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, multifaceted manufacturing solutions provider. We provide contract electronics manufacturing services (“EMS”) and diversified manufacturing services, including engineering and supply chain support, to customers in the automotive, medical, industrial, and public safety end markets. 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 further offer diversified contract manufacturing services for non-electronic components, medical disposables, precision molded plastics, and production automation, test, and inspection equipment. We are well recognized by customers and industry trade publications for our excellent quality, reliability, and innovative service.
The Company acquired GES Holdings, Inc., Global Equipment Services and Manufacturing, Inc., and its subsidiaries (collectively referred to as “GES”) on October 1, 2018, which specialize in design, production, and servicing of automation, test, and inspection equipment for industrial applications in the semiconductor, electronics, and life sciences industries.
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. The operating results of the GES acquisition are included in the Consolidated Financial Statements beginning as of the acquisition date of October 1, 2018.
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. We have made estimates and assumptions considering the impacts of the global emergence of COVID-19 on our business. These estimates may change as new events occur and more information is obtained.
Segment Information:
Kimball Electronics has business units located in the United States, China, Mexico, Poland, Romania, and Thailand, and each of these business units qualify as operating segments. In addition, GES has operations located in the United States, China, India, Japan, and Vietnam. The GES operations qualify as a single operating segment with its group results regularly reviewed by our chief operating decision maker, which is our Chief Executive Officer.
Our operating segments meet the aggregation criteria under the current accounting guidance for segment reporting. As of June 30, 2020, all of our operating segments provide contract manufacturing services, including engineering and supply chain support, for the production of electronic assemblies and other products including medical disposables, precision molded plastics, and automation, test, and inspection equipment primarily in automotive, medical, industrial, and public safety applications, 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 have similar characteristics. Each of our operating segments service customers in multiple markets, and many of our customers’ programs are manufactured and serviced by multiple operating segments. We leverage global processes such as component procurement and customer pricing that provide commonality and consistency among the various regions in which we operate. All of our operating segments have similar long-term economic characteristics, and as such, have been aggregated into one reportable segment.
Revenue Recognition:
We recognize revenue in accordance with the standard issued by the Financial Accounting Standards Board (“FASB”), Revenue from Contracts with Customers and all the related amendments (“New Revenue Guidance”). Our revenue from contracts with customers is generated primarily from manufacturing services provided for the production of electronic assemblies, components, medical disposables, precision molded plastics, and automation, test, and inspection equipment built to customer’s specifications. Our customer agreements are generally not for a definitive term but continue for the relevant product’s life cycle. Typically, our customer agreements do not commit the customer to purchase our services until a purchase order is provided, which is generally short term in nature. Customer purchase orders primarily have a single performance obligation. Generally, the prices stated in the customer purchase orders are agreed upon prices for the manufactured product and do not vary over the term of the order, and therefore, the majority of our contracts do not contain variable consideration. In limited circumstances, we may enter into a contract where we offer our customer a rebate for specific volume thresholds or other incentives; in these cases, the rebates or incentives are accounted for as variable consideration.
The majority of our revenue is recognized over time as manufacturing services are performed as we manufacture a product to customer specifications with no alternative use and we have an enforceable right to payment for performance completed to date. The remaining revenue for manufacturing services is recognized when the customer obtains control of the product, typically either upon shipment or delivery of the product dependent on the terms of the contract, and the customer is able to direct the use of and obtain substantially all of the remaining benefits from the asset. We generally recognize revenue over time using costs based input methods, in which judgment is required to evaluate assumptions including the total estimated costs to determine our progress towards contract completion and to calculate the corresponding amount of revenue to recognize. Estimated costs include material, direct and indirect labor, and appropriate applied overheads. Costs based input methods are considered a faithful depiction of our efforts and progress toward satisfying our performance obligations for manufacturing services and for which we believe we are entitled to payment for performance completed to date. The cumulative effect of revisions to estimates related to net contract revenues or costs are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated.
We have elected to account for shipping and handling activities related to contracts with customers as costs to fulfill our promise to transfer the associated services and products. Accordingly, we record customer payments of shipping and handling costs as a component of net sales and classify such costs as a component of cost of sales. We recognize sales net of applicable sales or value add taxes. Based on estimated product returns and price concessions, a reserve for returns and allowances is recorded at the time revenue is recognized, resulting in a reduction of net revenue.
Direct incremental costs to obtain and fulfill a contract are capitalized as a contract asset only if they are material, expected to be recovered, and are not accounted for in accordance with other guidance. Incidental items that are immaterial in the context of the contract are recognized as expense in the period incurred.
On July 1, 2018, we adopted the New Revenue Guidance for all contracts using the modified retrospective transition method. Prior to fiscal year 2019, we recognized revenue when persuasive evidence of an arrangement existed, delivery occurred, the sales price was fixed or determinable, and collectability was reasonably assured. Delivery was not considered to have occurred until the title and the risk of loss passed to the customer according to the terms of the contract. Title and risk of loss were considered transferred upon shipment to or receipt at our customers’ locations, or in limited circumstances, as determined by other specific sales terms of the transaction.
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. Management believes that historical loss information
generally provides a basis for its assessment of expected credit losses. 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 fiscal years 2020, 2019, and 2018, we sold, without recourse, $280.7 million, $261.2 million, and $181.5 million of accounts receivable, respectively. Factoring fees were $1.9 million, $1.7 million, and $1.1 million during fiscal years 2020, 2019, and 2018, respectively, and were included in Selling and Administrative Expense on the Consolidated Statements of Income.
One of our China operations, in limited circumstances, may receive banker’s acceptance drafts from customers as payment on account. 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 $7.1 million and $4.2 million at June 30, 2020 and 2019, 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 2020, 2019, and 2018 were $6.8 million, $2.7 million, and $5.5 million, respectively. See Note 7 - 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 and net realizable 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 and repairs are expensed. Depreciation and expenses for maintenance and repairs 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 2020, 2019, and 2018.
Goodwill:
Goodwill represents the difference between the purchase price and the related underlying tangible and intangible net asset fair values resulting from business acquisitions. Annually, or if conditions indicate an earlier review is necessary, goodwill is assessed or tested at the reporting unit level. If the estimated fair value of the reporting unit is less than the carrying value, goodwill is written down to its estimated fair value. See section entitled “New Accounting Standards” below for more information on the adoption of accounting guidance for simplifying the test for goodwill impairment.
To test for goodwill impairment, we use a combination of the Income Approach and the Market Approach. The discounted cash flow method (Income Approach) uses forecasted information based on management’s strategic plans and projections. Discount
rates are developed using a weighted average cost of capital (“WACC”) methodology. The WACC represents the blended average required rate of return for equity and debt capital based on observed market return data and company specific risk factors. In the Market Approach, fair value is determined using transactional evidence for similar publicly traded equity. See Note 6 - Goodwill and Other Intangible Assets for more information on the June 30, 2020 GES goodwill impairment test.
Other Intangible Assets:
Other Intangible Assets reported on the Consolidated Balance Sheets consist of capitalized software, customer relationships, technology, and trade name. Intangible assets are reviewed for impairment, and their remaining useful lives evaluated for revision, when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. 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 could include 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. We have not recognized impairment on intangible assets during fiscal years 2020, 2019, or 2018.
Research and Development:
The costs of research and development are expensed as incurred. Research and development costs were approximately, in millions, $17, $15, and $11 in fiscal years 2020, 2019, and 2018, respectively.
Insurance and Self-insurance:
We are self-insured up to certain limits for general liability, workers’ compensation, and certain domestic 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, 2020 and 2019, accrued liabilities for self-insurance exposure were $1.6 million and $1.7 million, respectively.
The remainder of our workforce not covered by self-insured plans have medical and disability coverage through either our external plans or government plans. Insurance benefits are not provided to retired employees.
Income Taxes:
Deferred income tax assets and liabilities, recorded in Other Assets and Other long-term liabilities, respectively, in the Consolidated Balance Sheets, are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. We evaluate the recoverability of deferred tax assets each quarter by assessing the likelihood of future taxable income and available tax planning strategies that could be implemented to realize our deferred tax assets. If recovery is not likely, we provide a valuation allowance based on our best estimate of future taxable income in the various taxing jurisdictions and the amount of deferred taxes ultimately realizable. Future events could change management’s assessment.
We operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex uncertain tax positions, which may require an extended period of time to resolve. A tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. We maintain a liability for uncertain income tax and other tax positions, including accrued interest and penalties on those positions. As tax positions are effectively settled, the tax liability is adjusted accordingly. We recognize interest and penalties related to unrecognized tax benefits in Provision for Income Taxes on the Consolidated Statements of Income.
Concentrations of Credit Risk:
We have business and credit risks associated with our customers concentrated in the automotive, medical, industrial, and public safety industries. The Company monitors credit quality and associated risks of receivables 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.
A summary of significant customers’ net sales and trade receivables as a percentage of consolidated net sales and consolidated trade receivables is as follows:
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Net Sales
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Trade Receivables
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Year Ended June 30
|
|
As of June 30
|
|
2020
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|
2019
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|
2018
|
|
2020
|
|
2019
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Philips
|
16%
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|
14%
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|
13%
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|
*
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|
*
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ZF
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*
|
|
12%
|
|
15%
|
|
*
|
|
14%
|
Nexteer Automotive
|
14%
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|
12%
|
|
13%
|
|
17%
|
|
16%
|
Regal Beloit Corporation
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*
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|
*
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|
*
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|
*
|
|
10%
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|
|
|
|
|
|
|
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|
* 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 one of the Company’s China operations and standby letters of credit entered into in the normal course of business as described in Note 7 - Commitments and Contingent Liabilities of Notes to Consolidated Financial Statements.
Other General Income:
Other General Income in fiscal year 2019 consisted of $0.3 million resulting from payments received related to class action lawsuits in which Kimball Electronics was a class member. We recorded no Other General Income during fiscal years 2020 and 2018.
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, government subsidies, bank charges, 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. Non-operating expense in fiscal year 2020 included a $3.8 million final net working capital adjustment recorded after the end of the measurement period of the GES acquisition that was determined through the dispute resolution procedure provided for under the terms of the asset purchase agreement.
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 section entitled “New Accounting Standards” below for information on the adoption of new derivative guidance and Note 14 - Derivative Instruments of Notes to Consolidated Financial Statements for more information on derivative instruments and hedging activities.
Stock-Based Compensation:
As described in Note 10 - 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 also maintains 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. 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 for which performance targets have been established and is expected to vest. The Company has elected to account for forfeitures by reversing the compensation costs at the time a forfeiture occurs.
New Accounting Standards:
Adopted in Fiscal Year 2020:
In February 2016, the Financial Accounting Standards Board (“FASB”) issued guidance on leases with subsequent amendments to this new guidance in January 2018, July 2018, and December 2018. The new guidance requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by those leases and requires additional qualitative and quantitative disclosures. Under previous guidance, only capital leases were recognized on the balance sheet. We adopted this standard on July 1, 2019, the beginning of our first quarter of fiscal year 2020, under the modified retrospective method. As allowed by the July 2018 amendment, the Company has not recast the comparative periods.
We elected the “package of practical expedients,” which permits us not to reassess under the new standard our prior conclusions about lease identification, classification, and initial direct costs. We also elected the short-term lease recognition exemption, permitting us not to recognize right-of-use assets and lease liabilities for leases with a term of 12 months or less and do not include a purchase option whose exercise is reasonably certain.
Lease assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our estimated incremental borrowing rate, unless the implicit rate is readily determinable. The estimated incremental borrowing rate is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.
The adoption resulted in the recognition of $2.6 million of right-of-use assets and lease liabilities on our Condensed Consolidated Balance Sheet, primarily for our real estate operating leases, on the adoption date. The adoption did not have a material effect on our results of operations or cash flows. There was no cumulative-effect adjustment to equity. See Note 20 - Leases of Notes to Consolidated Financial Statements for more information on leases.
In August 2017, the FASB issued guidance on Derivatives and Hedging. The pronouncement expands and refines hedge accounting, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The Company adopted this during the first quarter of fiscal year 2020 with an immaterial effect on our Consolidated Financial Statements.
In January 2017, the FASB issued guidance for Intangibles - Goodwill and Other, which simplifies the goodwill impairment test by eliminating the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test. An entity should perform its goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount, recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The guidance is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption allowed and should be applied on a prospective basis. The Company elected to early adopt this guidance beginning in the fourth quarter of fiscal year 2020, and applied to its fourth quarter goodwill impairment tests discussed in Note 6 - Goodwill and Other Intangible Assets.
Not Yet Adopted:
In June 2016, the FASB issued guidance on the Measurement of Credit Losses on Financial Instruments, which replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. We will adopt this standard effective July 1, 2020, and the adoption will not have a material effect on our consolidated financial statements.
In August 2018, the FASB issued guidance on Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This new guidance amends the accounting for implementation, setup, and other upfront costs incurred in a cloud computing hosting arrangement. The amendment aligns the requirement for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendment also requires companies to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, including options to extend the agreement that is in control of the customer. The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The guidance is to be adopted either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We plan to adopt prospectively effective July 1, 2020, and the adoption of this standard will not have a material effect on our consolidated financial statements.
In December 2019, the FASB issued guidance on Simplifying the Accounting for Income Taxes, intended to simplify various aspects related to the accounting for income taxes. The guidance is effective for fiscal years beginning after December 15, 2020 and for interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.
Note 2 Acquisitions
On October 1, 2018, the Company completed the acquisition of GES Holdings, Inc., Global Equipment Services and Manufacturing, Inc., and its subsidiaries (collectively referred to as “GES”). The acquisition included purchasing substantially all of the assets and assuming certain liabilities of GES Holdings, Inc., Global Equipment Services and Manufacturing, Inc., GES Infotek Pvt. Ltd., (India), GES Japan KK, Global Equipment Services and Manufacturing (Suzhou) Co., Ltd., (China), Suzhou Global Equipment Services and Trading Co., Ltd. (China), and acquiring 100% of the capital stock of Global Equipment Services & Manufacturing Vietnam Company Limited.
This acquisition supported the Company’s strategy for growth and diversification into a multifaceted manufacturing solutions company. GES specializes in design, production, and servicing of automation, test, and inspection equipment for industrial applications in the semiconductor, electronics, and life sciences industries.
Incremental costs expensed as incurred directly related to the acquisition has totaled $2.2 million, of which $0.8 million, $0.5 million, and $0.9 million were expensed during the fiscal years ended June 30, 2020, 2019, and 2018, respectively. These costs were recorded in Selling and Administrative Expenses on our Consolidated Statements of Income. The operating results of this acquisition are included in the Company’s consolidated financial statements beginning on the acquisition date of October 1, 2018. The acquisition was primarily funded with the Company’s primary credit facility.
The GES acquisition was accounted for as a business combination. The Company recorded a net adjusted purchase price of $42.4 million which included a reduction for a net working capital adjustment of $7.6 million. The net working capital adjustment was disputed by the sellers, and in July 2020, it was determined, through the dispute resolution procedure provided for under the terms of the asset purchase agreement, the final net working capital adjustment to be $3.8 million. As a result, for fiscal year 2020, after the end of the twelve-month measurement period, the Company recorded a $3.8 million pre-tax charge in the Non-operating expense line on the Consolidated Statements of Income. The twelve-month measurement period ended on September 30, 2019.
The following table summarizes the final purchase price allocation to assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, with the excess allocated to goodwill. Measurement period adjustments during the first quarter of fiscal year 2020 included a reduction of $2.0 million to Property and Equipment as a result of additional information obtained related to the valuation of certain equipment as of the acquisition date and a $0.2 million reduction in Other long-term liabilities to adjust deferred tax liabilities on the equipment. These measurement period adjustments to the purchase price allocation in the first quarter of fiscal year 2020 increased Goodwill by $1.8 million. For tax purposes, $8.9 million of the goodwill in the following table is expected to be deductible. See Note 1 – Business Description and Summary of Significant Accounting Policies and Note 6 - Goodwill and Other Intangible Assets of Notes to Consolidated Financial Statements for information on subsequent testing and measurement of Goodwill.
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|
|
|
|
(Amounts in Thousands)
|
October 1, 2018
|
Cash
|
$
|
2,257
|
|
Receivables
|
15,656
|
|
Inventories
|
6,454
|
|
Prepaid expenses and other current assets
|
1,424
|
|
Property and Equipment
|
7,037
|
|
Other Intangible Assets
|
19,259
|
|
Other Assets
|
498
|
|
Goodwill
|
13,745
|
|
Total assets acquired
|
$
|
66,330
|
|
|
|
Borrowings under Credit Facilities
|
$
|
12,843
|
|
Accounts payable
|
4,113
|
|
Accrued expenses
|
1,340
|
|
Other long-term liabilities
|
5,653
|
|
Total liabilities assumed
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$
|
23,949
|
|
Net assets acquired
|
$
|
42,381
|
|
Income tax liabilities, indirect tax liabilities, and liabilities for unrecognized tax benefits, including interest and penalties, of $4.2 million were recorded as of October 1, 2018 related to pre-closing tax periods of Global Equipment Services & Manufacturing Vietnam Company Limited of which $3.9 million was recorded in Other long-term liabilities and $0.3 million was included in Accrued expenses. This reflects management’s best assessment of the estimated taxes, interest, and penalties as of the acquisition date that are more likely than not to be paid, or for indirect taxes the probable amounts due to the tax authorities, including interest and penalties, under the applicable laws in the various jurisdictions. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is significantly different from our current estimate of the tax liabilities. Included in the Receivables line above is a related indemnification asset of $4.2 million for these estimated tax liabilities. The seller has agreed to indemnify the buyer in the purchase agreements for all taxes allocable to all pre-closing tax periods.
Other Intangible Assets include the estimated fair values for finite-lived intangible assets acquired and are listed in the table below along with their estimated useful lives which are being amortized on a straight-line basis.
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|
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|
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|
|
(Amounts in Thousands)
|
Estimated
Fair Value
|
|
Estimated useful life
(years)
|
Software
|
$
|
379
|
|
|
3 to 7
|
Technology
|
5,060
|
|
|
5
|
Trade name
|
6,369
|
|
|
10
|
Customer relationships
|
7,451
|
|
|
15
|
Total other intangible assets
|
$
|
19,259
|
|
|
|
Note 3 Revenue from Contracts with Customers
Our revenue from contracts with customers is generated primarily from manufacturing services provided for the production of electronic assemblies, electronic and non-electronic components, medical disposables, precision molded plastics, and automation, test, and inspection equipment in automotive, medical, industrial, and public safety applications, to the specifications and designs of our customers.
The following table disaggregates our revenue by end market vertical for fiscal years 2020 and 2019:
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Year Ended
|
(Amounts in Millions)
|
2020
|
|
2019
|
Vertical Markets:
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|
|
|
Automotive
|
$
|
457.4
|
|
|
$
|
474.3
|
|
Medical
|
397.8
|
|
|
367.5
|
|
Industrial
|
271.0
|
|
|
255.9
|
|
Public Safety
|
56.2
|
|
|
66.2
|
|
Other
|
18.2
|
|
|
17.9
|
|
Total net sales
|
$
|
1,200.6
|
|
|
$
|
1,181.8
|
|
For fiscal years 2020 and 2019, approximately 78% and 70% of our net sales, respectively, were recognized over time as manufacturing services were performed under a customer contract on a product with no alternative use and we have an enforceable right to payment for performance completed to date. The remaining sales revenues were primarily recognized at a point in time when the customer obtained control of the manufactured product. Revenue recognized for tooling, excess inventory, and other services was not material for fiscal year 2020 and 2019.
The timing differences of revenue recognition, billings to our customers, and cash collections from our customers result in billed accounts receivable and unbilled accounts receivable. Contract assets on the Consolidated Balance Sheets relate to unbilled accounts receivable and occur when revenue is recognized over time as manufacturing services are provided and the billing to the customer has not yet occurred as of the balance sheet date, which are generally transferred to receivables in the next fiscal quarter due to the short-term nature of the manufacturing cycle. Contract assets were $70.4 million and $51.9 million as of June 30, 2020 and 2019, respectively.
In limited circumstances, the Company may receive payments from customers in advance of the satisfaction of performance obligations primarily for tooling or other miscellaneous services or costs. These advance payments are recognized as contract liabilities until the performance obligations are completed and are included in Accrued expenses on the Consolidated Balance Sheets, which amounted to $7.1 million and $6.3 million as of June 30, 2020 and 2019, respectively.
Note 4 Inventories
Inventories were valued using the lower of first-in, first-out (“FIFO”) cost and net realizable value. Inventory components were as follows at June 30:
|
|
|
|
|
|
|
|
|
(Amounts in Thousands)
|
2020
|
|
2019
|
Finished products
|
$
|
4,529
|
|
|
$
|
2,708
|
|
Work-in-process
|
3,577
|
|
|
4,119
|
|
Raw materials
|
210,937
|
|
|
197,013
|
|
Total inventory
|
$
|
219,043
|
|
|
$
|
203,840
|
|
Note 5 Property and Equipment
Major classes of property and equipment consist of the following at June 30:
|
|
|
|
|
|
|
|
|
(Amounts in Thousands)
|
2020
|
|
2019
|
Land and land use rights
|
$
|
11,792
|
|
|
$
|
11,836
|
|
Buildings and improvements
|
80,606
|
|
|
78,508
|
|
Machinery and equipment
|
278,858
|
|
|
255,978
|
|
Construction-in-progress
|
19,646
|
|
|
14,262
|
|
Total
|
$
|
390,902
|
|
|
$
|
360,584
|
|
Less: Accumulated depreciation
|
(236,373
|
)
|
|
(216,955
|
)
|
Property and equipment, net
|
$
|
154,529
|
|
|
$
|
143,629
|
|
The useful lives used in computing depreciation are based on estimated service lives for classes of property, as follows:
|
|
|
|
Years
|
Buildings and improvements
|
5 to 40
|
Machinery and equipment
|
3 to 11
|
Land use rights
|
39
|
Leasehold improvements
|
Lesser of Useful Life or Term of Lease
|
Depreciation of property and equipment totaled, in millions, $27.7 for fiscal year 2020, $26.3 for fiscal year 2019, and $25.5 for fiscal year 2018.
Note 6 Goodwill and Other Intangible Assets
A summary of goodwill is as follows:
|
|
|
|
|
(Amounts in Thousands)
|
|
Balance as of June 30, 2018
|
|
Goodwill
|
$
|
19,017
|
|
Accumulated impairment
|
(12,826
|
)
|
Goodwill, net
|
6,191
|
|
Goodwill Acquired
|
11,913
|
|
Balance as of June 30, 2019
|
|
Goodwill
|
30,930
|
|
Accumulated impairment
|
(12,826
|
)
|
Goodwill, net
|
18,104
|
|
Purchase Accounting Adjustments
|
1,832
|
|
Impairment
|
(7,925
|
)
|
Balance as of June 30, 2020
|
|
Goodwill
|
32,762
|
|
Accumulated impairment
|
(20,751
|
)
|
Goodwill, net
|
$
|
12,011
|
|
|
|
We acquired $13.7 million in goodwill resulting from the GES acquisition, with $11.9 million reported in fiscal year 2019 and $1.8 million added in fiscal year 2020 as a result of fair value measurement period adjustments. See Note 2 - Acquisitions of Notes to Consolidated Financial Statements for more information on this acquisition. During fiscal year 2020, $7.9 million of goodwill impairment was recognized at the GES reporting unit. During fiscal years 2019 and 2018, no goodwill impairment was recognized.
GES’s annual goodwill impairment test date is April 30th. Subsequent to our annual test date, we identified an indicator of impairment related to future anticipated revenues, which triggered an additional impairment test as of June 30, 2020. The June 30, 2020 test (the “GES impairment test”) resulted in a $7.9 million goodwill impairment charge, partially offset by a $1.0 million reduction in income tax expense associated with the deferred tax asset established for the deductible portion of the impaired goodwill.
For the GES impairment test, we used an independent, third-party valuation specialist to assist in the determination of fair value for the GES reporting unit. We used a combination of the Income Approach, using a discounted cash flow model, and the Market Approach, based on projected fiscal year 2021 results. Significant assumptions include:
|
|
•
|
Income Approach and Market Approach each weighted at 50%
|
|
|
•
|
Weighted average cost of capital (“WACC”) of 20%, based on observed market return data and size and company-specific risk premiums; a change of 100 basis points in the determined WACC has an approximate $1.7 million impact on the calculated fair value
|
|
|
•
|
Forecasted revenue growth rates ranging from 20% to 50% in fiscal years 2021 through 2023, and ranging from 3% to 12% thereafter
|
|
|
•
|
Terminal growth rate of 3%
|
|
|
•
|
Improved operating margins driven by revenue growth and product mix
|
The forecast assumptions are considered management’s best projections for the outlook of this business but are uncertain, and potential events or circumstances, such as not receiving the award of certain identified new business programs in fiscal year 2021 and beyond, not realizing revenue growth projections from new and existing customers and markets, and not achieving forecasted operating margins, could have a negative effect on GES’s estimated fair value and result in additional impairment charges that could be material to the Consolidated Financial Statements. Other macroeconomic events or circumstances, such as a sustained downturn in global economies or the industries GES serves, also could negatively affect estimated fair values.
A summary of other intangible assets subject to amortization is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
June 30, 2019
|
(Amounts in Thousands)
|
Cost
|
|
Accumulated
Amortization
|
|
Net Value
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net Value
|
Capitalized Software
|
$
|
32,052
|
|
|
$
|
27,851
|
|
|
$
|
4,201
|
|
|
$
|
32,015
|
|
|
$
|
27,124
|
|
|
$
|
4,891
|
|
Customer Relationships
|
8,618
|
|
|
2,014
|
|
|
6,604
|
|
|
8,618
|
|
|
1,506
|
|
|
7,112
|
|
Technology
|
5,060
|
|
|
1,777
|
|
|
3,283
|
|
|
5,060
|
|
|
766
|
|
|
4,294
|
|
Trade Name
|
6,369
|
|
|
1,114
|
|
|
5,255
|
|
|
6,369
|
|
|
478
|
|
|
5,891
|
|
Other Intangible Assets
|
$
|
52,099
|
|
|
$
|
32,756
|
|
|
$
|
19,343
|
|
|
$
|
52,062
|
|
|
$
|
29,874
|
|
|
$
|
22,188
|
|
During fiscal years 2020, 2019, and 2018, amortization expense of other intangible assets was, in millions, $3.2, $2.6, and $0.9, respectively. Amortization expense in future periods is expected to be, in millions, $3.1, $3.0, $2.9, $2.1, and $1.6 in the five years ending June 30, 2025, and $6.6 thereafter. The estimated useful life of internal-use software ranges from 3 to 10 years. The amortization period for the customer relationships, technology, and trade name intangible assets is 15 years, 5 years, and 10 years, respectively. We have no intangible assets with indefinite useful lives which are not subject to amortization.
Substantially all the customer relationships, technology, and trade name intangible assets were acquired in fiscal year 2019 as a result of the GES acquisition. See Note 2 - Acquisitions of Notes to Consolidated Financial Statements for more information on this acquisition. No customer relationships, technology, and trade name intangible assets were acquired in fiscal year 2020.
Intangible assets are reviewed for impairment, and their remaining useful lives evaluated for revision, when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. During the fourth quarter of fiscal year 2020, as a result of the indicator of impairment that led to goodwill impairment, we determined that the carrying amount of the GES long-lived asset group, including their other intangible assets, may not be recoverable. As a result, we tested the GES long-lived asset group for recoverability as of June 30, 2020. The test resulted in no impairment as the undiscounted cash flows of the GES long-lived asset group exceeded the carrying amount.
Significant judgment was used in performing the impairment test, including the use of customer relationships as the primary asset to determine the remaining useful life of the asset group, and the assumptions around the undiscounted cash flows of the asset group. If the estimated undiscounted cash flows related to GES’s long-lived assets are not realized, an impairment charge may result, which could be material to the Consolidated Financial Statements.
Note 7 Commitments and Contingent Liabilities
Guarantees:
As of June 30, 2020 and 2019, 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, 2020 and 2019. We do not 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, 2020 and 2019 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:
One of the Company’s China operations, 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, the draft would revert back to our China operation and we would be required to satisfy the obligation with the transferee. At June 30, 2020 and 2019, the drafts transferred and outstanding totaled $0.4 million and $0.9 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:
The Company provides only assurance-type warranties for a limited time period, which cover workmanship and assures the product complies with specifications provided by or agreed upon with the customer. We maintain a provision for limited warranty repair or replacement of products manufactured and sold, which has been established in specific manufacturing contract agreements. We estimate product warranty liability at the time of sale based on historical repair or replacement cost trends in conjunction with the length of the warranty offered. Management refines the warranty liability 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 2020, 2019, and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in Thousands)
|
2020
|
|
2019
|
|
2018
|
Product Warranty Liability at the beginning of the year
|
$
|
958
|
|
|
$
|
656
|
|
|
$
|
593
|
|
Additions to warranty accrual (including changes in estimates)
|
(271
|
)
|
|
361
|
|
|
346
|
|
Settlements made (in cash or in kind)
|
(40
|
)
|
|
(59
|
)
|
|
(283
|
)
|
Product Warranty Liability at the end of the year
|
$
|
647
|
|
|
$
|
958
|
|
|
$
|
656
|
|
Note 8 Credit Facilities
Credit facilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unused Borrowings at
|
|
Borrowings Outstanding at
|
|
Borrowings Outstanding at
|
(Amounts in Millions, in U.S Dollar Equivalents)
|
June 30, 2020
|
|
June 30, 2020
|
|
June 30, 2019
|
Primary credit facility (1)
|
$
|
38.2
|
|
|
$
|
111.4
|
|
|
$
|
122.8
|
|
Secondary credit facility (2)
|
30.0
|
|
|
—
|
|
|
—
|
|
Thailand overdraft credit facility (3)
|
0.1
|
|
|
—
|
|
|
—
|
|
Netherlands revolving credit facility (4)
|
3.6
|
|
|
6.7
|
|
|
3.4
|
|
Poland revolving credit facility (5)
|
5.6
|
|
|
—
|
|
|
—
|
|
Total credit facilities
|
$
|
77.5
|
|
|
118.1
|
|
|
126.2
|
|
Less: current portion
|
|
|
(26.6
|
)
|
|
(34.7
|
)
|
Long-term debt under credit facilities, less current portion (6)
|
|
|
$
|
91.5
|
|
|
$
|
91.5
|
|
|
|
(1)
|
The Company maintains a U.S. primary credit facility (the “primary credit facility”) among the Company, the lenders party thereto, and JPMorgan Chase Bank, National Association, as Administrative Agent, and Bank of America, N.A., as Documentation Agent, scheduled to mature July 27, 2023. The primary credit facility provides for $150 million in borrowings, with an option to increase the amount available for borrowing to $225 million at the Company’s request, subject to the consent of each lender participating in such increase. This facility is maintained for working capital and general corporate purposes of the Company including capital expenditures and acquisitions. A commitment fee is payable on the unused portion of the credit facility which was immaterial to our operating results in fiscal years 2020, 2019, and 2018. 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, as defined in the primary facility. 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 and will be one of the following two options:
|
|
•
|
the London Interbank Offered Rate (“LIBOR”) in effect two business days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period as defined under the primary credit facility, plus the Eurocurrency Loans spread which can range from 125.0 to 175.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA; or
|
|
|
•
|
the Alternate Base Rate (“ABR”), which is defined as the highest of the fluctuating rate per annum equal to the higher of
|
|
|
a.
|
JPMorgan’s prime rate;
|
|
|
b.
|
1% per annum above the Adjusted LIBO Rate (as defined under the primary credit facility); or
|
|
|
c.
|
1/2 of 1% per annum above the Federal Funds Effective Rate (as defined under the primary credit facility);
|
plus the ABR Loans spread which can range from 25.0 to 75.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA.
The Company’s financial covenants under the primary credit facility require:
|
|
•
|
a ratio of consolidated total indebtedness minus unencumbered U.S. cash on hand in the United States in excess of $15 million to adjusted consolidated EBITDA, determined as of the end of each of its fiscal quarters for the then most recently ended four fiscal quarters, to not be greater than 3.0 to 1.0, 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 primary credit facility at both June 30, 2020 and 2019.
|
|
|
(2)
|
During the current fiscal year, the Company established a 364-day multi-currency revolving credit facility (the “secondary credit facility”) among the Company, as borrower, certain subsidiaries of the Company as guarantors, the lenders party thereto, JPMorgan Chase Bank, National Association, as Administrative Agent, and Bank of America, N.A., as Documentation Agent, which allows for borrowings of up to $30 million and has a maturity date of May 18, 2021. This secondary credit facility is to be used for working capital and general corporate purposes. A commitment fee on the unused portion of principal amount of this secondary credit facility is payable at 50.0 basis points per annum.
|
The interest rate on borrowings is dependent on the type of borrowings and will be one of the following two options:
|
|
•
|
the LIBOR in effect two business days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period as defined under the secondary credit facility, plus the Eurocurrency Loans spread of 2.125%; or
|
|
|
•
|
the ABR, which is defined as the highest of the fluctuating rate per annum equal to the higher of
|
|
|
a.
|
JPMorgan’s prime rate;
|
|
|
b.
|
1/2 of 1% per annum above the Federal Funds Effective Rate (as defined under the secondary credit facility); or
|
|
|
c.
|
1% per annum above the Adjusted LIBO Rate (as defined under the secondary credit facility);
|
plus the ABR Loans spread of 1.125%.
The Company’s financial covenants under this secondary credit facility are the same as the financial covenants listed above for its primary credit facility.
|
|
(3)
|
The Company also maintains a foreign credit facility for its operation in Thailand which allows for borrowings of up to 2.4 million Thai Baht (approximately $0.1 million at June 30, 2020 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.
|
|
|
(4)
|
The Company also maintains an uncommitted revolving credit facility for our Netherlands subsidiary. The Netherlands credit facility allows for borrowings of up to 9.2 million Euro (approximately $10.3 million at June 30, 2020 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 22, 2021.
|
|
|
(5)
|
The Company also maintains an uncommitted revolving credit facility for our Poland operation, which allows for borrowings up to 5 million Euro (approximately $5.6 million at June 30, 2020 exchange rates) that can be drawn in Euro, U.S. dollars, or Polish Zloty. The availability of funds under this uncommitted facility is at the sole discretion of the bank. 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 dependent on the denomination of the currency borrowed. The facility matures on December 20, 2020.
|
|
|
(6)
|
The amount of Long-term debt under credit facilities, less current maturities reflects the borrowings on the primary credit facility that the Company intends, and has the ability, to refinance for a period longer than twelve months. The primary credit facility matures on July 27, 2023.
|
The weighted-average interest rate on borrowings outstanding under the credit facilities at June 30, 2020 and June 30, 2019 were 2.5% and 4.5%, respectively. Cash payments for interest on borrowings in fiscal years 2020, 2019, and 2018 were, in millions, $4.9, $3.0, and $0.4, respectively. Capitalized interest expense was immaterial during fiscal years 2020, 2019, and 2018.
Note 9 Employee Benefit Plans
Defined Contribution Retirement Plans:
The Company maintains a trusteed defined contribution retirement plan which is in effect for substantially all domestic employees meeting the eligibility requirements. The Company also maintains a supplemental employee retirement plan (“SERP”) for executives and other key employees which enables them to defer cash compensation on a pre-tax basis in excess of IRS limitations. 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, $2.4, $2.1, and $2.0 for fiscal years 2020, 2019, and 2018, respectively.
Defined Benefit Postemployment Plans:
The Company established and maintains severance plans for all domestic employees and other postemployment plans for certain foreign subsidiaries. There are no statutory requirements for 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.
As of June 30, 2020 and 2019, total obligations under these plans were $4.2 million and $3.4 million, respectively, of which $3.6 million and $3.1 million were long term and $0.6 million and $0.3 million were short term. Of the total obligation at June 30, 2020 and 2019, domestic plans were $1.1 million and $1.5 million and foreign plans were $3.1 million and $1.9 million, respectively. Actuarial (gain) loss is recorded in Accumulated Other Comprehensive (Income) Loss and amortized into net period benefit cost on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plans. Net periodic benefit cost recognized for these plans in fiscal years 2020, 2019, and 2018 were $0.3 million, $0.8 million, and $0.3 million, respectively.
Note 10 Stock Compensation Plans
A stock compensation plan was created and adopted by the Company’s Board of Directors (the “Board”) on October 3, 2014. The Kimball Electronics, Inc. 2014 Stock Option and Incentive Plan (the “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.
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 2020, 2019, and 2018 was $4.0 million, $5.7 million, and $5.3 million, respectively. These costs are 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.
A summary of the Company’s performance share activity during fiscal year 2020 is presented below:
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted Average
Grant Date
Fair Value
|
Performance shares outstanding at July 1, 2019
|
447,260
|
|
|
$
|
17.16
|
|
Granted
|
252,878
|
|
|
$
|
14.39
|
|
Vested
|
(253,483
|
)
|
|
$
|
15.47
|
|
Forfeited
|
(3,119
|
)
|
|
$
|
11.87
|
|
Performance shares outstanding at June 30, 2020
|
443,536
|
|
|
$
|
16.58
|
|
As of June 30, 2020, there was approximately $4.3 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 2020 through August 2022, with a weighted average vesting period of ten months. The fair value of performance shares is based on the stock price at the date of grant. During fiscal years 2020, 2019, and 2018, respectively, 253,483, 292,175, and 255,757 performance shares vested at a fair value of $3.9 million, $3.9 million, and $2.9 million. The performance shares vested represent the total number of shares vested prior to the reduction of shares withheld to satisfy tax withholding obligations. 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 years 2020, 2019, and 2018, respectively, the Company granted a total of 4,258, 4,236, and 7,694 unrestricted shares at an average grant date fair value of $16.99, $17.69, and $20.15 for a total fair value of $0.1 million, $0.1 million, and $0.2 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. Unrestricted shares were also awarded to a key employee which were expensed immediately.
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 in a lump sum or installments in accordance with deferral elections upon a director’s retirement or termination from the Board or death. During fiscal years 2020, 2019, and 2018, respectively, 32,950, 32,758, and 12,159 deferred share units were granted to non-employee members of the Board at an average grant date fair value of $17.30, $17.40, and $20.15 for a total fair value of $0.6 million, $0.6 million, and $0.2 million. During fiscal year 2020, 2,754 shares of common stock were issued under the Deferral Plan to a former non-employee member of the Board in accordance with their deferral election at an average fair value of $17.51.
Note 11 Income Taxes
The U.S. Tax Cuts and Jobs Act (“Tax Reform”) was enacted into law on December 22, 2017. Tax Reform makes broad and complex changes to the U.S. tax code, for which complete guidance may have not yet been issued. Tax Reform changes included, but were not limited to, (i) reducing the U.S. corporate statutory tax rate, (ii) requiring a one-time transition tax on certain unremitted earnings of foreign subsidiaries that is payable over an eight-year period, (iii) eliminating U.S. federal income taxes on dividends from foreign subsidiaries, and (iv) bonus depreciation that will allow for full expensing of qualifying property. Tax Reform reduces the U.S. corporate statutory tax rate from 35% to 21%. For our fiscal year ended June 30, 2018, we had a blended U.S. corporate tax rate of 28.1%, which was based on the applicable tax rates before and after Tax Reform and the number of days in the fiscal year. The aggregate unremitted earnings of the Company’s foreign subsidiaries were approximately $270 million as of June 30, 2020. Most of these accumulated unremitted foreign earnings have been invested in active non-U.S. business operations, and it is not anticipated such earnings will be remitted to the United States. Our intent is to permanently reinvest these funds outside of the United States. However, if such funds were repatriated, a portion of the funds remitted may be subject to applicable non-U.S. income and withholding taxes.
Accounting guidance provided a measurement period of one year from the Tax Reform enactment date, during which a company could complete the accounting for the impacts of Tax Reform. In accordance with the accounting guidance, the Company recorded provisional tax expense of $17.8 million related to Tax Reform for fiscal year 2018, including $4.4 million for the revaluation of the net deferred tax assets and $13.4 million for the deemed repatriation tax.
In accordance with the expiration of the one-year measurement period, the Company completed the assessment of the income tax effects of Tax Reform in fiscal year 2019. In finalizing the tax expense resulting from Tax Reform, the Company reversed $0.4 million of previous tax expense for the deemed repatriation tax. At June 30, 2020, $9.8 million is recorded in Long-term income taxes payable on the Consolidated Balance Sheet for the deemed repatriation tax.
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, 2020 and 2019, were as follows:
|
|
|
|
|
|
|
|
|
(Amounts in Thousands)
|
2020
|
|
2019
|
Deferred Tax Assets:
|
|
|
|
|
|
Receivables
|
$
|
145
|
|
|
$
|
105
|
|
Inventory
|
1,894
|
|
|
1,914
|
|
Employee benefits
|
224
|
|
|
193
|
|
Deferred compensation
|
5,338
|
|
|
6,149
|
|
Other current liabilities
|
265
|
|
|
1,275
|
|
Tax credit carryforwards
|
2,445
|
|
|
1,638
|
|
Goodwill
|
1,608
|
|
|
268
|
|
Net operating loss carryforward
|
2,398
|
|
|
2,339
|
|
Net foreign currency losses
|
—
|
|
|
11
|
|
Miscellaneous
|
4,020
|
|
|
2,970
|
|
Valuation Allowance
|
(1,637
|
)
|
|
(658
|
)
|
Total asset
|
$
|
16,700
|
|
|
$
|
16,204
|
|
Deferred Tax Liabilities:
|
|
|
|
Other intangible assets
|
$
|
1,313
|
|
|
$
|
1,412
|
|
Property and equipment
|
1,211
|
|
|
1,116
|
|
Net foreign currency gains
|
22
|
|
|
—
|
|
Miscellaneous
|
581
|
|
|
477
|
|
Total liability
|
$
|
3,127
|
|
|
$
|
3,005
|
|
Net Deferred Income Taxes
|
$
|
13,573
|
|
|
$
|
13,199
|
|
Income tax benefits associated with the net operating loss carryforwards expire from fiscal year 2023 to 2040. Income tax benefits associated with tax credit carryforwards primarily expire from fiscal year 2021 to 2029. A valuation allowance was provided as of June 30, 2020 and 2019 for deferred tax assets related to certain state credits of, in millions, $1.6 and $0.7, respectively. Except as reserved for in the valuation allowance, we believe our tax credit and net operating loss carryforwards are more likely than not to be realized in the future.
The components of income before taxes on income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30
|
(Amounts in Thousands)
|
2020
|
|
2019
|
|
2018
|
United States
|
$
|
(6,117
|
)
|
|
$
|
11,191
|
|
|
$
|
5,609
|
|
Foreign
|
31,274
|
|
|
27,294
|
|
|
39,166
|
|
Total income before taxes on income
|
$
|
25,157
|
|
|
$
|
38,485
|
|
|
$
|
44,775
|
|
The provision for income taxes is composed of the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30
|
(Amounts in Thousands)
|
2020
|
|
2019
|
|
2018
|
Current Taxes:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
(1,666
|
)
|
|
$
|
872
|
|
|
$
|
13,132
|
|
Foreign
|
8,479
|
|
|
7,545
|
|
|
11,982
|
|
State
|
(29
|
)
|
|
203
|
|
|
459
|
|
Total payable
|
$
|
6,784
|
|
|
$
|
8,620
|
|
|
$
|
25,573
|
|
Deferred Taxes:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
99
|
|
|
$
|
67
|
|
|
$
|
5,015
|
|
Foreign
|
237
|
|
|
(1,177
|
)
|
|
(2,427
|
)
|
State
|
(1,138
|
)
|
|
(603
|
)
|
|
(776
|
)
|
Valuation allowance
|
979
|
|
|
20
|
|
|
638
|
|
Total deferred
|
$
|
177
|
|
|
$
|
(1,693
|
)
|
|
$
|
2,450
|
|
Total provision for income taxes
|
$
|
6,961
|
|
|
$
|
6,927
|
|
|
$
|
28,023
|
|
A reconciliation of the statutory U.S. income tax rate to the Company’s effective income tax rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30
|
|
2020
|
|
2019
|
|
2018
|
(Amounts in Thousands)
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Tax computed at U.S. federal statutory rate
|
$
|
5,283
|
|
|
21.0
|
%
|
|
$
|
8,082
|
|
|
21.0
|
%
|
|
$
|
12,582
|
|
|
28.1
|
%
|
State income taxes, net of federal income tax benefit
|
(1,128
|
)
|
|
(4.5
|
)
|
|
(320
|
)
|
|
(0.8
|
)
|
|
(408
|
)
|
|
(0.9
|
)
|
Foreign tax rate differential
|
714
|
|
|
2.8
|
|
|
313
|
|
|
0.8
|
|
|
(1,615
|
)
|
|
(3.6
|
)
|
Impact of foreign exchange rates on foreign income taxes
|
867
|
|
|
3.4
|
|
|
156
|
|
|
0.4
|
|
|
180
|
|
|
0.4
|
|
Non-deductible goodwill impairment
|
388
|
|
|
1.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Valuation allowance
|
979
|
|
|
3.9
|
|
|
20
|
|
|
0.1
|
|
|
638
|
|
|
1.4
|
|
Research credit
|
(1,056
|
)
|
|
(4.2
|
)
|
|
(627
|
)
|
|
(1.6
|
)
|
|
(378
|
)
|
|
(0.8
|
)
|
Deemed repatriation
|
—
|
|
|
—
|
|
|
(416
|
)
|
|
(1.1
|
)
|
|
13,436
|
|
|
30.0
|
|
Revaluation of net deferred tax assets
|
—
|
|
|
—
|
|
|
(10
|
)
|
|
—
|
|
|
4,357
|
|
|
9.7
|
|
Global intangible low tax income
|
607
|
|
|
2.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other - net
|
307
|
|
|
1.4
|
|
|
(271
|
)
|
|
(0.8
|
)
|
|
(769
|
)
|
|
(1.7
|
)
|
Total provision for income taxes
|
$
|
6,961
|
|
|
27.7
|
%
|
|
$
|
6,927
|
|
|
18.0
|
%
|
|
$
|
28,023
|
|
|
62.6
|
%
|
Net cash payments for income taxes were, in thousands, $9,096, $10,172 and $14,724 in fiscal years 2020, 2019, and 2018, respectively.
Changes in the unrecognized tax benefit, excluding accrued interest and penalties, during fiscal years 2020, 2019, and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in Thousands)
|
2020
|
|
2019
|
|
2018
|
Beginning balance - July 1
|
$
|
904
|
|
|
$
|
160
|
|
|
$
|
102
|
|
Tax positions related to prior fiscal years:
|
|
|
|
|
|
|
|
|
Additions
|
116
|
|
|
758
|
|
|
78
|
|
Reductions
|
—
|
|
|
—
|
|
|
(20
|
)
|
Tax positions related to current fiscal year:
|
|
|
|
|
|
|
|
|
Additions
|
—
|
|
|
—
|
|
|
—
|
|
Reductions
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
—
|
|
|
—
|
|
|
—
|
|
Lapses in statute of limitations
|
(66
|
)
|
|
(14
|
)
|
|
—
|
|
Ending balance - June 30
|
$
|
954
|
|
|
$
|
904
|
|
|
$
|
160
|
|
Portion that, if recognized, would reduce tax expense and effective tax rate
|
$
|
262
|
|
|
$
|
214
|
|
|
$
|
137
|
|
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 both June 30, 2020 and 2019 was $1.6 million. Interest and penalties accrued for unrecognized tax benefits as of June 30, 2018 and expenses related to interest and penalties in fiscal years 2020, 2019, and 2018 were not material.
Liabilities for unrecognized tax benefits, including interest and penalties, have been recorded as a result of the GES acquisition related to pre-closing tax periods of Global Equipment Services & Manufacturing Vietnam Company Limited. This reflects management’s best assessment of the estimated taxes, interest, and penalties that are more likely than not to be paid under the applicable laws in the various jurisdictions. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. See Note 2 - Acquisitions of Notes to Consolidated Financial Statements for more information related to the GES acquisition.
The Company or its wholly-owned subsidiaries file U.S. federal income tax returns and income tax returns in various state, local, and foreign jurisdictions. We are no longer subject to any significant U.S. federal tax examinations by tax authorities for years before fiscal year 2017. We are subject to various state and local income tax examinations by tax authorities for years after June 30, 2015, and various foreign jurisdictions for years after June 30, 2015.
Global Equipment Services & Manufacturing Vietnam Company Limited is subject to U.S. federal tax examinations and various state and local jurisdictions by tax authorities for years after December 31, 2007 and for various foreign jurisdictions for years after December 31, 2009 relating to periods prior to the acquisition date.
Note 12 Share Owners’ Equity
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. Then, separately on each of September 29, 2016, August 23, 2017, and November 8, 2018, the Board extended and increased the Plan to allow the repurchase of up to an additional $20 million worth of common stock with no expiration date, which brought the total authorized stock repurchases under the Plan to $80 million. 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, and as of June 30, 2020, the Plan is temporarily suspended as a result of the COVID-19 environment.
During fiscal year 2020, the Company repurchased $8.8 million of common stock under the Plan at an average price of $14.12 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 $76.7 million of common stock under that Plan at an average cost of $14.93 per share.
Note 13 Fair Value
The Company categorizes assets and liabilities measured at fair value into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas level 3 generally requires significant management judgment. The three levels are defined as follows:
|
|
•
|
Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.
|
|
|
•
|
Level 2: Observable inputs other than those included in level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
|
|
|
•
|
Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
|
There were no changes in the inputs or valuation techniques used to measure fair values during fiscal year 2020.
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, 2020 and 2019, 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, 2020
|
(Amounts in Thousands)
|
Level 1
|
|
Level 2
|
|
Total
|
Assets
|
|
|
|
|
|
Cash equivalents
|
$
|
1,140
|
|
|
$
|
—
|
|
|
$
|
1,140
|
|
Derivatives: foreign exchange contracts
|
—
|
|
|
741
|
|
|
741
|
|
Trading securities: mutual funds held in nonqualified SERP
|
10,477
|
|
|
—
|
|
|
10,477
|
|
Total assets at fair value
|
$
|
11,617
|
|
|
$
|
741
|
|
|
$
|
12,358
|
|
Liabilities
|
|
|
|
|
|
Derivatives: foreign exchange contracts
|
$
|
—
|
|
|
$
|
2,134
|
|
|
$
|
2,134
|
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
2,134
|
|
|
$
|
2,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
(Amounts in Thousands)
|
Level 1
|
|
Level 2
|
|
Total
|
Assets
|
|
|
|
|
|
Cash equivalents
|
$
|
1,123
|
|
|
$
|
—
|
|
|
$
|
1,123
|
|
Derivatives: foreign exchange contracts
|
—
|
|
|
1,832
|
|
|
1,832
|
|
Trading securities: mutual funds held in nonqualified SERP
|
9,268
|
|
|
—
|
|
|
9,268
|
|
Total assets at fair value
|
$
|
10,391
|
|
|
$
|
1,832
|
|
|
$
|
12,223
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivatives: foreign exchange contracts
|
$
|
—
|
|
|
$
|
299
|
|
|
$
|
299
|
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
299
|
|
|
$
|
299
|
|
We had no Level 3 assets or liabilities during fiscal years 2020 and 2019.
The nonqualified supplemental employee retirement plan (“SERP”) assets consist primarily of equity funds, balanced funds, bond funds, and a money market fund. The SERP investment assets are offset by a SERP liability which represents the Company’s obligation to distribute SERP funds to participants. See Note 15 - 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 values of our cash deposit accounts, trade accounts receivable, and trade accounts payable approximate fair value due to their relatively short maturity and immaterial non-performance risk.
Note 14 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, 2020, we had outstanding foreign exchange contracts to hedge currencies against the U.S. dollar in the aggregate notional amount of $32.3 million and to hedge currencies against the Euro in the aggregate notional amount of 62.5 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 gain or loss associated with derivative instruments that are not designated as hedging instruments or that cease to meet the criteria for hedging under FASB guidance is reported immediately in Non-operating income or expense on the Consolidated Statements of Income.
Based on fair values as of June 30, 2020, we estimate that approximately $1.7 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, 2021. 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, 2020 and June 30, 2019.
See Note 13 - Fair Value of Notes to Consolidated Financial Statements for further information regarding the fair value of derivative assets and liabilities and Note 19 - 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
2020
|
|
June 30
2019
|
|
Balance Sheet Location
|
|
June 30
2020
|
|
June 30
2019
|
Derivatives Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
517
|
|
|
$
|
1,136
|
|
|
Accrued expenses
|
|
$
|
2,054
|
|
|
$
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
224
|
|
|
696
|
|
|
Accrued expenses
|
|
80
|
|
|
21
|
|
Total derivatives
|
|
|
$
|
741
|
|
|
$
|
1,832
|
|
|
|
|
$
|
2,134
|
|
|
$
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Effect of Derivative Instruments on Other Comprehensive Income (Loss)
|
|
|
|
|
June 30
|
(Amounts in Thousands)
|
|
|
|
2020
|
|
2019
|
|
2018
|
Amount of Pre-Tax Gain or (Loss) Recognized in Other Comprehensive Income (Loss) (OCI) on Derivatives:
|
|
|
Foreign exchange contracts
|
|
$
|
(2,079
|
)
|
|
$
|
3,337
|
|
|
$
|
(2,669
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
2020
|
|
2019
|
|
2018
|
Amount of Pre-Tax Gain or (Loss) Reclassified from Accumulated OCI into Income:
|
|
|
|
|
Foreign exchange contracts
|
|
Cost of Sales
|
|
$
|
64
|
|
|
$
|
1,061
|
|
|
$
|
(1,648
|
)
|
Foreign exchange contracts
|
|
Non-operating income (expense)
|
|
—
|
|
|
5
|
|
|
(20
|
)
|
Total
|
|
$
|
64
|
|
|
$
|
1,066
|
|
|
$
|
(1,668
|
)
|
|
|
|
|
|
|
|
|
|
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)
|
|
$
|
1,558
|
|
|
$
|
2,766
|
|
|
$
|
796
|
|
|
|
|
|
|
|
|
|
|
Total Derivative Pre-Tax Gain (Loss) Recognized in Income
|
|
$
|
1,622
|
|
|
$
|
3,832
|
|
|
$
|
(872
|
)
|
Note 15 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 for the fiscal years ended June 30, 2020, 2019, and 2018 was, in thousands, $385, $35, and $552, respectively.
SERP asset and liability balances applicable to Kimball Electronics participants were as follows:
|
|
|
|
|
|
|
|
|
|
June 30
|
(Amounts in Thousands)
|
2020
|
|
2019
|
SERP investments - current asset
|
$
|
1,972
|
|
|
$
|
1,728
|
|
SERP investments - other long-term asset
|
8,505
|
|
|
7,540
|
|
Total SERP investments
|
$
|
10,477
|
|
|
$
|
9,268
|
|
SERP obligation - current liability
|
$
|
1,972
|
|
|
$
|
1,728
|
|
SERP obligation - other long-term liability
|
8,505
|
|
|
7,540
|
|
Total SERP obligation
|
$
|
10,477
|
|
|
$
|
9,268
|
|
Note 16 Accrued Expenses
Accrued expenses consisted of:
|
|
|
|
|
|
|
|
|
|
June 30
|
(Amounts in Thousands)
|
2020
|
|
2019
|
Taxes
|
$
|
5,135
|
|
|
$
|
5,760
|
|
Compensation
|
16,839
|
|
|
19,046
|
|
Customer advance payments
|
7,145
|
|
|
6,345
|
|
Retirement plan
|
2,337
|
|
|
1,959
|
|
Insurance
|
1,618
|
|
|
1,675
|
|
Other expenses
|
9,190
|
|
|
8,411
|
|
Total accrued expenses
|
$
|
42,264
|
|
|
$
|
43,196
|
|
Note 17 Geographic Information
The following geographic area data includes net sales based on the country location of the Company’s business unit providing the manufacturing or other service and long-lived assets based on physical location. Long-lived assets include property and equipment and capitalized software.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Year Ended June 30
|
(Amounts in Thousands)
|
2020
|
|
2019
|
|
2018
|
Net Sales:
|
|
|
|
|
|
United States
|
$
|
346,376
|
|
|
$
|
321,805
|
|
|
$
|
224,834
|
|
Mexico
|
232,135
|
|
|
282,400
|
|
|
256,537
|
|
Poland
|
244,107
|
|
|
251,635
|
|
|
282,847
|
|
China
|
159,746
|
|
|
146,332
|
|
|
177,930
|
|
Thailand
|
124,415
|
|
|
113,276
|
|
|
87,513
|
|
Other Foreign
|
93,771
|
|
|
66,396
|
|
|
42,400
|
|
Total net sales
|
$
|
1,200,550
|
|
|
$
|
1,181,844
|
|
|
$
|
1,072,061
|
|
Long-Lived Assets:
|
|
|
|
|
|
United States
|
$
|
48,190
|
|
|
$
|
43,887
|
|
|
$
|
39,465
|
|
Mexico
|
36,548
|
|
|
31,238
|
|
|
30,733
|
|
Poland
|
32,670
|
|
|
29,736
|
|
|
33,629
|
|
Romania
|
17,707
|
|
|
19,546
|
|
|
19,394
|
|
China
|
10,405
|
|
|
12,138
|
|
|
14,546
|
|
Other Foreign
|
13,210
|
|
|
11,975
|
|
|
3,773
|
|
Total long-lived assets
|
$
|
158,730
|
|
|
$
|
148,520
|
|
|
$
|
141,540
|
|
Note 18 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
|
|
2020
|
|
2019
|
|
2018
|
Basic and Diluted Earnings Per Share:
|
|
|
|
|
|
Net Income
|
$
|
18,196
|
|
|
$
|
31,558
|
|
|
$
|
16,752
|
|
Less: Net Income allocated to participating securities
|
24
|
|
|
32
|
|
|
9
|
|
Net Income allocated to common Share Owners
|
$
|
18,172
|
|
|
$
|
31,526
|
|
|
$
|
16,743
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
25,243
|
|
|
25,857
|
|
|
26,745
|
|
Dilutive effect of average outstanding performance shares
|
165
|
|
|
200
|
|
|
255
|
|
Dilutive effect of average outstanding deferred stock units
|
20
|
|
|
25
|
|
|
7
|
|
Dilutive weighted average shares outstanding
|
25,428
|
|
|
26,082
|
|
|
27,007
|
|
|
|
|
|
|
|
Earnings Per Share of Common Stock:
|
|
|
|
|
|
Basic
|
$
|
0.72
|
|
|
$
|
1.22
|
|
|
$
|
0.63
|
|
Diluted
|
$
|
0.71
|
|
|
$
|
1.21
|
|
|
$
|
0.62
|
|
Note 19 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in Thousands)
|
Foreign Currency Translation Adjustments
|
|
Derivative Gain (Loss)
|
|
Postemployment Benefits
Net Actuarial Gain (Loss)
|
|
Accumulated Other Comprehensive Income (Loss)
|
Balance at June 30, 2018
|
$
|
(4,357
|
)
|
|
$
|
(3,379
|
)
|
|
$
|
837
|
|
|
$
|
(6,899
|
)
|
Other comprehensive income (loss) before reclassifications
|
(2,491
|
)
|
|
2,638
|
|
|
339
|
|
|
486
|
|
Reclassification to (earnings) loss
|
—
|
|
|
(857
|
)
|
|
(358
|
)
|
|
(1,215
|
)
|
Net current-period other comprehensive income (loss)
|
$
|
(2,491
|
)
|
|
$
|
1,781
|
|
|
$
|
(19
|
)
|
|
$
|
(729
|
)
|
Balance at June 30, 2019
|
$
|
(6,848
|
)
|
|
$
|
(1,598
|
)
|
|
$
|
818
|
|
|
$
|
(7,628
|
)
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
(1,046
|
)
|
|
(1,570
|
)
|
|
87
|
|
|
(2,529
|
)
|
Reclassification to (earnings) loss
|
—
|
|
|
(86
|
)
|
|
(308
|
)
|
|
(394
|
)
|
Net current-period other comprehensive income (loss)
|
(1,046
|
)
|
|
(1,656
|
)
|
|
(221
|
)
|
|
(2,923
|
)
|
Balance at June 30, 2020
|
$
|
(7,894
|
)
|
|
$
|
(3,254
|
)
|
|
$
|
597
|
|
|
$
|
(10,551
|
)
|
The following reclassifications were made from Accumulated Other Comprehensive Income (Loss) to the Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications from Accumulated Other Comprehensive Income (Loss)
|
|
|
|
|
|
Year Ended June 30
|
|
Affected Line Item in the
|
(Amounts in Thousands)
|
|
2020
|
|
2019
|
|
Consolidated Statements of Income
|
Derivative Gain (Loss) (1)
|
|
$
|
64
|
|
|
$
|
1,061
|
|
|
Cost of Sales
|
|
|
—
|
|
|
5
|
|
|
Non-operating income (expense), net
|
|
|
22
|
|
|
(209
|
)
|
|
Benefit (Provision) for Income Taxes
|
|
|
$
|
86
|
|
|
$
|
857
|
|
|
Net of Tax
|
Postemployment Benefits:
|
|
|
|
|
|
|
Amortization of Actuarial Gain (Loss) (2)
|
|
$
|
406
|
|
|
$
|
472
|
|
|
Non-operating income
|
|
|
(98
|
)
|
|
(114
|
)
|
|
Benefit (Provision) for Income Taxes
|
|
|
$
|
308
|
|
|
$
|
358
|
|
|
Net of Tax
|
|
|
|
|
|
|
|
Total Reclassifications for the Period
|
|
$
|
394
|
|
|
$
|
1,215
|
|
|
Net of Tax
|
Amounts in parentheses indicate reductions to income.
Note 20 Leases
The Company determines if a contract is or contains a lease at inception. The Company leases certain office, manufacturing, and warehouse facilities under operating leases, in addition to land on which certain office and manufacturing facilities reside. These operating leases expire from fiscal year 2020 to 2057. The Company has a minimal number of finance leases with an immaterial impact on its Consolidated Financial Statements.
Operating lease costs in fiscal year 2020 were $1.2 million, including short-term and variable lease costs. Cash payments for operating leases included in the measurement of lease liabilities in fiscal year 2020 were $0.8 million, which is included in Cash Flows from Operating Activities in the Consolidated Statement of Cash Flows.
The lease assets and liabilities, which exclude leases with terms of 12 months or less, as of June 30, 2020, were as follows:
|
|
|
|
|
(Amounts in Thousands)
|
|
Operating lease right-of-use assets (included in Other Assets)
|
$
|
2,025
|
|
Operating lease liability, current (included in Accrued expenses)
|
$
|
817
|
|
Operating lease liability, noncurrent (included in Other long-term liabilities)
|
$
|
1,208
|
|
Weighted average remaining lease term in years - operating leases
|
4.7
|
|
Weighted average discount rate - operating leases
|
3.3
|
%
|
Future lease payments as of June 30, 2020 are as follows:
|
|
|
|
|
(Amounts in Thousands)
|
|
2021
|
$
|
832
|
|
2022
|
655
|
|
2023
|
95
|
|
2024
|
95
|
|
2025
|
95
|
|
Thereafter
|
380
|
|
Total undiscounted lease payments
|
$
|
2,152
|
|
Less: imputed interest
|
127
|
|
Total lease liabilities
|
$
|
2,025
|
|
As reported under the previous lease accounting standard, the total rental expense amounted to $1.1 million and $0.7 million in fiscal years 2019 and 2018, respectively, and the aggregate future minimum rental payments on our operating leases, as of June 30, 2019, were, in millions, $0.8, $0.7, $0.6, $0.1, and $0.1 for the five years ending June 30, 2024, respectively, and $0.5 million thereafter. As of June 30, 2019, capital leases were immaterial.
Note 21 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 2020:
|
|
|
|
|
|
|
|
Net Sales
|
$
|
313,385
|
|
|
$
|
307,084
|
|
|
$
|
293,925
|
|
|
$
|
286,156
|
|
Gross Profit
|
22,193
|
|
|
20,511
|
|
|
20,212
|
|
|
20,925
|
|
Goodwill Impairment
|
—
|
|
|
—
|
|
|
—
|
|
|
7,925
|
|
Operating Income
|
11,115
|
|
|
8,684
|
|
|
10,588
|
|
|
1,609
|
|
Net Income (Loss)
|
6,598
|
|
|
6,612
|
|
|
6,259
|
|
|
(1,273
|
)
|
Basic Earnings (Loss) Per Share
|
$
|
0.26
|
|
|
$
|
0.26
|
|
|
$
|
0.25
|
|
|
$
|
(0.05
|
)
|
Diluted Earnings (Loss) Per Share
|
$
|
0.26
|
|
|
$
|
0.26
|
|
|
$
|
0.25
|
|
|
$
|
(0.05
|
)
|
Fiscal Year 2019:
|
|
|
|
|
|
|
|
Net Sales
|
$
|
265,620
|
|
|
$
|
284,149
|
|
|
$
|
313,454
|
|
|
$
|
318,621
|
|
Gross Profit
|
18,186
|
|
|
20,444
|
|
|
26,554
|
|
|
23,222
|
|
Operating Income
|
7,032
|
|
|
10,212
|
|
|
14,497
|
|
|
10,319
|
|
Net Income
|
5,069
|
|
|
7,115
|
|
|
11,849
|
|
|
7,525
|
|
Basic Earnings Per Share
|
$
|
0.19
|
|
|
$
|
0.27
|
|
|
$
|
0.46
|
|
|
$
|
0.30
|
|
Diluted Earnings Per Share
|
$
|
0.19
|
|
|
$
|
0.27
|
|
|
$
|
0.46
|
|
|
$
|
0.29
|
|