What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-08 compared with 2022-05-06 · 106 added, 149 removed, 172 unchanged (60% of the section changed)

11 unchanged sentences

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.

CIRCUITS ASSEMBLY is a leading brand and technical publication for electronics manufacturers worldwide.

CIRCUITS ASSEMBLY, a leading brand and technical publication for electronics manufacturers worldwide, has recognized us three times in the past four years for achieving the Highest Overall Customer Rating in their Service Excellence Awards.

The contract manufacturing services industry is very competitive.

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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.

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.

Nonetheless, all of our facilities have been affected to varying degrees by COVID-19.

Most recently, due to the continued spread of COVID-19 cases, in various cities in China where our customers and suppliers operate, Chinese authorities have reinstated certain measures to keep COVID-19 in check, including travel restrictions, stay-at-home orders, compulsory quarantines, and the temporary closure of many corporate offices, manufacturing facilities, and factories.

Due to the continued spread of COVID-19 cases, in various cities in China where our customers and suppliers operate, Chinese authorities have reinstated certain measures to keep COVID-19 in check, including travel restrictions, stay-at-home orders, compulsory quarantines, and the temporary closure of many corporate offices, manufacturing facilities, and factories.

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.

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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 have been especially challenging throughout this fiscal year.

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 component shortages is unknown.

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 in the short term, and the financial impact on our future results cannot be reasonably estimated but could continue to be material.

In February 2022, Russia launched an invasion of Ukraine.

The ongoing war there has impacted the global economy as the United States, the UK, the EU, and other countries have imposed broad export controls and financial and economic sanctions against Russia (a large exporter of commodities), Belarus, and specific areas of Ukraine, and may continue to impose additional sanctions or other measures.

however, our profitability has been impacted, and the financial impact on our future results cannot be reasonably estimated but could be material.

The Russian invasion of Ukraine and the ongoing war there has impacted the global economy as the United States, the UK, the EU, and other countries have imposed broad export controls and financial and economic sanctions against Russia (a large exporter of commodities), Belarus, and specific areas of Ukraine, and may continue to impose additional sanctions or other measures.

Russia may impose its own counteractive measures.

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The resulting impacts to the global economy, financial markets, inflation, interest rates, and unemployment, among others, could adversely impact economic and financial conditions, and may disrupt the global economy’s ongoing recovery from the COVID-19 pandemic.

to regions close to the areas of conflict, and an increase in the number of refugees fleeing across Europe, among other unforeseen social and humanitarian effects.

Other potential consequences include, but are not limited to, growth in the number of popular uprisings in the region, increased political discontent, especially in the regions most affected by war or economic sanctions, increase in cyberterrorism activities and attacks, displacement of persons to regions close to the areas of conflict, and an increase in the number of refugees fleeing across Europe, among other unforeseen social and humanitarian effects.

Any future negative impact to our operations cannot be reasonably estimated but could be material.

As expected, the second half to fiscal year 2022 is off to a strong start as we had record quarterly net sales in the third quarter of the current fiscal year.

Sales to customers in the automotive market experienced a record quarter for the current fiscal year quarter as sales increased by 16% when compared to the sales in the third quarter of fiscal year 2021, largely driven by the ramp-up of certain programs.

We anticipate demand from customers in the automotive market to remain strong in the last quarter of the fiscal year as we continue to expect the supply to catch up with the demand and the launch of new programs.

In the medical market, sales experienced double-digit growth in the current fiscal year quarter when compared to the third quarter of fiscal year 2021 primarily due to the launch and ramp-up of new products.

In the industrial market, sales also experienced double-digit growth in the current fiscal year quarter in large part due to higher end market demand for climate control products.

Sales to customers in the public safety market were slightly higher in the current fiscal year quarter compared to the third quarter of fiscal year 2021.

We experienced record quarterly net sales in the first quarter of the current fiscal year as sales increased 39% from the prior fiscal year first quarter, with double-digit increases 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 prior fiscal year first quarter net sales were adversely impacted by component shortages, especially within the automotive end market vertical.

Sales to customers in the automotive market in the first quarter of fiscal year 2023 were a quarterly record, largely driven by the supply chain catching up with the demand and 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 higher end market demand for climate control products, which was supported by improved component availability.

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 1.8, a debt-to-equity ratio of 0.3, and Share Owners’ equity of $454 million at March 31, 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 $78 million at March 31, 2022.

We continue to maintain a strong balance sheet, which included a current ratio of 1.9, a debt-to-equity ratio of 0.5, and Share Owners’ equity of $456 million at September 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 $113 million at September 30, 2022.

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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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

Three Months Ended

Customer Service Years 2022 2021

24 unchanged sentences

Open Orders $ 1,069 $ 749 43 %

For the Nine Months Ended

(Amounts in Millions, Except for Per Share Data) 2022 as a % of Net Sales 2021 as a % of Net Sales % Change

Net Sales $ 976.0 $ 962.7 1 %

Gross Profit $ 70.4 7.2 % $ 86.3 9.0 % (18) %

Selling and Administrative Expenses 39.8 4.0 % 38.4 4.0 % 4 %

Other General Income 1.4 0.7

Operating Income 32.0 3.3 % 48.6 5.1 % (34) %

Other Income (Expense) (3.6) 3.9

Provision for Income Taxes 7.1 10.2 (30) %

Net Income $ 21.3 $ 42.3 (50) %

Diluted Earnings per Share $ 0.84 $ 1.67 (50) %

Net Sales by Vertical Market Three Months Ended Nine Months Ended

March 31 March 31

(Amounts in Millions) 2022 2021 % Change 2022 2021 % Change

Net Sales by Vertical Market Three Months Ended

(Amounts in Millions) 2022 2021 % Change

Automotive $ 184.5 $ 129.4 43 %

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Industrial 100.9 75.0 35 %

Public Safety 13.8 13.5 2 % 35.7 37.3 (4) %

Other 5.7 3.3 75 %

Total Net Sales $ 405.9 $ 292.7 39 %

Third quarter and year-to-date fiscal year 2022 consolidated net sales increased compared to the third quarter and year-to-date period of fiscal year 2021.

The impact from foreign currency fluctuations on net sales was an unfavorable 2% in the current quarter compared to the third quarter of fiscal year 2021 and less than 1% for the current year-to-date period compared to the year-to-date period of fiscal year 2021.

First quarter fiscal year 2023 consolidated net sales increased compared to the first quarter of fiscal year 2022, setting a new quarterly record.

The impact from foreign currency fluctuations on net sales was an unfavorable 5% in the current quarter compared to the first quarter of fiscal year 2022.

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 2022, increasing 16% compared to the third quarter of fiscal year 2021.

This double-digit increase is largely due to the

ramp-up of certain programs, including programs for fully electric vehicles, partially offset by the unfavorable impact of component shortages.

Sales to customers in the automotive market in the year-to-date period of fiscal year 2022 also increased, but by a smaller percentage when compared to the year-to-date period of fiscal year 2021, as the component shortages had more of a negative impact in the first half of the current fiscal year.

• Sales to customers in the medical market had a double-digit increase in the third quarter of fiscal year 2022 when compared to the third quarter of fiscal year 2021 primarily due to the ramp-up of certain programs.

Sales to customers in the medical market decreased in the year-to-date period of fiscal year 2022 compared to the year-to-date period of fiscal year 2021 as the prior year-to-date period 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 year-to-date period decrease is the launch and ramp-up of new programs.

• Sales to customers in the industrial market also had a double-digit increase in the third quarter of fiscal year 2022 when compared to the third quarter of fiscal year 2021, primarily due to higher end market demand for climate control products and the ramp-up of certain programs, which were partially offset by the phase out of certain programs.

Sales to customers in the industrial market increased by a smaller percentage in the year-to-date period of the current fiscal year when compared to the year-to-date period of the prior fiscal year as the phase out of certain products had a more unfavorable impact.

• Sales to customers in the public safety market declined in the year-to-date period of fiscal year 2022 compared to the year-to-date period of fiscal year 2021 primarily 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

2022 2021 2022 2021

Nexteer Automotive 18% 18% 17% 17%

• Sales to customers in the automotive market experienced record net sales during the first quarter of fiscal year 2023, increasing 43% compared to the first quarter 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.

• Sales to customers in the medical market had a double-digit increase in the first quarter of fiscal year 2023 when compared to the first quarter of fiscal year 2022 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 had a double-digit increase in the first quarter of fiscal year 2023 when compared to the first quarter of fiscal year 2022, primarily due to higher end market demand for climate control products which was supported by overall improved component availability.

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

Three Months Ended

Philips 17% 14%

Open orders were up 43% as of March 31, 2022 compared to March 31, 2021, 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.

Nexteer Automotive 15% 17%

* amount is less than 10% of total

Open orders were up 43% as of September 30, 2022 compared to September 30, 2021, primarily from an increase in the automotive and medical verticals;

however, our open orders were down 10% when compared to June 30, 2022, driven by improved component availability.

The increase in open orders from September 30, 2021 in both the automotive market and the medical market is driven by the overall increase in demand coupled with 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, 2022 are expected to be filled within the next twelve months.

The majority of open orders as of September 30, 2022 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.

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 third quarter of fiscal year 2022 improved when compared to the third quarter of fiscal year 2021 primarily due to lower depreciation expense from the change in estimates of useful lives on Surface Mount Technology production equipment that occurred in the second quarter of fiscal year 2022 and the leverage gained on the higher revenue, which were partially offset by higher material costs and increased freight costs driven by the component shortages.

Gross profit as a percent of net sales in the first quarter of fiscal year 2023 improved when compared to the first quarter of fiscal year 2022 primarily due to the leverage gained on higher revenue and the lower depreciation expense from the change in estimates of useful lives on Surface Mount Technology production equipment that occurred in the second quarter of fiscal year 2022.

Additionally, the first quarter of fiscal year 2022 was impacted to a much greater degree than the current year by component shortages, and as we retained our workforce, our gross profit as a percent of net sales was negatively impacted.

See Note 1 - Business Description and Summary of Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements for more information on the change in estimates of useful lives.

Gross profit as a percent of net sales declined in the first nine months of fiscal year 2022 when compared to the first nine months of fiscal year 2021.

We experienced lost absorption in the first half of the current fiscal year as we retained our workforce to be well-positioned for the anticipated growth in the second half of the current fiscal year.

We also incurred higher material costs, increased freight costs driven by the component shortages, and wage inflation in the current year-to-date period compared to the prior year-to-date period.

Partially offsetting these unfavorable factors in the current year-to-date period were lower profit-sharing incentive bonus expense and lower depreciation from the change in estimates of useful lives on Surface Mount Technology production equipment.

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

The selling and administrative expenses increased primarily from higher salary and related payroll costs and stock-based compensation, including non-recurring charges related to executive succession planning, which were partially offset by the decrease in the fair value of the liability for the supplemental employee retirement plan (“SERP”).

Selling and administrative expenses remained flat as a percent of sales but increased in absolute dollars in the year-to-date period of fiscal year 2022 compared to the year-to-date period of fiscal year 2021.

The selling and administrative expenses increased in absolute dollars primarily from higher salary and related payroll costs and stock-based compensation, including non-recurring charges related to executive succession planning, which were partially offset by lower profit-sharing incentive bonus expense and the decrease in the fair value of the liability for SERP.

Other General Income in the nine months ended March 31, 2022 and 2021 included $1.4 million and $0.7 million, respectively, of pre-tax income resulting from payments received related to the class action lawsuits in which Kimball Electronics was a class member.

Selling and administrative expenses declined as a percent of net sales but increased in absolute dollars in the first quarter of fiscal year 2023 when compared to the first quarter of fiscal year 2022.

The selling and administrative expenses increased primarily from higher salary and related payroll costs, higher incentive-based compensation, and increased factoring fees associated with our accounts receivable factoring arrangements, which were partially offset by the decrease in the fair value of the liability for the supplemental employee retirement plan (“SERP”).

Other General Income in the three months ended September 30, 2021 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 three months ended March 31, 2022, and $0.4 million was recorded in the three months ended March 31, 2021.

No Other General Income was recorded in three months ended September 30, 2022.

Other Income (Expense) consisted of the following:

Three Months Ended Nine Months Ended

March 31 March 31

Three Months Ended

(Amounts in Thousands) 2022 2021

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Gain (loss) on SERP investments (235) (87)

Adjustments after measurement period of GES acquisition — 335 — 53

Other 201 (219)

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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.

The adjustments after measurement period of GES acquisition relate to charges recognized from agreements reached after the measurement period on disputed claims with the sellers of GES.

Our provision for income taxes for the first nine months ended March 31, 2022 and March 31, 2021 was $7.1 million, or 25.0% of income before taxes on income, and $10.2 million, or 19.4% 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, which was favorably impacted by a mix of earnings in jurisdictions with rates lower than the U.S.

federal statutory rate of 21.0% and a discrete tax adjustment related to the reduction in our state tax valuation allowance for research and development credit carryforwards.

Comparing the balance sheet as of March 31, 2022 to June 30, 2021, Receivables increased $20.8 million largely due to higher sales volumes.

Contract assets, which reflect the unbilled accounts receivable that occur when we recognize revenue over time, increased $17.9 million.

Our provision for income taxes for the first three months ended September 30, 2022 and September 30, 2021 was $2.7 million, or 21.9% of income before taxes on income, and $1.0 million, or 27.4% of income before taxes on income, respectively.

Comparing the balance sheet as of September 30, 2022 to June 30, 2022, receivables increased $31.0 million largely due to higher sales volumes.

Our inventory balance increased $53.9 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, as well as increased demand.

Property and equipment, net increased $28.1 million primarily from the Mexico and Thailand facility expansions.

Accounts payable increased $13.6 million primarily due to the increased inventory purchases.

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Liquidity and Capital Resources

Working capital at March 31, 2022 was $316.6 million compared to working capital of $282.6 million at June 30, 2021.

The current ratio was 1.8 at March 31, 2022 and 1.9 at June 30, 2021.

The debt-to-equity ratio was 0.3 at March 31, 2022 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 $78.4 million at March 31, 2022 and $206.7 million at June 30, 2021.

Working capital at September 30, 2022 was $380.1 million compared to working capital of $352.3 million at June 30, 2022.

The current ratio was 1.9 at both September 30, 2022 and June 30, 2022.

The debt-to-equity ratio was 0.5 at September 30, 2022 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 $113.4 million at September 30, 2022 and $178.6 million at June 30, 2022.

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, 2022 June 30, 2021 March 31, 2021

September 30, 2022 June 30, 2022 September 30, 2021

PDSOH 106 100 77

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 2022 and 2021.

Nine Months Ended

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.

The following table reflects the major categories of cash flows for the first three months of fiscal years 2023 and 2022.

Three Months Ended

(Amounts in Millions) 2022 2021

Net cash (used for) provided by operating activities $ (84.7) $ 103.8

Net cash used for operating activities $ (60.2) $ (8.2)

Net cash used for investing activities $ (19.3) $ (12.9)

Net cash provided by (used for) financing activities $ 64.9 $ (58.7)

Net cash provided by financing activities $ 50.8 $ 5.0

Cash Flows from Operating Activities

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

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

Changes in operating assets and liabilities used $133.3 million of cash in the first nine months of fiscal year 2022 compared to $37.4 million of cash provided in the first nine months of the prior year.

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.

Net cash used for operating activities for the first three months of fiscal year 2023 was driven by changes in operating assets and liabilities.

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

Changes in operating assets and liabilities used $75.5 million of cash in the first three months of fiscal year 2023 compared to $20.9 million of cash used in the first three months of the prior year.

The cash used of $75.5 million from changes in operating assets and liabilities in the first three months of fiscal year 2023 is largely due to an increase in inventory, which used cash of $57.6 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 in addition to increased demand, and an increase in accounts receivable, which used cash of $33.3 million primarily resulting from increased sales volumes.

Partially offsetting cash used by inventory was an increase in accounts payable, which provided cash of $17.5 million largely resulting from increased inventory purchases.

The cash provided of $37.4 million from changes in operating assets and liabilities in the first nine months of fiscal year 2021 was 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 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.

Cash Flows from Investing Activities

For the first nine months of fiscal years 2022 and 2021, net cash used for investing activities was $50.0 million and $23.0 million, respectively.

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, capacity purposes, and to support new business awards.

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.

For the first three months of fiscal years 2023 and 2022, net cash used for investing activities was $19.3 million and $12.9 million, respectively.

During the first three months of fiscal year 2023, we invested $19.5 million into capital expenditures primarily for expansions at our Mexico, Thailand, and Poland facilities and to support new business awards.

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, to support new business awards.

Cash Flows from Financing Activities

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 primarily for working capital purposes, partially offset by repurchases of our common stock under an authorized stock repurchase plan.

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, partially offset by the receipt of $3.0 million for the final net working capital adjustment from the GES acquisition.

For the first three months of fiscal year 2023, net cash provided by financing activities of $50.8 million resulted largely from net borrowings on our credit facilities of $52.2 million primarily for working capital purposes.

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.

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, National Association, as Administrative Agent, and Bank of America, N.A., as Documentation Agent, scheduled to mature July 27, 2023.

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 including capital expenditures and potential acquisitions.

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 20.0 to 25.0 basis points per annum as determined by the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA.

On November 8, 2021, the primary facility was amended to provide, among other things, (1) the interest rate calculation method will generally transition from the London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”) on the transition date of December 31, 2021 on applicable borrowings;

(2) the Eurocurrency borrowings are replaced with Term Benchmark borrowings;

(3) if any Term Benchmark borrowing is denominated Euros, the Euro Interbank Offered Rate (“EURIBOR”) shall be utilized;

and (4) all ABR borrowings will be denominated in U.S.

The interest rate on borrowings is dependent on the type and currencies of borrowings and will be one of following two options:

• prior to the transition date of December 31, 2021, any Term Benchmark borrowing denominated in U.S.

Dollars will utilize LIBOR in effect two business days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period as defined in the agreement, plus the Term Benchmark Loans spread which can range from 125.0 to 175.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA;

• after the transition date of December 31, 2021, any existing or future Term Benchmark borrowing denominated in U.S.

Dollars will utilize 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 Term Benchmark Loans spread which can range from 125.0 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 business days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period as defined in the agreement, plus the Term Benchmark Loans spread which can range from 125.0 to 175.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA;

• the Alternate Base Rate (“ABR”), which is defined as the highest of the fluctuating rate per annum equal to the higher of

JPMorgan’s prime rate;

1% per annum above the Adjusted LIBO Rate (as defined under the primary credit facility);

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.

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;

• the Alternate Base Rate (“ABR”), which is defined as the highest of the fluctuation rate per annum equal to the higher of:

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;

1/2 of 1% per annum above the Federal Funds Effective Rate (as defined under the primary credit facility);

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, 2022, we had $127.7 million in borrowings under the primary credit facility and $0.4 million in letters of credit against the primary credit facility, and $95.0 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.

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 September 30, 2022, we had $225.0 million in borrowings under the primary credit facility and $0.4 million in letters of credit against the primary credit facility, and $180.0 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.

• 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, 2022.

The Company entered into a credit agreement on March 16, 2022 (the “secondary credit facility”), which allows for borrowings up to $20 million.

This secondary credit facility was established for working capital purposes and had a maturity date of the earlier of June 30, 2022 or the date upon which the primary credit facility was refinanced.

As noted in the Future Liquidity section below, the primary credit facility was amended and restated on May 4, 2022, and the secondary credit facility was terminated.

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 be less than 3.5 to 1.0.

We were in compliance with the financial covenants during the first quarter ended September 30, 2022.

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, 2022, 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, 2022 exchange rates).

We had no borrowings under this foreign credit facility as of March 31, 2022 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 $10.2 million at March 31, 2022 exchange rates) that can be drawn in Euro, U.S.

As of September 30, 2022, 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 September 30, 2022 or June 30, 2022.

During the first quarter of fiscal year 2023, the borrowing capacity was expanded.

• The Company 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 current quarter.

The facility is scheduled to mature on June 30, 2023.

We had $0.5 million in borrowings under this foreign credit facility as of September 30, 2022.

• An uncommitted revolving credit facility for our Netherlands subsidiary, which allows for borrowings of up to 9.2 million Euro (approximately $9.0 million at September 30, 2022 exchange rates) that can be drawn in Euro, U.S.

dollars, or another optional currency.

We had $9.4 million in borrowings outstanding under this Netherlands revolving credit facility as of March 31, 2022 and $3.5 million as of June 30, 2021.

During the current fiscal year, the uncommitted revolving credit facility for our Poland operation expired, which allowed for borrowings of up to 5 million Euro that could be drawn in Euro, U.S.

dollars, or Polish Zloty.

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

We had $7.0 million in borrowings outstanding under this Netherlands revolving credit facility as of September 30, 2022 and $9.2 million as of June 30, 2022.

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, 2022 and 2021, we sold, without recourse, $201.5 million and $246.3 million of accounts receivable, respectively.

In the three months ended September 30, 2022 and 2021, we sold, without recourse, $97.6 million and $62.1 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.

Future Liquidity

On May 4, 2022, the Company entered into an amended and restated credit agreement (the “Credit Agreement”) 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.

The Credit Agreement amends and restates the Company’s primary credit facility, which was scheduled to mature on July 27, 2023.

The Credit Agreement has a maturity date of May 4, 2027 and allows 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 are to be used for working capital and general corporate purposes of the Company.

See Note 15 - Subsequent Event of Notes to Condensed Consolidated Financial Statements for more detail on the Credit Agreement.

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 $42.8 million at March 31, 2022.

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.

Our Thailand facility expansion was completed in the third quarter of fiscal year 2022, and we anticipate the Mexico facility expansion will be complete in the beginning of fiscal year 2023.

We have also approved a plan to expand the facility in Poznan, Poland, and the expansion is expected to be completed in early fiscal year 2024.

The unused borrowings in USD equivalent under all of our credit facilities totaled $93.7 million at September 30, 2022.

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.

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, 2022, our capital expenditure commitments were approximately $16 million, consisting primarily of commitments for the expansion of our Mexico facility, capital related to new program wins, and capacity purposes.

At September 30, 2022, our capital expenditure commitments were approximately $26 million, consisting primarily of commitments for the expansion of our Poland facility, equipment for the Mexico and Thailand facility expansions, and capital related to new program wins.

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

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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 March 31, 2022, our foreign entities held cash totaling $34.0 million.

At September 30, 2022, our foreign entities held cash totaling $19.6 million.

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

business operations, and we expect we may only repatriate a minor amount of these earnings to the United States in a tax-efficient manner.

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.

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The Company expects to finance the purchases with existing liquidity.

The Company has repurchased $84.6 million of common stock under the Plan through March 31, 2022.

The Company has repurchased $88.8 million of common stock under the Plan through September 30, 2022.

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.

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Additional cautionary statements regarding our risk factors are contained in our Annual Report on Form 10-K for the year ended June 30, 2022.

During the third quarter of fiscal year 2022, no level 1 or level 2 financial instruments were affected by a lack of market liquidity.

During the first 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.

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Off-Balance Sheet Arrangements

As of March 31, 2022, we do not have any material off-balance sheet arrangements.

As of September 30, 2022, we do not have any material off-balance sheet arrangements.

Critical Accounting Policies

6 unchanged sentences

New Accounting Standards

See Note 1 - Business Description and Summary of Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements for information regarding 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.

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