KIMBALL ELECTRONICS, INC. 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," "likely," "future," "may," "should," "would," "could," "will," "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 inUkraine , 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 ofKimball Electronics are contained in our Annual Report on Form 10-K for the year endedJune 30, 2022 .
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. 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
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.
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The contract manufacturing services industry is very competitive. As a mid-sized
player, we can expect to be challenged by the agility and flexibility of the
smaller, regional players, and we can expect to be challenged by the scale and
price competitiveness of the larger, global players. We enjoy a unique market
position between these extremes which allows us to compete with the larger scale
players for high-volume projects, but also maintain our competitive position in
the generally lower volume durable electronics market space. We expect to
continue to effectively operate in this market space; 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. This characteristic of the contract electronics
marketplace is expected to continue.
The Worldwide Manufacturing Services Market - 2022 Edition, a comprehensive
study on the worldwide EMS market published by New Venture Research ("NVR"),
provided worldwide forecast trends through 2026. NVR projects the worldwide
assembly market for electronics products to grow at a compound annual growth
rate ("CAGR") of 4.3% over the next five years, with the EMS industry projected
to grow at a CAGR of 5.5%.
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. We cannot reasonably estimate the
financial impact of the uncertainties and risks of the COVID-19 pandemic on our
future results, though they could be material. The well-being and safety of our
employees remains our number one priority, and we are following guidelines
suggested by applicable authorities as appropriate for our operations.
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.
COVID-19 interruptions and 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
financial impact on our future results cannot be reasonably estimated but could
be material.
We experienced record quarterly net sales in the third quarter of the current
fiscal year as sales increased 32% from the prior fiscal year third quarter,
with double-digit increases and quarterly records in all three of our end market
verticals. Beginning in fiscal year 2023, we changed our presentation of revenue
for the industrial and public safety end market verticals by combining them into
the industrial end market vertical. Prior year periods have been recast to
conform to the current year presentation. The increase in sales to customers in
the automotive market in the third quarter of fiscal year 2023 were largely
driven by the supply chain catching up with the demand, the continued ramp-up of
certain programs, and the launch of new programs. In the medical market, sales
increased due to the launch and ramp-up of new programs in addition to improved
component availability. In the industrial market, sales increased in large part
due to improved component availability and new product launches.
We have a strong focus on cost control balanced with managing the future growth
prospects of our business and growing backlog of orders due to the global
component shortage and logistical challenges. 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 $503 million
at March 31, 2023 . Recently, we have invested to support our expansions and
growth in Mexico and Thailand . At the same time, we have supported our customers
through strategic inventory purchases to mitigate parts shortages. 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.
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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,
program start-ups, and facility expansions generally cause margin dilution early
in their respective lifecycles, which we generally recover as the customer
relationship, program, or facility becomes established and matures.
•Risk factors within our business include, but are not limited to, general
economic and market conditions, component availability, logistical challenges,
customer order delays, globalization, global health emergencies including the
COVID-19 pandemic, geopolitical conflicts such as the war in Ukraine , impact
related to tariffs and other trade barriers, foreign currency exchange rate
fluctuations, rapid technological changes, supplier and customer financial
stability, the contract nature of this industry, the concentration of sales to
significant customers, and the potential for customers to choose a dual sourcing
strategy or to in-source a greater portion of their manufacturing. The
continuing success of our business is dependent upon our ability to replace
expiring customers/programs with new customers/programs. We monitor our success
in this area by tracking the number of customers and the percentage of our net
sales generated from them by years of service as depicted in the table below.
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 the
"Risk Factors" section of our Annual Report on Form 10-K for the year ended
June 30, 2022 .
Nine Months Ended
March 31
Customer Service Years 2023 2022
More than 10 Years
% of Net Sales 78 % 79 %
# of Customers 31 34
5 to 10 Years
% of Net Sales 17 % 17 %
# of Customers 19 21
Less than 5 Years
% of Net Sales 5 % 4 %
# of Customers 12 11
Total
% of Net Sales 100 % 100 %
# of Customers 62 66
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Financial Overview
At or for the
Three Months Ended
March 31
(Amounts in Millions, Except for Per Share as a % of Net as a % of Net
Data) 2023 Sales 2022 Sales % Change
Net Sales $ 484.7 $ 368.1 32 %
Gross Profit $ 43.0 8.9 % $ 33.9 9.2 % 27 %
Selling and Administrative Expenses 17.8 3.7 % 13.6 3.7 % 30 %
Operating Income 25.2 5.2 % 20.3 5.5 % 24 %
Other Income (Expense) (3.3) (2.2)
Provision for Income Taxes 5.5 4.5 21 %
Net Income $ 16.4 $ 13.6 20 %
Diluted Earnings per Share $ 0.65 $ 0.54 20 %
Open Orders $ 882 $ 930 (5) %
For the Nine Months Ended
March 31
(Amounts in Millions, Except for Per Share as a % of Net as a % of Net
Data) 2023 Sales 2022 Sales % Change
Net Sales $ 1,327.3 $ 976.0 36 %
Gross Profit $ 106.5 8.0 % $ 70.4 7.2 % 51 %
Selling and Administrative Expenses 50.2 3.8 % 39.8 4.0 % 26 %
Other General Income - 1.4
Operating Income 56.3 4.2 % 32.0 3.3 % 76 %
Other Income (Expense) (8.1) (3.6)
Provision for Income Taxes 11.6 7.1 64 %
Net Income $ 36.6 $ 21.3 72 %
Diluted Earnings per Share $ 1.46 $ 0.84 74 %
Net Sales by Vertical Market Three Months Ended
Nine Months Ended
March 31 March 31
(Amounts in Millions) 2023 2022 % Change 2023 2022 % Change
Automotive $ 216.0 $ 161.5 34 % $ 600.5 $ 429.8 40 %
Medical 134.0 102.9 30 % 373.5 277.7 34 %
Industrial 126.9 98.2 29 % 332.8 255.8 30 %
Other 7.8 5.5 42 % 20.5 12.7 61 %
Total Net Sales $ 484.7 $ 368.1 32 % $ 1,327.3 $ 976.0 36 %
Third quarter and year-to-date fiscal year 2023 consolidated net sales increased
compared to the third quarter and year-to-date period of fiscal year 2022, with
a new quarterly record set in the third quarter of fiscal year 2023. The impact
from foreign currency fluctuations on net sales was an unfavorable 2% in the
current quarter and an unfavorable 4% in the current year-to-date period
compared to the third quarter and the year-to-date period of fiscal year 2022,
respectively. By end market vertical, our market verticals fluctuated as
follows:
•Sales to customers in the automotive market experienced record net sales during
the third quarter of fiscal year 2023, increasing 34% compared to the third
quarter of fiscal year 2022 and increasing 40% in the year-to-date period of
fiscal year 2023 compared to the year-to-date period of fiscal year 2022. This
double-digit increase is largely due to the continued ramp-up of certain
programs, new product launches, and improved component availability.
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•Sales to customers in the medical market experienced record net sales during
the third quarter of fiscal year 2023, increasing 30% compared to the third
quarter of fiscal year 2022 and increasing 34% in the year-to-date period of
fiscal year 2023 when compared to the year-to-date period of fiscal year 2022.
This double-digit increase is primarily due to launch and ramp-up of new
programs and overall improved component availability.
•Beginning in fiscal year 2023, the Company changed its presentation of revenue
for the industrial and public safety end market verticals by combining them into
the industrial end market vertical. Prior year periods have been recast to
conform to the current year presentation. Sales to customers in the industrial
market also experienced record net sales during the third quarter of fiscal year
2023, increasing 29% when compared to the third quarter of fiscal year 2022
largely due to improved component availability and new product launches. Sales
to customers in the industrial market also had a double-digit increase in the
year-to-date period of the current fiscal year when compared to the year-to-date
period of the prior fiscal year primarily due to higher end market demand for
climate control products which was supported by overall improved component
availability.
Sales to Nexteer Automotive, Philips, and ZF accounted for the following
portions of our net sales:
Three Months Ended Nine Months Ended
March 31 March 31
2023 2022 2023 2022
Nexteer Automotive 15% 18% 15% 17%
Philips 14% 15% 15% 15%
ZF 12% * 12% *
* amount is less than 10% of total
Open orders were down 5% as ofMarch 31, 2023 compared toMarch 31, 2022 . The decrease in open orders fromMarch 31, 2022 is driven by the overall improvement in component availability, which has increased our ability to fulfill customer orders. Open orders are the aggregate sales price of production pursuant to unfulfilled customer orders, which may be delayed or canceled by the customer subject to contractual termination provisions. The majority of open orders as ofMarch 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. Gross profit as a percent of net sales in the third quarter of fiscal year 2023 declined when compared to the third quarter of fiscal year 2022 as we continue to optimize operating performance levels following recent facility expansions. Gross profit as a percent of net sales in the first nine months of fiscal year 2023 improved when compared to the first nine months of fiscal year 2022 primarily due to the leverage gained on higher revenue. Additionally, we experienced lost absorption in the first half of fiscal year 2022 as the prior fiscal year was impacted to a much greater degree than the current fiscal year by component shortages, and as we retained our workforce, our gross profit as a percent of net sales was negatively impacted. Selling and administrative expenses as a percent of net sales remained flat but increased in absolute dollars in the third quarter of fiscal year 2023 when compared to the third quarter of fiscal year 2022. The selling and administrative expenses increase was driven by the increase in the fair value of the liability for the supplemental employee retirement plan ("SERP"), increased factoring fees due to higher factoring fee rates coupled with increased accounts receivable factoring activity, added resources to support our significant growth, wage inflation, and higher incentive-based compensation. Selling and administrative expenses declined as a percent of net sales but increased in absolute dollars in the first nine months of fiscal year 2023 when compared to the first nine months of fiscal year 2022. The selling and administrative expenses increase was driven by increased factoring fees due to higher factoring fee rates coupled with increased accounts receivable factoring activity, added resources to support our significant growth, wage inflation, and higher incentive-based compensation. Other General Income in the nine months endedMarch 31, 2022 included$1.4 million of pre-tax income resulting from payments received related to the class action lawsuits in whichKimball Electronics was a class member. These lawsuits alleged that certain suppliers to the EMS industry conspired over a number of years to raise and fix the prices of electronic components, resulting in overcharges to purchasers of those components. No Other General Income was recorded in the three and nine month periods endedMarch 31, 2023 and in the three month period endedMarch 31, 2022 . We perform our annual goodwill impairment test of our Global Equipment Services ("GES") reporting unit in the fourth quarter. As ofMarch 31, 2023 , GES has$5.8 million of goodwill. In our latest annual test performed as ofApril 30, 2022 , the fair value of the GES reporting unit exceeded its carrying value by 9%. We are in the process of developing our long-range plan, which will support our annual test. Our test will consider GES's recent performance and trends in the semiconductor and consumer electronics capital equipment markets which GES serves. If our test indicates a decline in GES's fair value, there could be a non-cash charge for impairment. 25 --------------------------------------------------------------------------------
Other Income (Expense) consisted of the following:
Three Months Ended Nine Months Ended
March 31 March 31
(Amounts in Thousands) 2023 2022 2023 2022
Interest income $ 45 $ 31 $ 88 $ 66
Interest expense (4,822) (669) (10,790) (1,537)
Foreign currency/derivative gain (loss) 1,328 (625) 2,581 (1,325)
Gain (loss) on SERP investments 353 (719) 458 (404)
Other (248) (121) (380) (361)
Other income (expense), net $ (3,344) $ (2,103) $ (8,043) $ (3,561)
Interest expense has increased in the three and nine months ended March 31, 2023
compared to the three and nine months ended March 31, 2022 due to higher
interest rates and higher borrowings on credit facilities. Foreign
currency/derivative gains (losses) result from net foreign currency exchange
rate movements during the periods. The revaluation to fair value of the SERP
investments recorded in Other Income (Expense) is offset by the revaluation of
the SERP liability recorded in Selling and Administrative Expenses, and thus
there is no effect on net income.
Our provision for income taxes for the first nine months ended March 31, 2023
and March 31, 2022 was $11.6 million , or 24.1% of income before taxes on income,
and $7.1 million , or 25.0% of income before taxes on income, respectively.
Comparing the balance sheet as of March 31, 2023 to June 30, 2022 , receivables
increased $76.5 million largely due to higher sales volumes. Our inventory
balance increased $92.5 million due to the component shortages as we continue to
purchase material not impacted by the shortages so we can fulfill our customer
orders once the impacted components are received, as well as to support
production at our newly expanded facilities. Property and Equipment, net
increased $51.2 million for expansions at our Mexico , Thailand , and Poland
facilities and to support new business awards. Accounts payable increased $52.9
million primarily due to the increased inventory purchases. Borrowings on credit
facilities increased $108.8 million primarily for working capital purposes and
capital expenditures supporting our expansions.
Liquidity and Capital Resources
Working capital atMarch 31, 2023 was$441.8 million compared to working capital of$352.3 million atJune 30, 2022 . The current ratio was 1.9 at bothMarch 31, 2023 andJune 30, 2022 . The debt-to-equity ratio was 0.6 atMarch 31, 2023 and 0.4 atJune 30, 2022 . Our short-term liquidity available, represented as cash and cash equivalents plus the unused amount of our credit facilities, some of which are uncommitted, totaled$128.5 million atMarch 31, 2023 and$178.6 million atJune 30, 2022 . Cash Conversion Days ("CCD") are calculated as the sum of Days Sales Outstanding plus Contract Asset Days plus Production Days Supply on Hand less Accounts Payable Days and less Advances from Customers Days. CCD, or a similar metric, is used in our industry and by our management to measure the efficiency of managing working capital. The following table summarizes our CCD for the quarterly periods indicated. Beginning in the third quarter of fiscal year 2023, we included Advances from Customers Days in our CCD calculation as these are customer deposits related to inventory. Prior periods have been recast to conform to the current quarter presentation. Three Months Ended March 31, 2023 December 31, 2022 March 31, 2022 Days Sales Outstanding 54 56 51 Contract Asset Days 14 14 14 Production Days Supply on Hand 101 108 89 Accounts Payable Days 69 72 71 Advances from Customers Days 8 9 4 Cash Conversion Days 92 97 79 We define Days Sales Outstanding as the average of monthly trade accounts and notes receivable divided by an average day's net sales, Contract Asset Days as the average monthly contract assets divided by an average day's net sales, Production Days Supply on Hand as the average of monthly gross inventory divided by an average day's cost of sales, Accounts Payable Days as the average of monthly accounts payable divided by an average day's cost of sales, and Advances from Customers Days as the total customer deposits divided by an average day's cost of sales. Over the past several quarters, we have supported our customers through strategic inventory builds to mitigate parts shortages, which adversely impacted our PDSOH and CCD metrics. We expect inventory levels and working capital to normalize as the part shortages abate and our expansions continue to ramp up production. 26 --------------------------------------------------------------------------------
Cash Flows
The following table reflects the major categories of cash flows for the first nine months of fiscal years 2023 and 2022.
Nine Months Ended
March 31
(Amounts in Millions) 2023 2022
Net cash used for operating activities
Cash Flows from Operating Activities
Net cash used for operating activities for the first nine months of fiscal year 2023 and the first nine months of the prior year was driven by changes in operating assets and liabilities. Changes in operating assets and liabilities used$122.3 million of cash in the first nine months of fiscal year 2023 compared to$133.3 million of cash used in the first nine months of the prior year. The cash used of$122.3 million from changes in operating assets and liabilities in the first nine months of fiscal year 2023 is largely due to an increase in inventory, which used cash of$88.6 million , driven by investment to support our expansions and growth inMexico andThailand , as well as supporting our customers through strategic inventory purchases to mitigate parts shortages, and an increase in accounts receivable, which used cash of$74.0 million primarily resulting from increased sales volumes. Partially offsetting cash used by inventory was an increase in accounts payable, which provided cash of$45.1 million largely resulting from increased inventory purchases. The cash used of$133.3 million from changes in operating assets and liabilities in the first nine months of fiscal year 2022 is largely due to an increase in inventory, which used cash of$142.5 million primarily due to the component shortages as we continue to purchase material not impacted by the shortages so we can fulfill our customer orders once the impacted components are received, and an increase in accounts receivable, which used cash of$25.2 million primarily resulting from increased sales volumes. Partially offsetting cash used by inventory was an increase in accounts payable, which provided cash of$61.1 million largely resulting from increased inventory purchases.
Cash Flows from Investing Activities
For the first nine months of fiscal years 2023 and 2022, net cash used for investing activities was$66.5 million and$50.0 million , respectively. During the first nine months of fiscal year 2023, we invested$66.8 million into capital expenditures primarily for expansions at ourMexico ,Thailand , andPoland facilities and to support new business awards. During the first nine months of fiscal year 2022, we invested$50.1 million into capital expenditures primarily for expansions at ourThailand andMexico facilities and to support new business awards.
Cash Flows from Financing Activities
For the first nine months of fiscal year 2023, net cash provided by financing activities of$107.1 million resulted largely from net borrowings on our credit facilities of$108.7 million primarily for working capital purposes and capital expenditures supporting our expansions. For the first nine months of fiscal year 2022, net cash provided by financing activities of$64.9 million resulted largely from net borrowings on our credit facilities of$71.2 million .
Credit Facilities
The Company maintains aU.S. primary credit facility (the "primary credit facility") among the Company, the lenders party thereto, andJPMorgan Chase Bank, N.A ., as Administrative Agent, andBank of America, N.A ., as Documentation Agent, scheduled to matureMay 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, will be available for the issuance of letters of credit. A commitment fee on the unused portion of the principal amount of the credit facility is payable 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 under the primary credit facility. 27 --------------------------------------------------------------------------------
The interest rate on borrowings is dependent on the type and currencies of borrowings and will be one of following options:
•any Term Benchmark borrowing denominated inU.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, theFederal 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 fluctuation rate per annum equal to the higher of:
a.Prime Rate in theU.S. last quoted by theWall Street Journal , and if this is ceased to be quoted, the highest bank prime loan rate or similar rate quoted by theFederal 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 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.
AtMarch 31, 2023 , we had$279.0 million in borrowings under the primary credit facility and$0.4 million in letters of credit against the primary credit facility, and$235.0 million of the borrowings were classified as long-term as the Company intends, and has the ability, to refinance for a period longer than twelve months. AtJune 30, 2022 , we had$171.4 million in borrowings under the primary credit facility and$0.4 million in letters of credit against the primary credit facility, and$145.0 million were classified as long-term.
The Company's financial covenants under the primary credit facility require:
•a ratio of consolidated total indebtedness minus unencumberedU.S. cash on hand inthe 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 not be less than 3.5 to 1.0.
We were in compliance with the financial covenants during the nine-month period
ended
The Company entered into a 364-day multi-currency revolving credit facility agreement onFebruary 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 ., asAdministrative Agent andBank of America, N.A ., as Documentation Agent. The secondary credit facility has a maturity date ofFebruary 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 inU.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, theFederal 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
b.1/2 of 1% per annum above the Federal Funds Effective Rate (as defined under the primary credit facility); or
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--------------------------------------------------------------------------------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.
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 ofMarch 31, 2023 , we maintained the following foreign credit facilities: •A Thailand overdraft credit facility which allows for borrowings up to$10.1 million . We had no borrowings under this foreign credit facility as ofMarch 31, 2023 orJune 30, 2022 . During the first quarter of fiscal year 2023, the borrowing capacity was expanded. •We entered into an uncommitted credit facility for its EMS operation inChina which allows for borrowings up to$7.5 million that can be drawn in eitherU.S. dollars or China Renminbi during the first quarter of the current fiscal year. We had no borrowings under this foreign credit facility as ofMarch 31, 2023 . •An uncommitted revolving credit facility for ourNetherlands subsidiary, which allows for borrowings of up to9.2 million Euro (approximately$9.9 million atMarch 31, 2023 exchange rates) that can be drawn in Euro,U.S. dollars, or another optional currency. We had$9.3 million in borrowings outstanding under thisNetherlands revolving credit facility atMarch 31, 2023 and$9.2 million atJune 30, 2022 . •The Company entered into a foreign credit facility for its operation inPoland during the current quarter which allows for borrowings up to5.0 million Euro (approximately$5.4 million equivalent). We had no borrowings under this foreign credit facility as ofMarch 31, 2023 . •The Company entered into a foreign credit facility for its operation inVietnam during the current quarter which allows for borrowings up to$5.0 million . We had$1.1 million in borrowings outstanding under this foreign credit facility as ofMarch 31, 2023 . Factoring Arrangements The Company utilizes 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 ofKimball 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 nine months endedMarch 31, 2023 and 2022, we sold, without recourse,$357.1 million and$201.5 million of accounts receivable, respectively. See Note 1 - Business Description and Summary of Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements for more information regarding the factoring arrangements. Future Liquidity We 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$98.1 million atMarch 31, 2023 , including the$50 million secondary credit facility expiring inFebruary 2024 . Additionally, accounts receivable factoring arrangements could provide flexible access to cash as needed. While our primary credit facility includes a covenant that limits the amount of sold receivables outstanding at any time, currently and historically, we have been considerably below this limit. We expect to continue to prudently invest in capital expenditures, including for capacity expansions and potential acquisitions, that would help us continue our growth as a multifaceted manufacturing solutions company. We recently completed ourThailand facility expansion in the third quarter of fiscal year 2022 and ourMexico facility expansion in the first quarter of fiscal year 2023. OurPoland expansion is expected to be completed in early fiscal year 2024. AtMarch 31, 2023 , our capital expenditure commitments were approximately$16 million , consisting primarily of equipment for theMexico andThailand facility expansions, capital related to new program wins, and commitments for the expansion of ourPoland facility. 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 turn, our material authorization agreements with customers cover a portion of the exposure for material which is purchased prior to having a firm order. 29 -------------------------------------------------------------------------------- AtMarch 31, 2023 , our foreign entities held cash totaling$30.1 million . Most of our accumulated unremitted foreign earnings have been invested in active non-U.S. business operations, and it is not anticipated such earnings will be remitted tothe United States . Our intent is to permanently reinvest the remaining funds outside ofthe United States , and our current plans do not demonstrate a need to repatriate these funds to ourU.S. operations. However, if such funds were repatriated, a portion of the funds remitted may be subject to applicable non-U.S. income and withholding taxes. The Company has a Board-authorized stock repurchase plan (the "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 Plan has no expiration date but may be suspended or discontinued at any time. The extent to which the Company repurchases its shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements, and other corporate considerations, as determined by the Company's management team. The Company expects to finance the purchases with existing liquidity. The Company has repurchased$88.8 million of common stock under the Plan throughMarch 31, 2023 . Our ability to generate cash from operations to meet our liquidity obligations could be adversely affected in the future by factors such as general economic and market conditions, lack of availability of raw material components in the supply chain, a decline in demand for our services, loss of key contract customers, unsuccessful integration of acquisitions and new operations, global health emergencies such as the COVID-19 pandemic, the duration and severity of the COVID-19 pandemic and the related uncertainties around the financial impact, and other unforeseen circumstances. 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. Additional cautionary statements regarding our risk factors are contained in our Annual Report on Form 10-K for the year endedJune 30, 2022 .
Fair Value
During the third quarter of fiscal year 2023, no level 1 or level 2 financial instruments were affected by a lack of market liquidity. For level 1 financial assets, readily available market pricing was used to value the financial instruments. Our foreign currency derivative assets and liabilities, which were classified as level 2, were independently valued using observable market inputs such as forward interest rate yield curves, current spot rates, and time value calculations. To verify the reasonableness of the independently determined fair values, these derivative fair values were compared to fair values calculated by the counterparty banks. Our own credit risk and counterparty credit risk had an immaterial impact on the valuation of the foreign currency derivatives. See
Note 7 - Fair Value of Notes to Condensed Consolidated Financial Statements for additional information.
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies
Kimball Electronics' Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted inthe United States of America . These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the Condensed Consolidated Financial Statements and related notes. Actual results could differ from these estimates and assumptions. Management uses its best judgment in the assumptions used to value these estimates, which are based on current facts and circumstances, prior experience, and other assumptions that are believed to be reasonable. There have been no material changes to our critical accounting policies since our Annual Report on Form 10-K for the year endedJune 30, 2022 . For further information regarding our critical accounting policies, refer to "Note 1 - Business Description and Summary of Significant Accounting Policies" of Notes to Consolidated Financial Statements and "Critical Accounting Policies" in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedJune 30, 2022 . 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 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. 30
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