What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-05 compared with 2023-02-07 · 103 added, 79 removed, 213 unchanged (46% of the section changed)

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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.

We experienced record quarterly net sales in the third quarter of the current fiscal year as sales increased 32% from the prior fiscal year third quarter, with double-digit increases and quarterly records in all three of our end market verticals.

Beginning in fiscal year 2023, we changed our presentation of revenue for the industrial and public safety end market verticals by combining them into the industrial end market vertical.

Prior year periods have been recast to conform to the current year presentation.

The 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.

The increase in sales to customers in the automotive market in the third quarter of fiscal year 2023 were largely driven by the supply chain catching up with the demand, the continued ramp-up of certain programs, and the launch of new programs.

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

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

In the industrial market, sales increased in large part due to improved component availability and new product launches.

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

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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 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.

We continue to maintain a strong balance sheet, which included a current ratio of 1.9, a debt-to-equity ratio of 0.6, and Share Owners’ equity of $503 million at March 31, 2023.

Recently, we have invested to support our expansions and growth in Mexico and Thailand.

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

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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.

Six Months Ended

Nine Months Ended

Customer Service Years 2023 2022

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Open Orders $ 882 $ 930 (5) %

For the Six Months Ended

For the Nine Months Ended

(Amounts in Millions, Except for Per Share Data) 2023 as a % of Net Sales 2022 as a % of Net Sales % Change

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Diluted Earnings per Share $ 1.46 $ 0.84 74 %

Net Sales by Vertical Market Three Months Ended Six Months Ended

December 31 December 31

Net Sales by Vertical Market Three Months Ended Nine Months Ended

March 31 March 31

(Amounts in Millions) 2023 2022 % Change 2023 2022 % Change

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Total Net Sales $ 484.7 $ 368.1 32 % $ 1,327.3 $ 976.0 36 %

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.

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

The impact from foreign currency fluctuations on net sales was an unfavorable 2% in the current quarter and an unfavorable 4% in the current year-to-date period compared to the third quarter and the year-to-date period of fiscal year 2022, respectively.

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

• Sales to customers in the automotive market experienced record net sales during the 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.

• Sales to customers in the automotive market experienced record net sales during the third quarter of fiscal year 2023, increasing 34% compared to the third quarter of fiscal year 2022 and increasing 40% in the year-to-date period of fiscal year 2023 compared to the year-to-date period of fiscal year 2022.

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

• 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.

• Sales to customers in the medical market experienced record net sales during the third quarter of fiscal year 2023, increasing 30% compared to the third quarter of fiscal year 2022 and increasing 34% in the year-to-date period of fiscal year 2023 when compared to the year-to-date period of fiscal year 2022.

This double-digit increase is primarily due to launch and ramp-up of new programs and overall improved component availability.

• Beginning in fiscal year 2023, the Company changed its presentation of revenue for the industrial and public safety end market verticals by combining them into the industrial end market vertical.

Prior year periods have been recast to conform to the current year presentation.

Sales to customers in the industrial market also experienced record net sales during the 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 experienced record net sales during the third quarter of fiscal year 2023, increasing 29% when compared to the third quarter of fiscal year 2022 largely due to improved component availability and new product launches.

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

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

Three Months Ended Six Months Ended

December 31 December 31

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

Three Months Ended Nine Months Ended

March 31 March 31

2023 2022 2023 2022

Philips 16% 16% 17% 15%

Nexteer Automotive 15% 18% 15% 17%

Philips 14% 15% 15% 15%

ZF 12% * 12% *

* amount is less than 10% of total

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 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 were down 5% as of March 31, 2023 compared to March 31, 2022.

The decrease in open orders from March 31, 2022 is driven by the overall improvement in component availability, which has increased our ability to fulfill customer orders.

Open orders are the aggregate sales price of production pursuant to unfulfilled customer orders, which may be delayed or canceled by the customer subject to contractual termination provisions.

The majority of open orders as of December 31, 2022 are expected to be filled within the next twelve months.

The majority of open orders as of March 31, 2023 are expected to be filled within the next twelve months.

Open orders at a point in time may not be indicative of future sales trends due to the contract nature of our business and the variability of order lead times among our customers.

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 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.

Gross profit as a percent of net sales in the third quarter of fiscal year 2023 declined when compared to the third quarter of fiscal year 2022 as we continue to optimize operating performance levels following recent facility expansions.

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

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

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

The selling and administrative expenses increase was driven by the increase in the fair value of the liability for the supplemental employee retirement plan (“SERP”), increased factoring fees due to higher factoring fee rates coupled with increased accounts receivable factoring activity, added resources to support our significant growth, wage inflation, and higher incentive-based compensation.

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

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

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

These lawsuits alleged that certain suppliers to the EMS industry conspired over a number of years to raise and fix the prices of electronic components, resulting in overcharges to purchasers of those components.

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

No Other General Income was recorded in the three and nine month periods ended March 31, 2023 and in the three month period ended March 31, 2022.

We perform our annual goodwill impairment test of our Global Equipment Services (“GES”) reporting unit in the fourth quarter.

As of March 31, 2023, GES has $5.8 million of goodwill.

In our latest annual test performed as of April 30, 2022, the fair value of the GES reporting unit exceeded its carrying value by 9%.

We are in the process of developing our long-range plan, which will support our annual test.

Our test will consider GES’s recent performance and trends in the semiconductor and consumer electronics capital equipment markets which GES serves.

If our test indicates a decline in GES’s fair value, there could be a non-cash charge for impairment.

Other Income (Expense) consisted of the following:

Three Months Ended Six Months Ended

December 31 December 31

Three Months Ended Nine Months Ended

March 31 March 31

(Amounts in Thousands) 2023 2022 2023 2022

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Other income (expense), net $ (3,344) $ (2,103) $ (8,043) $ (3,561)

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.

Interest expense has increased in the three and nine months ended March 31, 2023 compared to the three and nine months ended March 31, 2022 due to higher interest rates and higher borrowings on credit facilities.

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

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

Our provision for income taxes for the first 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 provision for income taxes for the first nine months ended March 31, 2023 and March 31, 2022 was $11.6 million, or 24.1% of income before taxes on income, and $7.1 million, or 25.0% of income before taxes on income, respectively.

Comparing the balance sheet as of March 31, 2023 to June 30, 2022, receivables increased $76.5 million largely due to higher sales volumes.

Our inventory balance increased $92.5 million due to the component shortages as we continue to purchase material not impacted by the shortages so we can fulfill our customer orders once the impacted components are received, as well as to support production at our newly expanded facilities.

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Liquidity and Capital Resources

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”).

Working capital at March 31, 2023 was $441.8 million compared to working capital of $352.3 million at June 30, 2022.

The current ratio was 1.9 at both March 31, 2023 and June 30, 2022.

The debt-to-equity ratio was 0.6 at March 31, 2023 and 0.4 at June 30, 2022.

Our short-term liquidity available, represented as cash and cash equivalents plus the unused amount of our credit facilities, some of which are uncommitted, totaled $128.5 million at March 31, 2023 and $178.6 million at June 30, 2022.

Cash Conversion Days (“CCD”) are calculated as the sum of Days Sales Outstanding plus Contract Asset Days plus Production Days Supply on Hand less Accounts Payable Days and less Advances from Customers Days.

CCD, or a similar metric, is used in our industry and by our management to measure the efficiency of managing working capital.

The following table summarizes our CCD for the quarterly periods indicated.

Beginning in the third quarter of fiscal year 2023, we included Advances from Customers Days in our CCD calculation as these are customer deposits related to inventory.

Prior periods have been recast to conform to the current quarter presentation.

Three Months Ended

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.

March 31, 2023 December 31, 2022 March 31, 2022

Days Sales Outstanding 54 56 51

Contract Asset Days 14 14 14

Production Days Supply on Hand 101 108 89

Accounts Payable Days 69 72 71

Advances from Customers Days 8 9 4

Cash Conversion Days 92 97 79

We define Days Sales Outstanding as the average of monthly trade accounts and notes receivable divided by an average day’s net sales, Contract Asset Days as the average monthly contract assets divided by an average day’s net sales, Production Days Supply on Hand as the average of monthly gross inventory divided by an average day’s cost of sales, Accounts Payable Days as the average of monthly accounts payable divided by an average day’s cost of sales, and Advances from Customers Days as the total customer deposits divided by an average day’s cost of sales.

Over the past several quarters, we have supported our customers through strategic inventory builds to mitigate parts shortages, which adversely impacted our PDSOH and CCD metrics.

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

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

Six Months Ended

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

Nine Months Ended

(Amounts in Millions) 2023 2022

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Cash Flows from Operating Activities

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.

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

Changes in operating assets and liabilities used $122.3 million of cash in the first nine months of fiscal year 2023 compared to $133.3 million of cash used in the first nine months of the prior year.

The cash used of $122.3 million from changes in operating assets and liabilities in the first nine months of fiscal year 2023 is largely due to an increase in inventory, which used cash of $88.6 million, driven by investment to support our expansions and growth in Mexico and Thailand, as well as supporting our customers through strategic inventory purchases to mitigate parts shortages, and an increase in accounts receivable, which used cash of $74.0 million primarily resulting from increased sales volumes.

Partially offsetting cash used by inventory was an increase in accounts payable, which provided cash of $45.1 million largely resulting from increased inventory purchases.

The cash used of $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.

The cash used of $133.3 million from changes in operating assets and liabilities in the first nine months of fiscal year 2022 is largely due to an increase in inventory, which used cash of $142.5 million primarily due to the component shortages as we continue to purchase material not impacted by the shortages so we can fulfill our customer orders once the impacted components are received, and an increase in accounts receivable, which used cash of $25.2 million primarily resulting from increased sales volumes.

Partially offsetting cash used by inventory was an increase in accounts payable, which provided cash of $61.1 million largely resulting from increased inventory purchases.

Cash Flows from Investing Activities

For the first 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.

For the first nine months of fiscal years 2023 and 2022, net cash used for investing activities was $66.5 million and $50.0 million, respectively.

During the first nine months of fiscal year 2023, we invested $66.8 million into capital expenditures primarily for expansions at our Mexico, Thailand, and Poland facilities and to support new business awards.

During the first nine months of fiscal year 2022, we invested $50.1 million into capital expenditures primarily for expansions at our Thailand and Mexico facilities and to support new business awards.

Cash Flows from Financing Activities

For the first 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.

For the first nine months of fiscal year 2023, net cash provided by financing activities of $107.1 million resulted largely from net borrowings on our credit facilities of $108.7 million primarily for working capital purposes and capital expenditures supporting our expansions.

For the first nine months of fiscal year 2022, net cash provided by financing activities of $64.9 million resulted largely from net borrowings on our credit facilities of $71.2 million.

Credit Facilities

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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 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 March 31, 2023, we had $279.0 million in borrowings under the primary credit facility and $0.4 million in letters of credit against the primary credit facility, and $235.0 million of the borrowings were classified as long-term as the Company intends, and has the ability, to refinance for a period longer than twelve months.

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

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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 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.

We were in compliance with the financial covenants during the nine-month period ended March 31, 2023.

The Company entered into a 364-day multi-currency revolving credit facility agreement on February 3, 2023 (the “secondary credit facility”), which allows for borrowings up to $50 million, among the Company, as borrower, certain subsidiaries of the Company as guarantors, the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Bank of America, N.A., as Documentation Agent.

The secondary credit facility has a maturity date of February 2, 2024.

The proceeds of the loans are to be used for working capital and general corporate purposes of the Company.

A commitment fee on the unused portion of principal amount of this secondary credit facility is payable at 30.0 basis points per annum.

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

• any Term Benchmark borrowing denominated in U.S.

Dollars will utilize the Secured Overnight Financing Rate (“SOFR”), which is a rate per annum equal to the secured overnight financing rate for such business day published by the SOFR Administrator, the Federal Reserve Bank of New York, on the immediately succeeding business day, plus a Revolving Commitment Term Benchmark spread of 175.0 basis points;

• any Term Benchmark borrowing denominated in Euros will utilize the Euro Interbank Offered Rate (“EURIBOR”) in effect two target days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period as defined in the agreement, plus a Revolving Commitment Term Benchmark spread of 175.0 basis points;

• the Alternate Base Rate (“ABR”), which is defined as the highest of the fluctuating 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 loan 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);

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

plus a Revolving Commitment ABR spread of 75.0 basis points.

The Company’s financial covenants under this secondary credit facility are the same as the financial covenants for its primary credit facility.

Kimball Electronics has foreign credit facilities available to satisfy short-term cash needs at specific foreign locations rather than funding from intercompany sources.

These foreign credit facilities can be canceled at any time by either the bank or us.

As of December 31, 2022, we maintained the following foreign credit facilities:

As of March 31, 2023, we maintained the following foreign credit facilities:

• A Thailand overdraft credit facility which allows for borrowings up to $10.1 million.

We had no borrowings under this foreign credit facility as of December 31, 2022 or June 30, 2022.

We had no borrowings under this foreign credit facility as of March 31, 2023 or June 30, 2022.

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

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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 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.

We had no borrowings under this foreign credit facility as of March 31, 2023.

• An uncommitted revolving credit facility for our Netherlands subsidiary, which allows for borrowings of up to 9.2 million Euro (approximately $9.9 million at March 31, 2023 exchange rates) that can be drawn in Euro, U.S.

dollars, or another optional currency.

We had $9.2 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).

We had $9.3 million in borrowings outstanding under this Netherlands revolving credit facility at March 31, 2023 and $9.2 million at June 30, 2022.

• The Company entered into a foreign credit facility for its operation in Poland during the current quarter which allows for borrowings up to 5.0 million Euro (approximately $5.4 million equivalent).

We had no borrowings under this foreign credit facility as of March 31, 2023.

• The Company entered into a foreign credit facility for its operation in Vietnam during the current quarter which allows for borrowings up to $5.0 million.

We had $1.1 million in borrowings outstanding under this foreign credit facility as of March 31, 2023.

Factoring Arrangements

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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 six months ended December 31, 2022 and 2021, we sold, without recourse, $225.1 million and $125.3 million of accounts receivable, respectively.

In the nine months ended March 31, 2023 and 2022, we sold, without recourse, $357.1 million and $201.5 million of accounts receivable, respectively.

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

Future Liquidity

We 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 $53.5 million at December 31, 2022.

The unused borrowings in USD equivalent under all of our credit facilities totaled $98.1 million at March 31, 2023, including the $50 million secondary credit facility expiring in February 2024.

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

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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 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.

At March 31, 2023, our capital expenditure commitments were approximately $16 million, consisting primarily of equipment for the Mexico and Thailand facility expansions, capital related to new program wins, and commitments for the expansion of our Poland facility.

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

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

At March 31, 2023, our foreign entities held cash totaling $30.1 million.

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

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The Company expects to finance the purchases with existing liquidity.

The Company has repurchased $88.8 million of common stock under the Plan through December 31, 2022.

The Company has repurchased $88.8 million of common stock under the Plan through March 31, 2023.

Our ability to generate cash from operations to meet our liquidity obligations could be adversely affected in the future by factors such as general economic and market conditions, lack of availability of raw material components in the supply chain, a decline in demand for our services, loss of key contract customers, unsuccessful integration of acquisitions and new operations, global health emergencies such as the COVID-19 pandemic, the duration and severity of the COVID-19 pandemic and the related uncertainties around the financial impact, and other unforeseen circumstances.

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

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

For level 1 financial assets, readily available market pricing was used to value the financial instruments.

4 unchanged sentences

Off-Balance Sheet Arrangements

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

As of March 31, 2023, 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