NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 contract electronic manufacturing services (“EMS”) company that specializes in producing durable electronics for the automotive, medical, industrial, and public safety markets. We offer a package of value that begins with our core competency of producing “durable electronics” and includes our set of robust processes and procedures that help us ensure that we deliver the highest levels of quality, reliability, and service throughout the entire life cycle of our customers’ products. We have been producing safety critical electronic assemblies for our automotive customers for over 30 years. We are well recognized by customers and industry trade publications for our excellent quality, reliability, and innovative service.
Kimball Electronics was a wholly owned subsidiary of Kimball International, Inc. (“former Parent” or “Kimball International”) and on October 31, 2014 became a stand-alone public company upon the completion of a spin-off from former Parent. In conjunction with the spin-off, on October 31, 2014, Kimball International distributed
29.1 million
shares of Kimball Electronics common stock to Kimball International Share Owners. Holders of Kimball International common stock received three shares of Kimball Electronics common stock for every four shares of Kimball International common stock held on October 22, 2014. Kimball International structured the distribution to be tax free to its U.S. Share Owners for U.S. federal income tax purposes.
Principles of Consolidation:
The Consolidated Financial Statements include the accounts of all domestic and foreign subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidation.
On September 30, 2014, the shares of Kimball Electronics Mexico, S.A. de C.V., a wholly owned subsidiary of former Parent, were contributed in a capital transaction to Kimball Electronics Mexico, Inc., a wholly owned subsidiary of Kimball Electronics, Inc. The financial results for Kimball Electronics Mexico, S.A. de C.V. are included in the Consolidated Financial Statements herein for all periods presented. Assets and liabilities were recorded at historical costs or carrying value.
The Consolidated Financial Statements include allocations from former Parent for direct costs and indirect costs attributable to the operations of the Company through October 31, 2014, the spin-off date. These allocations were made on a direct usage or cost incurred basis when appropriate, with the remainder allocated using various drivers including average capital deployed, payroll, revenue less material costs, headcount, or other measures. While we believe such allocations are reasonable, the financial statements do not purport to reflect what the results of operations, comprehensive income, equity, or cash flows would have been had the Company operated as a stand-alone public company for the entirety of fiscal year 2015.
Note 2 - Related Party Transactions
of Notes to Consolidated Financial Statements provides information regarding direct and indirect cost allocations.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts included in the Consolidated Financial Statements and related note disclosures. While efforts are made to assure estimates used are reasonably accurate based on management’s knowledge of current events, actual results could differ from those estimates.
Segment Information:
Kimball Electronics has business units located in the United States, China, Mexico, Poland, Romania, and Thailand. Each of our business units qualifies as an operating segment with its results regularly reviewed by our chief operating decision maker. Our chief operating decision maker is our Chief Executive Officer. Our business units meet the aggregation criteria under the current accounting guidance for segment reporting. As of
June 30, 2017
, all of our business units operated in the EMS industry with engineering, manufacturing, and supply chain services that provide electronic assemblies and components primarily in automotive, medical, industrial, and public safety applications, all to the specifications and designs of our customers. The nature of the products, the production process, the type of customers, and the methods used to distribute the products, all have similar characteristics. Each of our business units service customers in multiple markets and many of our customers’ programs are manufactured and serviced by multiple business units. Our global processes such as component procurement and customer pricing provide commonality and consistency among the various regions in which we operate. All of our business units have similar long-term economic characteristics. As such, our business units have been aggregated into one reportable segment.
Revenue Recognition:
Our net sales are principally from the manufacturing of electronic assemblies built to customer specifications. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Delivery is not considered to have occurred until the title and the risk of loss passes to the customer according to the terms of the contract. Title and risk of loss are transferred upon shipment to or receipt at our customers’ locations, or in limited circumstances, as determined by other specific sales terms of the transaction. Shipping and handling fees billed to customers are recorded as sales while the related shipping and handling costs are included in cost of sales. We recognize sales net of applicable sales tax. Based on estimated product returns and price concessions, a reserve for returns and allowances is recorded at the time of the sale, resulting in a reduction of revenue.
Cash and Cash Equivalents:
Cash equivalents consist primarily of highly liquid investments with original maturities of three months or less at the time of acquisition. Cash and cash equivalents consist of bank accounts and money market funds. Bank accounts are stated at cost, which approximates fair value, and money market funds are stated at fair value.
Notes Receivable and Trade Accounts Receivable:
The Company’s notes receivable and trade accounts receivable are recorded per the terms of the agreement or sale, and accrued interest is recognized when earned. We determine on a case-by-case basis the cessation of accruing interest, the resumption of accruing interest, the method of recording payments received on nonaccrual receivables, and the delinquency status for our limited number of notes receivable.
Our policy for estimating the allowance for credit losses on trade accounts receivable and notes 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 determine the final allowance for credit losses on the trade accounts receivable and notes receivable. Trade accounts receivable and notes receivable are written off after exhaustive collection efforts occur and the receivable is deemed uncollectible. Our limited amount of notes receivable allows management to monitor the risks, credit quality indicators, collectability, and probability of impairment on an individual basis. Adjustments to the allowance for credit losses are recorded in selling and administrative expenses.
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 may utilize accounts receivable factoring arrangements with third-party financial institutions in order to extend terms for the customer without negatively impacting our cash flow. 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. During the fiscal years ended
June 30, 2017
and
2016
, we sold, without recourse,
$145.3 million
and
$126.5 million
of accounts receivable, respectively. Factoring fees were not material.
The Company’s China operation, in limited circumstances, may receive banker’s acceptance drafts from customers as payment for their trade accounts receivable. The banker’s acceptance drafts are non-interest bearing and primarily mature within six months from the origination date. The Company has the ability to sell the drafts at a discount or transfer the drafts in settlement of current accounts payable prior to the scheduled maturity date. These drafts, which totaled
$5.3 million
and
$5.7 million
at
June 30, 2017
and
2016
, respectively, are reflected in Receivables on the Consolidated Balance Sheets until the banker’s drafts are sold at a discount, transferred in settlement of current accounts payable, or cash is received at maturity. Banker’s acceptance drafts sold at a discount or transferred in settlement of current accounts payable during fiscal years
2017
and
2016
were
$8.1 million
and
$14.9 million
, respectively. See
Note 6 - Commitments and Contingent Liabilities
of Notes to Consolidated Financial Statements for more information on banker’s acceptance drafts.
Inventories:
Inventories are stated at the lower of cost or market value. Cost includes material, labor, and applicable manufacturing overhead. Costs associated with underutilization of capacity are expensed as incurred. Inventories are valued using the first-in, first-out (“FIFO”) method. Inventories are adjusted for excess and obsolete inventory. Evaluation of excess inventory includes such factors as anticipated usage, inventory turnover, inventory levels, and product demand levels. Factors considered when evaluating obsolescence include the age of on-hand inventory and reduction in value due to damage, design changes, or cessation of product lines.
Property, Equipment, and Depreciation:
Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful life of the assets using the straight-line method for financial reporting purposes. Major maintenance activities and improvements are capitalized; other maintenance, repairs, and minor renewals are expensed. Depreciation and expenses for maintenance, repairs, and minor renewals are included in both Cost of Sales and Selling and Administrative Expense on the Consolidated Statements of Income.
Impairment of Long-Lived Assets:
We perform reviews for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Impairment is recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. When an impairment is identified, the carrying amount of the asset is reduced to its estimated fair value. Assets to be disposed of are recorded at the lower of net book value or fair market value less cost to sell at the date management commits to a plan of disposal. Impairment of long-lived assets was not material during fiscal years
2017
,
2016
, and
2015
.
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, we may assess qualitative factors to determine if it is more likely than not that the fair value is less than its carrying amount and if it is necessary to perform the quantitative two-step goodwill impairment test. We also have the option to bypass the qualitative assessment and proceed directly to performing the first step of the quantitative goodwill impairment test. If the first step is determined to be necessary, we compare the carrying value of the reporting unit to an estimate of the reporting unit’s fair value to identify potential impairment. If the estimated fair value of the reporting unit is less than the carrying value, a second step is performed to determine the amount of potential goodwill impairment. If impaired, goodwill is written down to its estimated implied fair value. Goodwill is assigned to and the fair value is tested at the reporting unit level. The fair value is established primarily using a discounted cash flow analysis and secondarily a market approach utilizing current industry information. The calculation of the fair value of the reporting units considers current market conditions existing at the assessment date. During fiscal years
2017
,
2016
, and
2015
,
no
goodwill impairment was recognized.
A summary of goodwill is as follows:
|
|
|
|
|
(Amounts in Thousands)
|
|
Balance as of June 30, 2015
|
|
Goodwill
|
$
|
15,390
|
|
Accumulated impairment
|
(12,826
|
)
|
Goodwill, net
|
2,564
|
|
Goodwill Acquired
|
3,627
|
|
Balance as of June 30, 2016
|
|
Goodwill
|
19,017
|
|
Accumulated impairment
|
(12,826
|
)
|
Goodwill, net
|
6,191
|
|
Balance as of June 30, 2017
|
|
Goodwill
|
19,017
|
|
Accumulated impairment
|
(12,826
|
)
|
Goodwill, net
|
$
|
6,191
|
|
During the fiscal year ended June 30, 2016, we acquired
$3.6 million
in goodwill from the acquisition of Medivative Technologies, LLC. See
Note 3 - Acquisitions
of Notes to Consolidated Financial Statements for more information on this acquisition. In addition to performing the required annual testing, we will continue to monitor circumstances and events in future periods to determine whether additional goodwill impairment testing is warranted on an interim basis.
Other Intangible Assets reported on the Consolidated Balance Sheets consist of capitalized software and customer relationships. Intangible assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets.
A summary of other intangible assets subject to amortization is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
June 30, 2016
|
(Amounts in Thousands)
|
Cost
|
|
Accumulated
Amortization
|
|
Net Value
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net Value
|
Capitalized Software
|
$
|
29,806
|
|
|
$
|
25,294
|
|
|
$
|
4,512
|
|
|
$
|
29,243
|
|
|
$
|
24,750
|
|
|
$
|
4,493
|
|
Customer Relationships
|
1,167
|
|
|
1,098
|
|
|
69
|
|
|
1,167
|
|
|
1,067
|
|
|
100
|
|
Other Intangible Assets
|
$
|
30,973
|
|
|
$
|
26,392
|
|
|
$
|
4,581
|
|
|
$
|
30,410
|
|
|
$
|
25,817
|
|
|
$
|
4,593
|
|
During fiscal years
2017
,
2016
, and
2015
, amortization expense of other intangible assets was, in thousands,
$924
,
$883
, and
$759
, respectively. Amortization expense in future periods is expected to be, in thousands,
$862
,
$684
,
$565
,
$526
, and
$517
in the five years ending June 30,
2022
, and
$1,427
thereafter. The amortization period for the customer relationship intangible asset ranges from
10
to
15 years
. The estimated useful life of internal-use software ranges from
3
to
10 years
.
Internal-use software is stated at cost less accumulated amortization and is amortized using the straight-line method. During the software application development stage, capitalized costs include external consulting costs, cost of software licenses, and internal payroll and payroll-related costs for employees who are directly associated with a software project. Upgrades and enhancements are capitalized if they result in added functionality which enable the software to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion, and business process reengineering costs are expensed in the period in which they are incurred.
Capitalized customer relationships are amortized on estimated attrition rate of customers. We have
no
intangible assets with indefinite useful lives which are not subject to amortization.
Research and Development:
The costs of research and development are expensed as incurred. Research and development costs were approximately, in millions,
$10
,
$9
, and
$9
in fiscal years
2017
,
2016
, and
2015
, respectively.
Insurance and Self-insurance:
We are self-insured up to certain limits for general liability, workers’ compensation, and certain employee health benefits including medical, short-term disability, and dental, with the related liabilities included in the accompanying financial statements. Our policy is to estimate reserves based upon a number of factors including known claims, estimated incurred but not reported claims, and other analyses, which are based on historical information along with certain assumptions about future events. Approximately
20%
of the workforce is covered under self-insured medical and short-term disability plans. At
June 30, 2017
and
2016
, accrued liabilities for self-insurance exposure were
$1.4 million
and
$1.1 million
, respectively.
We carry external medical and disability insurance coverage for the remainder of our eligible workforce not covered by self-insured plans. Insurance benefits are not provided to retired employees.
Income Taxes:
Through October 31, 2014, the Company was included in the consolidated U.S. federal income tax return of former Parent, as well as certain state tax returns where former Parent filed on a combined basis. The provisions for income taxes for these jurisdictions were determined on a separate return basis and presented as such for all years included in these Consolidated Financial Statements.
Deferred income tax assets and liabilities 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 Consolidated Statements of Income.
Concentrations of Credit Risk:
We have business and credit risks concentrated in the automotive, medical, industrial, and public safety industries. The Company monitors credit quality and associated risks of notes receivable on an individual basis based on criteria such as financial stability of the party and collection experience in conjunction with general economic and market conditions. At
June 30, 2017
and
2016
, amounts outstanding under notes receivables were
$0.7 million
and
$1.7 million
, respectively. See
Note 2 - Related Party Transactions
and
Note 3 - Acquisitions
of Notes to Consolidated Financial Statements for more information regarding the outstanding notes receivable at
June 30, 2017
and
2016
.
A summary of significant customers’ net sales and trade receivables as a percentage of consolidated net sales and consolidated trade receivables is as follows:
|
|
|
|
|
|
|
|
|
|
At or For the Year Ended
|
|
At or For the Year Ended
|
|
June 30, 2017
|
|
June 30, 2016
|
|
Net Sales
|
|
Trade Receivables
|
|
Net Sales
|
|
Trade Receivables
|
Philips
|
14%
|
|
*
|
|
15%
|
|
*
|
ZF
|
12%
|
|
17%
|
|
11%
|
|
14%
|
Nexteer Automotive
|
12%
|
|
13%
|
|
*
|
|
11%
|
Regal Beloit Corporation
|
*
|
|
11%
|
|
*
|
|
*
|
|
|
|
|
|
|
|
|
* amount is less than 10% of total
|
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|
|
Off-Balance Sheet Risk:
Off-balance sheet arrangements are limited to banker’s acceptance drafts transferred with recourse provisions at the Company’s China operation, standby letters of credit, and operating leases entered into in the normal course of business as described in
Note 6 - Commitments and Contingent Liabilities
of Notes to Consolidated Financial Statements.
Other General Income:
Other General Income in fiscal year 2017 consisted of
$4.0 million
resulting from a payment received related to a class action lawsuit in which Kimball Electronics was a class member. The lawsuit 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. We recorded no Other General Income during fiscal years
2016
and 2015.
Non-operating Income and Expense:
Non-operating income and expense include 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, bank charges, bargain purchase gain on acquisition, and other miscellaneous non-operating income and expense items that are not directly related to operations. The gain or loss on SERP investments is offset by a change in the SERP liability that is recognized in Selling and Administrative Expense.
Foreign Currency Translation:
The Company predominantly uses the U.S. dollar and Euro as its functional currencies. Foreign currency assets and liabilities are remeasured into functional currencies at end-of-period exchange rates, except for nonmonetary assets and equity, which are remeasured at historical exchange rates. Revenue and expenses are remeasured at the weighted average exchange rate during the fiscal year, except for expenses related to nonmonetary assets, which are remeasured at historical exchange rates. Gains and losses from foreign currency remeasurement are reported in Non-operating income or expense on the Consolidated Statements of Income.
For business units whose functional currency is other than the U.S. dollar, the translation of functional currency statements to U.S. dollar statements uses end-of-period exchange rates for assets and liabilities, weighted average exchange rates for revenue and expenses, and historical rates for equity. The resulting currency translation adjustment is recorded in Accumulated Other Comprehensive Income (Loss), as a component of Share Owners’ Equity.
Derivative Instruments and Hedging Activities:
Derivative financial instruments are recognized on the balance sheet as assets and liabilities and are measured at fair value. Changes in the fair value of derivatives are recorded each period in earnings or Accumulated Other Comprehensive Income (Loss), depending on whether a derivative is designated and effective as part of a hedge transaction, and if it is, the type of hedge transaction. Hedge accounting is utilized when a derivative is expected to be highly effective upon execution and
continues to be highly effective over the duration of the hedge transaction. Hedge accounting permits gains and losses on derivative instruments to be deferred in Accumulated Other Comprehensive Income (Loss) and subsequently included in earnings in the periods in which earnings are affected by the hedged item, or when the derivative is determined to be ineffective. We use derivatives primarily for forward purchases of foreign currency to manage exposure to the variability of cash flows, primarily related to the foreign exchange rate risks inherent in forecasted transactions denominated in foreign currency. Cash receipts and cash payments related to derivative instruments are recorded in the same category as the cash flows from the items being hedged on the Consolidated Statements of Cash Flows. See
Note 13 - Derivative Instruments
of Notes to Consolidated Financial Statements for more information on derivative instruments and hedging activities.
Stock-Based Compensation:
As described in
Note 9 - Stock Compensation Plans
of Notes to Consolidated Financial Statements, the Company maintains the 2014 Stock Option and Incentive Plan, which allows for the issuance of incentive stock options, stock appreciation rights, restricted shares, unrestricted shares, restricted share units, or performance shares and performance units for grant to officers and other key employees, and to members of the Board of Directors who are not employees. The Company established in fiscal year 2017 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. The Deferral Plan allows for issuance of up to
1.0 million
shares of the Company’s common stock. We recognize the cost resulting from share-based payment transactions using a fair-value-based method. The estimated fair value of outstanding performance shares is based on the stock price at the date of the grant. Stock-based compensation expense is recognized for the portion of the award that is ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
“Emerging Growth Company” Reporting Requirements:
The Company qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). For as long as a company is deemed to be an “emerging growth company,” it may take advantage of specified reduced reporting and other regulatory requirements that are generally unavailable to other public companies. Among other things, we are not required to provide an auditor attestation report on the assessment of the internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”).
Section 107 of the JOBS Act also provides that an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.
We would cease to be an “emerging growth company” upon the earliest of:
|
|
•
|
the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement filed under the Securities Act, or June 30, 2020;
|
|
|
•
|
the last day of the fiscal year in which our total annual gross revenues exceed
$1.07 billion
;
|
|
|
•
|
the date on which we have, during the previous three-year period, issued more than
$1 billion
in non-convertible debt securities; or
|
|
|
•
|
the date on which we become a “large accelerated filer,” as defined in Rule 12b-2 under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), which would occur if the market value of our common stock held by non-affiliates exceeds
$700 million
as of the last day of our most recently completed second fiscal quarter.
|
New Accounting Standards:
In March 2016, the Financial Accounting Standards Board (“FASB”) issued guidance on accounting for share-based payment transactions. The objective of this guidance is to simplify certain aspects of the accounting for share-based payment transactions, including the treatment of excess income tax benefits and deficiencies, allowing an election to account for forfeitures as they occur, and classification of excess tax benefits on the statement of cash flows. For public companies, the guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For as long as we remain an “emerging growth company” the new guidance is effective for our fiscal year 2019 annual financial statements and interim statements in our fiscal year 2020. Early adoption is permitted in any interim or annual period.
The Company adopted this guidance effective July 1, 2017. As a result, the Company elected to reverse compensation cost of any forfeited awards when they occur and will classify the cash flows related to excess tax benefits for share-based payment arrangements as cash flows from operating activities prospectively. The adoption of this guidance did not have a material impact on the Company’s financial statements at the time of implementation. Under the new guidance, all excess tax benefits and tax deficiencies will be recognized as income tax expense or benefit in the income statement in the period in which they
occur. Excess tax benefits and tax deficiencies will vary based on the stock price of the Company’s common stock on the grant date in relation to the stock price used for valuing the stock-based awards on the award date.
In February 2016, the FASB issued guidance on leases. The new guidance requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by those leases with terms of more than 12 months. Under the current guidance, only capital leases are recognized on the balance sheet. The new guidance requires additional qualitative and quantitative disclosures. For public companies, the guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For as long as we remain an “emerging growth company” the new guidance will be effective for our fiscal year 2020 annual financial statements and for interim statements beginning in fiscal year 2021. Early application is permitted. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.
In November 2015, the FASB issued guidance on the balance sheet classification of deferred taxes. Under the current guidance, deferred tax liabilities and assets must be separated into current and noncurrent amounts in a classified statement of financial position. The new guidance requires deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The new guidance does not change the requirement that deferred tax liabilities and assets of a tax-paying component of an entity to be offset and presented as a single amount. For public companies, the guidance is effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods. For as long as we remain an “emerging growth company” the guidance is effective for our fiscal year 2019 annual financial statements and interim periods within our fiscal year 2020 financial statements, with earlier application permitted as of the beginning of an interim or annual reporting period. The guidance offers two acceptable adoption methods: (i) retrospective adoption to all periods presented; or (ii) prospective adoption to all deferred tax liabilities and assets. We do not expect the adoption of this standard to have a material effect on our financial position, results of operations, or cash flows.
In July 2015, the FASB issued guidance on Simplifying the Measurement of Inventory. The guidance amends the subsequent measurement of inventory from the lower of cost or market to the lower of cost and net realizable value. Under the current guidance, market value could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. Within the scope of the new guidance, an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. For public companies, the guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For as long as we remain an “emerging growth company” the guidance is effective for our fiscal year 2018 annual financial statements and for interim statements beginning in fiscal year 2019. Early application is permitted as of the beginning of an interim or annual reporting period. We do not expect the adoption of this standard to have a material effect on our financial position, results of operations, or cash flows.
In May 2014, the FASB issued guidance on the recognition of revenue from contracts with customers. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. To achieve this core principle, the guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The guidance addresses several areas including transfer of control, contracts with multiple performance obligations, and costs to obtain and fulfill contracts. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued additional guidance deferring the effective date for one year while allowing entities the option to adopt one year early. For public companies, the guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that annual reporting period. For as long as we remain an “emerging growth company” the guidance will be effective for our fiscal year 2020 annual financial statements and for interim periods beginning in fiscal year 2021. The Company continues to evaluate the impact the adoption of this new standard will have on its consolidated financial statements; however, it anticipates, for the majority of its contracts for manufacturing services, it will change from a point-in-time recognition method upon transfer of title to an over-time model based on the progress of completing customer orders. We believe the adoption of the standard will have a material effect on the Company’s consolidated financial statements primarily from the recognition of contract assets for unbilled receivables and a corresponding reduction in inventories. Under the guidance there are two acceptable adoption methods: (i) retrospective adoption to each prior reporting period presented with the option to elect certain practical expedients; or (ii) adoption with the cumulative effect of initially applying the guidance recognized at the date of initial application and providing certain additional disclosures. We have not yet finalized our selection of a transition method for adoption.
Note 2 Related Party Transactions
Services Provided by Kimball International, Inc.:
Prior to the spin-off on October 31, 2014, Kimball Electronics operated as a reportable segment within Kimball International. The Consolidated Financial Statements include allocations of general corporate expenses from former Parent including, but not limited to, spin-off costs, finance, legal, information technology, human resources, employee benefits administration, treasury, risk management, and other shared services. The allocations were primarily made using various drivers including average capital deployed, payroll, revenue less material costs, headcount, or other measures, with the remainder allocated on a direct usage or cost incurred basis when appropriate. Former Parent charged us for such services and indirect general and corporate overhead expenses of approximately
$4.5 million
in fiscal year 2015. Additionally, former Parent charged us approximately
$2.1 million
in fiscal year
2015
for corporate incentive plan expenses, including stock-based compensation. These costs are primarily included in Selling and Administrative Expenses and were charged through October 31, 2014, the spin-off date.
We consider the basis on which the expenses were allocated to be a reasonable reflection of the utilization of services provided to or the benefit received by us through the spin-off date. The allocations may not, however, reflect the expense we would have incurred as an independent, publicly traded company through the spin-off date. Actual costs that might have been incurred had we been a stand-alone company would depend on a number of factors, including what functions we might have performed ourselves or outsourced and strategic decisions we might have made in areas such as information technology and infrastructure.
Taxes:
The Company entered into a Tax Matters Agreement with former Parent that governs the Company’s rights and obligations after the spin-off with respect to tax liabilities and benefits, tax attributes, tax contests, and other tax sharing regarding income taxes, other tax matters, and related tax returns. The Company will continue to have joint and several liabilities with former Parent with the IRS and certain U.S. state tax authorities for U.S. federal income and state taxes for the taxable periods in which the Company was a part of former Parent’s consolidated group. The tax matters agreement specifies the portion, if any, of this liability for which the Company bears responsibility, and former Parent has agreed to indemnify the Company against any amounts for which the Company is not responsible. As of
June 30, 2017
and
June 30, 2016
, the Company has a receivable from Kimball International recorded for
$0.6 million
and
$0.7 million
, respectively. As of
June 30, 2017
and
June 30, 2016
,
$0.5 million
and
$0.6 million
, respectively, of the receivable from Kimball International is a long-term receivable and was recorded in Other Assets on the Consolidated Balance Sheets, relating to benefits from domestic research and development tax credits.
Cash Management:
For purposes of the historical Consolidated Financial Statements, former Parent did not allocate to us the cash and cash equivalents held at former Parent’s corporate level for the periods presented prior to the spin-off. Our cash balance prior to the spin-off primarily represented cash held by international entities at the local level. In connection with the spin-off, net distributions of cash were made from former Parent to us of
$44.3 million
on or around October 31, 2014. We began operations as an independent company with approximately
$63 million
of cash, including cash held by our foreign facilities.
Former Parent provided centralized treasury functions for us, whereby, former Parent regularly transferred cash both to and from our subsidiaries, as necessary. Intercompany receivables/payables from/to related parties arising from the corporate overhead activity described above were included in Net Parent investment in the Consolidated Financial Statements. As of July 1, 2014, Net Parent investment was converted to Additional paid-in capital. For additional information, see
Note 1 – Business Description and Summary of Significant Accounting Policies
and
Note 11 - Share Owners’ Equity
of Notes to Consolidated Financial Statements.
Agreements with Kimball International, Inc.:
As part of the spin-off, the Company entered into various agreements with former Parent which provide for the allocation between the Company and former Parent of the assets, liabilities, and obligations, of former Parent and its subsidiaries, and govern the relationship between former Parent and the Company after the spin-off. These agreements became effective on October 31, 2014 and included the following:
Separation and Distribution Agreement:
The Separation and Distribution Agreement, among other things, (1) provides for the transfers of assets and assumptions of liabilities; (2) governs the rights and obligations of the parties regarding the distribution; (3) provides that following the spin-off the Company is responsible for obtaining and maintaining its own insurance coverage; and (4) governs other matters, including, but not limited to access and provision of records, intellectual property, confidentiality, treatment of outstanding guarantees and similar credit support, and dispute resolution procedures.
Employee Matters Agreement:
The Employee Matters Agreement provides (1) that generally the Company has responsibility for its own employees and compensation plans, subject to certain exceptions; (2) that following the spin-off, the Company’s employees will generally participate in various retirement, welfare, and other employee benefit and compensation plans established and maintained by the Company; (3) for the treatment of outstanding equity awards in connection with the spin-off; (4) for the assumption of certain employment related contracts that the Company’s employees originally entered into with former Parent; and (5) the allocation of certain employee liabilities and the cooperation between the Company and former Parent in sharing employee information.
Transition Services Agreement:
The Transition Services Agreement provides the Company and former Parent will provide to each other specified services on a transitional basis to help ensure an orderly transition following the spin-off. These services include information technology, financial, telecommunications, benefits support services, and other specified services. The services were provided at cost and the services were completed by June 30, 2016.
Tax Matters Agreement:
See section entitled “Taxes” above for information on the Tax Matters Agreement.
Note 3 Acquisitions
Fiscal Year 2017 Acquisition:
On
July 18, 2016
, the Company acquired certain assets and assumed certain liabilities of Aircom Manufacturing, Inc. (“Aircom”), located in Indianapolis, Indiana, for consideration of
$3.5 million
, which consisted of
$2.5 million
in cash payments and the settlement of a
$1.0 million
receivable. The Aircom acquisition was accounted for as a business combination and includes assets acquired of
$6.4 million
and liabilities assumed of
$1.4 million
based on their estimated fair values as of the acquisition date. Operating results are included in the Company’s consolidated financial statements beginning on July 18, 2016 and had an immaterial effect on the Company’s financial results for the year ended
June 30, 2017
. Direct transaction costs of the Aircom acquisition were not material and were expensed as incurred.
Consideration paid for Aircom was less than the estimated fair values of the assets acquired and liabilities assumed, which resulted in a bargain purchase gain of
$0.9 million
and was recorded in Non-operating income on the Consolidated Statements of Income. For tax purposes, the bargain purchase gain resulted in the reduction of the tax basis in Property and Equipment, resulting in a deferred tax liability of
$0.6 million
recorded on the opening balance sheet. This deferred tax liability reduced the bargain purchase gain, and the bargain purchase gain is not taxable.
The Company reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that all assets and liabilities were recognized and the valuation procedures and resulting estimates of fair values were appropriate. The bargain purchase gain resulted from the financial distress of Aircom as they were unable to secure sufficient capital to continue operations and service their existing debt.
Aircom provided component parts and services to the Company subsequent to the acquisition of Medivative Technologies, LLC, the acquisition of which is described further below. The Aircom acquisition is expected to add expertise in the manufacturing of precision metals and plastics to the Company’s package of value.
Fiscal Year 2016 Acquisition:
On
May 2, 2016
, the Company acquired certain assets and assumed certain liabilities of Medivative Technologies, LLC, (“Medivative”) located in Indianapolis, Indiana, a wholly owned subsidiary of privately held Aircom Manufacturing, Inc. The Medivative acquisition adds capabilities in mechanical design, precision plastics, combination devices, instruments, and complex system assembly to our package of value. It is expected to position us to better serve both existing and new customers in the medical end market vertical.
The Medivative acquisition was accounted for as a business combination with a total purchase price of
$7.3 million
, which included a cash payment of
$8.3 million
less a working capital adjustment of
$1.0 million
recorded in Receivables on the Consolidated Balance Sheets as of June 30, 2016. Assets acquired were
$11.6 million
, which included
$3.6 million
of tax deductible goodwill, and liabilities assumed were
$4.3 million
. The allocation of the purchase price to the assets acquired and liabilities assumed was based on their estimated fair values as of the date of acquisition. Direct transaction costs of the acquisition were not material. Operating results are included in the Company’s consolidated financial statements beginning on May 2, 2016 and had an immaterial effect on the financial results for the years ended
June 30, 2017
and
2016
.
Note 4 Inventories
Inventories are valued using the lower of first-in, first-out (“FIFO”) cost or market value. Inventory components at June 30 were as follows:
|
|
|
|
|
|
|
|
|
(Amounts in Thousands)
|
2017
|
|
2016
|
Finished products
|
$
|
18,916
|
|
|
$
|
21,577
|
|
Work-in-process
|
15,480
|
|
|
10,678
|
|
Raw materials
|
110,210
|
|
|
100,622
|
|
Total inventory
|
$
|
144,606
|
|
|
$
|
132,877
|
|
Note 5 Property and Equipment
Major classes of property and equipment at June 30 consist of the following:
|
|
|
|
|
|
|
|
|
(Amounts in Thousands)
|
2017
|
|
2016
|
Land
|
$
|
9,331
|
|
|
$
|
8,683
|
|
Buildings and improvements
|
63,996
|
|
|
58,579
|
|
Machinery and equipment
|
230,142
|
|
|
199,792
|
|
Construction-in-progress
|
14,108
|
|
|
14,681
|
|
Total
|
$
|
317,577
|
|
|
$
|
281,735
|
|
Less: Accumulated depreciation
|
(180,028
|
)
|
|
(161,034
|
)
|
Property and equipment, net
|
$
|
137,549
|
|
|
$
|
120,701
|
|
The useful lives used in computing depreciation are based on estimated service lives for classes of property, as follows:
|
|
|
|
Years
|
Buildings and improvements
|
3 to 40
|
Machinery and equipment
|
3 to 10
|
Leasehold improvements
|
Lesser of Useful Life or Term of Lease
|
Depreciation of property and equipment totaled, in millions,
$23.0
for fiscal year
2017
,
$19.5
for fiscal year
2016
, and
$19.0
for fiscal year
2015
.
Note 6 Commitments and Contingent Liabilities
Leases:
Operating leases for a warehouse facility and for land on which certain office and manufacturing facilities reside expire from fiscal year
2018
to
2056
and contain provisions under which minimum annual lease payments are
$0.1 million
, for each of the five years ending June 30,
2022
and aggregate
$0.7
million from fiscal year
2023
to the expiration of the leases in fiscal year
2056
. We are obligated under certain real estate leases to maintain the properties and pay real estate taxes. Certain leases include renewal options and escalation clauses. Total rental expense amounted to, in millions,
$0.7
,
$0.5
, and
$0.3
in fiscal years
2017
,
2016
, and
2015
, respectively.
As of
June 30, 2017
and
2016
, the Company had
no
capital leases.
Guarantees:
As of
June 30, 2017
and
2016
, we had
no
guarantees issued which were contingent on the future performance of another entity. Standby letters of credit may be issued to third-party suppliers and insurance institutions and can only be drawn upon in the event of the Company’s failure to pay its obligations to the beneficiary. We had a maximum financial exposure from unused standby letters of credit totaling
$0.4 million
as of both
June 30, 2017
and
2016
. We don’t expect circumstances to arise that would require us to perform under any of these arrangements and believe that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect our consolidated financial statements. Accordingly, no liability has been recorded as of
June 30, 2017
and
2016
with respect to the standby letters of credit. We also may enter into commercial letters of credit to facilitate payments to vendors and from customers.
Banker’s Acceptance Drafts:
The Company’s China operation, in limited circumstances, receives banker’s acceptance drafts from customers as settlement for their trade accounts receivable. We in turn may transfer the acceptance drafts to a supplier of ours in settlement of current accounts payable. These drafts contain certain recourse provisions afforded to the transferee under laws of The People’s Republic of China. If a transferee were to exercise its available recourse rights, our China operation would be required to satisfy the obligation with the transferee and the draft would revert back to our China operation. At
June 30, 2017
and
2016
, the drafts transferred and outstanding totaled
$2.1 million
and
$2.7 million
, respectively. No transferee has exercised their recourse rights against us. For additional information on banker’s acceptance drafts, see
Note 1 – Business Description and Summary of Significant Accounting Policies
of Notes to Consolidated Financial Statements.
Product Warranties:
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 periodically based on changes in historical cost trends and in certain cases where specific warranty issues become known.
Changes in the product warranty accrual during fiscal years
2017
,
2016
, and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in Thousands)
|
2017
|
|
2016
|
|
2015
|
Product Warranty Liability at the beginning of the year
|
$
|
605
|
|
|
$
|
621
|
|
|
$
|
911
|
|
Additions to warranty accrual (including changes in estimates)
|
415
|
|
|
160
|
|
|
625
|
|
Settlements made (in cash or in kind)
|
(427
|
)
|
|
(176
|
)
|
|
(915
|
)
|
Product Warranty Liability at the end of the year
|
$
|
593
|
|
|
$
|
605
|
|
|
$
|
621
|
|
Note 7 Credit Facilities
Credit facilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Availability to Borrow at
|
|
Borrowings Outstanding at
|
|
Borrowings Outstanding at
|
(Amounts in Millions, in U.S Dollar Equivalents)
|
June 30, 2017
|
|
June 30, 2017
|
|
June 30, 2016
|
Primary credit facility
(1)
|
$
|
39.6
|
|
|
$
|
10.0
|
|
|
$
|
9.0
|
|
Thailand overdraft credit facility
(2)
|
2.6
|
|
|
—
|
|
|
—
|
|
China revolving credit facility
(3)
|
7.5
|
|
|
—
|
|
|
—
|
|
Netherlands revolving credit facility
(4)
|
10.5
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
60.2
|
|
|
$
|
10.0
|
|
|
$
|
9.0
|
|
|
|
(1)
|
In connection with the spin-off, the Company entered into a U.S. primary credit facility (the “primary facility”) dated as of October 31, 2014. The credit facility expires in
October 2019
and provides for up to
$50 million
in borrowings, with an option to increase the amount available for borrowing to
$75 million
upon request, subject to participating banks’ consent. We will use this facility for acquisitions and general corporate purposes. A commitment fee is payable on the unused portion of the credit facility which was immaterial to our operating results in fiscal years
2017
,
2016
, and
2015
. The commitment fee on the unused portion of principal amount of the credit facility is payable at a rate that ranges from
20.0
to
25.0
basis points per annum as determined by the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA. Types of borrowings available on the primary facility include revolving loans, multi-currency term loans, and swingline loans. The interest rate on borrowings is dependent on the type of borrowings. The weighted-average interest rate on short-term borrowings outstanding under the credit facilities at
June 30, 2017
and
June 30, 2016
were
4.50%
and
1.69%
.
|
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, and
|
|
|
•
|
a fixed charge coverage ratio, determined as of the end of each of its fiscal quarters for the then most recently ended four fiscal quarters, to not be less than
1.10
to 1.00.
|
|
|
|
The Company had
$0.4 million
in letters of credit contingently committed against the credit facility at
June 30, 2017
.
|
|
|
(2)
|
The Company also maintains a foreign credit facility for its operation in Thailand which allows for borrowings of up to
90.0 million
Thai Baht (approximately
$2.6 million
at
June 30, 2017
exchange rates). This credit facility can be terminated at any time by either the Company or the bank by giving prior written notice of at least 15 days to the other party. Interest on borrowing under this facility is charged at a rate of interest determined by the bank in accordance with relevant laws and regulations for charging interest on an overdraft facility.
|
|
|
(3)
|
The Company also maintains a foreign revolving credit facility for its China operation. The China credit facility allows for borrowings of up to
$7.5 million
, which borrowings can be made in either Chinese Renminbi (RMB) or U.S. dollars. The availability of this uncommitted facility is at the sole discretion of the bank and is subject to the availability of funds and other relevant conditions. The bank may, at its sole discretion, agree to provide the facility on such terms and conditions as the bank deems appropriate. Further, the availability of the facility is also subject to the determination by the bank of the borrower’s actual need for such facility. Proceeds from the facility are to be used for general working capital purposes. Interest on borrowing under this facility is charged at a rate of interest determined by the bank and is dependent on the denomination of the currency borrowed. The facility matures on
May 31, 2018
.
|
(4) The Company established an uncommitted revolving credit facility in fiscal year 2017 for our Netherlands subsidiary. The Netherlands credit facility allows for borrowings of up to
9.2 million
Euro (approximately
$10.5 million
at
June 30, 2017
exchange rates), which borrowings can be made in Euro, U.S. dollars, or other optional currency. The availability of funds under this facility is at the sole discretion of the bank. Proceeds from the facility are to be used for general corporate purposes. Interest on borrowing under this facility is charged at a rate of interest dependent on the denomination of the currency borrowed. The facility matures on
June 21, 2018
.
Cash payments for interest on borrowings in fiscal years
2017
and
2016
were, in thousands,
$294
and
$44
, respectively, and
no
cash payments were made for interest on borrowings in fiscal year
2015
. Capitalized interest expense was immaterial during fiscal years
2017
,
2016
, and
2015
.
Note 8 Employee Benefit Plans
Retirement Plans:
In connection with the spin-off, the Company established a trusteed defined contribution retirement plan which is in effect for substantially all domestic employees meeting the eligibility requirements. All contributions for Kimball Electronics’ employees in former Parent’s plan at the spin date were transferred to the Company’s new plan on or around the spin date and were immediately fully vested. The Company also established a supplemental employee retirement plan (“SERP”) for executives and other key employees which enables them to defer cash compensation on a pre-tax basis in excess of IRS limitations. Assets in the former Parent SERP plan for Kimball Electronics employees were transferred to the Company’s plan on or around the spin date. 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.
The discretionary employer contribution for domestic employees is determined annually by the Compensation and Governance Committee of the Company’s Board of Directors. Total expense related to employer contributions to the domestic retirement plans was, in millions,
$1.7
,
$1.4
, and
$1.5
for fiscal years
2017
,
2016
, and
2015
, respectively.
Employees of certain foreign subsidiaries are covered by local pension or retirement plans. Total expense related to employer contributions to these foreign plans was, in millions,
$0.2
,
$0.3
, and
$0.2
for fiscal years
2017
,
2016
, and
2015
, respectively.
Severance Plans:
The Company established and maintains severance plans for all domestic employees, and prior to the spin-off, the Company’s domestic employees participated in severance plans sponsored by former Parent. These plans provide severance benefits to eligible employees meeting the plans’ qualifications, primarily involuntary termination without cause. There are no statutory requirements for the Company 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. Benefits are based upon an employee’s years of service and accumulate up to certain limits specified in the plans and include both salary and an allowance for medical benefits. In conjunction with the spin-off, these plans were remeasured and legally separated. There were no significant changes to the actuarial assumptions used in the remeasurement.
The components and changes in the Benefit Obligation, Accumulated Other Comprehensive Income (Loss), and Net Periodic Benefit Cost, for the domestic severance plans, are as follows:
|
|
|
|
|
|
|
|
|
|
June 30
|
(Amounts in Thousands)
|
2017
|
|
2016
|
Changes and Components of Benefit Obligation:
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
1,805
|
|
|
$
|
1,977
|
|
Service cost
|
302
|
|
|
328
|
|
Interest cost
|
39
|
|
|
50
|
|
Actuarial gain for the period
|
(285
|
)
|
|
(507
|
)
|
Benefits paid
|
(53
|
)
|
|
(43
|
)
|
Benefit obligation at end of year
|
$
|
1,808
|
|
|
$
|
1,805
|
|
Balance in current liabilities
|
$
|
385
|
|
|
$
|
317
|
|
Balance in noncurrent liabilities
|
1,423
|
|
|
1,488
|
|
Total benefit obligation recognized in the Consolidated Balance Sheets
|
$
|
1,808
|
|
|
$
|
1,805
|
|
|
|
|
|
|
|
|
|
|
|
June 30
|
(Amounts in Thousands)
|
2017
|
|
2016
|
Changes and Components in Accumulated Other Comprehensive Income (Loss) (before tax):
|
|
|
|
Accumulated Other Comprehensive Income (Loss) at beginning of year
|
$
|
(961
|
)
|
|
$
|
(680
|
)
|
Change in unrecognized prior service cost
|
—
|
|
|
(28
|
)
|
Net change in unrecognized actuarial (gain) loss
|
32
|
|
|
(253
|
)
|
Accumulated Other Comprehensive Income (Loss) at end of year
|
$
|
(929
|
)
|
|
$
|
(961
|
)
|
Balance in unrecognized actuarial (gain) loss
|
(929
|
)
|
|
(961
|
)
|
Total Accumulated Other Comprehensive Income (Loss) recognized in Share Owners’ Equity
|
$
|
(929
|
)
|
|
$
|
(961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in Thousands)
|
Year Ended June 30
|
Components of Net Periodic Benefit Cost (before tax):
|
2017
|
|
2016
|
|
2015
|
Service cost
|
$
|
302
|
|
|
$
|
328
|
|
|
$
|
327
|
|
Interest cost
|
39
|
|
|
50
|
|
|
50
|
|
Amortization of prior service cost
|
—
|
|
|
28
|
|
|
28
|
|
Amortization of actuarial (gain) loss
|
(317
|
)
|
|
(254
|
)
|
|
(146
|
)
|
Net periodic benefit cost recognized in the Consolidated Statements of Income
|
$
|
24
|
|
|
$
|
152
|
|
|
$
|
259
|
|
The benefit cost in the above table includes only normal recurring levels of severance activity, as estimated using an actuarial method. Unusual or non-recurring severance actions are not estimable using actuarial methods and are expensed in accordance with other applicable U.S. GAAP.
Prior service cost is amortized on a straight-line basis over the average remaining service period of employees that were active at the time of the plan initiation and actuarial (gain) loss is amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan.
The estimated actuarial net (gain) loss for the severance plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year is
$(287) thousand
.
No
prior service cost remains to be amortized for next fiscal year.
Assumptions used to determine fiscal year end benefit obligations are as follows:
|
|
|
|
|
|
2017
|
|
2016
|
Discount Rate
|
2.8%
|
|
2.2%
|
Rate of Compensation Increase
|
3.0%
|
|
3.0%
|
Weighted average assumptions used to determine fiscal year net periodic benefit costs are as follows:
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Discount Rate
|
2.4%
|
|
2.7%
|
|
2.7%
|
Rate of Compensation Increase
|
3.0%
|
|
3.0%
|
|
3.0%
|
Note 9 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 “Plan”) allows for the issuance of up to
4.5 million
shares and may be awarded 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.
Prior to the spin-off, former Parent maintained stock compensation plans in which our executives and certain key employees participated. All awards granted under the former Parent plans were based on former Parent’s Common Stock. Performance share awards issued and outstanding to Kimball Electronics employees under the former Parent plans as of the spin-off date were amended, in accordance with the terms of the plans, to provide an equitable adjustment as a result of the spin-off.
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.
Pre-tax stock compensation charged against income in fiscal years
2017
,
2016
, and
2015
was
$3.5 million
,
$3.4 million
, and
$3.5 million
, respectively, including
$1.8 million
allocated to us by former Parent prior to the spin-off. These costs are primarily included in Selling and Administrative Expenses.
Performance Shares:
The Company awards performance shares to officers and other key employees. Under these awards granted prior to fiscal year 2016, a number of shares will be issued to each participant based upon the attainment of the applicable bonus percentage calculated under the Company’s profit sharing incentive bonus plan as applied to a total potential share award made and approved by the Compensation and Governance Committee of the Board. Under these awards granted in and subsequent to fiscal year 2016, a number of shares will be issued to each participant based upon a combination of the bonus percentage attainment component above, adjusted to a three-year average bonus percentage, and a growth attainment component, which is the Company’s growth in sales revenue based on comparison of its three-year compounded annual growth rate (“CAGR”) with the Electronics Manufacturing Services Industry’s three-year CAGR.
Performance shares are vested when shares of the Company’s Common Stock are issued shortly after the end of the fiscal year in which the performance measurement period is complete. Certain outstanding performance shares are applicable to performance measurement periods in future fiscal years and will be measured at fair value when the performance targets are established in future fiscal years. The contractual life of performance shares ranges from
one year
to
five years
. If a participant is not employed on the date shares are issued, the performance share award is forfeited, except in the case of death, retirement at age 62 or older, total permanent disability, or certain other circumstances described in the Plan.
On December 2, 2014, Performance Share Awards issued and outstanding to Kimball Electronics employees under the former Parent plans were amended, in accordance with the terms of the plans, to provide an equitable adjustment as a result of the spin-off. The awards have been or will be granted in shares of the Company’s Common Stock, instead of Kimball International, Inc. shares, under the Kimball Electronics Plan. The amended awards retained the same terms and conditions and vesting schedule, issuance dates, and expiration dates of the original Kimball International awards.
A summary of the Company’s performance share activity during fiscal year
2017
is presented below:
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted Average
Grant Date
Fair Value
|
Performance shares outstanding at
July 1, 2016
|
804,391
|
|
|
$
|
11.21
|
|
Granted
|
—
|
|
|
$
|
—
|
|
Vested
|
(194,624
|
)
|
|
$
|
10.42
|
|
Forfeited
|
(6,653
|
)
|
|
$
|
11.80
|
|
Performance shares outstanding at
June 30, 2017
|
603,114
|
|
|
$
|
11.46
|
|
As of
June 30, 2017
, there was approximately
$4.4 million
of unrecognized compensation cost related to performance shares, based on the latest estimated attainment of performance goals. That cost is expected to be recognized over annual performance periods ending August 2017 through August 2019, with a weighted average vesting period of
eleven months
. The fair value of performance shares is based on the stock price at the date of grant. No performance shares were awarded during fiscal year 2017 as the Company changed the timing of when it awards performance shares from June to August to align the grant and vesting dates. During fiscal year
2017
and
2016
, respectively,
194,624
and
279,923
performance shares vested at a fair value of
$2.0 million
and
$2.7 million
. The performance shares vested represent the total number of shares vested prior to the reduction of shares withheld to satisfy tax withholding obligations.
No
Kimball Electronics performance shares vested during fiscal year
2015
. The number of shares presented in the above table, the amounts of unrecognized compensation, and the weighted average period include performance shares awarded that are applicable to future performance measurement periods and will be measured at fair value when the performance targets are established in future fiscal years.
Unrestricted Share Grants:
Unrestricted shares may be granted to employees and members of the Board as consideration for services rendered. Unrestricted share grants do not have vesting periods, holding periods, restrictions on sale, or other restrictions. The fair value of unrestricted shares is based on the stock price at the date of the award. During fiscal year
2017
,
2016
, and
2015
respectively, the Company granted a total of
10,477
,
47,262
, and
28,700
unrestricted shares at an average grant date fair value of
$15.75
,
$10.94
, and
$10.76
for a total fair value of
$0.2 million
,
$0.5 million
, and
$0.3 million
. Unrestricted shares were awarded to non-employee members of the Board as compensation for director’s fees, including directors’ elections to receive unrestricted shares in lieu of cash payment. Director’s fees are expensed over the period that directors earn the compensation.
Deferred Share Units:
Deferred share units may be granted to non-employee members of the Board under the Deferral Plan as compensation for the portion of their annual retainer fees resulting from their election to receive deferred share units in lieu of cash payment or unrestricted shares. Director’s fees are expensed over the period that directors earn the compensation. Deferred share units are participating securities and are payable in common stock upon a director’s retirement or termination from the Board or death. During fiscal year
2017
,
19,207
deferred share units were granted to non-employee members of the Board at an average grant date fair value of
$15.79
for a total fair value of
$0.3 million
.
Note 10 Income Taxes
The Company and its subsidiaries, prior to the spin-off, were included in former Parent’s tax returns in certain taxing jurisdictions. The provisions for income taxes for those certain jurisdictions were determined on a separate return basis and presented as such in these Consolidated Financial Statements.
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The components of the deferred tax assets and liabilities as of
June 30, 2017
and
2016
, were as follows:
|
|
|
|
|
|
|
|
|
(Amounts in Thousands)
|
2017
|
|
2016
|
Deferred Tax Assets:
|
|
|
|
|
|
Receivables
|
$
|
112
|
|
|
$
|
116
|
|
Inventory
|
1,792
|
|
|
1,288
|
|
Employee benefits
|
190
|
|
|
180
|
|
Deferred compensation
|
8,226
|
|
|
7,075
|
|
Other current liabilities
|
727
|
|
|
783
|
|
Tax credit carryforwards
|
749
|
|
|
700
|
|
Goodwill
|
1,421
|
|
|
1,823
|
|
Net operating loss carryforward
|
1,597
|
|
|
845
|
|
Net foreign currency losses
|
75
|
|
|
—
|
|
Property and equipment
|
1,774
|
|
|
2,174
|
|
Miscellaneous
|
1,387
|
|
|
890
|
|
Total asset
|
$
|
18,050
|
|
|
$
|
15,874
|
|
Deferred Tax Liabilities:
|
|
|
|
Net foreign currency gains
|
$
|
—
|
|
|
$
|
8
|
|
Miscellaneous
|
1,962
|
|
|
258
|
|
Total liability
|
$
|
1,962
|
|
|
$
|
266
|
|
Net Deferred Income Taxes
|
$
|
16,088
|
|
|
$
|
15,608
|
|
Income tax benefits associated with the net operating loss carryforwards expire from fiscal year
2023
to
2036
. Income tax benefits associated with tax credit carryforwards primarily expire from fiscal year
2017
to
2026
. No valuation allowances were recognized on deferred tax assets as of
June 30, 2017
or
2016
.
The components of income before taxes on income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30
|
(Amounts in Thousands)
|
2017
|
|
2016
|
|
2015
|
United States
|
$
|
10,051
|
|
|
$
|
1,919
|
|
|
$
|
1,195
|
|
Foreign
|
34,204
|
|
|
26,057
|
|
|
33,576
|
|
Total income before taxes on income
|
$
|
44,255
|
|
|
$
|
27,976
|
|
|
$
|
34,771
|
|
Foreign unremitted earnings of entities not included in the U.S. tax return have been included in the Consolidated Financial Statements without giving effect to the U.S. taxes that may be payable on distribution to the United States because it is not anticipated such earnings will be remitted to the United States. Under current applicable tax laws, if we chose to remit some or all of the funds we have designated as indefinitely reinvested outside the United States rather than making nontaxable repayments on our intercompany loans, the amount remitted would be subject to U.S. income taxes and applicable non-U.S. income and withholding taxes. Such earnings would also become taxable upon the sale or liquidation of these subsidiaries or upon remittance of dividends. The aggregate unremitted earnings of the Company’s foreign subsidiaries for which a deferred income tax liability has not been recorded was approximately
$214 million
as of
June 30, 2017
. Determination of the amount of unrecognized deferred tax liability on unremitted earnings is not practicable.
The provision for income taxes is composed of the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30
|
(Amounts in Thousands)
|
2017
|
|
2016
|
|
2015
|
Currently Payable:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
2,696
|
|
|
$
|
280
|
|
|
$
|
186
|
|
Foreign
|
8,130
|
|
|
5,848
|
|
|
6,586
|
|
State
|
134
|
|
|
50
|
|
|
108
|
|
Total current
|
$
|
10,960
|
|
|
$
|
6,178
|
|
|
$
|
6,880
|
|
Deferred Taxes:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
6
|
|
|
$
|
153
|
|
|
$
|
(188
|
)
|
Foreign
|
(631
|
)
|
|
(501
|
)
|
|
1,957
|
|
State
|
(259
|
)
|
|
(141
|
)
|
|
(83
|
)
|
Total deferred
|
$
|
(884
|
)
|
|
$
|
(489
|
)
|
|
$
|
1,686
|
|
Total provision for income taxes
|
$
|
10,076
|
|
|
$
|
5,689
|
|
|
$
|
8,566
|
|
A reconciliation of the statutory U.S. income tax rate to the Company’s effective income tax rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30
|
|
2017
|
|
2016
|
|
2015
|
(Amounts in Thousands)
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Tax computed at U.S. federal statutory rate
|
$
|
15,489
|
|
|
35.0
|
%
|
|
$
|
9,791
|
|
|
35.0
|
%
|
|
$
|
12,170
|
|
|
35.0
|
%
|
State income taxes, net of federal income tax benefit
|
(81
|
)
|
|
(0.2
|
)
|
|
(59
|
)
|
|
(0.2
|
)
|
|
16
|
|
|
—
|
|
Foreign tax rate differential
|
(3,832
|
)
|
|
(8.7
|
)
|
|
(2,998
|
)
|
|
(10.7
|
)
|
|
(4,482
|
)
|
|
(12.9
|
)
|
Impact of foreign exchange rates on foreign income taxes
|
(613
|
)
|
|
(1.4
|
)
|
|
1,026
|
|
|
3.7
|
|
|
1,274
|
|
|
3.7
|
|
Foreign subsidiary capitalization
|
—
|
|
|
—
|
|
|
(1,801
|
)
|
|
(6.4
|
)
|
|
—
|
|
|
—
|
|
Research credit
|
(348
|
)
|
|
(0.8
|
)
|
|
(320
|
)
|
|
(1.2
|
)
|
|
(421
|
)
|
|
(1.2
|
)
|
Spin-off costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
625
|
|
|
1.8
|
|
Other - net
|
(539
|
)
|
|
(1.1
|
)
|
|
50
|
|
|
0.1
|
|
|
(616
|
)
|
|
(1.8
|
)
|
Total provision for income taxes
|
$
|
10,076
|
|
|
22.8
|
%
|
|
$
|
5,689
|
|
|
20.3
|
%
|
|
$
|
8,566
|
|
|
24.6
|
%
|
During the year ended June 30, 2016, we recognized a foreign tax benefit, in thousands, of
$1,801
as a result of a favorable tax ruling related to the fiscal year 2015 capitalization of our Romania subsidiary.
Net cash payments for income taxes were, in thousands,
$5,896
,
$8,975
and
$11,783
in fiscal years
2017
,
2016
, and
2015
, respectively.
Changes in the unrecognized tax benefit, excluding accrued interest and penalties, during fiscal years
2017
,
2016
, and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in Thousands)
|
2017
|
|
2016
|
|
2015
|
Beginning balance - July 1
|
$
|
46
|
|
|
$
|
—
|
|
|
$
|
792
|
|
Tax positions related to prior fiscal years:
|
|
|
|
|
|
|
|
|
Additions
|
56
|
|
|
46
|
|
|
—
|
|
Reductions
|
—
|
|
|
—
|
|
|
(792
|
)
|
Tax positions related to current fiscal year:
|
|
|
|
|
|
|
|
|
Additions
|
—
|
|
|
—
|
|
|
—
|
|
Reductions
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
—
|
|
|
—
|
|
|
—
|
|
Lapses in statute of limitations
|
—
|
|
|
—
|
|
|
—
|
|
Ending balance - June 30
|
$
|
102
|
|
|
$
|
46
|
|
|
$
|
—
|
|
Portion that, if recognized, would reduce tax expense and effective tax rate
|
$
|
85
|
|
|
$
|
37
|
|
|
$
|
—
|
|
Unrecognized tax benefits at the beginning of fiscal year 2015 were allocated to us by former Parent. The unrecognized tax benefits at the spin-off date reverted back to former Parent for the prior fiscal years in which we were included in former Parent’s consolidated tax returns resulting in the reductions in the tax positions during fiscal year 2015. We do not expect the change in the amount of unrecognized tax benefits in the next 12 months to have a significant impact on our results of operations or financial position. We recognize interest and penalties related to unrecognized tax benefits in Provision for Income Taxes on the Consolidated Statements of Income.
Interest and penalties accrued for unrecognized tax benefits as of
June 30, 2017
,
2016
, and
2015
and expenses related to interest and penalties in fiscal years
2017
,
2016
, and
2015
were not material.
In connection with the spin-off, the Company entered into a Tax Matters Agreement with former Parent that governs the Company’s rights and obligations after the spin-off with respect to tax liabilities and benefits, tax attributes, tax contests, and other tax sharing regarding income taxes, other tax matters, and related tax returns. The Company will continue to have joint and several liabilities with former Parent with the IRS and certain U.S. state tax authorities for U.S. federal income and state taxes for the taxable periods in which the Company was a part of former Parent’s consolidated group. For additional information, see
Note 2 - Related Party Transactions
of Notes to Consolidated Financial Statements. The Company, former Parent, or one of our wholly-owned subsidiaries, files U.S. federal income tax returns and income tax returns in various state, local, and foreign jurisdictions. Former Parent is no longer subject to any significant U.S. federal tax examinations by tax authorities for years before fiscal year 2014. We or former Parent are subject to various state and local income tax examinations by tax authorities for years after June 30, 2012 and various foreign jurisdictions for years after June 30, 2011.
Note 11 Share Owners’ Equity
Effective October 16, 2014, the Company’s authorized capital was increased to
165 million
shares comprised of
15 million
preferred shares without par value and
150 million
common shares without par value. On the same day,
50 thousand
common shares outstanding were split into
29.1 million
common shares. On October 31, 2014, Kimball International, Inc., the Company’s sole Share Owner, distributed all
29.1 million
outstanding shares of Kimball Electronics common stock to Kimball International Share Owners in connection with the spin-off. Upon the spin-off, holders of Kimball International common stock received three shares of Kimball Electronics common stock for every four shares of Kimball International common stock held on October 22, 2014. Preferred and common shares were retrospectively restated for the number of Kimball Electronics shares authorized and outstanding immediately following these events.
On
October 21, 2015
, the Company’s Board of Directors (the “Board”) authorized an
18
-month stock repurchase plan (the “Plan”) allowing a repurchase of up to
$20 million
worth of common stock. On September 29, 2016, the Board extended the Plan to allow the repurchase of up to an additional
$20 million
worth of common stock with no expiration date. 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 may be suspended or discontinued at any time. During fiscal year
2017
, the Company repurchased
$21.9 million
of common stock under the Plan at an average cost of
$14.33
per share, which was recorded as Treasury stock, at cost in the Consolidated Balance Sheet. Since the inception of the Plan, the Company has repurchased
$35.1 million
of common stock under that Plan at an average cost of
$12.95
.
During fiscal year 2016, the Company acquired an additional
78,000
shares of its common stock, recorded as Treasury stock, at cost in the Consolidated Balance Sheet. These shares were not acquired in open market purchases as part of the Plan but were acquired in connection with automatically withholding shares from employees upon the vesting of performance share awards to satisfy minimum statutory withholding tax obligations.
Net Parent investment in the Consolidated Financial Statements represents former Parent’s historical investment in us, our accumulated net earnings after taxes, and the net effect of the transactions with and allocations from former Parent. As of July 1, 2014, Net Parent investment was converted to Additional paid-in capital. During fiscal year 2015, Net contributions from Parent of
$46.0 million
included non-cash net transfers to Parent of
$4.3 million
including net transfers of assets and liabilities and allocation of stock compensation. For additional information, see
Note 1 – Business Description and Summary of Significant Accounting Policies
and
Note 2 – Related Party Transactions
of Notes to Consolidated Financial Statements.
Note 12 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.
|
Our policy is to recognize transfers between these levels as of the end of each quarterly reporting period. There were no transfers between these levels during fiscal years
2017
and
2016
. There were also no changes in the inputs or valuation techniques used to measure fair values during fiscal year
2017
.
Financial Instruments Recognized at Fair Value:
The following methods and assumptions were used to measure fair value:
|
|
|
|
|
|
Financial Instrument
|
|
Level
|
|
Valuation Technique/Inputs Used
|
Cash Equivalents
|
|
1
|
|
Market - Quoted market prices
|
Derivative Assets: Foreign exchange contracts
|
|
2
|
|
Market - Based on observable market inputs using standard calculations, such as time value, forward interest rate yield curves, and current spot rates, considering counterparty credit risk
|
Trading securities: Mutual funds held in SERP
|
|
1
|
|
Market - Quoted market prices
|
Derivative Liabilities: Foreign exchange contracts
|
|
2
|
|
Market - Based on observable market inputs using standard calculations, such as time value, forward interest rate yield curves, and current spot rates adjusted for Kimball Electronics’ non-performance risk
|
Recurring Fair Value Measurements:
As of
June 30, 2017
and
2016
, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
(Amounts in Thousands)
|
Level 1
|
|
Level 2
|
|
Total
|
Assets
|
|
|
|
|
|
Cash equivalents
|
$
|
1,087
|
|
|
$
|
—
|
|
|
$
|
1,087
|
|
Derivatives: foreign exchange contracts
|
—
|
|
|
1,810
|
|
|
1,810
|
|
Trading securities: mutual funds held in nonqualified SERP
|
7,607
|
|
|
—
|
|
|
7,607
|
|
Total assets at fair value
|
$
|
8,694
|
|
|
$
|
1,810
|
|
|
$
|
10,504
|
|
Liabilities
|
|
|
|
|
|
Derivatives: foreign exchange contracts
|
$
|
—
|
|
|
$
|
2,928
|
|
|
$
|
2,928
|
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
2,928
|
|
|
$
|
2,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
(Amounts in Thousands)
|
Level 1
|
|
Level 2
|
|
Total
|
Assets
|
|
|
|
|
|
Cash equivalents
|
$
|
21,225
|
|
|
$
|
—
|
|
|
$
|
21,225
|
|
Derivatives: foreign exchange contracts
|
—
|
|
|
754
|
|
|
754
|
|
Trading securities: mutual funds held in nonqualified SERP
|
6,166
|
|
|
—
|
|
|
6,166
|
|
Total assets at fair value
|
$
|
27,391
|
|
|
$
|
754
|
|
|
$
|
28,145
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivatives: foreign exchange contracts
|
$
|
—
|
|
|
$
|
1,300
|
|
|
$
|
1,300
|
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
1,300
|
|
|
$
|
1,300
|
|
We had no Level 3 assets or liabilities during fiscal years
2017
and
2016
.
The nonqualified supplemental employee retirement plan (“SERP”) assets consist primarily of equity funds, balanced funds, a bond fund, 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 14 - Investments
of Notes to Consolidated Financial Statements for further information regarding the SERP.
Financial Instruments Not Carried At Fair Value:
Financial instruments that are not reflected in the Consolidated Balance Sheets at fair value that have carrying amounts which approximate fair value include the following:
|
|
|
|
|
|
Financial Instrument
|
|
Level
|
|
Valuation Technique/Inputs Used
|
Notes receivable
|
|
2
|
|
Market - Price approximated based on the assumed collection of receivables in the normal course of business, taking into account non-performance risk
|
Borrowings under credit facilities
|
|
2
|
|
Market - Based on observable market rates taking into account Kimball Electronics’ non-performance risk
|
The carrying value of our cash deposit accounts, trade accounts receivable, and trade accounts payable approximates fair value due to their relatively short maturity and immaterial non-performance risk.
Note 13 Derivative Instruments
Foreign Exchange Contracts:
We operate internationally and are therefore exposed to foreign currency exchange rate fluctuations in the normal course of our 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. Foreign exchange contracts are also used to hedge against foreign currency exchange rate risks related to intercompany balances denominated in currencies other than the functional currencies. As of
June 30, 2017
, we had outstanding foreign exchange contracts to hedge currencies against the U.S. dollar in the aggregate notional amount of
$27.6 million
and to hedge currencies against the Euro in the aggregate notional amount of
74.2 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 balance sheet as a derivative asset or liability. 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 effective portions of the gain or loss on the derivative instrument are initially recorded net of related tax effect in Accumulated Other Comprehensive Income (Loss), a component of Share Owners’ Equity, and are subsequently reclassified into earnings in the period or periods during which the hedged transaction is recognized in earnings. The ineffective portion of the derivative gain or loss is reported in Non-operating income or expense on the Consolidated Statements of Income immediately. 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 also reported in Non-operating income or expense on the Consolidated Statements of Income immediately.
Based on fair values as of
June 30, 2017
, we estimate that approximately
$0.2 million
of pre-tax derivative
loss
deferred in Accumulated Other Comprehensive Income (Loss) will be reclassified into earnings, along with the earnings effects of related forecasted transactions, within the fiscal year ending June 30,
2018
. Losses on foreign exchange contracts are generally offset by gains in operating costs 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
June 30, 2017
and
June 30, 2016
.
See
Note 12 - Fair Value
of Notes to Consolidated Financial Statements for further information regarding the fair value of derivative assets and liabilities and
Note 18 - Accumulated Other Comprehensive Income (Loss)
of Notes to Consolidated Financial Statements for the amount and changes in derivative gains and losses deferred in Accumulated Other Comprehensive Income (Loss).
Information on the location and amounts of derivative fair values in the Consolidated Balance Sheets and derivative gains and losses in the Consolidated Statements of Income are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivative Instruments on the Consolidated Balance Sheets
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
|
Fair Value As of
|
|
|
|
Fair Value As of
|
(Amounts in Thousands)
|
Balance Sheet Location
|
|
June 30
2017
|
|
June 30
2016
|
|
Balance Sheet Location
|
|
June 30
2017
|
|
June 30
2016
|
Derivatives Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
1,810
|
|
|
$
|
517
|
|
|
Accrued expenses
|
|
$
|
2,009
|
|
|
$
|
1,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
—
|
|
|
237
|
|
|
Accrued expenses
|
|
919
|
|
|
144
|
|
Total derivatives
|
|
|
$
|
1,810
|
|
|
$
|
754
|
|
|
|
|
$
|
2,928
|
|
|
$
|
1,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Effect of Derivative Instruments on Other Comprehensive Income (Loss)
|
|
|
|
|
June 30
|
(Amounts in Thousands)
|
|
|
|
2017
|
|
2016
|
|
2015
|
Amount of Pre-Tax Gain or (Loss) Recognized in Other Comprehensive Income (Loss) (OCI) on Derivatives (Effective Portion):
|
|
|
Foreign exchange contracts
|
|
$
|
779
|
|
|
$
|
(2,869
|
)
|
|
$
|
3,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Effect of Derivative Instruments on Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in Thousands)
|
|
|
|
Year Ended June 30
|
Derivatives in Cash Flow Hedging Relationships
|
|
Location of Gain or (Loss)
|
|
2017
|
|
2016
|
|
2015
|
Amount of Pre-Tax Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion):
|
|
|
|
|
Foreign exchange contracts
|
|
Cost of Sales
|
|
$
|
18
|
|
|
$
|
(3,535
|
)
|
|
$
|
1,310
|
|
Foreign exchange contracts
|
|
Non-operating income (expense)
|
|
(5
|
)
|
|
(1
|
)
|
|
2,998
|
|
Total
|
|
$
|
13
|
|
|
$
|
(3,536
|
)
|
|
$
|
4,308
|
|
|
|
|
|
|
|
|
|
|
Amount of Pre-Tax Gain or (Loss) Reclassified from Accumulated OCI into Income (Ineffective Portion):
|
|
|
|
|
Foreign exchange contracts
|
|
Non-operating income (expense)
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
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)
|
|
$
|
(42
|
)
|
|
$
|
381
|
|
|
$
|
1,734
|
|
|
|
|
|
|
|
|
|
|
Total Derivative Pre-Tax Gain (Loss) Recognized in Income
|
|
$
|
(29
|
)
|
|
$
|
(3,156
|
)
|
|
$
|
6,041
|
|
Note 14 Investments
Supplemental Employee Retirement Plan Investments:
The Company maintains a self-directed supplemental employee retirement plan (“SERP”) for executive and other key employees. The Company SERP utilizes 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. The SERP investment assets are classified as trading, and accordingly, realized and unrealized gains and losses are recognized in income in the Other Income (Expense) category. 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 (losses) for the fiscal years ended
June 30, 2017
,
2016
, and
2015
was, in thousands,
$789
,
$(321)
, and
$(27)
, respectively.
SERP asset and liability balances applicable to Kimball Electronics participants were as follows:
|
|
|
|
|
|
|
|
|
|
June 30
|
(Amounts in Thousands)
|
2017
|
|
2016
|
SERP investment - current asset
|
$
|
258
|
|
|
$
|
214
|
|
SERP investment - other long-term asset
|
7,349
|
|
|
5,952
|
|
Total SERP investment
|
$
|
7,607
|
|
|
$
|
6,166
|
|
SERP obligation - current liability
|
$
|
258
|
|
|
$
|
214
|
|
SERP obligation - other long-term liability
|
7,349
|
|
|
5,952
|
|
Total SERP obligation
|
$
|
7,607
|
|
|
$
|
6,166
|
|
Note 15 Accrued Expenses
Accrued expenses consisted of:
|
|
|
|
|
|
|
|
|
|
June 30
|
(Amounts in Thousands)
|
2017
|
|
2016
|
Taxes
|
$
|
6,412
|
|
|
$
|
1,878
|
|
Compensation
|
16,670
|
|
|
13,503
|
|
Derivatives
|
2,928
|
|
|
1,300
|
|
Retirement plan
|
1,506
|
|
|
1,283
|
|
Insurance
|
1,426
|
|
|
1,087
|
|
Other expenses
|
5,688
|
|
|
4,600
|
|
Total accrued expenses
|
$
|
34,630
|
|
|
$
|
23,651
|
|
Note 16 Geographic Information
The following geographic area data includes net sales based on the destination of the product shipped and long-lived assets based on physical location. Long-lived assets include property and equipment and other long-term assets such as software.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Year Ended June 30
|
(Amounts in Thousands)
|
2017
|
|
2016
|
|
2015
|
Net Sales:
|
|
|
|
|
|
United States
|
$
|
403,830
|
|
|
$
|
383,678
|
|
|
$
|
396,516
|
|
China
|
152,817
|
|
|
150,080
|
|
|
127,761
|
|
Mexico
|
94,726
|
|
|
76,499
|
|
|
81,117
|
|
Other Foreign
|
279,541
|
|
|
231,803
|
|
|
213,956
|
|
Total net sales
|
$
|
930,914
|
|
|
$
|
842,060
|
|
|
$
|
819,350
|
|
Long-Lived Assets:
|
|
|
|
|
|
United States
|
$
|
67,817
|
|
|
$
|
53,596
|
|
|
$
|
49,689
|
|
Poland
|
32,315
|
|
|
34,588
|
|
|
33,692
|
|
China
|
17,106
|
|
|
15,922
|
|
|
16,676
|
|
Romania
|
16,468
|
|
|
12,249
|
|
|
1,710
|
|
Other Foreign
|
8,355
|
|
|
8,839
|
|
|
9,382
|
|
Total long-lived assets
|
$
|
142,061
|
|
|
$
|
125,194
|
|
|
$
|
111,149
|
|
Note 17 Earnings Per Share
Basic and diluted earnings per share were calculated as follows under the two-class method:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands, except per share data)
|
Year Ended June 30
|
|
2017
|
|
2016
|
|
2015
|
Basic and Diluted Earnings Per Share:
|
|
|
|
|
|
Net Income
|
$
|
34,179
|
|
|
$
|
22,287
|
|
|
$
|
26,205
|
|
Less: Net Income allocated to participating securities
|
15
|
|
|
—
|
|
|
—
|
|
Net Income allocated to common Share Owners
|
$
|
34,164
|
|
|
$
|
22,287
|
|
|
$
|
26,205
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
27,413
|
|
|
28,916
|
|
|
29,162
|
|
Dilutive effect of average outstanding performance shares
|
110
|
|
|
260
|
|
|
226
|
|
Dilutive effect of average outstanding deferred stock units
|
7
|
|
|
—
|
|
|
—
|
|
Dilutive weighted average shares outstanding
|
27,530
|
|
|
29,176
|
|
|
29,388
|
|
|
|
|
|
|
|
Earnings Per Share of Common Stock:
|
|
|
|
|
|
Basic
|
$
|
1.25
|
|
|
$
|
0.77
|
|
|
$
|
0.90
|
|
Diluted
|
$
|
1.24
|
|
|
$
|
0.76
|
|
|
$
|
0.89
|
|
|
|
|
|
|
|
Note 18 Accumulated Other Comprehensive Income (Loss)
The changes in the balances of each component of Accumulated Other Comprehensive Income (Loss), net of tax, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postemployment Benefits
|
|
|
(Amounts in Thousands)
|
Foreign Currency Translation Adjustments
|
|
Derivative Gain (Loss)
|
|
Prior Service Costs
|
|
Net Actuarial Gain (Loss)
|
|
Accumulated Other Comprehensive Income (Loss)
|
Balance at June 30, 2015
|
$
|
(9,113
|
)
|
|
$
|
(3,557
|
)
|
|
$
|
(18
|
)
|
|
$
|
441
|
|
|
$
|
(12,247
|
)
|
Other comprehensive income (loss) before reclassifications
|
(540
|
)
|
|
(1,932
|
)
|
|
—
|
|
|
312
|
|
|
(2,160
|
)
|
Reclassification to (earnings) loss
|
—
|
|
|
2,352
|
|
|
18
|
|
|
(153
|
)
|
|
2,217
|
|
Net current-period other comprehensive income (loss)
|
$
|
(540
|
)
|
|
$
|
420
|
|
|
$
|
18
|
|
|
$
|
159
|
|
|
$
|
57
|
|
Balance at June 30, 2016
|
$
|
(9,653
|
)
|
|
$
|
(3,137
|
)
|
|
$
|
—
|
|
|
$
|
600
|
|
|
$
|
(12,190
|
)
|
Other comprehensive income (loss) before reclassifications
|
2,777
|
|
|
523
|
|
|
—
|
|
|
178
|
|
|
3,478
|
|
Reclassification to (earnings) loss
|
—
|
|
|
(174
|
)
|
|
—
|
|
|
(198
|
)
|
|
(372
|
)
|
Net current-period other comprehensive income (loss)
|
2,777
|
|
|
349
|
|
|
—
|
|
|
(20
|
)
|
|
3,106
|
|
Balance at June 30, 2017
|
$
|
(6,876
|
)
|
|
$
|
(2,788
|
)
|
|
$
|
—
|
|
|
$
|
580
|
|
|
$
|
(9,084
|
)
|
The following reclassifications were made from Accumulated Other Comprehensive Income (Loss) to the Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications from Accumulated Other Comprehensive Income (Loss)
|
|
|
|
Affected Line Item in the
Consolidated Statements of Income
|
|
Year Ended June 30
|
|
(Amounts in Thousands)
|
|
2017
|
|
2016
|
|
Derivative Gain (Loss)
(1)
|
|
$
|
18
|
|
|
$
|
(3,535
|
)
|
|
Cost of Sales
|
|
|
(5
|
)
|
|
(2
|
)
|
|
Non-operating income (expense), net
|
|
|
161
|
|
|
1,185
|
|
|
Benefit (Provision) for Income Taxes
|
|
|
$
|
174
|
|
|
$
|
(2,352
|
)
|
|
Net of Tax
|
Postemployment Benefits:
|
|
|
|
|
|
|
Amortization of Prior Service Costs
(2)
|
|
$
|
—
|
|
|
$
|
(16
|
)
|
|
Cost of Sales
|
|
|
—
|
|
|
(12
|
)
|
|
Selling and Administrative Expenses
|
|
|
—
|
|
|
10
|
|
|
Benefit (Provision) for Income Taxes
|
|
|
$
|
—
|
|
|
$
|
(18
|
)
|
|
Net of Tax
|
|
|
|
|
|
|
|
Amortization of Actuarial Gain (Loss)
(2)
|
|
$
|
181
|
|
|
$
|
144
|
|
|
Cost of Sales
|
|
|
136
|
|
|
110
|
|
|
Selling and Administrative Expenses
|
|
|
(119
|
)
|
|
(101
|
)
|
|
Benefit (Provision) for Income Taxes
|
|
|
$
|
198
|
|
|
$
|
153
|
|
|
Net of Tax
|
|
|
|
|
|
|
|
Total Reclassifications for the Period
|
|
$
|
372
|
|
|
$
|
(2,217
|
)
|
|
Net of Tax
|
Amounts in parentheses indicate reductions to income.
Note 19 Quarterly Financial Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(Amounts in Thousands, Except for Per Share Data)
|
September 30
|
|
December 31
|
|
March 31
|
|
June 30
|
Fiscal Year 2017:
|
|
|
|
|
|
|
|
Net Sales
|
$
|
226,451
|
|
|
$
|
230,265
|
|
|
$
|
232,930
|
|
|
$
|
241,268
|
|
Gross Profit
|
18,322
|
|
|
20,553
|
|
|
18,718
|
|
|
18,002
|
|
Other General Income
(1)
|
(4,005
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Net Income
|
10,122
|
|
|
7,812
|
|
|
8,117
|
|
|
8,128
|
|
Basic Earnings Per Share
|
$
|
0.36
|
|
|
$
|
0.29
|
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
Diluted Earnings Per Share
|
$
|
0.36
|
|
|
$
|
0.28
|
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
Fiscal Year 2016:
|
|
|
|
|
|
|
|
Net Sales
|
$
|
200,418
|
|
|
$
|
207,129
|
|
|
$
|
214,111
|
|
|
$
|
220,402
|
|
Gross Profit
|
15,280
|
|
|
16,115
|
|
|
16,185
|
|
|
16,958
|
|
Net Income
|
4,475
|
|
|
4,564
|
|
|
7,477
|
|
|
5,771
|
|
Basic Earnings Per Share
|
$
|
0.15
|
|
|
$
|
0.16
|
|
|
$
|
0.26
|
|
|
$
|
0.20
|
|
Diluted Earnings Per Share
|
$
|
0.15
|
|
|
$
|
0.16
|
|
|
$
|
0.26
|
|
|
$
|
0.20
|
|
(1) Other General Income included
$4.0 million
resulting from a payment received related to a class action lawsuit in which Kimball Electronics was a class member.
Item 9 -
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A -
Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Kimball Electronics maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation of those controls and procedures performed, the Chief Executive Officer and Chief Financial Officer of the Company concluded that its disclosure controls and procedures were effective as of
June 30, 2017
.
(b) Management’s report on internal control over financial reporting.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations adopted pursuant thereto, the Company included a report of management’s assessment of the effectiveness of its internal control over financial reporting as part of this report. Management’s report is included in the Company’s Consolidated Financial Statements under the caption entitled “Management’s Report on Internal Control Over Financial Reporting” and is incorporated herein by reference.
We are an emerging growth company, as defined by the JOBS Act, and are subject to reduced public company reporting requirements. The JOBS Act provides that an emerging growth company is not required to have the effectiveness of the Company’s internal control over financial reporting audited by its external auditors for as long as the Company is deemed to be an emerging growth company. Therefore, an independent attestation report on the effectiveness of the Company’s internal control over financial reporting is not included in this report.
(c) Changes in internal control over financial reporting.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended
June 30, 2017
that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B -
Other Information
None.
PART III