NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Business Description and Summary of Significant Accounting Policies
Business Description:
Kimball Electronics, Inc. (also referred to herein as “Kimball Electronics,” the “Company,” “we,” “us,” or “our”) is a global, multifaceted manufacturing solutions provider. We provide 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 devices, medical disposables, precision molded plastics, and production automation, test, and inspection equipment. We are consistently recognized by customers and industry trade publications for our excellent quality, reliability, and innovative service.
Basis of Presentation:
The Condensed Consolidated Financial Statements presented herein reflect the consolidated financial position as of December 31, 2021 and June 30, 2021, results of operations for the three and six months ended December 31, 2021 and 2020, cash flows for the six months ended December 31, 2021 and 2020, and share owners’ equity for the three and six months ended December 31, 2021 and 2020. The financial data presented herein is unaudited and should be read in conjunction with the annual Consolidated Financial Statements as of and for the year ended June 30, 2021 and related notes thereto included in our Annual Report on Form 10-K. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted, although we believe that the disclosures are adequate to make the information presented not misleading. Intercompany transactions and balances have been eliminated. Management believes the financial statements include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly the financial statements for the interim periods. The results of operations for the interim periods shown in this report are not necessarily indicative of results for any future interim period or for the entire fiscal year.
Certain prior period amounts have been reclassified to conform to current period presentation in the Condensed Consolidated Statements of Cash Flow within the Cash Flows from Operating Activities section. Deferred tax valuation allowance is now included with Deferred income taxes while the other deferred charges have been reclassified to Other, net.
Change in Estimates:
The Company reviews the estimated useful lives of its fixed assets on an ongoing basis. In evaluating useful lives, the Company considers how long assets will remain functionally efficient and effective, given levels of technology, competitive factors, and the economic environment. If the assessment indicates that the assets will continue to be used for a longer period than previously anticipated, the useful life of the assets is revised, resulting in a change in estimate. Changes in estimates are accounted for on a prospective basis by depreciating the assets’ current carrying values over their revised remaining useful lives.
The most recent review indicated that Surface Mount Technology production equipment had actual lives that were longer than previously estimated. As a result of these findings, the Company changed its estimates of useful lives on these assets to 10 years, from lives of 5 or 7 years. The change was effective and accounted for prospectively beginning on November 1, 2021. The effects of this change in useful life estimate for the three and six months ended December 31, 2021 were a decrease in depreciation expense of $1.7 million, an increase in net income of $1.3 million, and an increase to basic and diluted earnings per share by $0.05.
Revenue Recognition:
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 which contains minimum quantity thresholds to cover our capital costs, and we may offer our customer a rebate for specific volume thresholds or other incentives; in these cases, the rebates or incentives are accounted for as variable consideration.
The majority of our revenue is recognized over time as manufacturing services are performed as we manufacture a product to customer specifications with no alternative use and we have an enforceable right to payment for performance completed to date. The remaining revenue for manufacturing services is recognized when the customer obtains control of the product, typically either upon shipment or delivery of the product dependent on the terms of the contract, and the customer is able to direct the use of and obtain substantially all of the remaining benefits from the asset. We generally recognize revenue over time using costs based input methods, in which judgment is required to evaluate assumptions including anticipated margins to estimate the corresponding amount of revenue to recognize. Costs used as a basis for estimating anticipated margins include material, direct and indirect labor, and appropriate applied overheads. Anticipated margins are determined based on historical or quoted customer pricing. Costs based input methods are considered a faithful depiction of our efforts and progress toward satisfying our performance obligations for manufacturing services and for which we believe we are entitled to payment for performance completed to date. The cumulative effect of revisions to estimates related to net contract revenues or costs are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated.
We have elected to account for shipping and handling activities related to contracts with customers as costs to fulfill our promise to transfer the associated services and products. Accordingly, we record customer payments of shipping and handling costs as a component of net sales and classify such costs as a component of cost of sales. We recognize sales net of applicable sales or value add taxes. Based on estimated product returns and price concessions, a reserve for returns and allowances is recorded at the time revenue is recognized, resulting in a reduction of net revenue.
Direct incremental costs to obtain and fulfill a contract are capitalized as a contract asset only if they are material, expected to be recovered, and are not accounted for in accordance with other guidance. Incidental items that are immaterial in the context of the contract are recognized as expense in the period incurred.
Trade Accounts Receivable:
The Company’s trade accounts receivable are recorded per the terms of the agreement or sale, and accrued interest is recognized when earned. Our policy for estimating the allowance for credit losses on trade accounts receivable includes analysis of such items as aging, credit worthiness, payment history, and historical bad debt experience. Management uses these specific analyses in conjunction with an evaluation of the general economic and market conditions to estimate expected credit losses. Management believes that historical loss information generally provides a basis for its assessment of expected credit losses. Trade accounts receivable are written off after exhaustive collection efforts occur and the receivable is deemed uncollectible. Adjustments to the allowance for credit losses are recorded in Selling and Administrative Expenses on our Condensed Consolidated Statements of Income.
In the ordinary course of business, customers periodically negotiate extended payment terms on trade accounts receivable. Customary terms require payment within 30 to 45 days, with any terms beyond 45 days being considered extended payment terms. We utilize factoring arrangements for certain of our accounts receivables with third-party financial institutions in order to extend terms for the customer without negatively impacting our cash flow. These arrangements in all cases do not contain recourse provisions which would obligate us in the event of our customers’ failure to pay. Receivables are considered sold when they are transferred beyond the reach of Kimball Electronics and its creditors, the purchaser has the right to pledge or exchange the receivables, and we have surrendered control over the transferred receivables. In the six months ended December 31, 2021 and 2020, we sold, without recourse, $125.3 million and $186.0 million of accounts receivable, respectively. Factoring fees were $0.3 million for the three months ended December 31, 2021 and 2020, and $0.5 million and $0.7 million during the six months ended December 31, 2021 and 2020, respectively. Factoring fees are recorded in Selling and Administrative Expenses on our Condensed 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. We did not hold any drafts at December 31, 2021, and the drafts totaled less than $0.1 million at June 30, 2021. These drafts were reflected in Receivables on the Condensed Consolidated Balance Sheets until the banker’s drafts were sold at a discount, transferred in settlement of current accounts payable, or cash was received at maturity. Banker’s acceptance drafts sold at a discount or transferred in settlement of current accounts payable during the six months ended December 31, 2021 and 2020 were less than $0.1 million and $1.7 million, respectively.
Goodwill and Other Intangible Assets:
Goodwill represents the difference between the purchase price and the related underlying tangible and intangible net asset fair values resulting from business acquisitions. Annually, or if conditions indicate an earlier review is necessary, goodwill is tested at the reporting unit level. If the estimated fair value of the reporting unit is less than the carrying value, goodwill is written down to its estimated fair value. Other Intangible Assets consist of capitalized software, customer relationships, technology, and trade name, and are reviewed for impairment, and their remaining useful lives evaluated for revision, when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. As of December 31, 2021, the Company determined there have been no indicators of impairment for goodwill and other intangible assets. See Note 12 - Goodwill and Other Intangible Assets of Notes to Condensed Consolidated Financial statements for more information on Goodwill and Other Intangible Assets.
Leases:
The Company leases certain office, manufacturing, and warehouse facilities under operating leases, in addition to land on which certain office and manufacturing facilities resides. Operating lease costs and cash payments for operating leases are immaterial to the Condensed Consolidated Statements of Income and our Condensed Consolidated Statements of Cash Flows. Lease right-of-use assets and lease liabilities each totaled $3.6 million at December 31, 2021 and $1.6 million at June 30, 2021. Lease right-of-use assets are included in Other Assets and lease liabilities are included in Accrued expenses and Other long-term liabilities on the Condensed Consolidated Balance Sheets.
Other General Income:
Other General Income in the six months ended December 31, 2021 and 2020 included $1.4 million and $0.3 million, respectively, of pre-tax income resulting from payments received related to class action lawsuits in which Kimball Electronics was a class member. These lawsuits alleged that certain suppliers to the EMS industry conspired over a number of years to raise and fix the prices of electronic components, resulting in overcharges to purchasers of those components.
Non-operating Income (Expense), net:
Non-operating income (expense), net includes the impact of such items as foreign currency rate movements and related derivative gain or loss, fair value adjustments on supplemental employee retirement plan (“SERP”) investments, amortization of actuarial gains (losses), and other miscellaneous non-operating income and expense items that are not directly related to operations. The gain (loss) on SERP investments is offset by a change in the SERP liability that is recognized in Selling and Administrative Expenses.
Components of Non-operating income (expense), net:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
December 31
|
|
December 31
|
(Amounts in Thousands)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Foreign currency/derivative gain (loss)
|
$
|
(128)
|
|
|
$
|
2,545
|
|
|
$
|
(700)
|
|
|
$
|
4,967
|
|
Gain on SERP investments
|
402
|
|
|
811
|
|
|
315
|
|
|
1,361
|
|
|
|
|
|
|
|
|
|
Adjustments after measurement period of GES acquisition
|
—
|
|
|
(282)
|
|
|
—
|
|
|
(282)
|
|
Other
|
(21)
|
|
|
(73)
|
|
|
(240)
|
|
|
(94)
|
|
Non-operating income (expense), net
|
$
|
253
|
|
|
$
|
3,001
|
|
|
$
|
(625)
|
|
|
$
|
5,952
|
|
Income Taxes:
In determining the quarterly provision for income taxes, we use an estimated annual effective tax rate which is based on expected annual income, statutory tax rates, and available tax planning opportunities in the various jurisdictions in which we operate. Unusual or infrequently occurring items are separately recognized in the quarter in which they occur.
Deferred income tax assets and liabilities, recorded in Other Assets and Other long-term liabilities, respectively, in the Condensed Consolidated Balance Sheets, are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. We evaluate the recoverability of deferred tax assets each quarter by assessing the likelihood of future taxable income and available tax planning strategies that could be implemented to realize our deferred tax assets. If recovery is not likely, we provide a valuation allowance based on our best estimate of future taxable income in the various taxing jurisdictions and the amount of deferred taxes ultimately realizable. Future events could change management’s assessment.
We operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex uncertain tax positions, which may require an extended period of time to resolve. A tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. We maintain a liability for uncertain income tax and other tax positions, including accrued interest and penalties on those positions. As tax positions are effectively settled, the tax liability is adjusted accordingly. We recognize interest and penalties related to unrecognized tax benefits in Provision for Income Taxes on the Condensed Consolidated Statements of Income.
The U.S. Tax Cuts and Jobs Act (“Tax Reform”) was enacted into law on December 22, 2017, making broad and complex changes to the U.S. tax code, for which complete guidance may have not yet been issued. Tax Reform, in addition to other changes, required a one-time transition tax on certain unremitted earnings of foreign subsidiaries that is payable over an eight-year period. As of December 31, 2021 and June 30, 2021, the remaining provision recorded for the one-time deemed repatriation tax was $8.9 million and $9.8 million, respectively, payable through fiscal year 2026, with the long-term portion recorded in Long-term income taxes payable on the Condensed Consolidated Balance Sheets. As of December 31, 2021, $1.1 million of the remaining deemed repatriation tax is short term and is recorded in Accrued expenses on the Condensed Consolidated Balance Sheet.
New Accounting Standards:
Adopted in fiscal year 2022:
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. We adopted this standard effective July 1, 2021, the beginning of our first quarter of fiscal year 2022, and the adoption did not have a material effect on our Condensed Consolidated Financial Statements.
Note 2. Revenue from Contracts with Customers
Our revenue from contracts with customers is generated primarily from manufacturing services provided for the production of electronic assemblies, electronic and non-electronic components, medical devices, medical disposables, precision molded plastics, and automation, test, and inspection equipment in automotive, medical, industrial, and public safety applications, to the specifications and designs of our customers.
The following table disaggregates our revenue by end market vertical for the three and six months ended December 31, 2021 and 2020.
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|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
December 31
|
|
December 31
|
(Amounts in Millions)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Vertical Markets:
|
|
|
|
|
|
|
|
Automotive
|
$
|
139.0
|
|
|
$
|
151.9
|
|
|
$
|
268.4
|
|
|
$
|
270.1
|
|
Medical
|
89.8
|
|
|
87.1
|
|
|
174.8
|
|
|
214.3
|
|
Industrial
|
71.8
|
|
|
67.7
|
|
|
135.7
|
|
|
137.8
|
|
Public Safety
|
10.8
|
|
|
10.5
|
|
|
21.9
|
|
|
23.8
|
|
Other
|
3.9
|
|
|
3.4
|
|
|
7.2
|
|
|
6.4
|
|
Total net sales
|
$
|
315.3
|
|
|
$
|
320.6
|
|
|
$
|
608.0
|
|
|
$
|
652.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended December 31, 2021 and 2020, approximately 95% and 85% 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. For the six months ended December 31, 2021 and 2020, approximately 95% and 86% of our net sales, respectively, were recognized over time. The remaining sales revenues were recognized at a point in time when the customer obtained control of the products.
The timing differences of revenue recognition, billings to our customers, and cash collections from our customers result in billed accounts receivable and unbilled accounts receivable. Contract assets on the Condensed Consolidated Balance Sheets relate to unbilled accounts receivable and occur when revenue is recognized over time as manufacturing services are provided and the billing to the customer has not yet occurred as of the balance sheet date, which are generally transferred to receivables in the next fiscal quarter due to the short-term nature of the manufacturing cycle. Contract assets were $57.2 million and $45.9 million as of December 31, 2021 and June 30, 2021, respectively.
In limited circumstances, the Company may receive payments from customers in advance of the satisfaction of performance obligations primarily for tooling, material price variances, 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 Condensed Consolidated Balance Sheets, which amounted to $13.4 million and $7.6 million as of December 31, 2021 and June 30, 2021, respectively. Our performance obligations are short term in nature and therefore our contract liabilities are all expected to be settled within twelve months.
Note 3. Inventories
Inventories were valued using the lower of first-in, first-out (“FIFO”) cost and net realizable value. Inventory components were as follows:
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|
|
|
|
|
|
|
|
|
|
|
(Amounts in Thousands)
|
December 31, 2021
|
|
June 30, 2021
|
Finished products
|
$
|
1,030
|
|
|
$
|
769
|
|
Work-in-process
|
5,148
|
|
|
5,149
|
|
Raw materials
|
298,016
|
|
|
194,468
|
|
|
|
|
|
|
|
|
|
Total inventory
|
$
|
304,194
|
|
|
$
|
200,386
|
|
Note 4. Accumulated Other Comprehensive Income (Loss)
During the six months ended December 31, 2021 and 2020, the changes in the balances of each component of Accumulated Other Comprehensive Income (Loss), net of tax, were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
(Amounts in Thousands)
|
Foreign Currency Translation Adjustments
|
|
Derivative Gain (Loss)
|
|
|
|
Post Employment Benefits
Net Actuarial Gain (Loss)
|
|
Accumulated Other Comprehensive Income (Loss)
|
Balance at June 30, 2021
|
$
|
(2,223)
|
|
|
$
|
(2,427)
|
|
|
|
|
$
|
(233)
|
|
|
$
|
(4,883)
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
(5,480)
|
|
|
(746)
|
|
|
|
|
(74)
|
|
|
(6,300)
|
|
Reclassification to (earnings) loss
|
—
|
|
|
404
|
|
|
|
|
(98)
|
|
|
306
|
|
Net current-period other comprehensive income (loss)
|
(5,480)
|
|
|
(342)
|
|
|
|
|
(172)
|
|
|
(5,994)
|
|
Balance at December 31, 2021
|
$
|
(7,703)
|
|
|
$
|
(2,769)
|
|
|
|
|
$
|
(405)
|
|
|
$
|
(10,877)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2020
|
$
|
(7,894)
|
|
|
$
|
(3,254)
|
|
|
|
|
$
|
597
|
|
|
$
|
(10,551)
|
|
Other comprehensive income (loss) before reclassifications
|
9,439
|
|
|
560
|
|
|
|
|
(362)
|
|
|
9,637
|
|
Reclassification to (earnings) loss
|
—
|
|
|
849
|
|
|
|
|
(201)
|
|
|
648
|
|
Net current-period other comprehensive income (loss)
|
9,439
|
|
|
1,409
|
|
|
|
|
(563)
|
|
|
10,285
|
|
Balance at December 31, 2020
|
$
|
1,545
|
|
|
$
|
(1,845)
|
|
|
|
|
$
|
34
|
|
|
$
|
(266)
|
|
The following reclassifications were made from Accumulated Other Comprehensive Income (Loss) to the Condensed Consolidated Statements of Income:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications from Accumulated Other Comprehensive Income (Loss)
|
|
Three Months Ended
|
|
Six Months Ended
|
|
Affected Line Item in the Condensed Consolidated Statements of Income
|
|
December 31
|
|
December 31
|
|
(Amounts in Thousands)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Derivative gain (loss) (1)
|
|
$
|
(537)
|
|
|
$
|
(304)
|
|
|
$
|
(436)
|
|
|
$
|
(1,042)
|
|
|
Cost of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
|
|
|
45
|
|
|
32
|
|
|
193
|
|
|
Benefit (Provision) for Income Taxes
|
|
|
$
|
(446)
|
|
|
$
|
(259)
|
|
|
$
|
(404)
|
|
|
$
|
(849)
|
|
|
Net of Tax
|
Postemployment Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial gain (2)
|
|
65
|
|
|
167
|
|
|
129
|
|
|
264
|
|
|
Non-operating income (expense), net
|
|
|
(16)
|
|
|
(40)
|
|
|
(31)
|
|
|
(63)
|
|
|
Benefit (Provision) for Income Taxes
|
|
|
$
|
49
|
|
|
$
|
127
|
|
|
$
|
98
|
|
|
$
|
201
|
|
|
Net of Tax
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
(397)
|
|
|
$
|
(132)
|
|
|
$
|
(306)
|
|
|
$
|
(648)
|
|
|
Net of Tax
|
Amounts in parentheses indicate reductions to income.
Note 5. Commitments and Contingent Liabilities
The Company typically provides only assurance-type warranties for a limited time period, which cover workmanship and assures the product complies with specifications provided by or agreed upon with the customer. We maintain a provision for limited warranty repair or replacement of products manufactured and sold, which has been established in specific manufacturing contract agreements. We estimate product warranty liability at the time of sale based on historical repair or replacement cost trends in conjunction with the length of the warranty offered. Management refines the warranty liability periodically based on changes in historical cost trends and in certain cases where specific warranty issues become known. Product warranty liability is recorded in Accrued expenses and Other long-term liabilities on the Condensed Consolidated Balance Sheets.
Changes in the product warranty liability for the six months ended December 31, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
December 31
|
(Amounts in Thousands)
|
2021
|
|
2020
|
Product warranty liability at the beginning of the period
|
$
|
610
|
|
|
$
|
647
|
|
Additions to warranty accrual (including changes in estimates)
|
(37)
|
|
|
141
|
|
Settlements made (in cash or in kind)
|
(4)
|
|
|
(14)
|
|
Product warranty liability at the end of the period
|
$
|
569
|
|
|
$
|
774
|
|
Note 6. 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)
|
December 31, 2021
|
|
December 31, 2021
|
|
June 30, 2021
|
Primary credit facility (1)
|
$
|
51.1
|
|
|
$
|
98.5
|
|
|
$
|
62.7
|
|
|
|
|
|
|
|
Thailand overdraft credit facility
|
0.1
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Netherlands revolving credit facility
|
5.9
|
|
|
4.5
|
|
|
3.5
|
|
Poland revolving credit facility
|
5.7
|
|
|
—
|
|
|
—
|
|
Total credit facilities
|
$
|
62.8
|
|
|
$
|
103.0
|
|
|
$
|
66.2
|
|
Less: current portion
|
|
|
$
|
(63.0)
|
|
|
$
|
(26.2)
|
|
Long-term debt under credit facilities, less current portion (2)
|
|
|
$
|
40.0
|
|
|
$
|
40.0
|
|
(1) The Company maintains a U.S. primary credit facility (the “primary 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 facility provides for $150 million in borrowings, with an option to increase the amount available for borrowing to $225 million upon request, subject to the consent of each lender participating in such increase. This facility is maintained for working capital and general corporate purposes of the Company including capital expenditures and potential acquisitions. A commitment fee is payable on the unused portion of the credit facility 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.
On November 8, 2021, the primary facility was amended to provide, among other things, (1) the interest rate calculation method will generally transition from the London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”) on the transition date of December 31, 2021 on applicable borrowings; (2) the Eurocurrency borrowings are replaced with Term Benchmark borrowings; (3) if any Term Benchmark borrowing is denominated Euros, the Euro Interbank Offered Rate (“EURIBOR”) shall be utilized; and (4) all ABR borrowings will be denominated in U.S. Dollars.
The interest rate on borrowings is dependent on the type and currencies of borrowings and will be one of the following options:
•prior to the transition date of December 31, 2021, any Term Benchmark borrowing denominated in U.S. Dollars will utilize LIBOR in effect two business days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period as defined in the agreement, plus the Term Benchmark 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;
•after the transition date of December 31, 2021, any existing or future Term Benchmark borrowing denominated in U.S. Dollars will utilize SOFR which is a rate per annum equal to the secured overnight financing rate for such business day published by the SOFR Administrator, the Federal Reserve Bank of New York, on the immediately succeeding business day, plus the Term Benchmark 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;
•any Term Benchmark borrowing denominated in Euros will utilize the Euro Interbank Offered Rate (“EURIBOR”) in effect two business days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period as defined in the agreement, plus the Term Benchmark 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 1.1 to 1.0.
The Company had $0.4 million in letters of credit contingently committed against the credit facility at both December 31, 2021 and June 30, 2021.
(2) The amount of Long-term debt under credit facilities, less current maturities reflects the borrowings on the primary 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 both December 31, 2021 and June 30, 2021 was 2.0%.
Note 7. Fair Value
The Company categorizes assets and liabilities measured at fair value into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas level 3 generally requires significant management judgment. The three levels are defined as follows:
•Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.
•Level 2: Observable inputs other than those included in level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
•Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
There were no changes in the inputs or valuation techniques used to measure fair values during the six months ended December 31, 2021. For more information on inputs and fair valuation techniques used, refer to our Annual Report on Form 10-K for the year ended June 30, 2021.
Recurring Fair Value Measurements:
As of December 31, 2021 and June 30, 2021, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021
|
(Amounts in Thousands)
|
Level 1
|
|
Level 2
|
|
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
1,540
|
|
|
$
|
—
|
|
|
|
|
$
|
1,540
|
|
Derivatives: foreign exchange contracts
|
—
|
|
|
1,308
|
|
|
|
|
1,308
|
|
|
|
|
|
|
|
|
|
Trading securities: mutual funds held in nonqualified SERP
|
13,041
|
|
|
—
|
|
|
|
|
13,041
|
|
Total assets at fair value
|
$
|
14,581
|
|
|
$
|
1,308
|
|
|
|
|
$
|
15,889
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivatives: foreign exchange contracts
|
$
|
—
|
|
|
$
|
2,091
|
|
|
|
|
$
|
2,091
|
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
2,091
|
|
|
|
|
$
|
2,091
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
(Amounts in Thousands)
|
Level 1
|
|
Level 2
|
|
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
1,540
|
|
|
$
|
—
|
|
|
|
|
$
|
1,540
|
|
Derivatives: foreign exchange contracts
|
—
|
|
|
1,468
|
|
|
|
|
1,468
|
|
|
|
|
|
|
|
|
|
Trading securities: mutual funds held in nonqualified SERP
|
12,644
|
|
|
—
|
|
|
|
|
12,644
|
|
Total assets at fair value
|
$
|
14,184
|
|
|
$
|
1,468
|
|
|
|
|
$
|
15,652
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivatives: foreign exchange contracts
|
$
|
—
|
|
|
$
|
1,702
|
|
|
|
|
$
|
1,702
|
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
1,702
|
|
|
|
|
$
|
1,702
|
|
We had no level 3 assets or liabilities at December 31, 2021 and June 30, 2021.
The nonqualified supplemental employee retirement plan (“SERP”) assets consist primarily of equity funds, balanced funds, bond funds, and a money market fund. The SERP investment assets are offset by a SERP liability which represents the Company’s obligation to distribute SERP funds to participants. See Note 9 - Investments of Notes to Condensed Consolidated Financial Statements for further information regarding the SERP.
Financial Instruments Not Carried At Fair Value:
Financial instruments that are not reflected in the Condensed Consolidated Balance Sheets at fair value that have carrying amounts which approximate fair value include notes receivable and borrowings under credit facilities. There were no changes to the inputs and valuation techniques used to assess the fair value of these financial instruments during the six months ended December 31, 2021. For more information on inputs and fair valuation techniques used, refer to our Annual Report on Form 10-K for the year ended June 30, 2021.
The carrying values of our cash deposit accounts, trade accounts receivable, and trade accounts payable approximate fair value due to the relatively short maturity and immaterial non-performance risk.
Note 8. Derivative Instruments
Foreign Exchange Contracts:
We operate internationally and are therefore exposed to foreign currency exchange rate fluctuations in the normal course of business. Our primary means of managing this exposure is to utilize natural hedges, such as aligning currencies used in the supply chain with the sale currency. To the extent natural hedging techniques do not fully offset currency risk, we use derivative instruments with the objective of reducing the residual exposure to certain foreign currency rate movements. Factors considered in the decision to hedge an underlying market exposure include the materiality of the risk, the volatility of the market, the duration of the hedge, the degree to which the underlying exposure is committed to, and the availability, effectiveness, and cost of derivative instruments. Derivative instruments are only utilized for risk management purposes and are not used for speculative or trading purposes.
We use forward contracts designated as cash flow hedges to protect against foreign currency exchange rate risks inherent in forecasted transactions denominated in a foreign currency. 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 December 31, 2021, we had outstanding foreign exchange contracts to hedge currencies against the U.S. dollar in the aggregate notional amount of $43.8 million and to hedge currencies against the Euro in the aggregate notional amount of 43.0 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 gain or loss on the derivative instrument is initially recorded net of related tax effect in Accumulated Other Comprehensive Income (Loss), a component of Share Owners’ Equity, and is subsequently reclassified into earnings in the period or periods during which the hedged transaction is recognized in earnings. The gain or loss associated with derivative instruments that are not designated as hedging instruments or that cease to meet the criteria for hedging under FASB guidance is reported immediately in Non-operating income (expense), net on the Condensed Consolidated Statements of Income.
Based on fair values as of December 31, 2021, we estimate that approximately $0.9 million of pre-tax derivative loss deferred in Accumulated Other Comprehensive Loss will be reclassified into earnings, along with the earnings effects of related forecasted transactions, within the next 12 months. 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 December 31, 2021 and June 30, 2021.
Information on the location and amounts of derivative fair values in the Condensed Consolidated Balance Sheets and derivative gains and losses in the Condensed Consolidated Statements of Income are presented below.
Fair Value of Derivative Instruments on the Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
|
Fair Value As of
|
|
|
|
Fair Value As of
|
(Amounts in Thousands)
|
Balance Sheet Location
|
|
December 31,
2021
|
|
June 30,
2021
|
|
Balance Sheet Location
|
|
December 31,
2021
|
|
June 30,
2021
|
Derivatives Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
573
|
|
|
$
|
1,158
|
|
|
Accrued expenses
|
|
$
|
1,293
|
|
|
$
|
1,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
735
|
|
|
310
|
|
|
Accrued expenses
|
|
798
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
$
|
1,308
|
|
|
$
|
1,468
|
|
|
|
|
$
|
2,091
|
|
|
$
|
1,702
|
|
The Effect of Derivative Instruments on Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
|
December 31
|
|
December 31
|
(Amounts in Thousands)
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Amount of Pre-Tax Gain or (Loss) Recognized in Other Comprehensive Income (Loss) (OCI) on Derivatives:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
$
|
646
|
|
|
$
|
1,503
|
|
|
$
|
(915)
|
|
|
$
|
878
|
|
The Effect of Derivative Instruments on Condensed Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(Amounts in Thousands)
|
|
|
|
December 31
|
|
December 31
|
Derivatives in Cash Flow Hedging Relationships
|
|
Location of Gain or (Loss)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Amount of Pre-Tax Gain or (Loss) Reclassified from Accumulated OCI into Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Cost of Sales
|
|
$
|
(537)
|
|
|
$
|
(304)
|
|
|
$
|
(436)
|
|
|
$
|
(1,042)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
$
|
(115)
|
|
|
$
|
(1,619)
|
|
|
$
|
(42)
|
|
|
$
|
(2,540)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivative Pre-Tax Gain (Loss) Recognized in Income
|
|
$
|
(652)
|
|
|
$
|
(1,923)
|
|
|
$
|
(478)
|
|
|
$
|
(3,582)
|
|
Note 9. 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. The Company recognizes 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 the Other Income (Expense) category on our Condensed Consolidated Statements of Income. Adjustments made to revalue the SERP liability are also recognized in income as selling and administrative expenses and offset valuation adjustments on SERP investment assets. The change in net unrealized holding gains for the six months ended December 31, 2021 and 2020 was approximately $(0.2) million and $0.8 million, respectively.
SERP asset and liability balances applicable to Kimball Electronics participants were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in Thousands)
|
December 31,
2021
|
|
June 30,
2021
|
SERP investments - current asset
|
$
|
3,638
|
|
|
$
|
3,095
|
|
SERP investments - other long-term asset
|
9,403
|
|
|
9,549
|
|
Total SERP investments
|
$
|
13,041
|
|
|
$
|
12,644
|
|
|
|
|
|
SERP obligation - current liability
|
$
|
3,638
|
|
|
$
|
3,095
|
|
SERP obligation - other long-term liability
|
9,403
|
|
|
9,549
|
|
Total SERP obligation
|
$
|
13,041
|
|
|
$
|
12,644
|
|
Note 10. Employee Benefit 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 Company established and maintains severance plans for all domestic employees and other postemployment plans for certain foreign subsidiaries. There are no statutory requirements for us to contribute to the plans, nor do employees contribute to the plans. The plans hold no assets. Benefits are paid using available cash on hand when eligible employees meet plan qualifications for payment. Net periodic benefit costs were not material for the six months ended December 31, 2021 and 2020.
Note 11. 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 granted in the form of incentive stock options, stock appreciation rights, restricted shares, unrestricted shares, restricted share units, or performance shares and performance units. The Plan is a ten-year plan with no further awards allowed to be made under the Plan after October 1, 2024.
On October 20, 2016, the Board approved a nonqualified deferred stock compensation plan, the Kimball Electronics, Inc. Non-Employee Directors Stock Compensation Deferral Plan (the “Deferral Plan”), which allows Non-Employee Directors to elect to defer all, or a portion of, their retainer fees in stock until retirement or termination from the Board or death. The Deferral Plan allows for issuance of up to 1.0 million shares of the Company’s common stock. For more information on the Plan and the Deferral Plan, refer to our Annual Report on Form 10-K for the year ended June 30, 2021.
During the first six months of fiscal year 2022, the following stock compensation was granted under the Plan and the Deferral Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Compensation Granted
|
|
Quarter Granted
|
|
Shares/Units
|
|
Grant Date Fair Value (2)
|
|
|
|
|
|
|
|
Long-Term Performance Shares (1)
|
|
1st Quarter
|
|
287,312
|
|
|
$23.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted shares (3)
|
|
2nd Quarter
|
|
5,027
|
|
|
$24.87
|
|
|
|
|
|
|
|
|
Deferred share units (4)
|
|
2nd Quarter
|
|
34,480
|
|
|
$24.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(1) Long-term performance share awards were granted to officers and other key employees. These annual performance share awards were approved by the Compensation and Governance Committee of the Board. Beginning with awards granted in fiscal year 2022 that will vest in fiscal year 2025, awards cliff vest at the third anniversary of the award date. To avoid a gap in the vesting of awards due to the transition from grants that vested annually in three equal installments to ones that vest after three years, two smaller bridge awards were also granted for fiscal year 2022 and fiscal year 2022-2023 performance periods. The bridge award for the fiscal year 2022 performance period cliff vests at the first anniversary of the grant. The bridge award for the fiscal year 2022-2023 performance period cliff vests at the second anniversary of the grant. The award for the fiscal year 2022-2024 performance period, and future performance share awards, cliff vest at the third anniversary of the grant.
Under these awards, a number of shares will be issued to each participant based upon a combination of a profitability attainment component, based on the Company’s operating income plan, and a growth attainment component, based on the Company’s growth in sales revenue, comparing its three-year compounded annual growth rate (“CAGR”) with the Electronics Manufacturing Services Industry’s three-year CAGR. The number of shares issued will be less than the targeted shares issuable if the Company does not reach 100% of one or both of the above-mentioned performance metrics, and could be zero if the Company does not reach the required minimum thresholds of either metric. The number of shares issued will exceed the number of targeted shares issuable (up to a maximum of 125%) if the Company exceeds 100% of one or both of the above-mentioned incentive metrics.
(2) The grant date fair value is based on the stock price at the date of the grant.
(3) Unrestricted shares were awarded to a non-employee member of the Board as compensation for the portion of their annual retainer fees resulting from their election to be paid in unrestricted shares in lieu of cash payment or deferred share units. Director’s fees are expensed over the period that directors earn the compensation. Unrestricted shares do not have vesting periods, holding periods, restrictions on sales, or other restrictions.
(4) Deferred share units were awarded to non-employee members of the Board as compensation for the portion of their annual retainer fees resulting from their elections 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.
Note 12. Goodwill and Other Intangible Assets
A summary of goodwill is as follows: