What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-07 compared with 2022-11-08 · 97 added, 83 removed, 195 unchanged (48% of the section changed)

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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.

CIRCUITS ASSEMBLY, a leading brand and technical publication for electronics manufacturers worldwide, has recognized us four times in the past five years for achieving the Highest Overall Customer Rating in their Service Excellence Awards, and we received awards in all categories in 2022.

The contract manufacturing services industry is very competitive.

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The COVID-19 pandemic continues to impact the global economy, and we are actively monitoring its impact on all our operations.

We cannot reasonably estimate the financial impact of the uncertainties and risks of the COVID-19 pandemic on our future results, though they could be material.

The well-being and safety of our employees remains our number one priority, and we are following guidelines suggested by applicable authorities as appropriate for our operations.

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.

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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.

however, our profitability has been impacted, and necessary extended lead times on inventory purchases has negatively impacted our working capital.

The financial impact on our future results cannot be reasonably estimated but could be material.

We experienced record quarterly net sales in the second quarter of the current fiscal year as sales increased 39% from the prior fiscal year second 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.

The prior fiscal year second 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 second quarter of fiscal year 2023 were a quarterly record, largely driven by the supply chain catching up with the demand, the continued ramp-up of certain programs, and the launch of new programs.

In the medical market, sales increased due to the launch and ramp-up of new programs in addition to improved component availability.

In the industrial market, sales increased in large part due to higher end market demand for climate control products, which was supported by improved component availability.

In the industrial market, which also experienced a quarterly record in the current quarter, sales increased in large part due to improved component availability and new product launches.

We have a strong focus on cost control balanced with managing the future growth prospects of our business and growing backlog of orders due to the global component shortage and logistical challenges.

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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.

We continue to maintain a strong balance sheet, which included a current ratio of 2.0, a debt-to-equity ratio of 0.6, and Share Owners’ equity of $481 million at December 31, 2022.

Recently, inventory and debt levels have increased as we have invested in capital expenditures and working capital to support our expansions and growth in Mexico and Thailand.

At the same time, we have supported our customers through strategic inventory purchases to mitigate parts shortages.

We expect our balance sheet to normalize as parts shortages abate and our expansions continue to ramp up production.

Refer to the Future Liquidity section of Liquidity and Capital Resources below for further discussion of our liquidity.

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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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.

New customers, program start-ups, and facility expansions generally cause margin dilution early in their respective lifecycles, which we generally recover as the customer relationship, program, or facility becomes established and matures.

• Risk factors within our business include, but are not limited to, general economic and market conditions, component availability, logistical challenges, customer order delays, globalization, global health emergencies including the COVID-19 pandemic, geopolitical conflicts such as the war in Ukraine, impact related to tariffs and other trade barriers, foreign currency exchange rate fluctuations, rapid technological changes, supplier and customer financial stability, the contract nature of this industry, the concentration of sales to significant customers, and the potential for customers to choose a dual sourcing strategy or to in-source a greater portion of their manufacturing.

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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.

Three Months Ended

Six Months Ended

Customer Service Years 2022 2021

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Selling and Administrative Expenses 16.7 3.8 % 13.9 4.4 % 20 %

Other General Income — 1.4

Operating Income 17.5 4.0 % 6.9 2.2 % 153 %

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Open Orders $ 1,037 $ 771 35 %

Net Sales by Vertical Market Three Months Ended

(Amounts in Millions) 2022 2021 % Change

For the Six 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 $ 842.6 $ 608.0 39 %

Gross Profit $ 63.5 7.5 % $ 36.4 6.0 % 74 %

Selling and Administrative Expenses 32.4 3.8 % 26.1 4.3 % 24 %

Other General Income — 1.4

Operating Income 31.1 3.7 % 11.7 1.9 % 166 %

Other Income (Expense) (4.8) (1.4)

Provision for Income Taxes 6.1 2.6 140 %

Net Income $ 20.2 $ 7.7 164 %

Diluted Earnings per Share $ 0.81 $ 0.30 170 %

Net Sales by Vertical Market Three Months Ended Six Months Ended

December 31 December 31

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

Automotive $ 200.0 $ 139.0 44 % $ 384.5 $ 268.4 43 %

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Total Net Sales $ 436.7 $ 315.3 39 % $ 842.6 $ 608.0 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.

Second quarter and year-to-date fiscal year 2023 consolidated net sales increased compared to the second quarter and year-to-date period of fiscal year 2022, with a new quarterly record set in the second quarter of fiscal year 2023.

The impact from foreign currency fluctuations on net sales was an unfavorable 5% in the current quarter and current year-to-date period compared to the second quarter and the year-to-date period 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.

• Sales to customers in the automotive market experienced record net sales during the second quarter of fiscal year 2023, increasing 44% compared to the second quarter of fiscal year 2022 and increasing 43% in the year-to-date period of fiscal year 2023 compared to the year-to-date period of fiscal year 2022.

This double-digit increase is largely due to the continued ramp-up of certain programs, new product launches, and improved component availability.

• 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.

• Sales to customers in the medical market had a double-digit increase in both the second quarter of fiscal year 2023 when compared to the second quarter of fiscal year 2022 and the year-to-date period of the current fiscal year when compared to the year-to-date period of the prior fiscal year primarily due to 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.

Sales to customers in the industrial market also experienced record net sales during the second quarter of fiscal year 2023, increasing 27% when compared to the second quarter of fiscal year 2022 largely due to improved component availability and new product launches.

Sales to customers in the industrial market also had a double-digit increase in the year-to-date period of the current fiscal year when compared to the year-to-date period of the prior fiscal year primarily due to higher end market demand for climate control products which was supported by overall improved component availability.

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

Three Months Ended

Three Months Ended Six Months Ended

December 31 December 31

2022 2021 2022 2021

Philips 16% 16% 17% 15%

Nexteer Automotive 16% 17% 15% 17%

ZF 12% * 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;

Open orders were up 35% as of December 31, 2022 compared to December 31, 2021, primarily from an increase in the automotive and medical verticals;

however, our open orders were down 13% 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.

The increase in open orders from December 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.

The majority of open orders as of December 31, 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.

Gross profit as a percent of net sales in the second quarter and first half of fiscal year 2023 improved when compared to the second quarter and first half of fiscal year 2022 primarily due to the leverage gained on higher revenue.

Additionally, the second quarter and first half 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.

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

The selling and administrative expenses increase was driven by added resources to support our significant growth, wage inflation, and increased factoring fees due to higher factoring fee rates coupled with increased accounts receivable factoring activity.

Other General Income in the six months ended December 31, 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.

No Other General Income was recorded in six months ended December 31, 2022.

Other Income (Expense) consisted of the following:

Three Months Ended

Three Months Ended Six Months Ended

December 31 December 31

(Amounts in Thousands) 2022 2021 2022 2021

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Other income (expense), net $ (3,296) $ (209) $ (4,699) $ (1,458)

Interest expense has increased in the three and six months ended December 31, 2022 compared to the three and six months ended December 31, 2021 due to higher interest rates and higher borrowings on credit facilities.

Foreign currency/derivative gains (losses) result from net foreign currency exchange rate movements during the periods.

The revaluation to fair value of the SERP investments recorded in Other Income (Expense) is offset by the revaluation of the SERP liability recorded in Selling and Administrative Expenses, and thus there is no effect on net income.

Our provision for income taxes for the first 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.

Our provision for income taxes for the first six months ended December 31, 2022 and December 31, 2021 was $6.1 million, or 23.3% of income before taxes on income, and $2.6 million, or 25.0% of income before taxes on income, respectively.

Comparing the balance sheet as of December 31, 2022 to June 30, 2022, receivables increased $42.3 million largely due to higher sales volumes.

Our inventory balance increased $91.9 million due to the component shortages as we continue to purchase material not impacted by the shortages so we can fulfill our customer orders once the impacted components are received, as well as to support production at our newly expanded facilities.

Property and Equipment, net increased $32.0 million for expansions at our Mexico, Thailand, and Poland facilities and to support new business awards.

Accounts payable increased $29.1 million primarily due to the increased inventory purchases.

Borrowings on credit facilities increased $51.9 million primarily for working capital purposes.

Borrowings on credit facilities increased $93.0 million primarily for working capital purposes and capital expenditures supporting our expansions.

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.

Working capital at December 31, 2022 was $435.5 million compared to working capital of $352.3 million at June 30, 2022.

The current ratio was 2.0 and 1.9 at December 31, 2022 and June 30, 2022, respectively.

The debt-to-equity ratio was 0.6 at December 31, 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 $79.8 million at December 31, 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

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

December 31, 2022 September 30, 2022 December 31, 2021

PDSOH 108 106 91

CCD 103 99 81

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.

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

Three Months Ended

We expect inventory levels and working capital to normalize as the part shortages abate and our expansions continue to ramp up production.

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

Six Months Ended

(Amounts in Millions) 2022 2021

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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.

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

Changes in operating assets and liabilities used $107.5 million of cash in the first six months of fiscal year 2023 compared to $83.2 million of cash used in the first six months of the prior year.

The cash used of $107.5 million from changes in operating assets and liabilities in the first six months of fiscal year 2023 is largely due to an increase in inventory, which used cash of $88.9 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 in addition to increased demand, and an increase in accounts receivable, which used cash of $40.8 million primarily resulting from increased sales volumes.

Partially offsetting cash used by inventory was an increase in accounts payable, which provided cash of $23.2 million largely resulting from increased inventory purchases.

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.

The cash used of $83.2 million from changes in operating assets and liabilities in the first six months of fiscal year 2022 is largely due to an increase in inventory, which used cash of $106.9 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, and the decrease in accrued expenses and taxes payable, which used cash of $12.1 million from a significant portion of accrued incentive compensation payments occurring during the first half of the fiscal year.

Partially offsetting cash used by inventory and accrued expenses was an increase in accounts payable, which provided cash of $36.3 million largely resulting from increased inventory purchases, and a decrease in accounts receivable, which provided cash of $15.2 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.

For the first six months of fiscal years 2023 and 2022, net cash used for investing activities was $41.9 million and $27.8 million, respectively.

During the first six months of fiscal year 2023, we invested $42.2 million into capital expenditures primarily for expansions at our Mexico, Thailand, and Poland facilities and to support new business awards.

During the first six months of fiscal year 2022, we invested $27.9 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.

For the first six months of fiscal year 2023, net cash provided by financing activities of $91.4 million resulted largely from net borrowings on our credit facilities of $92.9 million primarily for working capital purposes and capital expenditures supporting our expansions.

For the first six months of fiscal year 2022, net cash provided by financing activities of $35.5 million resulted largely from net borrowings on our credit facilities of $37.0 million.

Credit Facilities

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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 December 31, 2022, we had $264.3 million in borrowings under the primary credit facility and $0.4 million in letters of credit against the primary credit facility, and $235.0 million of the borrowings were classified as long-term as the Company intends, and has the ability, to refinance for a period longer than twelve months.

At June 30, 2022, we had $171.4 million in borrowings under the primary credit facility and $0.4 million in letters of credit against the primary credit facility, and $145.0 million were classified as long-term.

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• 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.

We were in compliance with the financial covenants during the six-month period ended December 31, 2022.

As noted in the Future Liquidity section below, we entered into a 364-day multi-currency revolving credit facility agreement on February 3, 2023 (the “secondary credit facility”), which allows for borrowings up to $50 million.

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:

As of December 31, 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.

We had no borrowings under this foreign credit facility as of December 31, 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.

• We entered into an uncommitted credit facility for its EMS operation in China which allows for borrowings up to $7.5 million that can be drawn in either U.S.

dollars or China Renminbi during the first quarter of the current fiscal year.

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.

We had no borrowings under this foreign credit facility as of December 31, 2022.

• An uncommitted revolving credit facility for our Netherlands subsidiary, which allows for borrowings of up to 9.2 million Euro (approximately $9.8 million at December 31, 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.

We had $9.2 million in borrowings outstanding under this Netherlands revolving credit facility at both December 31, 2022 and June 30, 2022.

Subsequent to December 31, 2022, we entered into a foreign credit facility for its EMS operation in Poland which allows for borrowings up to 5 million Euro (approximately $5.4 million equivalent).

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 three months ended September 30, 2022 and 2021, we sold, without recourse, $97.6 million and $62.1 million of accounts receivable, respectively.

In the six months ended December 31, 2022 and 2021, we sold, without recourse, $225.1 million and $125.3 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 entered into a 364-day multi-currency revolving credit facility agreement on February 3, 2023 (the “secondary credit facility”), which allows for borrowings up to $50 million, The secondary credit facility will provide us with liquidity at the enterprise level instead of the subsidiary level.

Proceeds are primarily expected to support additional equipment and working capital needs in coordination with our facility expansion in Mexico, as well as supporting other customer growth.

See Note 14 - Subsequent Event of Notes to Condensed Consolidated Statements for more detail on the secondary credit facility.

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.

The unused borrowings in USD equivalent under all of our credit facilities totaled $53.5 million at December 31, 2022.

Additionally, accounts receivable factoring arrangements could provide flexible access to cash as needed.

While our primary credit facility includes a covenant that limits the amount of sold receivables outstanding at any time, currently and historically, we have been considerably below this limit.

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

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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.

At December 31, 2022, our capital expenditure commitments were approximately $23 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.

2 unchanged sentences

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.

At December 31, 2022, our foreign entities held cash totaling $26.3 million.

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

8 unchanged sentences

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.

The Company has repurchased $88.8 million of common stock under the Plan through December 31, 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.

1 unchanged sentence

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 first quarter of fiscal year 2023, no level 1 or level 2 financial instruments were affected by a lack of market liquidity.

During the second 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.

4 unchanged sentences

Off-Balance Sheet Arrangements

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

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

Critical Accounting Policies

9 unchanged sentences

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