What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-08-24 compared with 2022-08-30 · 90 added, 147 removed, 181 unchanged (57% of the section changed)

Item 7 - 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,” “seeks,” “likely,” “future,” “may,” “might,” “should,” “would,” “could,” “will,” “potentially,” “can,” “goal,” “predict,” 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 located within Item 1A - Risk Factors .

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.

We provide electronics manufacturing services (“EMS”), including engineering and supply chain support, to customers in the automotive, medical, and industrial end markets.

Our core competency is producing durable electronics, and we further offer 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.

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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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.

Pricing is competitive 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.

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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.

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

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

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

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 have been especially challenging throughout this fiscal year.

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

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

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however, the duration or severity of the components shortages is unknown.

COVID-19 interruptions and supply chain restraints have also resulted in an industry-wide inflation of components, labor, freight, and other operating costs.

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.

In February 2022, Russia launched an invasion of Ukraine.

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

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.

As expected, the second half of fiscal year 2022 finished stronger than the first half as we had record quarterly net sales in the fourth quarter and record annual net sales.

Sales to customers in the automotive market and the industrial market experienced record annual net sales.

We anticipate demand from customers in the automotive market to remain strong in fiscal year 2023 as the supply chain catches up with the demand and the continued ramp-up of certain programs and the launch of new programs.

In the medical market, sales increased slightly by 2% as the prior fiscal year benefited from the COVID-19-related demand increase for medical assemblies.

In the industrial market, sales increased in the current fiscal year in large part due to higher end market demand for climate control products.

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

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.

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 sales in the current fiscal year as sales increased 35% from the prior fiscal year, with double-digit increases and annual 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 in the industrial end market vertical.

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

Sales in all three of our end market verticals have increased when compared to the prior fiscal year from the improved component availability and the launch and ramp-up of new programs.

We have a strong focus on cost control balanced with managing the future growth prospects of our business.

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.

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We continue to maintain a strong balance sheet as of the end of fiscal year 2023, which included a current ratio of 2.0, a debt-to-equity ratio of 0.5, and Share Owners’ equity of $524 million.

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 $178.6 million at June 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.

• 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 are 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.

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

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

The continuing success of our business is dependent upon our ability to replace expiring customers/programs with new customers/programs.

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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 Item 1A - Risk Factors .

Customer Service Years 2023 2022 2021

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# of Customers 65 66 72

A detailed discussion of risk factors and uncertainties that could have an effect on our performance are located within Item 1A - Risk Factors .

Presentation of Results of Operations and Liquidity and Capital Resources

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Industrial 474.6 358.2 33 %

Public Safety 50.1 48.1 4 %

Other 34.7 17.4 99 %

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

• We experienced record sales to customers in the automotive market largely due to the ramp-up of certain programs and new product introductions, including programs for fully electric vehicles, partially offset by the unfavorable impact of component shortages.

• Sales to customers in the medical market improved slightly in the current fiscal year when compared to the prior fiscal year due to launch and ramp-up of new programs.

Partially offsetting this increase was the benefit in the prior fiscal year sales of the temporary increase in demand for medical assemblies, specifically those related to respiratory care and patient monitoring products as a direct result of the COVID-19 pandemic and related global shortage of respiratory equipment.

• We also experienced record sales to customers in the industrial market during the current fiscal year, as a result of higher end market demand for climate control products.

• Sales to customers in the public safety market were slightly higher in fiscal year 2022 compared to fiscal year 2021.

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

• We experienced record sales to customers in the automotive market during the current fiscal year largely due to the ramp-up of certain programs, new product launches, and improved component availability.

• Sales to customers in the medical market also experienced record net sales, with a double-digit increase in sales when compared to the prior fiscal year.

The increase is primarily due to overall increased demand, improved component availability, and launch and ramp-up of new programs.

We expect fiscal year 2024 medical market sales to be unfavorably impacted by decreased sales with a large medical customer who is remediating a recall.

The cause of the recall is unrelated to the products we provided.

• 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.

We also experienced record sales to customers in the industrial market during the current fiscal year, as a result of higher end market demand for climate control products which was supported by overall improved component availability, increased automation, test, and inspection equipment sales, and new product launches.

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

Year Ended June 30

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Philips 14% 15%

Open orders were up 59% as of June 30, 2022 compared to June 30, 2021, primarily from an increase in the medical and automotive verticals.

The increase in open orders in both the medical and automotive market is driven by the overall increase in demand coupled with the component shortages, which has limited our ability to fulfill customer orders.

* amount is less than 10% of total

Open orders were down 33% as of June 30, 2023 compared to June 30, 2022.

The decrease in open orders from June 30, 2022 is driven by decreased order lead times and 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.

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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 of fulfillment of open orders.

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

We incurred higher material costs, increased freight costs, unfavorable foreign currency fluctuations, and wage inflation in the current fiscal year compared to the prior fiscal year.

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

Partially offsetting these unfavorable factors in fiscal year 2022 were lower profit-sharing incentive bonus expense and lower depreciation from the change in estimates of useful lives on Surface Mount Technology production equipment.

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

For fiscal year 2022, selling and administrative expenses increased slightly by 1% in absolute dollars but remained flat as a percent of net sales when compared to fiscal year 2021.

Gross profit as a percent of net sales improved in fiscal year 2023 when compared to fiscal year 2022 primarily due to the leverage gained on higher revenue and favorable product mix.

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.

For fiscal year 2023, selling and administrative expenses declined as a percent of net sales but increased in absolute dollars when compared to fiscal year 2022.

The selling and administrative expense increase was driven by the increased factoring fees 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 fiscal years 2023 and 2022 consisted of $0.2 million and $1.4 million, respectively, resulting from payments received related to class action lawsuits in which Kimball Electronics was a class member.

The fiscal year 2021 amount was partially offset by lawsuit settlement accruals and payments.

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

Other Income (Expense) consisted of the following:

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Other Income (Expense), net $ (12,985) $ (8,818)

Interest expense has increased in the year ended June 20, 2023 compared to the year ended June 30, 2022 due to higher interest rates and higher borrowings on credit facilities.

The Foreign Currency/Derivative Gain (Loss) resulted from net foreign currency exchange rate movements during the periods.

The loss in fiscal year 2022 and the gain in fiscal year 2021 were driven by the respective strengthening and weakening of the U.S.

The gain in fiscal year 2023 and the loss in fiscal year 2022 were driven by the respective weakening and strengthening of the U.S.

dollar versus foreign currencies that we have exposure to in our business.

The revaluation of the fair value of the supplemental employee retirement plan (“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.

Other includes fees associated with our credit facilities, amortization of actuarial gains (losses), and other miscellaneous items that are not directly related to operations.

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

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Year Ended June 30, 2023 Year Ended June 30, 2022

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

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

United States $ (6,269) (1.1) % $ 1,542 29.8 %

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The consolidated effective tax rate for fiscal year 2023 was unfavorably impacted by the mix of taxable earnings within our various tax jurisdictions and foreign exchange rate movements.

The domestic effective tax rate and the consolidated effective tax rate for fiscal year 2021 were favorably impacted by a reversal of state valuation allowances.

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

The domestic favorable tax rate was favorably impacted by our loss before taxes and the research and development tax credit.

The domestic effective tax rate and the consolidated effective tax rate for fiscal year 2022 were unfavorably impacted by the mix of taxable earnings within our various tax jurisdictions and foreign exchange rate movements.

Our overall effective tax rate will fluctuate depending on the geographic distribution of our worldwide earnings.

See Note 10 - Income Taxes of Notes to Consolidated Financial Statements for more information.

We recorded net income of $31.3 million in fiscal year 2022, or $1.24 per diluted share, a decrease of 45.0% from fiscal year 2021 net income of $56.8 million, or $2.24 per diluted share.

We recorded net income of $55.8 million in fiscal year 2023, or $2.22 per diluted share, an increase of 78.6% from fiscal year 2022 net income of $31.3 million, or $1.24 per diluted share.

Comparing the balance sheet as of June 30, 2023 to June 30, 2022, Receivables increased $85.3 million largely due to increased sales volumes.

Our inventory balance increased $195.2 million primarily due to the component shortages as we continued to purchase material not impacted by the shortages so we can fulfill our customer orders once the impacted components are received, as well as increased demand.

Property and equipment, net increased $43.6 million primarily from the Mexico and Thailand facility expansions.

Our inventory balance increased $54.7 million primarily to support our newly expanded facilities.

Property and equipment, net increased $60.8 million for expansions at our Mexico, Thailand, and Poland facilities and to support new business awards.

Accounts payable increased $22.1 million primarily due to the increased inventory purchases.

Borrowings under credit facilities increased $100.9 million primarily due to borrowings on the U.S.

primary credit facility for working capital purposes, including the strategic inventory builds to mitigate part shortages.

primary credit facility for working capital purposes and capital expenditures supporting our expansions.

Liquidity and Capital Resources

Working capital at June 30, 2023 was $454.3 million compared to working capital of $352.3 million at June 30, 2022.

The current ratio was 1.9 at both June 30, 2022 and June 30, 2021.

The current ratio was 2.0 at June 30, 2023 and 1.9 at June 30, 2022, respectively.

The debt-to-equity ratio was 0.5 and 0.4 at June 30, 2023 and June 30, 2022, respectively.

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 $149.1 million at June 30, 2023 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.

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

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APD 65 69 72 73 76

ACD 8 8 9 7 7

CCD 94 92 97 94 86

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.

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, APD as the average of monthly accounts payable divided by an average day’s cost of sales, and ACD 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 parts shortages abate and our expansions continue to ramp up production.

The following table reflects the major categories of cash flows for the fiscal years ended June 30, 2023 and 2022.

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(Amounts in Millions) 2023 2022

Net cash (used for) provided by operating activities $ (83.2) $ 130.1

Net cash used for operating activities $ (13.8) $ (83.2)

Net cash used for investing activities $ (90.5) $ (74.8)

Net cash provided by (used for) financing activities $ 103.7 $ (53.1)

Net cash provided by financing activities $ 99.2 $ 103.7

Cash Flows from Operating Activities

Net cash used for operating activities for the fiscal year ended June 30, 2022 was driven by changes in operating assets and liabilities.

Net cash provided by operating activities for the fiscal year ended June 30, 2021 was driven by net income adjusted for non-cash items and changes in operating assets and liabilities.

Changes in operating assets and liabilities used $152.8 million of cash in the fiscal year ended June 30, 2022 compared to $40.4 million of cash provided in the fiscal year ended June 30, 2021.

Net cash used for operating activities for the fiscal year ended June 30, 2023 and the fiscal year ended June 30, 2022 was driven by changes in operating assets and liabilities, partially offset by net income plus non-cash depreciation and amortization charges.

Changes in operating assets and liabilities used $107.3 million of cash in the fiscal year ended June 30, 2023 and $152.8 million of cash in the fiscal year ended June 30, 2022, respectively.

The cash used of $107.3 million from changes in operating assets and liabilities in fiscal year 2023 was largely due to an increase in accounts receivable, which used cash of $82.4 million primarily resulting from increased sales volumes, and an increase in inventory, which used cash of $50.2 million, driven by investment to support our expansions.

Partially offsetting cash used by inventory was an increase in accounts payable, which provided cash of $20.4 million largely resulting from increased inventory purchases, and an increase in advances from customers, which provided cash of $7.9 million.

The cash used of $152.8 million from changes in operating assets and liabilities in fiscal year 2022 was largely due to an increase in inventory, which used cash of $203.2 million primarily due to the component shortages as we continued 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 $26.5 million primarily resulting from increased sales volumes.

Partially offsetting cash used by inventory was an increase in accounts payable, which provided cash of $96.8 million largely resulting from increased inventory purchases.

The cash provided of $40.4 million from changes in operating assets and liabilities in fiscal year 2021 was primarily due to a decrease in contract assets, which provided cash of $24.5 million as a result of the impact of timing of shipments and related billings to our customers, the decrease in inventory, which provided cash of $18.6 million primarily due to the consumption of the inventory build at the end of the prior fiscal year in addition to the reimbursement from certain customers for the excess raw material inventory we purchased based on their forecasts during the ramp-up due to COVID-19, and the increase in accounts payable, which provided cash of $14.6 million.

Partially offsetting cash provided by contract assets and inventory was an increase in accounts receivable, which used cash of $28.4 million primarily resulting from increased sales volumes and customer sales mix.

Partially offsetting cash used by inventory was an increase in accounts payable, which provided cash of $89.2 million largely resulting from increased inventory purchases, and an increase in advances from customers, which provided cash of $22.6 million.

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

Cash Flows from Investing Activities

Net cash used for investing activities during fiscal year 2023 includes $90.7 million cash used for capital investments.

The capital investments were primarily for expansions at our Thailand and Mexico facilities and to support new business awards.

The capital investments were primarily for expansions at our Mexico, Thailand, and Poland facilities and to support new business awards.

Net cash used for investing activities during fiscal year 2022 includes $74.7 million cash used for capital investments.

The capital investments were primarily for machinery and equipment for capacity purposes and to support new business awards in addition to capital investments for the beginning of the expansions at our Thailand and Mexico facilities.

The capital investments were primarily for expansions at our Thailand and Mexico facilities and to support new business awards.

Cash Flows from Financing Activities

Net cash provided by financing activities for the fiscal year ended June 30, 2022 resulted largely from net borrowings on our credit facilities of $114.9 million primarily for working capital purposes.

Net cash used for financing activities for the fiscal year ended June 30, 2021 resulted largely from net payments on our credit facilities of $52.3 million.

Net cash provided by financing activities for the fiscal year ended June 30, 2023 resulted largely from net borrowings on our credit facilities of $100.7 million primarily for working capital purposes and capital investments supporting expansions.

Net cash used for financing activities for the fiscal year ended June 30, 2022 resulted largely from net borrowings on our credit facilities of $114.9 million primarily for working capital purposes.

Credit Facilities

The Company maintained a U.S.

primary credit facility which was scheduled to mature on July 23, 2023.

On May 4, 2022, the Company entered into an amended and restated credit agreement (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, and the primary credit facility is now scheduled to mature on May 4, 2027.

The Company maintains a U.S.

primary credit facility (the “primary credit facility”) scheduled to mature on 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, was available for the issuance of letters of credit.

A commitment fee on the unused portion of the principal amount of the credit facility was payable at a rate that ranged 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 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 the Revolving Commitment Term Benchmark spread which can range from 100.0 to 175.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA;

• any Term Benchmark borrowing denominated in Euros will utilize the Euro Interbank Offered Rate (“EURIBOR”) in effect two target days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period as defined in the agreement, plus the Revolving Commitment Term Benchmark spread which can range from 100.0 to 175.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA;

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

Prime Rate in the U.S.

last quoted by the Wall Street Journal, and if this is ceased to be quoted, the highest bank prime loan rate or similar 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 Term SOFR Rate (as defined under the primary credit facility);

plus the Revolving Commitment ABR spread which can range from 0.0 to 75.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA.

At 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 of the borrowings were classified as long term.

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

Our debt classified as long term reflects the borrowings the Company intends, and has the ability, to refinance for a period longer than twelve months.

As noted above in the Cash Flows for Financing Activities section, our borrowings on the primary credit facility increased due to working capital purposes.

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 fiscal year ended June 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 June 30, 2022, we maintained the following foreign credit facilities:

• A Thailand overdraft credit facility which allows for borrowings up to 2.4 million Thai Baht (approximately $0.1 million at June 30, 2022 exchange rates).

We had no borrowings outstanding under this credit facility as of June 30, 2022 or June 30, 2021.

• An uncommitted revolving credit facility for our Netherlands subsidiary, which allows for borrowings of up to 9.2 million Euro (approximately $9.6 million at June 30, 2022 exchange rates) that can be drawn in Euro, U.S.

dollars, or other optional currency.

At June 30, 2022 and 2021, we had $9.2 million and $3.5 million, respectively, in borrowings outstanding under this credit facility.

The facility matures in July 2023.

During the current fiscal year, the Poland revolving credit facility, which allowed borrowings up to 5 million Euro, matured and was not extended.

There were no borrowings on the Poland revolving credit facility during the current or prior fiscal year.

Subsequent to June 30, 2022, the Company expanded the borrowing capacity of the Thailand credit facility to $10 million and entered into a foreign credit facility for its EMS operation in China which allows for borrowings up to $7.5 million.

These facilities will be used for general corporate needs and working capital purposes, including the strategic inventory builds to mitigate part shortages.

The Company also maintains a 364-day multi-currency revolving credit facility (the “secondary credit facility”), which allows for borrowings up to $50 million and has a maturity date of February 2, 2024.

The proceeds of the loans on the primary credit facility and the secondary credit facility are to be used for working capital and general corporate purposes of the Company.

We were in compliance with the financial covenants of the primary and secondary credit facilities during the fiscal year ended June 30, 2023.

We also maintain foreign credit facilities for working capital and general corporate purposes at specific foreign locations rather than utilizing funding from intercompany sources.

These foreign credit facilities can be canceled at any time by either the bank or us and generally include renewal clauses.

As of June 30, 2023, we maintained foreign credit facilities at our Thailand operation, our EMS operation in China, our Netherlands subsidiary, our Poland operation, and our Vietnam operation.

See Note 7 - Credit Facilities of Notes to Consolidated Financial Statements for more information on our credit facilities, including the terms of the credit facilities such as interest, commitment fees, and debt covenants.

Factoring Arrangements

The Company may utilize accounts receivable factoring arrangements with third-party financial institutions in order to extend terms for the customer without negatively impacting our cash flow.

The Company utilizes accounts receivable factoring arrangements 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.

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We believe our principal sources of liquidity from available funds on hand, cash generated from operations, and the availability of borrowing under our credit facilities, will be sufficient to meet our working capital and other operating needs for at least the next 12 months.

The unused borrowings in USD equivalent under all of our credit facilities totaled $128.7 million at June 30, 2022.

The unused borrowings in USD equivalent under all of our credit facilities totaled $106.1 million at June 30, 2023, including the $50 million secondary facility expiring in February 2024.

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

While our primary and secondary credit facilities include 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.

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

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

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

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 its impact to certain markets, the supply chain, and global macroeconomic conditions.

At June 30, 2022, our capital expenditure commitments were approximately $22 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 recently completed our Thailand facility expansion in the third quarter of fiscal year 2022, our Mexico facility expansion in the first quarter of fiscal year 2023, and our Poland expansion in the fourth quarter of fiscal year 2023.

At June 30, 2023, our capital expenditure commitments were approximately $13 million, consisting primarily of equipment for the Poland, 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.

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 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 June 30, 2023, our foreign operations held cash totaling $41.4 million and the aggregate unremitted earnings of our foreign subsidiaries were approximately $420 million.

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

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.

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

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, 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.

The preceding statements include forward-looking statements under the Private Securities Litigation Reform Act of 1995.

Certain factors could cause actual results to differ materially from forward-looking statements.

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

15 unchanged sentences

The majority of our revenue is recognized over time as manufacturing services are performed where we manufacture a product with no alternative use and have an enforceable right to payment for performance completed to date.

The remaining revenue is

recognized when the customer obtains control of the manufactured product.

The remaining revenue is recognized when the customer obtains control of the manufactured product.

We have elected to account for shipping and handling activities related to contracts with customers as costs to fulfill our promise to transfer the associated products.

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As tax positions are effectively settled, the tax provision will be adjusted accordingly.

The liability for uncertain income tax and other tax positions, including accrued interest and penalties on those positions, was $1.8 million and $3.0 million at June 30, 2022 and June 30, 2021, respectively.

The liability for uncertain income tax and other tax positions, including accrued interest and penalties on those positions, was $1.8 million at both June 30, 2023 and June 30, 2022.

New Accounting Standards

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

New accounting standards which have been issued but not yet adopted are typically disclosed in Note 1 - Business Description and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for information regarding New Accounting Standards.

Currently, there are no issued but not yet adopted accounting standards that are expected to have a material impact on the Company.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis