What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-02-06 compared with 2023-11-07 · 85 added, 65 removed, 163 unchanged (48% of the section changed)

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Certain statements contained within this document are considered forward-looking under the Private Securities Litigation Reform Act of 1995.

The statements may be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “forecasts,” “likely,” “future,” “may,” “should,” “would,” “could,” “will,” “potentially,” and similar expressions.

The statements may be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “forecasts,” “seeks,” “likely,” “future,” “may,” “should,” “would,” “could,” “will,” “can,” “potentially,” and similar expressions.

These forward-looking statements are subject to risks and uncertainties including, but not limited to, global economic conditions, geopolitical environment and conflicts such as the war in Ukraine, global health emergencies, availability or cost of raw materials and components, foreign exchange fluctuations, and our ability to convert new business opportunities into customers and revenue.

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

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

We have taken various actions to mitigate the risk and minimize the impact to our customers as well as the adverse effect component shortages, component allocations, or shipping delays could have on our results;

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

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 necessary extended lead times on inventory purchases has negatively impacted our working capital.

The EMS industry is experiencing the impacts of softening demand from global macroeconomic headwinds, especially in the current fiscal year.

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

Net sales in the first quarter of the current fiscal year increased 8% compared to the prior fiscal year first quarter, with double-digit increases in the automotive and industrial market verticals.

Such headwinds include pressure from elevated levels of inflation, higher interest rates, and geopolitical uncertainty.

Our inventory

levels, already elevated from strategic inventory purchases to mitigate part shortages in the prior fiscal year, remain high as softening demand has challenged our ability to work them down.

Additionally, as lead times dictate the ordering of components, demand softening results in deliveries of components that may exceed production needs in the short term.

To mitigate our inventory levels and the impacts to our balance sheet, we are working with our customers to consign excess inventory, make inventory deposits, or pay carrying costs.

Net sales in the second quarter of the current fiscal year decreased 4% compared to the prior fiscal year second quarter, with decreases in the automotive and medical markets partially offset by an increase in sales in the industrial market.

Beginning in fiscal year 2024, we changed our 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 increase in sales to customers in the automotive market were largely driven by the continued ramp-up of certain programs, the launch of new programs, and the supply chain catching up with demand.

The decrease in sales to customers in the automotive market were largely driven by decreased demand.

In the medical market, sales decreased due to decreased sales with a large medical customer who is remediating a recall.

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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.

Managing working capital in conjunction with fluctuating demand levels is likewise key.

In addition, a long-standing component of our profit-sharing incentive bonus plan is that it is linked to our financial performance which results in varying amounts of compensation expense as profits change.

We continue to maintain a strong balance sheet, which included a current ratio of 1.9, a debt-to-equity ratio of 0.6, and Share Owners’ equity of $528 million at September 30, 2023.

We continue to maintain a strong balance sheet, which included a current ratio of 2.0, a debt-to-equity ratio of 0.6, and Share Owners’ equity of $547 million at December 31, 2023.

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 parts shortages.

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

We expect our balance sheet to normalize as we negotiate with customers on excess inventory and as certain component shortages subside.

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

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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.

Three Months Ended

Six Months Ended

Customer Service Years 2023 2022

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Open Orders $ 836 $ 1,037 (19) %

Net Sales by Vertical Market Three Months Ended

(Amounts in Millions) 2023 2022 % Change

For the Six Months Ended

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

Net Sales $ 859.3 $ 842.6 2 %

Gross Profit $ 70.0 8.1 % $ 63.5 7.5 % 10 %

Selling and Administrative Expenses 33.9 3.9 % 32.4 3.8 % 4 %

Operating Income 36.1 4.2 % 31.1 3.7 % 16 %

Other Income (Expense) (11.7) (4.8)

Provision for Income Taxes 5.4 6.1 (11) %

Net Income $ 19.0 $ 20.2 (6) %

Diluted Earnings per Share $ 0.75 $ 0.81 (7) %

Net Sales by Vertical Market Three Months Ended Six Months Ended

December 31 December 31

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

Automotive $ 200.2 $ 205.2 (2) % $ 412.7 $ 393.4 5 %

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Total Net Sales $ 421.2 $ 436.7 (4) % $ 859.3 $ 842.6 2 %

First quarter fiscal year 2024 consolidated net sales increased 8% compared to the first quarter of fiscal year 2023.

The impact from foreign currency fluctuations on net sales was a favorable 1% in the current quarter compared to the first quarter of fiscal year 2023.

Second quarter fiscal year 2024 consolidated net sales decreased 4% compared to the second quarter of fiscal year 2023, while the year-to-date fiscal year 2024 consolidated net sales increased 2% compared to the year-to-date period of fiscal year 2023.

The impact from foreign currency fluctuations on net sales was a favorable 1% in the current quarter and current year-to-date period compared to the second quarter and the year-to-date period of fiscal year 2023.

Beginning in fiscal year 2024, we changed our presentation of revenue for miscellaneous sales previously included in Other to include in the respective customers’ end market verticals.

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

• Sales to customers in the automotive market increased 13% during the first quarter of fiscal year 2024, compared to the first quarter of fiscal year 2023.

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

• Sales to customers in the medical market declined during the first quarter of fiscal year 2024, compared to the first quarter of fiscal year 2023.

• Sales to customers in the automotive market decreased 2% during the second quarter of fiscal year 2024, compared to the second quarter of fiscal year 2023 but increased 5% in the year-to-date period of fiscal year 2024 compared to the year-to-date period of fiscal year 2023.

The quarter over quarter change is relatively flat, while the increase in the year-to-date period is due to overall demand increase, the continued ramp up of certain programs, and improved component availability.

• Sales to customers in the medical market declined in both the second quarter of fiscal year 2024, compared to the second quarter of fiscal year 2023 and the year-to-date period of the current fiscal year when compared to the year-to-date period of the prior fiscal year.

This decrease is primarily due to decreased sales with a large medical customer who is remediating a recall.

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Partially offsetting this decrease in sales was a ramp-up of certain programs and new product launches.

• Sales to customers in the industrial market increased 21% during the first quarter of fiscal year 2024, when compared to the first quarter of fiscal year 2023 largely due to the continued ramp-up of certain programs.

• Sales to customers in the industrial market increased 7% during the second quarter of fiscal year 2024, when compared to the second quarter of fiscal year 2023 and increased 14% in the year-to-date period of the current fiscal year when compared to the year-to-date period of the prior fiscal year.

These increases are largely due to higher end market demand for charging systems, public safety products, and climate control products, partially offset by lower demand for smart metering products.

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

Three Months Ended

Three Months Ended Six Months Ended

December 31 December 31

2023 2022 2023 2022

Nexteer Automotive 15% 16% 16% 15%

Philips * 16% * 17%

ZF 11% 12% 12% 12%

HL Mando 11% * 11% *

* amount is less than 10% of total

Gross profit as a percent of net sales in the first quarter of fiscal year 2024 improved when compared to the first quarter of fiscal year 2023 as we continue to optimize operating performance levels following recent facility expansions.

Selling and administrative expenses declined as a percent of net sales and remained relatively flat in absolute dollars in the first quarter of fiscal year 2024 when compared to the first quarter of fiscal year 2023.

Gross profit as a percent of net sales in the second quarter of fiscal year 2024 improved when compared to the second quarter of fiscal year 2023 driven by favorable product mix and lower material costs.

Gross profit as a percent of net sales in the first half of fiscal year 2024 improved when compared to the first half of fiscal year 2023 driven by favorable product mix, lower material costs, and leverage from higher net sales.

Selling and administrative expenses increased as a percent of net sales and in absolute dollars in the second quarter and first half of fiscal year 2024 when compared to the second quarter and first half of fiscal year 2023, primarily driven by the allowance for credit losses recorded in the second quarter of fiscal year 2024.

Other Income (Expense) consisted of the following:

Three Months Ended

Three Months Ended Six Months Ended

December 31 December 31

(Amounts in Thousands) 2023 2022 2023 2022

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Other income (expense), net $ (5,334) $ (3,296) $ (11,613) $ (4,699)

Interest expense has increased in the three months ended September 30, 2023 compared to the three months ended September 30, 2022 due to higher interest rates and higher borrowings on credit facilities.

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

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

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

Our provision for income taxes for the first three months ended September 30, 2023 and September 30, 2022 was $2.5 million, or 18.6% of income before taxes on income, and $2.7 million, or 21.9% of income before taxes on income, respectively.

Open orders were down 15% as of September 30, 2023 compared to September 30, 2022.

The decrease in open orders from September 30, 2022 is primarily driven by reduced orders from a large medical customer who is remediating a recall.

Our provision for income taxes for the first six months ended December 31, 2023 and December 31, 2022 was $5.4 million, or 22.2% of income before taxes on income, and $6.1 million, or 23.3% of income before taxes on income, respectively.

Open orders were down 19% as of December 31, 2023 compared to December 31, 2022.

The decrease in open orders from December 31, 2022 is primarily driven by reduced orders from a large medical customer who is remediating a recall.

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

The majority of open orders as of September 30, 2023 are expected to be filled within the next twelve months.

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

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

Liquidity and Capital Resources

Working capital at September 30, 2023 was $452.7 million compared to working capital of $454.3 million at June 30, 2023.

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

The debt-to-equity ratio was 0.6 at September 30, 2023 and 0.5 at June 30, 2023.

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 $147.1 million at September 30, 2023 and $149.1 million at June 30, 2023.

Working capital at December 31, 2023 was $457.7 million compared to working capital of $454.3 million at June 30, 2023.

The current ratio was 2.0 at both December 31, 2023 and June 30, 2023.

The debt-to-equity ratio was 0.6 at December 31, 2023 and 0.5 at June 30, 2023.

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 $105.7 million at December 31, 2023 and $149.1 million at June 30, 2023.

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

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Three Months Ended

September 30, 2023 June 30,

2023 September 30, 2022

December 31, 2023 September 30, 2023 December 31, 2022

Days Sales Outstanding 64 58 56

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

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

The following table reflects the major categories of cash flows for the first three months of fiscal years 2024 and 2023.

Three Months Ended

Additionally, through the first six months of fiscal year 2024, we have experienced customers push out deliveries due to softening consumer demand.

As lead times dictate the ordering of components, these push outs negatively impact our cash conversion days and working capital.

In these situations, we negotiate with our customers for inventory deposits or consignment arrangements to limit the impact to our balance sheet.

We expect inventory levels and working capital to normalize as we seek relief through customer negotiations.

The following table reflects the major categories of cash flows for the first six months of fiscal years 2024 and 2023.

Six Months Ended

(Amounts in Millions) 2023 2022

Net cash provided by (used for) operating activities $ 12.8 $ (60.2)

Net cash used for operating activities $ (17.9) $ (71.9)

Net cash used for investing activities $ (24.4) $ (41.9)

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Cash Flows from Operating Activities

Net cash provided by operating activities for the first three months of fiscal year 2024 was driven by net income adjusted for non-cash items, partially offset by changes in operating assets and liabilities.

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

Net income and non-cash adjustments provided cash of $22.5 million, while changes in operating assets and liabilities used $9.7 million of cash in the first three months of fiscal year 2024 compared to $75.5 million of cash used by changes in operating assets and liabilities in the first three months of the prior year.

Net income adjusted for non-cash items provided cash of $22.5 million in the first three months of fiscal year 2024.

Partially offsetting this was cash used of $9.7 million from changes in operating assets and liabilities, largely due to an increase in inventory, which used cash of $34.0 million, driven by investment to support our newly expanded facilities, a decrease in accounts payable, which used cash of $11.6 million, and an increase in contract assets, which used cash of $8.9 million.

Partially offsetting cash used by inventory, accounts payable, and contract assets was a decrease in accounts receivable, which provided cash of $45.3 million primarily resulting from decreased sales volumes compared to the three months ended June 30, 2023.

The cash used of $75.5 million from changes in operating assets and liabilities in the first three months of fiscal year 2023 is largely due to an increase in inventory, which used cash of $57.6 million primarily due to the component shortages as we continue to purchase material not impacted by the shortages so we can fulfill our customer orders once the impacted components are received in addition to increased demand, and an increase in accounts receivable, which used cash of $33.3 million primarily resulting from increased sales volumes.

Net cash used by operating activities for the first six months of fiscal year 2024 was driven by changes in operating assets and liabilities, partially offset by net income adjusted for non-cash items.

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

Changes in operating assets and liabilities used $59.0 million of cash in the first six months of fiscal year 2024, while net income and non-cash adjustments provided cash of $41.1 million.

In the first six months of the prior year cash used by changes in operating assets and liabilities was $107.5 million.

The cash used of $59.0 million from changes in operating assets and liabilities in the first six months of fiscal year 2024, is largely due to a decrease in accounts payable, which used cash of $42.5 million primarily driven by decreased inventory purchases due to lower sales, and a decrease in accrued expenses and taxes payable, which used $9.3 million primarily driven by timing of income tax and profit-sharing incentive bonus payments.

Partially offsetting cash used by accounts payable and accrued expenses and taxes payable was an increase in advances from customers, which provided cash of $8.8 million.

Partially offsetting the cash used from changes in operating assets and liabilities in the first six months of fiscal year 2024 was net income adjusted for non-cash items which provided cash of $41.1 million.

The cash used of $107.5 million from changes in operating assets and liabilities in the first six months of fiscal year 2023 is largely due to an increase in inventory, which used cash of $88.9 million, primarily due to the component shortages as we continue to purchase material not impacted by the shortages so we can fulfill our customer orders once the impacted components are received in addition to increased demand, and an increase in accounts receivable, which used cash of $40.8 million primarily resulting from increased sales volumes.

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

Cash Flows from Investing Activities

For the first three months of fiscal years 2024 and 2023, net cash used for investing activities was $11.3 million and $19.3 million, respectively.

During the first three months of fiscal year 2024, we invested $11.3 million into capital expenditures primarily to support new business awards, facility expansions, and replacement of older machinery and equipment.

During the first three months of fiscal year 2023, we invested $19.5 million into capital expenditures primarily for expansions at our Mexico, Thailand, and Poland facilities and to support new business awards.

For the first six months of fiscal years 2024 and 2023, net cash used for investing activities was $24.4 million and $41.9 million, respectively.

During the first six months of fiscal year 2024, we invested $24.5 million into capital expenditures primarily to support new business awards, facility expansions, and replacement of older machinery and equipment.

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

Cash Flows from Financing Activities

For the first three months of fiscal year 2024, net cash provided by financing activities of $14.0 million resulted largely from net borrowings on our credit facilities of $15.4 million primarily for working capital purposes and capital expenditures.

For the first three months of fiscal year 2023, net cash provided by financing activities of $50.8 million resulted largely from net borrowings on our credit facilities of $52.2 million.

For the first six months of fiscal year 2024, net cash provided by financing activities of $38.9 million resulted largely from net borrowings on our credit facilities of $40.3 million primarily for working capital purposes and capital expenditures.

For the first six months of fiscal year 2023, net cash provided by financing activities of $91.4 million resulted largely from net borrowings on our credit facilities of $92.9 million.

Credit Facilities

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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 period ended September 30, 2023.

We were in compliance with the financial covenants of the primary and secondary credit facilities during the period ended December 31, 2023.

As noted in the Future Liquidity section below, we amended our secondary credit facility on January 5, 2024 to increase the borrowings to $100 million.

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 September 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.

As of December 31, 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 6 - 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.

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Receivables are considered sold when they are transferred beyond the reach of Kimball Electronics and its creditors, the purchaser has the right to pledge or exchange the receivables, and we have surrendered control over the transferred receivables.

In the three months ended September 30, 2023 and 2022, we sold, without recourse, $103.0 million and $97.6 million of accounts receivable, respectively.

In the six months ended December 31, 2023 and 2022, we sold, without recourse, $198.9 million and $225.1 million of accounts receivable, respectively.

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

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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 $90.5 million at September 30, 2023, including the $50 million secondary credit facility expiring in February 2024.

We will evaluate the need to renew the secondary credit facility as we approach the maturity date.

The unused borrowings in USD equivalent under all of our credit facilities totaled $65.8 million at December 31, 2023, including the $50 million secondary credit facility initially scheduled to expire in February 2024.

Subsequent to December 31, 2023, we amended our secondary credit facility on January 5, 2024 to increase the borrowing limit to $100 million from $50 million and change the maturity date to January 3, 2025.

The increased borrowing limit will provide us with more liquidity at the enterprise level to meet working capital and other operating needs.

See Note 14 - Subsequent Event of Notes to Consolidated Financial Statements for further information.

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

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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 September 30, 2023, our capital expenditure commitments were approximately $12 million, consisting primarily of capital related to new program wins and equipment for facility expansions.

At December 31, 2023, our capital expenditure commitments were approximately $14 million, consisting primarily of capital related to new program wins, equipment for facility expansions, and replacement of older machinery and equipment.

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

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In turn, our material authorization agreements with customers cover a portion of the exposure for material which is purchased prior to having a firm order.

At September 30, 2023, our foreign operations held cash totaling $54.1 million.

At December 31, 2023, our foreign operations held cash totaling $39.9 million.

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

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The Company expects to finance the purchases with existing liquidity.

The Company has repurchased $88.8 million of common stock under the Repurchase Plan through September 30, 2023.

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

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

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Additional cautionary statements regarding our risk factors are contained in our Annual Report on Form 10-K for the year ended June 30, 2023.

During the first quarter of fiscal year 2024, no level 1 or level 2 financial instruments were affected by a lack of market liquidity.

During the second quarter of fiscal year 2024, no level 1 or level 2 financial instruments were affected by a lack of market liquidity.

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

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Off-Balance Sheet Arrangements

As of September 30, 2023, we do not have any material off-balance sheet arrangements.

As of December 31, 2023, we do not have any material off-balance sheet arrangements.

Critical Accounting Policies

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

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis