Kimball Electronics, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Certain statements contained within this document are considered forward-looking under the Private Securities Litigation Reform Act of 1995. The statements may be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “forecasts,” “likely,” “future,” “may,” “should,” “would,” “could,” “will,” “potentially,” and similar expressions. These forward-looking statements are subject to risks and uncertainties including, but not limited to, global economic conditions, geopolitical environment and conflicts such as the war in Ukraine, global health emergencies including the COVID-19 pandemic, availability or cost of raw materials and components, foreign exchange fluctuations, and our ability to convert new business opportunities into customers and revenue. Additional cautionary statements regarding other risk factors that could have an effect on the future performance of Kimball Electronics are contained in our Annual Report on Form 10-K for the year ended June 30, 2022. Business Overview We are a global, multifaceted manufacturing solutions provider. We provide contract electronics manufacturing services (“EMS”) and diversified manufacturing services, including engineering and supply chain support, to customers in the automotive, medical, industrial, and public safety end markets. Our core competency is producing durable electronics, and we further offer diversified contract manufacturing services for non-electronic components, medical devices, medical disposables, drug delivery devices and solutions, precision molded plastics, and production automation, test, and inspection equipment. Our manufacturing services, including engineering and supply chain support, utilize common production and support capabilities globally. We are well recognized by our customers and the industry for our excellent quality, reliability, and innovative service. CIRCUITS ASSEMBLY, a leading brand and technical publication for electronics manufacturers worldwide, has recognized us 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. As a mid-sized player, we can expect to be challenged by the agility and flexibility of the smaller, regional players, and we can expect to be challenged by the scale and price competitiveness of the larger, global players. We enjoy a unique market position between these extremes which allows us to compete with the larger scale players for high-volume projects, but also maintain our competitive position in the generally lower volume durable electronics market space. We expect to continue to effectively operate in this market space; however, one significant challenge will be maintaining our profit margins while we continue our revenue growth. Price increases are uncommon in the market as production efficiencies and material pricing advantages for most projects drive costs and prices down over the life of the projects. This characteristic of the contract electronics marketplace is expected to continue. The Worldwide Manufacturing Services Market - 2022 Edition , a comprehensive study on the worldwide EMS market published by New Venture Research (“NVR”), provided worldwide forecast trends through 2026. NVR projects the worldwide assembly market for electronics products to grow at a compound annual growth rate (“CAGR”) of 4.3% over the next five years, with the EMS industry projected to grow at a CAGR of 5.5%. We continue to monitor the current economic and industry conditions for uncertainties that may pose a threat to our future growth or cause disruption in business strategy, execution, and timing in the markets in which we compete. The COVID-19 pandemic continues to impact the global economy, and we are actively monitoring its impact on all our operations. 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. 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. While the availability of vaccines and other treatments 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 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 prior fiscal year. Component shortages or allocations could continue to increase component costs and potentially interrupt our operations and negatively impact our ability to meet commitments to customers. We have taken various actions to mitigate the risk and minimize the impact to our customers as well as the adverse effect component shortages, component allocations, or shipping delays could have on our results; however, the duration or severity of the components shortages is unknown. 20 COVID-19 interruptions and supply chain restraints have also resulted in an industry-wide inflation of components, labor, freight, and other operating costs. Through contractual pricing arrangements and negotiations with our customers, we have been able to mitigate a majority of these cost increases; however, our profitability has been impacted, and 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. Companies worldwide are interrupting or stopping production in Ukraine, Russia, and neighboring countries. We do not procure materials directly from Ukraine or Russia, but these impacts can further exacerbate the ongoing supply chain disruptions that are occurring across the globe, particularly in the automotive industry. While the precise effects on global economies of the ongoing war and sanctions remain uncertain, they have already resulted in significant volatility in financial markets, fluctuations in currency exchange rates, and an increase in energy and commodity prices globally. Should the war continue or escalate, there may be various economic and security consequences including, but not limited to, additional supply shortages of different kinds; further increases in prices of commodities; significant disruptions in logistics infrastructure and telecommunications services; and risks relating to the unavailability of information technology systems and infrastructure. 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. 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. 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 and completed capacity expansions. Managing working capital in conjunction with fluctuating demand levels is likewise key. In addition, a long-standing component of our profit-sharing incentive bonus plan is that it is linked to our financial performance which results in varying amounts of compensation expense as profits change. We continue to maintain a strong balance sheet, which included a current ratio of 1.9, a debt-to-equity ratio of 0.5, 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: • Employees throughout our business operations are an integral part of our ability to compete successfully, and the stability of the management team is critical to long-term Share Owner value. Our talent management and succession planning processes help to maintain stability in management. • Due to the contract and project nature of the contract manufacturing industry, fluctuation in the demand for our products and variation in the gross margin on those programs is inherent to our business. Effective management of manufacturing capacity is, and will continue to be, critical to our success. 21 • The nature of the EMS industry is such that the start-up of new customers and new programs to replace expiring programs occurs frequently. As such, our ability to continue contractual relationships with our customers, including our principal customers, is not certain. While our agreements with customers generally do not have a definitive term and thus could be canceled at any time with little or no notice, we generally realize relatively few cancellations prior to the end of the product’s life cycle. We attribute this to our focus on long-term customer relationships, meeting customer expectations, required capital investment, and product qualification cycle times. New customers 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, component availability, logistical challenges, customer order delays, globalization, global health emergencies including the COVID-19 pandemic, geopolitical conflicts such as the war in Ukraine, impact related to tariffs and other trade barriers, foreign currency exchange rate fluctuations, rapid technological changes, supplier and customer financial stability, the contract nature of this industry, the concentration of sales to significant customers, and the potential for customers to choose a dual sourcing strategy or to in-source a greater portion of their manufacturing. The continuing success of our business is dependent upon our ability to replace expiring customers/programs with new customers/programs. We monitor our success in this area by tracking the number of customers and the percentage of our net sales generated from them by years of service as depicted in the table below. While variation in the size of program awards makes it difficult to directly correlate this data to our sales trends, we believe it does provide useful information regarding our customer loyalty and new business growth. Additional risk factors that could have an effect on our performance are located within the “Risk Factors” section of our Annual Report on Form 10-K for the year ended June 30, 2022. Three Months Ended September 30 Customer Service Years 2022 2021 More than 10 Years % of Net Sales 80 % 78 % # of Customers 31 34 5 to 10 Years % of Net Sales 16 % 18 % # of Customers 18 22 Less than 5 Years % of Net Sales 4 % 4 % # of Customers 11 15 Total % of Net Sales 100 % 100 % # of Customers 60 71 22 Financial Overview At or for the Three Months Ended September 30 (Amounts in Millions, Except for Per Share Data) 2022 as a % of Net Sales 2021 as a % of Net Sales % Change Net Sales $ 405.9 $ 292.7 39 % Gross Profit $ 29.3 7.2 % $ 15.6 5.3 % 88 % Selling and Administrative Expenses 15.7 3.9 % 12.2 4.2 % 29 % Other General Income — 1.4 Operating Income 13.6 3.3 % 4.8 1.6 % 184 % Other Income (Expense) (1.4) (1.2) Provision for Income Taxes 2.7 1.0 175 % Net Income $ 9.5 $ 2.6 271 % Diluted Earnings per Share $ 0.38 $ 0.10 280 % Open Orders $ 1,069 $ 749 43 % Net Sales by Vertical Market Three Months Ended September 30 (Amounts in Millions) 2022 2021 % Change Automotive $ 184.5 $ 129.4 43 % Medical 114.8 85.0 35 % Industrial 100.9 75.0 35 % Other 5.7 3.3 75 % Total Net Sales $ 405.9 $ 292.7 39 % 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 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. 23 A significant amount of sales to Philips, Nexteer Automotive, and ZF accounted for the following portions of our net sales: Three Months Ended September 30 2022 2021 Philips 17% 14% Nexteer Automotive 15% 17% ZF 12% * * 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. 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 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. 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 September 30, 2022. Other Income (Expense) consisted of the following: Three Months Ended September 30 (Amounts in Thousands) 2022 2021 Interest income $ 17 $ 24 Interest expense (1,920) (395) Foreign currency/derivative gain (loss) 534 (572) Gain (loss) on SERP investments (235) (87) Other 201 (219) Other income (expense), net $ (1,403) $ (1,249) Foreign currency/derivative gains (losses) result from net foreign currency exchange rate movements during the periods. The revaluation to fair value of the SERP investments recorded in Other Income (Expense) is offset by the revaluation of the SERP liability recorded in Selling and Administrative Expenses, and thus there is no effect on net income. 24 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. Accounts payable increased $13.6 million primarily due to the increased inventory purchases. Borrowings on credit facilities increased $51.9 million primarily for working capital purposes. Liquidity and Capital Resources 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”). CCD, or a similar metric, is used in our industry and by our management to measure the efficiency of managing working capital. The following table summarizes our CCD for the quarterly periods indicated. Three Months Ended September 30, 2022 June 30, 2022 September 30, 2021 DSO 54 53 57 CAD 14 16 14 PDSOH 106 100 77 APD 75 78 75 CCD 99 91 73 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. 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. Cash Flows The following table reflects the major categories of cash flows for the first three months of fiscal years 2023 and 2022. Three Months Ended September 30 (Amounts in Millions) 2022 2021 Net cash used for operating activities $ (60.2) $ (8.2) Net cash used for investing activities $ (19.3) $ (12.9) Net cash provided by financing activities $ 50.8 $ 5.0 Cash Flows from Operating Activities 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. 25 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 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 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, N.A., as Administrative Agent, and Bank of America, N.A., as Documentation Agent, scheduled to mature May 4, 2027. The primary credit facility provides for $300 million in borrowings, with an option to increase the amount available for borrowing to $450 million at the Company’s request, subject to the consent of each lender participating in such increase. The proceeds of the loans on the primary credit facility are to be used for working capital and general corporate purposes of the Company. A portion of the credit facility, not to exceed $15 million of the principal amount, will be available for the issuance of letters of credit. A commitment fee on the unused portion of the principal amount of the credit facility is payable at a rate that ranges from 10.0 to 25.0 basis points per annum as determined by the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA, as defined under the primary credit facility. The interest rate on borrowings is dependent on the type and currencies of borrowings and will be one of following options: • any Term Benchmark borrowing denominated in U.S. Dollars will utilize the Secured Overnight Financing Rate (“SOFR”), which is a rate per annum equal to the secured overnight financing rate for such business day published by the SOFR Administrator, the Federal Reserve Bank of New York, on the immediately succeeding business day, plus the Revolving Commitment Term Benchmark spread which can range from 100.0 to 175.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA; • any Term Benchmark borrowing denominated in Euros will utilize the Euro Interbank Offered Rate (“EURIBOR”) in effect two target days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period as defined in the agreement, plus the Revolving Commitment Term Benchmark spread which can range from 100.0 to 175.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA; or • the Alternate Base Rate (“ABR”), which is defined as the highest of the fluctuation rate per annum equal to the higher of: a. Prime Rate in the U.S. last quoted by the Wall Street Journal, and if this is ceased to be quoted, the highest bank prime loan rate or similar rate quoted by the Federal Reserve Board; b. 1/2 of 1% per annum above the Federal Funds Effective Rate (as defined under the primary credit facility); or c. 1% per annum above the Adjusted Term SOFR Rate (as defined under the primary credit facility); plus the Revolving Commitment ABR spread which can range from 0.0 to 75.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA. 26 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. 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 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 $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 The Company utilizes factoring arrangements for certain of our accounts receivables with third-party financial institutions in order to extend terms for the customer without negatively impacting our cash flow. These arrangements in all cases do not contain recourse provisions which would obligate us in the event of our customers’ failure to pay. Receivables are considered sold when they are transferred beyond the reach of Kimball Electronics and its creditors, the purchaser has the right to pledge or exchange the receivables, and we have surrendered control over the transferred receivables. In the 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 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 $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 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. 27 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, 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 it is not anticipated such earnings will be remitted to the United States. Our intent is to permanently reinvest the remaining funds outside of the United States, and our current plans do not demonstrate a need to repatriate these funds to our U.S. operations. However, if such funds were repatriated, a portion of the funds remitted may be subject to applicable non-U.S. income and withholding taxes. The Company has a Board-authorized stock repurchase plan (the “Plan”) allowing the repurchase of up to $100 million of our common stock. Purchases may be made under various programs, including in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions, all in accordance with applicable securities laws and regulations. The Plan has no expiration date but may be suspended or discontinued at any time. The extent to which the Company repurchases its shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements, and other corporate considerations, as determined by the Company’s management team. The Company expects to finance the purchases with existing liquidity. The Company has repurchased $88.8 million of common stock under the Plan through 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. In particular, should demand for our customers’ products and, in turn, our services decrease significantly over the next 12 months, the available cash provided by operations could be adversely impacted. Additional cautionary statements regarding our risk factors are contained in our Annual Report on Form 10-K for the year ended June 30, 2022. Fair Value During the 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. Our foreign currency derivative assets and liabilities, which were classified as level 2, were independently valued using observable market inputs such as forward interest rate yield curves, current spot rates, and time value calculations. To verify the reasonableness of the independently determined fair values, these derivative fair values were compared to fair values calculated by the counterparty banks. Our own credit risk and counterparty credit risk had an immaterial impact on the valuation of the foreign currency derivatives. See Note 7 - Fair Value of Notes to Condensed Consolidated Financial Statements for additional information. Off-Balance Sheet Arrangements As of September 30, 2022, we do not have any material off-balance sheet arrangements. Critical Accounting Policies Kimball Electronics’ Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the Condensed Consolidated Financial Statements and related notes. Actual results could differ from these estimates and assumptions. Management uses its best judgment in the assumptions used to value these estimates, which are based on current facts and circumstances, prior experience, and other assumptions that are believed to be reasonable. There have been no material changes to our critical accounting policies since our Annual Report on Form 10-K for the year ended June 30, 2022. For further information regarding our critical accounting policies, refer to “Note 1 - Business Description and Summary of Significant Accounting Policies” of Notes to Consolidated Financial Statements and “Critical Accounting Policies” in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended June 30, 2022. 28 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.