severity and duration of the impact to certain markets, the supply chain, and to global macroeconomic conditions.

At March 31, 2021, our capital expenditure commitments were approximately $10 million, consisting primarily of commitments for the expansion of our Thailand facility, capital related to new program wins, and productivity improvements including automation.

At September 30, 2021, our capital expenditure commitments were approximately $30 million, consisting primarily of commitments for the expansion of our Mexico and Thailand facilities, capital related to new program wins, and capacity purposes.

We anticipate our available liquidity will be sufficient to fund these capital expenditures.

At March 31, 2021, our foreign entities held cash totaling $87.9 million.

In December 2017, the U.S.

Tax Cuts and Jobs Act (“Tax Reform”) was enacted into law by the United States.

Tax Reform imposed a one-time deemed repatriation tax on accumulated unremitted foreign earnings.

The Company has made reasonable estimates of certain effects, and therefore, has recorded provisions for net deferred tax assets at the new applicable rate and the one-time deemed repatriation tax on accumulated unremitted foreign earnings.

As of March 31, 2021, the remaining provision recorded for the one-time deemed repatriation tax was $9.8 million, of which $8.9 million was recorded in Long-term income taxes payable on the Consolidated Balance Sheet, and is payable through fiscal year 2026.

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.

At September 30, 2021, our foreign entities held cash totaling $87.7 million.

Most of these accumulated unremitted foreign earnings have been invested in active non-U.S.

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income and withholding taxes.

In March 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law making several changes to the Internal Revenue Code.

The changes include, but are not limited to, increasing the limitation on the amount of deductible interest expense, allowing companies to carryback certain net operating losses, and increasing the amount of net operating loss carryforwards that corporations can use to offset taxable income, in addition to allowing companies to defer the payment of certain employer payroll taxes.

At March 31, 2021, we have deferred payment of $3.3 million of employer payroll taxes under the CARES Act, of which approximately half is payable in December 2021 and the remaining deferred amount is payable in December 2022.

On October 21, 2015, the Company’s Board of Directors approved a resolution to authorize an 18-month stock repurchase plan (the “Plan”) to allow the repurchase of up to $20 million of 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.

The Plan may be suspended or discontinued at any time.

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 $79.7 million of common stock under the Plan through March 31, 2021.

The Company has repurchased $79.7 million of common stock under the Plan through September 30, 2021.

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.

During the third quarter of fiscal year 2021, no level 1 or level 2 financial instruments were affected by a lack of market liquidity.

Additional cautionary statements regarding our risk factors are contained in our Annual Report on Form 10-K for the year ended June 30, 2021.

During the first quarter of fiscal year 2022, 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.

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See Note 7 - Fair Value of Notes to Condensed Consolidated Financial Statements for additional information.

Contractual Obligations

There have been no material changes outside the ordinary course of business to Kimball Electronics’ summary of contractual obligations under the caption, “Contractual Obligations” in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended June 30, 2020.

Off-Balance Sheet Arrangements

In limited circumstances, we receive banker’s acceptance drafts from customers to one of our China operations.

In turn, we may transfer the acceptance drafts to a supplier in settlement of current accounts payable.

These drafts contain certain recourse provisions afforded to the transferee under laws of The People’s Republic of China, and if exercised, our China operation would be required to satisfy the obligation with the transferee as the draft would revert back to our China operation.

No transferee has exercised their recourse rights against us.

We also have standby letters of credit entered into in the normal course of business.

These arrangements do not have a material current effect and are not reasonably likely to have a material future effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources.

See Note 1 – Business Description and Summary of Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements for more information on the banker’s acceptance drafts.

We do not have material exposures to trading activities of non-exchange traded contracts.

As of September 30, 2021, we do not have any material off-balance sheet arrangements.

Critical Accounting Policies

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis