Kimball Electronics, Inc. 10-Q

Item 1. Financial Statements KIMBALL ELECTRONICS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in Thousands, Except for Share Data) (Unaudited) September 30, 2023 June 30, 2023 ASSETS Current Assets: Cash and cash equivalents $ 56,581 $ 42,955 Receivables, net of allowances of $ 237 and $ 257 , respectively 259,419 308,167 Contract assets 87,675 78,798 Inventories 482,229 450,319 Prepaid expenses and other current assets 45,141 49,188 Total current assets 931,045 929,427 Property and Equipment, net of accumulated depreciation of $ 297,941 and $ 293,197 , respectively 268,645 267,684 Goodwill 12,011 12,011 Other Intangible Assets, net of accumulated amortization of $ 39,647 and $ 38,785 , respectively 11,603 12,335 Other Assets 39,862 38,262 Total Assets $ 1,263,166 $ 1,259,719 LIABILITIES AND SHARE OWNERS ’ EQUITY Current Liabilities: Current portion of borrowings under credit facilities $ 61,680 $ 46,454 Accounts payable 308,912 322,274 Advances from customers 41,467 33,905 Accrued expenses 66,272 72,515 Total current liabilities 478,331 475,148 Other Liabilities: Long-term debt under credit facilities, less current portion 235,000 235,000 Long-term income taxes payable 3,255 5,859 Other long-term liabilities 18,318 19,718 Total other liabilities 256,573 260,577 Share Owners’ Equity: Preferred stock- no par value Shares authorized: 15,000,000 Shares issued: None — — Common stock- no par value Shares authorized: 150,000,000 Shares issued: 29,430,000 Shares outstanding: 24,845,000 and 24,724,000 , respectively — — Additional paid-in capital 314,255 315,482 Retained earnings 306,807 296,053 Accumulated other comprehensive loss ( 17,781 ) ( 11,046 ) Treasury stock, at cost: Shares: 4,585,000 and 4,706,000 , respectively ( 75,019 ) ( 76,495 ) Total Share Owners’ Equity 528,262 523,994 Total Liabilities and Share Owners’ Equity $ 1,263,166 $ 1,259,719 See Notes to Condensed Consolidated Financial Statements . 3 KIMBALL ELECTRONICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Amounts in Thousands, Except for Per Share Data) Three Months Ended September 30 (Unaudited) 2023 2022 Net Sales $ 438,081 $ 405,889 Cost of Sales 402,539 376,568 Gross Profit 35,542 29,321 Selling and Administrative Expenses 16,052 15,750 Operating Income 19,490 13,571 Other Income (Expense): Interest income 299 17 Interest expense ( 5,447 ) ( 1,920 ) Non-operating income (expense), net ( 1,131 ) 500 Other income (expense), net ( 6,279 ) ( 1,403 ) Income Before Taxes on Income 13,211 12,168 Provision for Income Taxes 2,457 2,659 Net Income $ 10,754 $ 9,509 Earnings Per Share of Common Stock: Basic $ 0.43 $ 0.38 Diluted $ 0.43 $ 0.38 Average Number of Shares Outstanding: Basic 25,041 24,826 Diluted 25,238 24,955 See Notes to Condensed Consolidated Financial Statements . 4 KIMBALL ELECTRONICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in Thousands) Three Months Ended Three Months Ended September 30, 2023 September 30, 2022 (Unaudited) Pre-tax Tax Net of Tax Pre-tax Tax Net of Tax Net income $ 10,754 $ 9,509 Other comprehensive income (loss): Foreign currency translation adjustments $ ( 4,230 ) $ — $ ( 4,230 ) $ ( 7,237 ) $ — $ ( 7,237 ) Postemployment actuarial change 29 ( 7 ) 22 ( 10 ) ( 7 ) ( 17 ) Derivative gain (loss) ( 387 ) 78 ( 309 ) 283 39 322 Reclassification to (earnings) loss: Derivatives ( 2,867 ) 654 ( 2,213 ) ( 346 ) ( 62 ) ( 408 ) Amortization of actuarial change ( 6 ) 1 ( 5 ) ( 101 ) 24 ( 77 ) Other comprehensive income (loss) $ ( 7,461 ) $ 726 $ ( 6,735 ) $ ( 7,411 ) $ ( 6 ) $ ( 7,417 ) Total comprehensive income $ 4,019 $ 2,092 See Notes to Condensed Consolidated Financial Statements . 5 KIMBALL ELECTRONICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) Three Months Ended September 30 (Unaudited) 2023 2022 Cash Flows From Operating Activities: Net income $ 10,754 $ 9,509 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 9,017 7,611 (Gain) loss on sales of assets ( 10 ) ( 21 ) Deferred income taxes 694 ( 238 ) Stock-based compensation 1,693 1,632 Other, net 315 ( 3,167 ) Change in operating assets and liabilities: Receivables 45,253 ( 33,283 ) Contract assets ( 8,877 ) ( 4,234 ) Inventories ( 34,023 ) ( 57,563 ) Prepaid expenses and other assets 589 ( 214 ) Accounts payable ( 11,564 ) 17,630 Advances from customers 7,574 3,614 Accrued expenses and taxes payable ( 8,614 ) ( 1,470 ) Net cash provided by (used for) operating activities 12,801 ( 60,194 ) Cash Flows From Investing Activities: Capital expenditures ( 11,191 ) ( 19,265 ) Proceeds from sales of assets 53 112 Purchases of capitalized software ( 148 ) ( 186 ) Other, net ( 16 ) 19 Net cash used for investing activities ( 11,302 ) ( 19,320 ) Cash Flows From Financing Activities: Proceeds from credit facilities — 20,000 Net change in revolving credit facilities 15,350 32,186 Payments related to tax withholding for stock-based compensation ( 1,365 ) ( 1,417 ) Net cash provided by financing activities 13,985 50,769 Effect of Exchange Rate Change on Cash and Cash Equivalents ( 549 ) ( 1,391 ) Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash 14,935 ( 30,136 ) Cash, Cash Equivalents, and Restricted Cash at Beginning of Period (1) 43,864 49,851 Cash, Cash Equivalents, and Restricted Cash at End of Period (1) $ 58,799 $ 19,715 Supplemental Disclosure of Cash Flow Information Cash paid during the period for: Income taxes $ 4,913 $ 3,324 Interest expense $ 3,378 $ 1,135 Non-cash investing activity: Unpaid purchases of property and equipment at the end of the period $ 2,393 $ 2,844 (1) The following table reconciles cash and cash equivalents in the balance sheets to cash, cash equivalents, and restricted cash per the statements of cash flows. The restricted cash included in Prepaid expenses and other current assets on the balance sheet represents funds held by the Company for a foreign subsidiary’s employee savings plan. (Unaudited) September 30, 2023 June 30, 2023 Cash and Cash Equivalents $ 56,581 $ 42,955 Restricted Cash included in Prepaid expenses and other current assets $ 2,218 $ 909 Total Cash, Cash Equivalents, and Restricted Cash at end of period $ 58,799 $ 43,864 See Notes to Condensed Consolidated Financial Statements . 6 KIMBALL ELECTRONICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHARE OWNERS’ EQUITY (Amounts in Thousands, Except for Share Data) Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Share Owners’ Equity (Unaudited) Additional Paid-In Capital Amounts at June 30, 2023 $ 315,482 $ 296,053 $ ( 11,046 ) $ ( 76,495 ) $ 523,994 Net income 10,754 10,754 Other comprehensive income (loss) ( 6,735 ) ( 6,735 ) Compensation expense related to stock compensation plans 1,613 1,613 Performance and restricted share issuance ( 107,000 and 14,000 shares, respectively) ( 2,840 ) 1,476 ( 1,364 ) Amounts at September 30, 2023 $ 314,255 $ 306,807 $ ( 17,781 ) $ ( 75,019 ) $ 528,262 Amounts at June 30, 2022 $ 311,090 $ 240,222 $ ( 19,672 ) $ ( 77,669 ) $ 453,971 Net income 9,509 9,509 Other comprehensive income (loss) ( 7,417 ) ( 7,417 ) Compensation expense related to stock compensation plans 1,598 1,598 Performance share issuance ( 85,000 shares) ( 2,417 ) 1,001 ( 1,416 ) Amounts at September 30, 2022 $ 310,271 $ 249,731 $ ( 27,089 ) $ ( 76,668 ) $ 456,245 See Notes to Condensed Consolidated Financial Statements . 7 KIMBALL ELECTRONICS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Business Description and Summary of Significant Accounting Policies Business Description: Kimball Electronics, Inc. (also referred to herein as “Kimball Electronics,” the “Company,” “we,” “us,” or “our”) is a global, multifaceted manufacturing solutions provider. We provide electronics manufacturing services (“EMS”), including engineering and supply chain support, to customers in the automotive, medical, and industrial end markets. We deliver a package of value that begins with our core competency of producing durable electronics, and we further offer contract manufacturing services for non-electronic components, medical disposables, precision molded plastics, and production automation, test, and inspection equipment. Our design and manufacturing expertise coupled with robust processes and procedures help us ensure that we deliver the highest levels of quality, reliability, and service throughout the entire life cycle of our customers’ products. We deliver award-winning service across our highly integrated global footprint, which is enabled by our largely common operating system, procedures, and standardization. We are well recognized by customers and industry trade publications for our excellent quality, reliability, and innovative service. Basis of Presentation: The Condensed Consolidated Financial Statements presented herein reflect the consolidated financial position as of September 30, 2023 and June 30, 2023, results of operations for the three months ended September 30, 2023 and 2022, cash flows for the three months ended September 30, 2023 and 2022, and share owners’ equity for the three months ended September 30, 2023 and 2022. The financial data presented herein is unaudited and should be read in conjunction with the annual Consolidated Financial Statements as of and for the year ended June 30, 2023 and related notes thereto included in our Annual Report on Form 10-K. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted, although we believe that the disclosures are adequate to make the information presented not misleading. Intercompany transactions and balances have been eliminated. Management believes the financial statements include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly the financial statements for the interim periods. The results of operations for the interim periods shown in this report are not necessarily indicative of results for any future interim period or for the entire fiscal year. Reclassifications: Advances from customers are now reported separately on the Condensed Consolidated Statements of Cash Flows. Advances from customers were previously reported in accounts payable and accrued expenses. Prior period amounts have been reclassified to conform to current period presentation. See Note 2 - Revenue from Contracts with Customers of Notes to Condensed Consolidated Financial Statements for more information on advances from customers. Revenue Recognition: We recognize revenue in accordance with the standard issued by the Financial Accounting Standards Board (“FASB”), Revenue from Contracts with Customers and all the related amendments. Our revenue from contracts with customers is generated primarily from manufacturing services provided for the production of electronic assemblies, components, medical devices, medical disposables, precision molded plastics, and automation, test, and inspection equipment built to customer’s specifications. Our customer agreements are generally not for a definitive term but continue for the relevant product’s life cycle. Typically, our customer agreements do not commit the customer to purchase our services until a purchase order is provided, which is generally short term in nature. Customer purchase orders primarily have a single performance obligation. Generally, the prices stated in the customer purchase orders are agreed upon prices for the manufactured product and do not vary over the term of the order, and therefore, the majority of our contracts do not contain variable consideration. In limited circumstances, we may enter into a contract which contains minimum quantity thresholds to cover our capital costs, and we may offer our customer a rebate for specific volume thresholds or other incentives; in these cases, the rebates or incentives are accounted for as variable consideration. The majority of our revenue is recognized over time as manufacturing services are performed as we manufacture a product to customer specifications with no alternative use and we have an enforceable right to payment for performance completed to date. The remaining revenue for manufacturing services is recognized when the customer obtains control of the product, typically either upon shipment or delivery of the product dependent on the terms of the contract, and the customer is able to direct the use of and obtain substantially all of the remaining benefits from the asset. We generally recognize revenue over time using costs based input methods, in which judgment is required to evaluate assumptions including anticipated margins to estimate the 8 corresponding amount of revenue to recognize. Costs used as a basis for estimating anticipated margins include material, direct and indirect labor, and appropriate applied overheads. Anticipated margins are determined based on historical or quoted customer pricing. Costs based input methods are considered a faithful depiction of our efforts and progress toward satisfying our performance obligations for manufacturing services and for which we believe we are entitled to payment for performance completed to date. The cumulative effect of revisions to estimates related to net contract revenues or costs are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated. 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 services and products. Accordingly, we record customer payments of shipping and handling costs as a component of net sales and classify such costs as a component of cost of sales. We recognize sales net of applicable sales or value add taxes. Based on estimated product returns and price concessions, a reserve for returns and allowances is recorded at the time revenue is recognized, resulting in a reduction of net revenue. Direct incremental costs to obtain and fulfill a contract are capitalized as a contract asset only if they are material, expected to be recovered, and are not accounted for in accordance with other guidance. Incidental items that are immaterial in the context of the contract are recognized as expense in the period incurred. Trade Accounts Receivable: The Company’s trade accounts receivable are recorded per the terms of the agreement or sale, and accrued interest is recognized when earned. Our policy for estimating the allowance for credit losses on trade accounts receivable includes analysis of such items as aging, credit worthiness, payment history, and historical bad debt experience. Management uses these specific analyses in conjunction with an evaluation of the general economic and market conditions to estimate expected credit losses. Management believes that historical loss information generally provides a basis for its assessment of expected credit losses. Trade accounts receivable are written off after exhaustive collection efforts occur and the receivable is deemed uncollectible. Adjustments to the allowance for credit losses are recorded in Selling and Administrative Expenses on our Condensed Consolidated Statements of Income. In the ordinary course of business, customers periodically negotiate extended payment terms on trade accounts receivable. Customary terms require payment within 30 to 45 days, with any terms beyond 45 days being considered extended payment terms. We utilize factoring arrangements for certain of our accounts receivables with third-party financial institutions in order to extend terms for the customer without negatively impacting our cash flow. These arrangements in all cases do not contain recourse provisions which would obligate us in the event of our customers’ failure to pay. Receivables are considered sold when they are transferred beyond the reach of Kimball Electronics and its creditors, the purchaser has the right to pledge or exchange the receivables, and we have surrendered control over the transferred receivables. We also have the ability to and have periodically utilized additional accounts receivable factoring arrangements to provide flexible access to cash as needed. In the three months ended September 30, 2023 and 2022, we sold, without recourse, $ 103.0 million and $ 97.6 million of accounts receivable, respectively. For both the three months ended September 30, 2023 and 2022, factoring fees were $ 0.9 million. Factoring fees are recorded in Selling and Administrative Expenses on our Condensed Consolidated Statements of Income. Goodwill and Other Intangible Assets: Goodwill represents the difference between the purchase price and the related underlying tangible and intangible net asset fair values resulting from business acquisitions. Annually, or if conditions indicate an earlier review is necessary, goodwill is assessed or tested at the reporting unit level. If the estimated fair value of the reporting unit is less than the carrying value, goodwill is written down to its estimated fair value. Other Intangible Assets consist of capitalized software, customer relationships, technology, and trade name, and are reviewed for impairment, and their remaining useful lives evaluated for revision, when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. As of September 30, 2023, the Company determined there have been no indicators of impairment for goodwill and other intangible assets. See Note 11 - Goodwill and Other Intangible Assets of Notes to Condensed Consolidated Financial statements for more information on Goodwill and Other Intangible Assets. Leases : The Company leases certain office, manufacturing, and warehouse facilities under operating leases, in addition to land on which certain office and manufacturing facilities resides. Operating lease costs and cash payments for operating leases are immaterial to the Condensed Consolidated Statements of Income and our Condensed Consolidated Statements of Cash Flows. Lease right-of-use assets and lease liabilities each totaled $ 3.0 million at September 30, 2023 and $ 2.6 million at June 30, 2023, respectively. Lease right-of-use assets are included in Other Assets and lease liabilities are included in Accrued expenses and Other long-term liabilities on the Condensed Consolidated Balance Sheets. 9 Non-operating Income (Expense), net: Non-operating income (expense), net includes the impact of such items as foreign currency rate movements and related derivative gain or loss, fair value adjustments on supplemental employee retirement plan (“SERP”) investments, government subsidies, bank charges, and other miscellaneous non-operating income and expense items that are not directly related to operations. The gain (loss) on SERP investments is offset by a change in the SERP liability that is recognized in Selling and Administrative Expenses. Components of Non-operating income (expense), net: Three Months Ended September 30 (Amounts in Thousands) 2023 2022 Foreign currency/derivative gain (loss) $ ( 674 ) $ 534 Gain (loss) on SERP investments ( 177 ) ( 235 ) Other ( 280 ) 201 Non-operating income (expense), net $ ( 1,131 ) $ 500 Income Taxes: In determining the quarterly provision for income taxes, we use an estimated annual effective tax rate which is based on expected annual income, statutory tax rates, and available tax planning opportunities in the various jurisdictions in which we operate. Unusual or infrequently occurring items are separately recognized in the quarter in which they occur. Deferred income tax assets and liabilities, recorded in Other Assets and Other long-term liabilities, respectively, in the Condensed Consolidated Balance Sheets, are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. We evaluate the recoverability of deferred tax assets each quarter by assessing the likelihood of future taxable income and available tax planning strategies that could be implemented to realize our deferred tax assets. If recovery is not likely, we provide a valuation allowance based on our best estimate of future taxable income in the various taxing jurisdictions and the amount of deferred taxes ultimately realizable. Future events could change management’s assessment. We operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex uncertain tax positions, which may require an extended period of time to resolve. A tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. We maintain a liability for uncertain income tax and other tax positions, including accrued interest and penalties on those positions. As tax positions are effectively settled, the tax liability is adjusted accordingly. We recognize interest and penalties related to unrecognized tax benefits in Provision for Income Taxes on the Condensed Consolidated Statements of Income. The U.S. Tax Cuts and Jobs Act (“Tax Reform”) was enacted into law on December 22, 2017, making broad and complex changes to the U.S. tax code, for which complete guidance may have not yet been issued. Tax Reform, in addition to other changes, required a one-time transition tax on certain unremitted earnings of foreign subsidiaries that is payable over an eight-year period. As of September 30, 2023 and June 30, 2023, the remaining provision recorded for the one-time deemed repatriation tax was $ 5.9 million and $ 7.9 million, respectively, payable through fiscal year 2026, with the long-term portion recorded in Long-term income taxes payable on the Condensed Consolidated Balance Sheets. As of September 30, 2023, $ 2.6 million of the remaining deemed repatriation tax is short term and is recorded in Accrued expenses on the Condensed Consolidated Balance Sheet. 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. 10 Note 2. Revenue from Contracts with Customers Our revenue from contracts with customers is generated primarily from manufacturing services provided for the production of electronic assemblies, electronic and non-electronic components, medical devices, medical disposables, precision molded plastics, and automation, test, and inspection equipment in automotive, medical, and industrial applications, to the specifications and designs of our customers. Beginning in fiscal year 2024, the Company changed its presentation of revenue for miscellaneous sales previously included in Other to include in the respective customers’ end market verticals. Prior year periods have been recast to conform to the current year presentation. The following table disaggregates our revenue by end market vertical for the three months ended September 30, 2023 and 2022. Three Months Ended September 30 (Amounts in Millions) 2023 2022 Vertical Markets: Automotive $ 212.5 $ 188.2 Medical 102.4 116.0 Industrial 123.2 101.7 Total net sales $ 438.1 $ 405.9 For the three months ended September 30, 2023 and 2022, approximately 97 % and 96 % of our net sales, respectively, were recognized over time as manufacturing services were performed under a customer contract on a product with no alternative use and we have an enforceable right to payment for performance completed to date. The remaining sales revenues were recognized at a point in time when the customer obtained control of the products. The timing differences of revenue recognition, billings to our customers, and cash collections from our customers result in billed accounts receivable and unbilled accounts receivable. Contract assets on the Condensed Consolidated Balance Sheets relate to unbilled accounts receivable and occur when revenue is recognized over time as manufacturing services are provided and the billing to the customer has not yet occurred as of the balance sheet date, which are generally transferred to receivables in the next fiscal quarter due to the short-term nature of the manufacturing cycle. Contract assets were $ 87.7 million and $ 78.8 million as of September 30, 2023 and June 30, 2023, respectively. The Company may receive payments from customers in advance of the satisfaction of performance obligations primarily for material price variances, inventory purchases, tooling, or other miscellaneous services or costs. These payments are recognized as contract liabilities until the performance obligations are completed and are included in Advances from customers, if inventory related, and Accrued expenses, if not inventory related, on the Condensed Consolidated Balance Sheets , which amounted to $ 53.7 million and $ 45.6 million as of September 30, 2023 and June 30, 2023, respectively. Our performance obligations are short term in nature and therefore our contract liabilities are all expected to be settled within twelve months. Note 3. Inventories Inventories were valued using the lower of first-in, first-out (“FIFO”) cost and net realizable value. Inventory components were as follows: (Amounts in Thousands) September 30, 2023 June 30, 2023 Finished products $ 54 $ 432 Work-in-process 4,347 3,117 Raw materials 477,828 446,770 Total inventory $ 482,229 $ 450,319 11 Note 4. Accumulated Other Comprehensive Income (Loss) During the three months ended September 30, 2023 and 2022, the changes in the balances of each component of Accumulated Other Comprehensive Income (Loss), net of tax, were as follows: Accumulated Other Comprehensive Income (Loss) (Amounts in Thousands) Foreign Currency Translation Adjustments Derivative Gain (Loss) Post Employment Benefits Net Actuarial Gain (Loss) Accumulated Other Comprehensive Income (Loss) Balance at June 30, 2023 $ ( 11,832 ) $ 1,368 $ ( 582 ) $ ( 11,046 ) Other comprehensive income (loss) before reclassifications ( 4,230 ) ( 309 ) 22 ( 4,517 ) Reclassification to (earnings) loss — ( 2,213 ) ( 5 ) ( 2,218 ) Net current-period other comprehensive income (loss) ( 4,230 ) ( 2,522 ) 17 ( 6,735 ) Balance at September 30, 2023 $ ( 16,062 ) $ ( 1,154 ) $ ( 565 ) $ ( 17,781 ) Balance at June 30, 2022 $ ( 17,349 ) $ ( 2,203 ) $ ( 120 ) $ ( 19,672 ) Other comprehensive income (loss) before reclassifications ( 7,237 ) 322 ( 17 ) ( 6,932 ) Reclassification to (earnings) loss — ( 408 ) ( 77 ) ( 485 ) Net current-period other comprehensive income (loss) ( 7,237 ) ( 86 ) ( 94 ) ( 7,417 ) Balance at September 30, 2022 $ ( 24,586 ) $ ( 2,289 ) $ ( 214 ) $ ( 27,089 ) The following reclassifications were made from Accumulated Other Comprehensive Income (Loss) to the Condensed Consolidated Statements of Income: Reclassifications from Accumulated Other Comprehensive Income (Loss) Three Months Ended Affected Line Item in the Condensed Consolidated Statements of Income September 30 (Amounts in Thousands) 2023 2022 Derivative gain (loss) (1) $ 2,867 $ 346 Cost of Sales ( 654 ) 62 Benefit (Provision) for Income Taxes $ 2,213 $ 408 Net of Tax Postemployment Benefits: Amortization of actuarial gain (2) 6 101 Non-operating income (expense), net ( 1 ) ( 24 ) Benefit (Provision) for Income Taxes $ 5 $ 77 Net of Tax Total reclassifications for the period $ 2,218 $ 485 Net of Tax Amounts in parentheses indicate reductions to income. (1) See Note 8 - Derivative Instruments of Notes to Condensed Consolidated Financial Statements for further information on derivative instruments. (2) See Note 9 - Employee Benefit Plans of Notes to Condensed Consolidated Financial Statements for further information on postemployment benefit plans. Note 5. Commitments and Contingent Liabilities The Company typically provides only assurance-type warranties for a limited time period, which cover workmanship and assures the product complies with specifications provided by or agreed upon with the customer. We maintain a provision for limited warranty repair or replacement of products manufactured and sold, which has been established in specific manufacturing contract agreements. We estimate product warranty liability at the time of sale based on historical repair or replacement cost trends in conjunction with the length of the warranty offered. Management refines the warranty liability regularly based on changes in historical cost trends and in certain cases where specific warranty issues become known. This product warranty liability and expense were immaterial during the three months ended September 30, 2023 and 2022. 12 Note 6. Credit Facilities Credit facilities consisted of the following: Available Borrowing Capacity at Borrowings Outstanding at Borrowings Outstanding at (Amounts in Millions, in U.S Dollar Equivalents) September 30, 2023 September 30, 2023 June 30, 2023 Primary credit facility (1) $ 12.1 $ 287.5 $ 272.1 Secondary credit facility (2) 50.0 — — Thailand overdraft credit facility (3) 10.1 — — China revolving credit facility (3) 7.5 — — Netherlands revolving credit facility (3) 0.5 9.2 9.4 Poland revolving credit facility (3) 5.3 — — Vietnam credit facility (3) 5.0 — — Total credit facilities $ 90.5 $ 296.7 $ 281.5 Less: current portion $ ( 61.7 ) $ ( 46.5 ) Long-term debt under credit facilities, less current portion (4) $ 235.0 $ 235.0 (1) The Company maintains a U.S. primary credit facility (the “primary credit facility”) among the Company, the lenders party thereto, and JPMorgan Chase Bank, N. A., as Administrative Agent, and Bank of America, N.A., as Documentation Agent, scheduled to mature May 4, 2027. The primary credit facility provides for $ 300 million in borrowings, with an option to increase the amount available for borrowing to $ 450 million upon request, subject to the consent of each lender participating in such increase. This facility is maintained for working capital and general corporate purposes of the Company. A commitment fee is payable on the unused portion of the credit facility at a rate that ranges from 10.0 to 25.0 basis points per annum as determined by the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA, as defined in the primary credit facility. Types of borrowings available on the primary credit facility include revolving loans, multi-currency term loans, and swingline loans. 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; or • the Alternate Base Rate (“ABR”), which is defined as the highest of the fluctuating rate per annum equal to the higher of: a. Prime Rate in the U.S. last quoted by the Wall Street Journal, and if this is ceased to be quoted, the highest bank prime loan rate or similar loan rate quoted by the Federal Reserve Board; b. 1/2 of 1% per annum above the Federal Funds Effective Rate (as defined under the primary credit facility); or c. 1 % per annum above the Adjusted 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. 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 13 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 not be less than 3.5 to 1.0. The Company had $ 0.4 million in letters of credit contingently committed against the credit facility at both September 30, 2023 and June 30, 2023. (2) 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; or • the Alternate Base Rate (“ABR”), which is defined as the highest of the fluctuating rate per annum equal to the higher of: a. Prime Rate in the U.S. last quoted by the Wall Street Journal, and if this is ceased to be quoted, the highest bank prime loan rate or similar loan rate quoted by the Federal Reserve Board; b. 1/2 of 1% per annum above the Federal Funds Effective Rate (as defined under the primary credit facility); or c. 1 % per annum above the Adjusted 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. (3) The Company also maintains 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. Interest on borrowing under these facilities is charged at a rate as defined under the respective foreign credit facility. (4) The amount of Long-term debt under credit facilities, less current maturities, reflects the borrowings on the primary credit facility that the Company intends, and has the ability, to refinance for a period longer than twelve months. The primary credit facility matures on May 4, 2027. The weighted-average interest rate on borrowings outstanding under the credit facilities at September 30, 2023 and June 30, 2023 were 7.1 % and 6.8 %, respectively. 14 Note 7. Fair Value The Company categorizes assets and liabilities measured at fair value into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas level 3 generally requires significant management judgment. The three levels are defined as follows: • Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities. • Level 2: Observable inputs other than those included in level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets. • Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability. There were no changes in the inputs or valuation techniques used to measure fair values during the three months ended September 30, 2023. For more information on inputs and fair valuation techniques used, refer to our Annual Report on Form 10-K for the year ended June 30, 2023. Recurring Fair Value Measurements: As of September 30, 2023 and June 30, 2023, the fair values of financial assets and liabilities that are measured at fair value on a recurring basis using the market approach are categorized as follows: September 30, 2023 (Amounts in Thousands) Level 1 Level 2 Total Assets Derivatives: foreign exchange contracts — 2,642 2,642 Trading securities: mutual funds held in nonqualified SERP 6,019 — 6,019 Total assets at fair value $ 6,019 $ 2,642 $ 8,661 Liabilities Derivatives: foreign exchange contracts $ — $ 2,136 $ 2,136 Total liabilities at fair value $ — $ 2,136 $ 2,136 June 30, 2023 (Amounts in Thousands) Level 1 Level 2 Total Assets Derivatives: foreign exchange contracts — 6,320 6,320 Trading securities: mutual funds held in nonqualified SERP 8,668 — 8,668 Total assets at fair value $ 8,668 $ 6,320 $ 14,988 Liabilities Derivatives: foreign exchange contracts $ — $ 1,245 $ 1,245 Total liabilities at fair value $ — $ 1,245 $ 1,245 We had no level 3 assets or liabilities at September 30, 2023 and June 30, 2023, or any activity in Level 3 assets or liabilities during the three months ended September 30, 2023. The nonqualified supplemental employee retirement plan (“SERP”) assets consist primarily of equity funds, balanced funds, bond funds, and a money market fund. The SERP investment assets are offset by a SERP liability which represents the Company’s obligation to distribute SERP funds to participants. See Note 9 - Employee Benefit Plans of Notes to Condensed Consolidated Financial Statements for further information regarding the SERP. 15 Financial Instruments Not Carried At Fair Value: Financial instruments that are not reflected in the Condensed Consolidated Balance Sheets at fair value that have carrying amounts which approximate fair value include notes receivable and borrowings under credit facilities. There were no changes to the inputs and valuation techniques used to assess the fair value of these financial instruments during the three months ended September 30, 2023. For more information on inputs and fair valuation techniques used, refer to our Annual Report on Form 10-K for the year ended June 30, 2023. The carrying values of our cash deposit accounts, trade accounts receivable, and trade accounts payable approximate fair value due to the relatively short maturity and immaterial non-performance risk. Note 8. Derivative Instruments Foreign Exchange Contracts: We operate internationally and are therefore exposed to foreign currency exchange rate fluctuations in the normal course of business. Our primary means of managing this exposure is to utilize natural hedges, such as aligning currencies used in the supply chain with the sale currency. To the extent natural hedging techniques do not fully offset currency risk, we use derivative instruments with the objective of reducing the residual exposure to certain foreign currency rate movements. Factors considered in the decision to hedge an underlying market exposure include the materiality of the risk, the volatility of the market, the duration of the hedge, the degree to which the underlying exposure is committed to, and the availability, effectiveness, and cost of derivative instruments. Derivative instruments are only utilized for risk management purposes and are not used for speculative or trading purposes. We use forward contracts designated as cash flow hedges to protect against foreign currency exchange rate risks inherent in forecasted transactions denominated in a foreign currency. Non-designated foreign exchange contracts are also used to hedge against foreign currency exchange rate risks related to intercompany balances and other balance sheet positions denominated in currencies other than the functional currencies. As of September 30, 2023, we had outstanding foreign exchange contracts to hedge currencies against the U.S. dollar in the aggregate notional amount of $ 14.1 million and to hedge currencies against the Euro in the aggregate notional amount of 59.8 million Euro. The notional amounts are indicators of the volume of derivative activities but may not be indicators of the potential gain or loss on the derivatives. In limited cases due to unexpected changes in forecasted transactions, cash flow hedges may cease to meet the criteria to be designated as cash flow hedges. Depending on the type of exposure hedged, we may either purchase a derivative contract in the opposite position of the undesignated hedge or may retain the hedge until it matures if the hedge continues to provide an adequate offset in earnings against the currency revaluation impact of foreign currency denominated liabilities. The fair value of outstanding derivative instruments is recognized on the Condensed Consolidated Balance Sheets as a derivative asset or liability and presented with Prepaid expenses and other current assets and Accrued expenses, respectively. When derivatives are settled with the counterparty, the derivative asset or liability is relieved and cash flow is impacted for the net settlement. For derivative instruments that meet the criteria of hedging instruments under FASB guidance, the gain or loss on the derivative instrument is initially recorded net of related tax effect in Accumulated Other Comprehensive Income (Loss), a component of Share Owners’ Equity, and is subsequently reclassified into earnings in the period or periods during which the hedged transaction is recognized in earnings. The gain or loss associated with derivative instruments that are not designated as hedging instruments or that cease to meet the criteria for hedging under FASB guidance is reported immediately in Non-operating income (expense), net on the Condensed Consolidated Statements of Income. Based on fair values as of September 30, 2023, we estimate that approximately $ 0.2 million of pre-tax derivative gain deferred in Accumulated Other Comprehensive Loss will be reclassified into earnings, along with the earnings effects of related forecasted transactions, within the next 12 months. Gains on foreign exchange contracts are generally offset by losses in operating income in the income statement when the underlying hedged transaction is recognized in earnings. Because gains or losses on foreign exchange contracts fluctuate partially based on currency spot rates, the future effect on earnings of the cash flow hedges alone is not determinable, but in conjunction with the underlying hedged transactions, the result is expected to be a decline in currency risk. The maximum length of time we had hedged our exposure to the variability in future cash flows was 12 months as of both September 30, 2023 and June 30, 2023. See Note 7 - Fair Value of Notes to Condensed Consolidated Financial Statements for further information regarding the fair value of derivative assets and liabilities and Note 4 - Accumulated Other Comprehensive Income (Loss) of Notes to Condensed Consolidated Financial Statements for the changes in deferred derivative gains and losses. 16 Information on the location and amounts of derivative fair values in the Condensed Consolidated Balance Sheets and derivative gains and losses in the Condensed Consolidated Statements of Income are presented below. Fair Value of Derivative Instruments on the Condensed Consolidated Balance Sheets Asset Derivatives Liability Derivatives Fair Value As of Fair Value As of (Amounts in Thousands) Balance Sheet Location September 30, 2023 June 30, 2023 Balance Sheet Location September 30, 2023 June 30, 2023 Derivatives Designated as Hedging Instruments: Foreign exchange contracts Prepaid expenses and other current assets $ 2,325 $ 4,772 Accrued expenses $ 1,920 $ 844 Derivatives Not Designated as Hedging Instruments: Foreign exchange contracts Prepaid expenses and other current assets 317 1,548 Accrued expenses 216 401 Total derivatives $ 2,642 $ 6,320 $ 2,136 $ 1,245 The Effect of Derivative Instruments on Other Comprehensive Income (Loss) Three Months Ended September 30 (Amounts in Thousands) 2023 2022 Amount of Pre-Tax Gain or (Loss) Recognized in Other Comprehensive Income (Loss) (OCI) on Derivatives: Foreign exchange contracts $ ( 387 ) $ 283 The Effect of Derivative Instruments on Condensed Consolidated Statements of Income Three Months Ended (Amounts in Thousands) September 30 Derivatives in Cash Flow Hedging Relationships Location of Gain or (Loss) 2023 2022 Amount of Pre-Tax Gain or (Loss) Reclassified from Accumulated OCI into Income: Foreign exchange contracts Cost of Sales $ 2,867 $ 346 Derivatives Not Designated as Hedging Instruments Amount of Pre-Tax Gain or (Loss) Recognized in Income on Derivatives: Foreign exchange contracts Non-operating income (expense) $ 142 $ 1,455 Total Derivative Pre-Tax Gain (Loss) Recognized in Income $ 3,009 $ 1,801 Note 9. Employee Benefit Plans Defined Contribution Retirement Plan: The Company maintains a trusteed defined contribution retirement plan which is in effect for substantially all domestic employees meeting the eligibility requirements. The Company matches 50% of eligible employee contributions up to 6%. The Company also provides a discretionary contribution determined annually by the Talent, Culture, and Compensation Committee of the Company’s Board of Directors. Total expense related to employer contributions to the domestic retirement plans was, in millions, $ 1.6 million and $ 1.5 million for the three months ended September 30, 2023 and September 30, 2022, respectively. The Company also maintains a supplemental employee retirement plan (“SERP”) for executives and other key employees which enables them to defer cash compensation on a pre-tax basis and restore amounts that would otherwise be payable under our tax-qualified retirement plans if the IRS did not have limits on includable compensation and maximum benefits. The SERP is structured as a rabbi trust, and therefore, assets in the SERP portfolio are subject to creditor claims in the event of bankruptcy. We recognize SERP investment assets on the balance sheet at current fair value. A SERP liability of the same amount is recorded on the balance sheet representing an obligation to distribute SERP funds to participants. As of September 30, 2023, both total investments and obligations under SERP were $ 6.0 million, of which $ 1.6 million were short term and $ 4.4 million were long term. As of June 30, 2023, both total investments and obligations under SERP were $ 8.7 million, of which $ 2.7 million were short term and $ 6.0 million were long term. The SERP investment assets are classified as 17 trading, and accordingly, realized and unrealized gains and losses are recognized in the Other Income (Expense) category on our Condensed Consolidated Statements of Income. Adjustments made to revalue the SERP liability are also recognized in income as selling and administrative expenses and offset valuation adjustments on SERP investment assets. The change in net unrealized holding gains for both the three months ended September 30, 2023 and 2022 was approximately $( 0.2 ) million and $( 0.3 ) million, respectively. Defined Benefit Postemployment Plan: The Company established and maintains severance plans for all domestic employees and other postemployment plans for certain foreign subsidiaries. There are no statutory requirements for us to contribute to the plans, nor do employees contribute to the plans. The plans hold no assets. Benefits are paid using available cash on hand when eligible employees meet plan qualifications for payment. As of September 30, 2023 and June 30, 2023, total obligations under these plans were both $ 6.6 million, of which $ 5.6 million were both long term and $ 1.0 million were both short term. Net periodic benefit costs were not material for the three months ended September 30, 2023 and 2022. Note 10. Stock Compensation Plans A stock compensation plan was created and adopted by the Company’s Board of Directors (the “Board”) on October 3, 2014. The Kimball Electronics, Inc. 2014 Stock Option and Incentive Plan (the “2014 Plan”) allows for the issuance of up to 4.5 million shares and may be granted in the form of incentive stock options, stock appreciation rights, restricted shares, unrestricted shares, restricted share units, or performance shares and performance units. The Plan is a ten-year plan with no further awards allowed to be made under the Plan after October 1, 2024. On September 20, 2023, on the recommendation of our Talent, Culture, and Compensation (TCC) Committee, our Board adopted the Kimball Electronics, Inc. 2023 Equity Incentive Plan (the “2023 Plan”), subject to Share Owner approval at our 2023 Annual Meeting. The 2023 Plan will supersede our 2014 Plan if it is approved by our Share Owners. On October 20, 2016, the Board approved a nonqualified deferred stock compensation plan, the Kimball Electronics, Inc. Non-Employee Directors Stock Compensation Deferral Plan (the “Deferral Plan”), which allows Non-Employee Directors to elect to defer all, or a portion of, their retainer fees in stock until retirement or termination from the Board or death. The Deferral Plan allows for issuance of up to 1.0 million shares of the Company’s common stock. For more information on the 2014 Plan and the Deferral Plan, refer to our Annual Report on Form 10-K for the year ended June 30, 2023. For more information on the 2023 Plan, refer to our Notice of 2023 Annual Meeting and Proxy Statement. During the first three months of fiscal year 2024, the following stock compensation was granted under the 2014 Plan and the Deferral Plan. Stock Compensation Granted Quarter Granted Shares/Units Grant Date Fair Value (2) Long-Term Performance Shares (1) 1st Quarter 172,079 $ 29.19 Restricted Shares (3) 1st Quarter 71,422 $ 29.19 (1) Long-term performance share awards were granted to officers and other key employees. These annual performance share awards were approved by the Talent, Culture, and Compensation Committee of the Board. The awards granted in fiscal year 2024 will cliff vest at the third anniversary of the award date in fiscal year 2027. Under these awards, a number of shares will be issued to each participant based upon a combination of the Company’s profitability based on its operating income over the performance period as defined in the Company’s operating business plans for the applicable fiscal years and the Company’s growth based on a comparison of its three-year compounded annual growth rate (“CAGR”) with the Electronics Manufacturing Services Industry’s three-year CAGR. The number of shares issued will be less than the targeted shares issuable if the Company does not reach 100 % of one or both of the above-mentioned performance metrics, and could be zero if the Company does not reach the required minimum thresholds of either metric. The number of shares issued will exceed the number of targeted shares issuable (up to a maximum of 125 %) if the Company exceeds 100 % of one or both of the above-mentioned incentive metrics. (2) The grant date fair value is the weighted average stock price based on the dates of the grants. (3) Restricted shares were granted to officers and other key employees. These restricted shares were approved by the Talent, Culture, and Compensation Committee of the Board. The contractual life of the restricted shares is three years , with one-third of the interest in the restricted shares vested after year one of the grant, another one-third after year two of the grant, and the final one-third after year three of the grant. Restricted shares are expensed over the contractual vesting period as earned. If the employment of a holder of restricted shares terminates before the RSU has vested for any reason other than death, retirement, or disability, the restricted shares not yet vested will be forfeited. 18 Note 11. Goodwill and Other Intangible Assets A summary of goodwill is as follows: (Amounts in Thousands) September 30, 2023 June 30, 2023 Goodwill $ 32,762 $ 32,762 Accumulated impairment ( 20,751 ) ( 20,751 ) Goodwill, net $ 12,011 $ 12,011 A summary of other intangible assets subject to amortization is as follows: September 30, 2023 June 30, 2023 (Amounts in Thousands) Cost Accumulated Amortization Net Value Cost Accumulated Amortization Net Value Capitalized Software $ 30,997 $ ( 27,713 ) $ 3,284 $ 30,867 $ ( 27,385 ) $ 3,482 Customer Relationships 8,618 ( 3,653 ) 4,965 8,618 ( 3,524 ) 5,094 Technology 5,060 ( 5,060 ) — 5,060 ( 4,816 ) 244 Trade Name 6,575 ( 3,221 ) 3,354 6,575 ( 3,060 ) 3,515 Other Intangible Assets $ 51,250 $ ( 39,647 ) $ 11,603 $ 51,120 $ ( 38,785 ) $ 12,335 For both the three months ended September 30, 2023 and 2022, amortization expense of other intangible assets was $ 0.9 million. The estimated useful life of internal-use software ranges from 3 years to 10 years. The amortization period for the customer relationships, technology, and trade name intangible assets is 15 years, 5 years, and 10 years, respectively. We have no intangible assets with indefinite useful lives which are not subject to amortization. Note 12. Share Owners’ Equity The Company has a Board-authorized stock repurchase plan (the “Repurchase Plan”) allowing the repurchase of up to $ 100 million of our common stock. Purchases may be made under various programs, including in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions, all in accordance with applicable securities laws and regulations. The Repurchase Plan has no expiration date but may be suspended or discontinued at any time. During both the three months ended September 30, 2023 and 2022, the Company had no share repurchases under the Repurchase Plan. Since the inception of the Repurchase Plan, the Company has repurchased $ 88.8 million of common stock at an average cost of $ 15.27 per share. 19 Note 13. Earnings Per Share Basic and diluted earnings per share were calculated as follows under the two-class method: Three Months Ended September 30 (Amounts in thousands, except per share data) 2023 2022 Basic and Diluted Earnings Per Share: Net Income $ 10,754 $ 9,509 Less: Net Income allocated to participating securities 16 13 Net Income allocated to common Share Owners $ 10,738 $ 9,496 Basic weighted average common shares outstanding 25,041 24,826 Dilutive effect of average outstanding stock compensation awards 197 129 Dilutive weighted average shares outstanding 25,238 24,955 Earnings Per Share of Common Stock: Basic $ 0.43 $ 0.38 Diluted $ 0.43 $ 0.38