Kimball Electronics, Inc 10-K for FY2023
Kimball Electronics, Inc. (KE)
10-K
2023-08-24
For: 2023-06-30
View Original
Added on
April 11, 2026
About this 10-K
Kimball Electronics, Inc filed this 10-K on August 24, 2023, covering the fiscal year ended June 30, 2023 (FY2023).
Headline figures
Fiscal year ended June 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.82B
- up 35.1% from $1.35B a year earlier
- Net income
- $55.83M
- up 78.6% from net income of $31.25M a year earlier
- Diluted EPS
- $2.22
- up 79.0% from $1.24 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
For the fiscal year ended June 30 , 2023
OR
For the transition period from to
Commission File Number 001-36454
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| Securities registered pursuant to Section 12(g) of the Act: None | ||||||||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. | ||||||||||||||||||||||||||
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ | ||||||||||||||||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | ||||||||||||||||||||||||||
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). | ||||||||||||||||||||||||||
| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | ||||||||||||||||||||||||||
| Large accelerated filer | ☐ | ☒ | ☐ | |||||||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ | ||||||||||||||||||||||||||
| Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that | ||||||||||||||||||||||||||||||||
| prepared or issued its audit report. | ||||||||||||||||||||||||||||||||
| If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the | ||||||||||||||||||||||||||||||||
| filing reflect the correction of an error to previously issued financial statements. | ||||||||||||||||||||||||||||||||
| Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation | ||||||||||||||||||||||||||||||||
| received by any of the registrant’s executive officers during the relevant recovery period pursuant to Section 240.10D-1(b). | ☐ | |||||||||||||||||||||||||||||||
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | No | ☒ | |||||||||||||||||||||||||||||
The aggregate market value of the common stock held by non-affiliates, as of December 30, 2022 (the last business day of the Registrant’s most recently completed second fiscal quarter), was $542.5 million based on 96.5% of common stock held by non-affiliates.
The number of shares outstanding of the Registrant’s common stock as of August 2, 2023 was 24,724,281 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Share Owners to be held on November 17, 2023, are incorporated by reference into Part III.
KIMBALL ELECTRONICS, INC.
FORM 10-K INDEX
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2
PART I
Item 1 - Business
General
As used herein, the terms “Company,” “Kimball Electronics,” “we,” “us,” or “our” refer to Kimball Electronics, Inc., the Registrant, and its subsidiaries. Reference to a year relates to a fiscal year, ended June 30 of the year indicated, rather than a calendar year unless the context indicates otherwise. Additionally, references to the first, second, third, and fourth quarters refer to those respective quarters of the fiscal year indicated.
Forward-Looking Statements
This document contains certain forward-looking statements. These are statements made by management, using their best business judgment based upon facts known at the time of the statements or reasonable estimates, about future results, plans, or future performance and business of the Company. Such statements involve risk and uncertainty, and their ultimate validity is affected by a number of factors, both specific and general. They should not be construed as a guarantee that such results or events will, in fact, occur or be realized as actual results may differ materially from those expressed in these forward-looking statements. The statements may be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “forecasts,” “seeks,” “likely,” “future,” “may,” “might,” “should,” “would,” “could,” “will,” “potentially,” “can,” “goal,” “predict,” and similar expressions. It is not possible to foresee or identify all factors that could cause actual results to differ from expected or historical results. We make no commitment to update these factors or to revise any forward-looking statements for events or circumstances occurring after the statement is issued, except as required by law.
The risk factors discussed in Item 1A - Risk Factors of this report could cause our results to differ materially from those expressed in forward-looking statements. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. Any such risks could cause our results to differ materially from those expressed in forward-looking statements.
At any time when we make forward-looking statements, we desire to take advantage of the “safe harbor” which is afforded such statements under the Private Securities Litigation Reform Act of 1995 where factors could cause actual results to differ materially from forward-looking statements.
Overview
Kimball Electronics was founded in 1961 and incorporated in 1998. We deliver a package of value that begins with our core competency of producing durable electronics and extends to contract manufacturing services for non-electronic components, medical disposables, drug delivery solutions, precision molded plastics, and production automation, test, and inspection equipment. Our design and manufacturing expertise coupled with robust processes and procedures help us ensure that we deliver the highest levels of quality and reliability throughout the entire life cycle of our customers’ products. We deliver award-winning service across our global footprint with an operations platform driven by highly integrated procedures, standardization, and teamwork. Our Customer Relationship Management (“CRM”) model is key to providing our customers convenient access to our global footprint and all of our services throughout the entire product life cycle. Because they operate in industries that demand rigorous engineering controls and that commonly require long product life cycles, our customers value our track record of quality, financial stability, social responsibility, and commitment to long-term relationships.
For over 35 years, we have manufactured safety-critical electronic assemblies for automotive customers, developing invaluable expertise that extends beyond the automotive industry to benefit our customers in the medical and industrial sectors as well. By harnessing our experience and expertise in design and process validation, traceability, process and control change, as well as lean manufacturing, we have achieved substantial growth and diversification. This has enabled us to create innovative and valuable solutions for customers across our three verticals. We have harmonized our quality systems to meet and exceed industry certifications and regulatory requirements. This allows us to leverage key supply chain advantages and streamline our operations, enabling cost-effective manufacturing of both electronic and non-electronic products within a single production facility for customers from all three end market verticals.
Many of our customers are multinational companies operating across multiple global regions, and they maximize their supplier relationship by partnering with us for engineering, manufacturing, and supply chain support across multiple locations and regions. We commonly manufacture the same product for the same customer in multiple facilities. Coupled with our CRM model and our global systems, procedures, processes, and teamwork, our strategic approach to expanding our global footprint aligns with our customers’ preferences in our three end market verticals. This positions us strongly to support their global growth initiatives.
3
Our customers benefit from consistent processes across all regions thanks to our global component sourcing, procurement, quoting, and customer pricing operations. Our central sourcing organization employs global procurement strategies that ensure consistent component availability and uniform pricing approach by leveraging the purchase volume of our entire organization. Our unified, global quoting model allows us to seamlessly respond to our customers’ production needs anywhere across our global footprint.
Our CRM model combines our facilities’ manufacturing experts with our business development team members located in-region with our global customers. Cross-functional teams from multiple facilities collaborate in quality, operational excellence, quoting, and design engineering global support. Clear roles and responsibilities, combined with diverse skill sets, establish a robust conduit critical for execution of our customers’ objectives and building strong customer relationships. Our robust customer scorecard process provides valuable feedback to all levels of our company, driving continuous improvement initiatives, strengthening our award-winning service, and fostering deep customer loyalty.
Our corporate headquarters is located at 1205 Kimball Boulevard, Jasper, Indiana. We manufacture products for our customers at facilities located in the United States, China, Mexico, Poland, Romania, Thailand, and Vietnam. We also have operations in India and Japan.
We offer our services globally on a contract basis, and we manufacture products to our customers’ specifications. Our services primarily include:
•Production and testing of printed circuit board assemblies (PCBAs);
•Full box build manufacturing and assembly;
•Final Assembly of medical electronic products;
•Design services and support;
•Supply chain services and support;
•Rapid prototyping and new product introduction support;
•Product design and process validation and qualification;
•Industrialization and automation of manufacturing processes;
•Reliability testing (testing of products under a series of extreme environmental conditions);
•Aftermarket services;
•Production and assembly of medical devices, medical disposables including packaging, and other non-electronic products;
•Drug delivery devices and solutions with and without electronics;
•Class 7 and 8 clean room assembly, cold chain and product sterilization management;
•Design engineering and production of precision molded plastics;
•Design engineering and manufacturing of automation, test, and inspection equipment;
•Software design; and
•Complete product life cycle management.
We take pride in our attentive approach to understanding and adapting to our customers’ ever-changing needs and preferences. We continuously seek opportunities to grow and diversify our business and the value we deliver to customers while enhancing our global presence.
Reporting Segment
Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and assessing performance. Each of our business units qualifies as an operating segment with its results regularly reviewed by our chief operating decision maker, the Chief Executive Officer. Our operating segments meet the aggregation criteria under the accounting guidance for segment reporting. As of June 30, 2023, all of our operating segments provided contract manufacturing services, including engineering and supply chain support, for the production of electronic assemblies and other products including medical devices, medical disposables, precision molded plastics, and automation, test, and inspection equipment primarily in automotive, medical, and industrial 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 across all our operating segments. Each of our operating segments serves 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.
4
Our Business Strategy
We intend to achieve sustained, profitable growth in the markets we serve by supporting the global growth initiatives of our customers as a multifaceted manufacturing solutions company. Key elements of executing our strategy include:
•Leveraging Our Global Footprint – continue our strategy of utilizing our presence in key regions worldwide, primarily focused on expansions of existing facilities, as well as potential new geographic regions, as our customer demands dictate;
•Expanding Our Package of Value – enhance our core strengths and expand our package of value through contract manufacturing services in areas such as complex system assembly, specialized processes, and precision molded plastics with particular emphasis on Kimball medical solutions;
•Expanding Our Markets – explore opportunities that will broaden existing or establish new markets, capabilities, or technologies such as automation, test, and inspection equipment for industrial applications.
We expect to make investments that will strengthen or add new capabilities to our package of value as a multifaceted manufacturing solutions company, including through acquisitions. See Item 1A - Risk Factors for risks associated with acquisitions.
Our Business Offerings
We offer electronics manufacturing services, including engineering and supply chain support, to customers in the automotive, medical, and industrial end market verticals. We further offer contract manufacturing services for non-electronic components, medical disposables, precision molded plastics, as well as production automation, test, and inspection equipment. Our services support the complete product life cycle of our customers’ products, and our processes and capabilities cover a range of products from high volume-low mix to high mix-low volume. We bring innovative, complete design solutions to our customers. We offer Design for Excellence input to our customers as a part of our standard package of value, and we use sophisticated software tools to integrate the supply chain in a way that provides our customers with the flexibility their business requires. Our robust new product introduction process and our extensive manufacturing capabilities give us the ability to execute to the various quality and reliability expectations of our customers in each of our end market verticals. We are committed to protecting the planet by combating climate change, including contributing to a lower carbon future, in our operations, our value chains, and in the services we offer to our customers. Our strategies include actions to optimize our manufacturing facilities and processes for sustainability, increase clean energy in our purchased power mix, collaborate with our customers and supply chain to address upstream and downstream carbon emissions, invest in clean energy solutions for climate protection, and develop low carbon products, technologies and services.
We value our customers and their unique needs and expectations. Our customer focus and dedication to unparalleled excellence in engineering and manufacturing has resulted in proven success in the contract manufacturing industry. Personal relationships are important to us, and we strive to build long-term global partnerships. Our commitment to support our customers is backed by our history and demonstrated performance for over the past 60 years.
Marketing Channels
Manufacturing services, including engineering and supply chain support, are marketed by our business development team. We use a CRM model to provide our customers with convenient access to our global footprint and all of our services throughout the entire product life cycle.
Major Competitive Factors
Key competitive factors in the markets we serve include quality and reliability, engineering design services, production flexibility, on-time delivery, customer lead time, test capability, competitive pricing, and global presence. Numerous contract manufacturing service providers compete globally for business from existing and potential customers. We also face competition from our customers’ own capacity and capabilities to in-source production. The proliferation of electronic components in today’s advanced products and the continuing trend of original equipment manufacturers in the electronics industry subcontracting the assembly process to companies with a core competency in this area drive growth in the EMS industry. The nature of the EMS industry is such that the start-up of new customers and new programs to replace expiring programs occurs frequently. New customers and program start-ups generally cause margin dilution early in the life of a program, which is often recovered as the program becomes established and matures. Our continuing success depends upon our ability to replace expiring customers/programs with new customers/programs.
5
We, and the industry in general, have special conditions affecting working capital that are significant for understanding our business, including fluctuating inventory levels, which may increase in conjunction with the start-up of new programs and component availability. Additionally, the nature of the contract manufacturing business is such that customers may be required to make advance payments for certain inventory purchases and share in the risk of excess and obsolete inventory.
Our Competitive Strengths
We derive our competitive strengths from our experience of producing safety critical electronic assemblies for automotive customers for over 35 years and leveraging this experience to create valuable and innovative solutions for customers in different industries. Our strengths include:
•Core competency of producing durable electronics;
•Body of knowledge as it relates to the design and manufacture of products that require high levels of quality control, reliability, and durability;
•Highly integrated, global footprint;
•Capability to provide our customers diversified contract manufacturing services for non-electronic components, medical disposables, precision molded plastics, and automation, test, and inspection equipment;
•CRM model and our customer scorecard process;
•Ability to provide our customers with valuable input regarding designs for improved manufacturability, reliability, and cost;
•Quality systems, industry certifications, and regulatory compliance;
•Integrated supply chain solutions and competitive bid process resulting in competitive raw material pricing; and
•Complete product life cycle management.
Competitors
The EMS industry is very competitive as numerous manufacturers compete for business from existing and potential customers. Our competition includes EMS companies such as Benchmark Electronics, Inc., Flex Ltd., Jabil Inc., Plexus Corp., and Sanmina Corporation. We do not have a significant share of the EMS market and were ranked the 20th largest global EMS provider for calendar year 2022 by Manufacturing Market Insider in the March 2023 edition published by New Venture Research.
Locations
As of June 30, 2023, we have twelve manufacturing facilities with two located in Indiana, two in China, two in Mexico, and one located in each of California, Florida, Poland, Romania, Thailand, and Vietnam. Our software design services are primarily performed at our location in India, and other support services are performed at our location in Japan. We continually assess our capacity needs and evaluate our operations to optimize our service levels for supporting our customers’ needs around the globe, and we have recently expanded our facilities in Thailand, Mexico, and Poland. See Item 1A - Risk Factors for information regarding financial and operational risks related to our international operations.
Seasonality
Consolidated sales revenue is generally not affected by seasonality.
Customers
While the total electronic assemblies market has broad applications, our customers are concentrated in the automotive, medical, and industrial end markets. Beginning in fiscal year 2023, the Company changed its presentation of revenue for the industrial and public safety end market verticals by combining them into the industrial end market vertical. Prior year periods have been recast to conform to the current year presentation.
6
Sales by industry as a percent of net sales for each of the three years in the period ended June 30, 2023 were as follows:
| Year Ended June 30 | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Automotive | 45% | 43% | 43% | ||||||||||||||
| Medical | 27% | 29% | 30% | ||||||||||||||
| Industrial | 26% | 27% | 26% | ||||||||||||||
| Other | 2% | 1% | 1% | ||||||||||||||
| Total | 100% | 100% | 100% | ||||||||||||||
Included in our sales were a significant amount to Nexteer Automotive, Philips, and ZF, which accounted for the following portions of net sales:
| Year Ended June 30 | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Nexteer Automotive | 15% | 17% | 17% | ||||||||||||||
| Philips | 14% | 15% | 15% | ||||||||||||||
| ZF | 12% | * | * | ||||||||||||||
| * amount is less than 10% of total | |||||||||||||||||
The nature of the contract manufacturing business is such that start-up of new programs to replace expiring programs occurs frequently. Our agreements with customers are often not for a definitive term and are amended and extended, but generally continue for the relevant product’s life cycle, which can be difficult to predict at the beginning of a program. Typically, our customer agreements do not commit the customer to purchase our services until a purchase order is provided, which are generally short term in nature. Our customers generally have the right to cancel a particular program subject to contractual provisions governing termination, the final product runs, excess or obsolete inventory, and end-of-life pricing, which reduces the additional costs that we incur when a manufacturing services agreement is terminated.
Raw Materials
Raw materials utilized in the manufacture of contract electronic products are generally readily available from both domestic and foreign sources, although from time to time the industry experiences shortages of certain components due to supply and demand forces, combined with rapid product life cycles of certain components. In addition, unforeseen events such as natural disasters and global events, like pandemics, can and have disrupted portions of the supply chain. We believe that maintaining close communication with suppliers helps minimize potential disruption in our supply chain.
The EMS industry continues to experience component shortages, component allocations, and shipping delays, particularly with semiconductors, which were especially challenging in the prior fiscal year. Component shortages or allocations could continue to increase component costs and potentially interrupt our operations and negatively impact our ability to meet commitments to customers. We take various actions to attempt to mitigate the risk and minimize the impact to our customers as well as the adverse effect component shortages, component allocations, or shipping delays could have on our results. Through contractual pricing arrangements and negotiations with our customers, we attempt to mitigate the adverse effect that cost increases could have on our results.
Raw materials are normally acquired for specific customer orders and may or may not be interchangeable among products. Inherent risks associated with rapid technological changes within this contract industry are mitigated by procuring raw materials, for the most part, based on firm orders. In certain instances, such as when lead times dictate, we enter into contractual agreements for material in excess of the levels required to fulfill customer orders. In turn, material authorization agreements with customers cover a portion of the exposure for material which is purchased prior to having a firm order. We may also purchase additional inventory to support new product introductions, transfers of production between manufacturing facilities, and to mitigate the potential impact from component shortages.
7
Intellectual Property
Our primary intellectual property is our proprietary manufacturing technology and processes that allow us to provide competitive contract manufacturing and design services to our customers. As such, this intellectual property is complex and normally contained within our facilities. To protect our trade secrets, our manufacturing technology and processes, and other proprietary rights, we rely primarily on a combination of intellectual property laws pertaining to trade secrets and copyrights; non-disclosure agreements with our customers, employees, and suppliers; and our internal security procedures and systems. We feel that relying on trade secret or copyright protections is a superior strategy because there is no disclosure of the information to outside parties, and protections do not expire after a length of time. We currently have or are pursuing a modest number of patents for some of our innovations and technologies in the United States and foreign countries. We also maintain trademark rights (including registrations) for “Kimball Electronics,” “GES” and other wordmarks and trademarks that we use in our business in the United States and around the world. We have policies and procedures to identify and protect our own intellectual property and that of our customers and suppliers.
Corporate Social Responsibility
We are committed to responsible, sustainable environmental, social, and governance philosophies and practices, which have been a part of our fabric since our founding in 1961. To showcase how our employees around the world share a strong sense of responsibility to protect the environment, sustain a safety focus at our facilities, and give back in meaningful ways to the communities where we live and work, we issued our latest annual Environmental, Social & Governance Report (“ESG Report”) in March 2023. The ESG Report highlights the long-term environmental, social, and governance principles and practices designed to support the Company’s commitment to sustaining lasting relationships and achieving global success with its stakeholders wherever Kimball Electronics’ touch is felt throughout the world. The ESG Report reflects several long-standing Guiding Principles of the Company: our customer is our business; our people are the company; the environment is our home; we strive to help our communities be great places to live; profitability and financial resources give us the freedom to shape our future and achieve our vision. The ESG Report is posted on our website at https://www.kimballelectronics.com/esg. The Company’s website and the information contained therein, or incorporated therein, are not intended to be incorporated into this Annual Report on Form 10-K.
Socially Responsible Supply Chain
We are committed to the use of a socially responsible supply chain to reduce the risk of human rights violations and the use of conflict minerals (tin, tungsten, tantalum and gold, or “3TG”) from the Democratic Republic of Congo and certain adjoining countries. Our efforts include requiring our suppliers to undertake reasonable due diligence within their supply chain to ensure that the 3TG in the materials we source from them do not directly or indirectly contribute to significant adverse human rights impacts, as well as conducting due diligence before allowing a potential supplier to become one of our preferred suppliers. We request the return of reporting forms related to conflict minerals from our suppliers under the Responsible Minerals Initiative, or RMI, Conflict Minerals Survey. Further, we seek to remove any suppliers that continue to fail to meet our supplier and conflict minerals policies after being provided the opportunity to remedy non-compliance via implementation of a corrective action plan. We also conduct recurring, annual training for all employees and certain select contractors on export compliance, anti-corruption and anti-slavery, and insider trading. In addition, Kimball Electronics is a member of the RMI, which is evaluating the supply chain risks of conflict minerals and other minerals (e.g., cobalt, mica) and studying how to mitigate those risks.
We are committed to the use of a socially responsible supply chain to reduce the risk of human rights violations and the use of conflict minerals (tin, tungsten, tantalum and gold, or “3TG”) from the Democratic Republic of Congo and certain adjoining countries. Our efforts include requiring our suppliers to undertake reasonable due diligence within their supply chain to ensure that the 3TG in the materials we source from them do not directly or indirectly contribute to significant adverse human rights impacts, as well as conducting due diligence before allowing a potential supplier to become one of our preferred suppliers. We request the return of reporting forms related to conflict minerals from our suppliers under the Responsible Minerals Initiative, or RMI, Conflict Minerals Survey. Further, we seek to remove any suppliers that continue to fail to meet our supplier and conflict minerals policies after being provided the opportunity to remedy non-compliance via implementation of a corrective action plan. We also conduct recurring, annual training for all employees and certain select contractors on export compliance, anti-corruption and anti-slavery, and insider trading. In addition, Kimball Electronics is a member of the RMI, which is evaluating the supply chain risks of conflict minerals and other minerals (e.g., cobalt, mica) and studying how to mitigate those risks.
Human Rights
As reflected in our Vision and Guiding Principles, Kimball Electronics is committed to the highest standards of conduct in its business dealings. We are a human-centered company that fully supports human rights. For us, human rights are more than just being compliant--they are about doing the right thing. Our Guiding Principles outline the critical role Kimball plays as a corporate citizen for our customers, our people, our partners, our environment, our Share Owners, and our communities. Our human rights beliefs are deeply rooted in our Guiding Principles and expressed in our Global Human Rights Policy, which is supported by annual review that explains some of the practical actions that we take each year to implement our Policy.
As reflected in our Vision and Guiding Principles, Kimball Electronics is committed to the highest standards of conduct in its business dealings. We are a human-centered company that fully supports human rights. For us, human rights are more than just being compliant--they are about doing the right thing. Our Guiding Principles outline the critical role Kimball plays as a corporate citizen for our customers, our people, our partners, our environment, our Share Owners, and our communities. Our human rights beliefs are deeply rooted in our Guiding Principles and expressed in our Global Human Rights Policy, which is supported by annual review that explains some of the practical actions that we take each year to implement our Policy.
Kimball has been built upon the tradition of pride in craftsmanship, mutual trust, personal integrity, respect for dignity of the individual, a spirit of cooperation, and a sense of family and good humor. We seek to enhance this culture as we grow. We believe that no company should prosper while violating the basic human rights of others whether through unlawful slavery, servitude, forced or compulsory labor, or otherwise exploitative means. We believe in upholding principles of human rights, fair remuneration and economic inclusion, fair labor practices, worker safety, and observing fair labor practices within our organization and our supply chain.
8
Diversity, Equity, Inclusion, and Belonging
We value and work to promote a diverse, equitable and inclusive work environment. We are committed to holding ourselves accountable, taking action to continuously improve our policies and practices, and to uphold the principles that encompass diversity, equity, inclusion, and belonging as outlined in our Diversity, Equity, Inclusion, and Belonging (“DEI&B”) statement. Our strategy is to achieve excellence in customer service, employee relations, and business objectives through creativity, responsiveness, and innovation as a result of increased well-being, sense of belonging, and meaningful work for our employees. We actively promote DEI&B, and incorporate DEI&B into our culture, values, and strategies. We provide a report on the diversity of our employees to the Board of Directors annually.
Contributing to Our Communities
One of our Guiding Principles is to strive to help our communities be great places to live. We live this Guiding Principle and further the goals of our Human Rights Policy when we contribute and encourage our employees to contribute to our local communities. Below are examples of our contributions:
•In 2022, we committed $100,000 to Southwestern Indiana Child Advocacy Center Coalition (“SWICACC”), a safe reporting center for abused or neglected children that serves seven counties in southwestern Indiana. We made our final installment of the commitment in fiscal year 2023.
•On International Women’s Day 2021, we donated $5,000 to Water To Thrive to build a freshwater well system for a village in Ethiopia because safe, fresh drinking water is a basic human right. This well was fully operational during fiscal year 2023.
•In 2022, we donated $100,000 to refugee-related activities and aid causes, including Ukrainian refugees.
•Kimball Electronics Gives, an employee-based giving circle, raised enough money to offer grants totaling $8,400 to seven worthy causes selected by our employees. To date, Kimball Electronics Gives has donated $41,500 to various worthy causes.
•In 2022, we implemented our Creating Quality for Life Scholarship program, awarding 10 dependents of employees a total of $12,500.
•We also initiated our Employee Relief Fund to help employees with undue financial stress placed on them and their families due to a catastrophic event or other unfortunate personal event creating financial hardship.
Environment and Energy Matters
Our operations are subject to various foreign, federal, state, and local laws and regulations with respect to environmental and ecological matters. We believe that we are in substantial compliance with present laws and regulations and that there are no material liabilities related to such items.
We are dedicated to excellence, leadership, and stewardship in protecting the environment and communities in which we have operations. We believe that continued compliance with foreign, federal, state, and local laws and regulations which have been enacted relating to the protection of the environment will not have a material effect on our capital expenditures, earnings, or competitive position. Management believes capital expenditures for environmental control equipment will not represent a material portion of total capital expenditures.
Our operations require significant amounts of energy, including natural gas and electricity. Federal, foreign, and state regulations may control the allocation of fuels available to us, but to date we have experienced no interruption of production due to such regulations.
Kimball Electronics participates in the Carbon Disclosure Project (CDP) climate change and water security questionnaires to quantify our environmental practices, provide transparency on our progress, and assist in the reduction of our contributions to climate change. Additionally, we align our sustainability reporting with the Sustainability Accounting Standards Board (SASB) and the Task Force On Climate Related Financial Disclosures (TCFD) frameworks and also highlight our alignment with the UN Sustainable Development Goals and the UN Global Compact. We discuss our ESG goals and programs in detail in our annual ESG report. We publish this ESG report and our responses to the CDP climate change and water security questionnaires annually on our website at kimballelectronics.com/esg. We publish this information because our Guiding Principles remind us that the environment is our home and that we will be leaders in not only protecting but enhancing our world. The contents of the ESG reports and CDP questionnaire responses are not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC.
Refer to the discussion in Item 1A - Risk Factors for further details of the legal and regulatory initiatives related to environmental matters including climate change that could adversely affect our business, results of operations, and financial condition.
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Our People are the Company: Human Capital Management
We believe our people are the company. We believe in creating quality for life. We believe lasting relationships create our global success. We believe our people are the competitive edge for our service, quality, and value. Kimball Electronics has been built upon the tradition of pride in craftsmanship, mutual trust, personal integrity, respect for dignity of the individual, a spirit of cooperation, and a sense of family and good humor. We seek to enhance this culture as we grow. We believe in the inherent value of all individuals.
To raise awareness of our commitment to human rights and to foster compliance with our Global Human Rights Policy, we have incorporated it as an integral part of our Code of Conduct, train all of our employees worldwide on human rights issues, and require our suppliers, vendors, contractors, and partners to meet the same standards. To this end, through our Guiding Principles, we champion transparency and accountability for ourselves.
Because our people are the reason for our success, central to our long-term strategy is attracting, developing, and retaining the best talent globally and strengthening collaboration. We are committed to pay equity and apply the principle of equal pay for work of equal value in all regions where we operate. As of June 30, 2023, Kimball Electronics employed approximately 7,900 people worldwide, with approximately 1,300 located in the United States and approximately 6,600 located in foreign countries. Three of our seven independent members of the Board of Directors are female, along with four of our eight executive management team members and over 50% of our global workforce. We continue to execute on our commitment to diversity, equity, inclusion, and belonging, and exhibit our commitment to gender, racial, and ethnic diversity by striving toward the corporate goals we outline in both our Global Human Rights Policy and Diversity, Equity, Inclusion, and Belonging statement, including by:
•Increasing female representation globally at the executive and senior management levels;
•Increasing racial and ethnic diversity at the executive and senior management levels so our leadership will reflect our organization and the communities in which we operate;
•Holding leadership accountable for diversity, equity, inclusion, and belonging outcomes.
The average tenure within our workforce is 6 years, and we work hard to mitigate turnover risk by consistently and formally surveying our workforce about how well we are living up to our People Guiding Principles by asking them to anonymously rate us on a scale from 1 (low) to 10 (high). We currently have a score of 8.29 across our enterprise. We believe this is evidence that we truly operate our business as our people are the company. We consistently have a participation rate in our Guiding Principles survey of approximately 90%. Upon completion of this survey every year, each local management team receives qualitative and quantitative feedback and are responsible for crafting improvement plans based on our people’s inputs.
Our U.S. operations are not subject to collective bargaining arrangements. Certain foreign operations are subject to collective bargaining arrangements, many mandated by government regulation or customs of the particular countries. We believe that our employee relations are good.
For additional information, see the Company’s Proxy Statement to be filed for its annual meeting of Share Owners to be held November 17, 2023 under the caption “Our People are the Company: Human Capital Management.”
Available Information
The Company makes available free of charge through its website, https://investors.kimballelectronics.com, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). All reports the Company files with the SEC are also available via the SEC website, http://www.sec.gov. The Company’s website and the information contained therein, or incorporated therein, are not intended to be incorporated into this Annual Report on Form 10-K.
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Item 1A - Risk Factors
The following important risk factors, among others, could affect future results and events, causing results and events to differ materially from those expressed or implied in forward-looking statements made in this report and presented elsewhere by management from time to time. Such factors, among others, may have a material adverse effect on our business, financial condition, and results of operations and should be carefully considered. Additional risks and uncertainties that we do not currently know about, we currently believe are immaterial, or we have not predicted may also affect our business, financial condition, or results of operations. Because of these and other factors, past performance should not be considered an indication of future performance.
Business and Operational Risks
Reduction of purchases by, or the loss of, one or more key customers could reduce revenues and profitability.
Losses of key customers within specific industries or significant volume reductions from key customers are both risks. Our continuing success is dependent upon replacing expiring contract customers/programs with new customers/programs. See “Customers” in Item 1 - Business for disclosure of the net sales as a percentage of consolidated net sales for each of our significant customers during fiscal years 2023, 2022, and 2021. Regardless of whether our agreements with our customers, including our significant customers, have a definite term, our customers typically do not commit to firm production schedules for more than one quarter. Our customers generally have the right to cancel a particular product, subject to contractual provisions governing the final product runs, excess or obsolete inventory, recovery of dedicated investments, and end-of-life pricing. As many of our costs and operating expenses are relatively fixed, a reduction in customer demand, particularly a reduction in demand for a product that represents a significant amount of revenue, can harm our gross profit margins and results of operations.
Significant declines in the level of purchases by key customers or the loss of a significant number of customers could have a material adverse effect on our business. In addition, the nature of the contract manufacturing industry is such that the start-up of new customers and new programs to replace expiring programs occurs frequently, and new customers and program start-ups generally cause margin dilution early in the life of a program. New customer relationships also present risk because we do not have an extensive product or customer relationship history.
Consolidation among our customers exposes us to increased risks, including reduced revenue and dependence on a smaller number of customers. Consolidation in industries that utilize our services may occur as companies combine to achieve further economies of scale and other synergies, which could result in an increase in excess manufacturing capacity as companies seek to divest manufacturing operations or eliminate duplicative product lines. Excess manufacturing capacity may increase pricing and competitive pressures for our industry as a whole and for us in particular.
We can provide no assurance that we will be able to fully replace any lost sales from these risks, which could have an adverse effect on our financial position, results of operations, or cash flows.
Supply chain disruptions could prevent us from purchasing sufficient materials, parts, and components necessary to meet customer demand at competitive prices, in a timely manner, or at all.
We depend on suppliers globally to provide timely delivery of materials, parts, and components for use in our products. From time to time, we have experienced shortages of some of the materials, parts and components that we use, particularly with semiconductors. These shortages can result from strong demand for those components or from problems experienced by suppliers, such as shortages of raw materials and shipping delays for such components with common carriers. These unanticipated component shortages have and will continue to result in curtailed production or delays in production, which prevent us from making scheduled shipments to customers.
We have also experienced, and may again experience in the future, such shortages due to the effects of and responses to the COVID-19 pandemic, including the emergence of variants for which vaccines may not be effective, and may be impacted by other events outside our control, including macroeconomic events, trade restrictions, political crises, social unrest, terrorism, and conflicts (including the Russian invasion of, and ongoing war in, Ukraine). We cannot reasonably predict the full extent to which these events may impact our supply chain, because any impacts will depend on future developments that are highly uncertain and continuously evolving, including new information that may emerge concerning COVID-19, further actions by governmental entities or others in response to the types of events described above, and how quickly and to what extent normal economic and operating conditions can resume.
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Suppliers adjust their capacity as demand fluctuates, and component shortages and/or component allocations could occur in addition to longer lead times. Certain components we purchase are primarily manufactured in select regions of the world and issues in those regions could cause manufacturing delays. Maintaining strong relationships with key suppliers of components critical to the manufacturing process is essential. Component shortages may also increase our cost of goods sold because we may be required to pay higher prices for components in short supply and redesign or reconfigure products to accommodate substitute components. These and other price increases, including increased tariffs, could have an adverse impact on our profitability if we cannot offset such increases with other cost reductions or by price increases to customers. If suppliers fail to meet commitments to us in terms of price, delivery, or quality, or if the supply chain is unable to react timely to increases in demand, it could interrupt our operations and negatively impact our ability to meet commitments to customers.
The substantial investments required to start up and expand facilities and new customer programs may adversely affect our margins and profitability.
We continue to expand our global operations by increasing our product and service offerings and scaling our infrastructure at certain facilities to support our business. This expansion increases the complexity of our business and places significant strain on our management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions. We may not be able to manage these expansions effectively, which could damage our reputation, limit our growth, and negatively affect our operating results.
Start-ups of new customer programs require the coordination of the design and manufacturing processes, as well as substantial investments in resources and equipment. The design and engineering required for certain new programs can take an extended period of time, and further time may be required to achieve customer acceptance. Accordingly, the launch of any particular program may be delayed, less successful than we originally anticipated, or not successful at all. Additionally, even after acceptance, most of our customers do not commit to long-term production schedules, and we are unable to forecast the level of customer orders with certainty over a given period of time. If our customers do not purchase anticipated levels of products, we may not recover our up-front investments, may not realize profits, and may not effectively utilize expanded fixed manufacturing capacities. All of these types of manufacturing inefficiencies could have an adverse impact on our financial position, operating margins, results of operations, or cash flows.
Our international operations make us vulnerable to financial and operational risks associated with doing business in foreign countries.
We derive a substantial majority of our revenues from our operations outside the United States, primarily in China, India, Mexico, Poland, Romania, Thailand, and Vietnam. Our international operations are subject to a number of risks, which may include the following:
•global, regional, or local economic and political instability;
•widespread health emergencies and foreign governments’ measures taken in response to them;
•foreign currency fluctuations including currency controls and inflation, which may adversely affect our ability to do business in certain markets and reduce the U.S. dollar value of revenues, profits, or cash flows we generate in non-U.S. markets;
•warfare, riots, terrorism, general strikes, or other forms of violence and/or geopolitical disruption;
•compliance with laws and regulations, including the U.S. Foreign Corrupt Practices Act, applicable to operations outside of the U.S.;
•changes in U.S. or foreign policies, regulatory requirements, and laws;
•tariffs and other trade barriers, including tariffs imposed by the United States as well as responsive tariffs imposed by China, the European Union, or Mexico;
•potentially adverse tax consequences, including changes in tax rates and the manner in which multinational companies are taxed in the United States and other countries; and
•foreign labor practices.
These risks could have an adverse effect on our financial position, results of operations, or cash flows. Certain foreign jurisdictions restrict the amount of cash that can be transferred to the United States or impose taxes and penalties on such transfers of cash. To the extent we have excess cash in foreign locations that could be used in, or is needed by, our operations in the United States, we may incur significant penalties and/or taxes to repatriate these funds.
For example, the Russian invasion of Ukraine and the ongoing war there has impacted the global economy as the United States, the UK, the EU, and other countries have imposed broad export controls and financial and economic sanctions against Russia (a large exporter of commodities), Belarus, and specific areas of Ukraine, and may continue to impose additional sanctions or
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other measures. Russia may impose its own counteractive measures. Companies worldwide have interrupted or stopped production in Ukraine, Russia, and neighboring countries. We do not procure materials directly from Ukraine or Russia or have facilities there, but impacts like these, wherever they may occur, can further exacerbate the ongoing supply chain disruptions that are occurring across the globe, particularly in the automotive industry. Our European operations are located in Poland and Romania, and both of these countries are part of NATO, which is actively taking, and could take in the future, certain measures in response to Russia’s invasion of Ukraine.
The extent of the war’s effect on the global economy and the duration, scope, and impacts of the conflict are unknown and highly unpredictable, and the consequences from future actions such as increased sanctions and retaliatory measures taken by the United States, NATO, or other countries cannot be predicted but could have an adverse impact on our business operations, particularly our European operations.
We operate in a highly competitive industry and may not be able to compete successfully.
Numerous manufacturers within the contract manufacturing industry compete globally for business from existing and potential customers. Some of our competitors have greater resources and more geographically diversified international operations than we do. We also face competition from the manufacturing operations of our customers, who are continually evaluating the merits of manufacturing products internally against the advantages of outsourcing to contract manufacturing service providers. In the past, some of our customers have decided to in-source a portion of their manufacturing from us in order to utilize their excess internal manufacturing capacity. The competition may further intensify as more companies enter the markets in which we operate, as existing competitors expand capacity, and as the industry consolidates.
In relation to customer pricing pressures, if we cannot achieve the proportionate reductions in costs, profit margins may suffer. The high level of competition in the industry impacts our ability to implement price increases or, in some cases, even maintain prices, which also could lower profit margins. In addition, as end markets dictate, we are continually assessing excess capacity and developing plans to better utilize manufacturing operations, including consolidating and shifting manufacturing capacity to lower cost venues as necessary.
If our engineering and manufacturing services do not meet our customers’ quality standards, our sales, operating results, and reputation could suffer.
We make substantial investments of capital and operating expenses to implement comprehensive, company-wide quality systems, certifications, and controls in our operations in an effort to ensure sustained compliance with various product and quality system regulations and requirements, and to meet the needs of our customers. However, in the event we fail to adhere to these requirements, we become subject to costs associated with product defects, interruptions in production, and reputational harm. Our failure to comply with applicable quality system standards could, in turn, adversely affect our customers through failures to supply product to them. Quality or noncompliance failures could have an adverse effect on our reputation in addition to an adverse impact on our financial position, results of operations, or cash flows. While we maintain product liability and other insurance coverage that we believe to be generally in accordance with industry practices, our insurance coverage may not be adequate to protect us fully against substantial claims and costs that may arise from warranty and other liabilities related to product defects.
Our business may be harmed due to failure to successfully implement information technology solutions or a lack of reasonable safeguards to maintain data security, including adherence to data privacy laws and physical security measures.
The operation of our business depends on effective information technology systems, including data management, analytics, and emerging machine learning and artificial intelligence platforms and applications. These systems are subject to the risk of security breach or cybersecurity threat, including misappropriation of assets or other sensitive information, such as confidential business information and personally identifiable data relating to employees, customers, and other business partners, or data corruption which could cause operational disruption. The unpredictability of AI, machine learning, and similar systems that automate certain operational tasks bring the potential for unintended consequences and unexpected disruptions in business operations, financial losses, and reputational damage. As we could be the target of cyber and other security threats, which are becoming increasingly sophisticated, we must continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address, and mitigate the risk of unauthorized access, misuse, computer viruses, and other events that could have a security impact. Information systems require an ongoing commitment of significant resources to research new technologies and processes, maintain and enhance existing systems, and develop new systems in order to keep pace with changes in information processing technology and evolving industry standards as well as to protect against cyber risks and security breaches. While we provide employee awareness training around phishing, malware, and other cyber threats to help protect against these cyber and security risks, we cannot ensure the measures we take to protect our information technology systems will be sufficient.
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Implementation delays, poor execution, or a breach of information technology systems could disrupt our operations, damage our reputation, or increase costs related to the mitigation of, response to, or litigation arising from any such issue. Similar risks exist with our third-party vendors. Any problems caused by these third parties, including those resulting from disruption in communications services, cyber attacks, or security breaches, have the potential to hinder our ability to conduct business. In addition, data privacy laws and regulations, such as the European Union General Data Protection Regulation (“GDPR”), the UK GDPR, ePrivacy Directive, the California Privacy Rights Act (“CPRA”), and similar legislation in jurisdictions in which we operate, pose increasingly complex compliance challenges and potentially elevate costs, and any failure to comply with these laws and regulations could result in significant penalties.
We depend on attracting and retaining executive officers, key employees, skilled personnel, and sufficient labor to efficiently operate our business.
Our success depends to a large extent on our ability to attract and retain highly qualified and diverse executive officers, key employees, and skilled personnel, and to continue to implement our succession plans for managers and other key employees. These employees are not generally bound by employment or non-competition agreements, and we cannot assure you that we will retain them. The labor market for these employees is intensely competitive, and compensation and benefit costs continue to increase significantly in the current economic environment. In particular, the high demand for manufacturing labor in certain geographic areas in which we operate makes recruiting new production employees and retaining experienced production employees difficult.
Our success also depends on keeping pace with technological advancements, including Industry 4.0, and adapting services to provide manufacturing capabilities which meet customers’ changing needs. Therefore, we must retain our qualified engineering and technical personnel and successfully anticipate and respond to technological changes in a cost effective and timely manner.
Shortages of workers could adversely impact our ability to operate our business effectively and timely serve our customers’ needs, which could adversely affect our relations with customers, result in reductions in orders from customers, or cause us to lose customers. Turnover in personnel could result in additional training and inefficiencies that could adversely impact our operating results. Our culture and guiding principles focus on continuous training, motivating, and development of employees, and we strive to attract, motivate, and retain qualified personnel. To aid in managing our growth and strengthening our pool of qualified personnel, we will need to internally develop, recruit, and retain diverse, qualified personnel. If we are not able to do so, our business and our ability to continue to grow could be harmed.
Regulatory and Litigation Risks
Failure to protect our intellectual property could undermine our competitive position.
Competing effectively depends, to a significant extent, on maintaining the proprietary nature of our intellectual property. We attempt to protect our intellectual property rights worldwide through a combination of keeping our proprietary information secret and utilizing trademark, copyright, and trade secret laws, as well as licensing agreements and third-party non-disclosure and assignment agreements. Because of the differences in foreign laws concerning proprietary rights, our intellectual property rights do not generally receive the same degree of protection in foreign countries as they do in the United States, and therefore, in some parts of the world, we have limited protections, if any, for our intellectual property. If we are unable to adequately protect our intellectual property embodied in our solutions, designs, processes, and products, the competitive advantages of our proprietary technology could be reduced or eliminated, which would harm our business and could have a material adverse effect on our results of operations and financial position.
Anti-takeover provisions in our organizational documents and Indiana law could delay or prevent a change in control.
Certain provisions of our Amended and Restated Articles of Incorporation and the Amended and Restated Bylaws may delay or prevent a merger or acquisition that a Share Owner may consider favorable. For example, the Amended and Restated Articles of Incorporation authorizes our Board of Directors to issue one or more series of preferred stock, prevents Share Owners from acting by written consent without unanimous consent, and requires a supermajority Share Owner approval for certain business combinations with related persons. These provisions may discourage acquisition proposals or delay or prevent a change in control, which could harm our stock price. Indiana law also imposes some restrictions on potential acquirers.
Our failure to maintain applicable registrations for our manufacturing facilities could negatively impact our ability to produce products for our customers.
We make substantial investments of capital and operating expenses to implement comprehensive, company-wide quality systems, certifications, and controls in our operations in an effort to ensure sustained compliance with various product and quality system regulations and requirements, and to meet the needs of our customers. However, in the event we fail to adhere to these requirements, we become subject to potential investigations and fines and penalties. Our failure to comply with applicable
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regulations and quality system standards could, in turn, adversely affect our customers through failures to supply product to them or delays in their ability to obtain and maintain product approvals. As a medical device manufacturer, we also have additional compliance requirements. The U.S. Food and Drug Administration (“FDA”) extensively regulates all aspects of product and manufacturing quality for medical products under its current Good Manufacturing Practices (cGMP) regulations. Outside the U.S., our operations and our customers’ products are subject to similar regulatory requirements, notably by the European Medicines Agency and the Safe Food and Drug Administration in China. For instance, we are required to register with the FDA and are subject to periodic inspection by the FDA for compliance with the FDA’s Quality System Regulation (“QSR”) requirements, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures. Any determination by the FDA or other regulatory authorities of manufacturing or other deficiencies could adversely affect our business. Failure or noncompliance could have an adverse effect on our reputation in addition to an adverse impact on our financial position, results of operations, or cash flows.
Climate change, and the legal and regulatory initiatives related to climate change, could subject us to extensive environmental regulation and significant potential environmental liabilities.
There is increasing concern that a gradual increase in global average temperatures due to increased concentration of carbon dioxide and other greenhouse gases in the atmosphere will cause significant changes in weather patterns around the globe and an increase in the frequency and severity of natural disasters or extreme weather conditions, such as hurricanes, earthquakes, droughts, wildfires, cyclones, or floods. Physical climate risks and the operation of facilities in areas subject to increased water stress could impair our production capabilities, disrupt the operations of our supply chain and infrastructure, and impact our customers and their demand for our services.
The past and present operation and ownership by Kimball Electronics of manufacturing plants and real property are subject to extensive and changing federal, state, local, and foreign environmental laws and regulations, including those relating to discharges in air, water, and land, the handling and disposal of solid and hazardous waste, the use of certain hazardous materials in the production of select products, and the remediation of contamination associated with releases of hazardous substances.
In addition, as regulators and investors increasingly focus on climate change and other sustainability issues, we are subject to new disclosure frameworks and regulations. For example, the European Parliament adopted the Corporate Sustainability Reporting Directive (CSRD) and the resulting adoption of EU sustainability reporting standards to be developed by the European Financial Reporting Advisory Group, with such standards to be tailored to EU policies building on and contributing to international standardization initiatives, will apply not only to local operations in the EU, but under certain circumstances, to entire global companies like Kimball Electronics that have EU operations. The CSRD will not apply to our operations in calendar year 2023, but we are assessing our obligations under the CSRD and we expect that compliance with the CSRD could require significant effort in future years. The SEC and the State of California have also proposed new climate change disclosure requirements, and compliance with such rules, if and when they are finalized, could also require significant effort.
We cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted, or what environmental conditions may be found to exist. Compliance with more stringent laws or regulations, or stricter interpretation of existing laws, may require additional expenditures, some of which could be material. In addition, any investigations or remedial efforts relating to environmental matters could involve material costs or otherwise result in material liabilities.
The long-term effects of climate change on the global economy and our industry in particular are unclear. Changes in climate where we, our customers, and our supply chain operate could have a long-term adverse impact on our business, results of operations, and financial condition. In addition, we have committed to cut our greenhouse gas emissions, water usage, electrical usage, and air emissions significantly by 2025 as part of our long-term sustainability strategy, and we may take additional voluntary steps to mitigate our impact on the environment. Climate transition risks related to shifts to a low-carbon economy and the associated costs of retrofitting or constructing facilities with green technology, in addition to investments in renewable energy and energy efficiency could involve material costs or otherwise impact our customers and their demand for our services.
Environmental regulations or changes in the supply, demand, or available sources of energy, water, or other resources may affect the availability or cost of goods and services, including natural resources, necessary to run our business. The cost of energy is a critical component of freight expense and the cost of operating manufacturing facilities. Increases in the cost of energy in particular could reduce our profitability. Given the political significance and uncertainty around these issues, we cannot predict how climate change, and the legal and regulatory initiatives related to climate change, will affect our operations and financial condition.
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Compliance with government legislation and regulations may significantly increase our operating costs in the United States and abroad.
Legislation and regulations promulgated by the U.S. federal and foreign governments could significantly impact our profitability by burdening us with forced cost choices that either cannot be recovered by increased pricing or, if we increase our pricing, could negatively impact demand for our products. For example:
•Changes in policies by the U.S. or other governments could negatively affect our operating results due to changes in duties, tariffs or taxes, or limitations on currency or fund transfers, as well as government-imposed restrictions on producing certain products in, or shipping them to, specific countries. For example, our facility in Mexico operates under the Mexican Maquiladora (“IMMEX”) program. This program provides for reduced tariffs and eased import regulations. We could be adversely affected by changes in the IMMEX program or our failure to comply with its requirements. As another example, the U.S. government has imposed tariffs on certain products imported from China. China has imposed tariffs on certain U.S. products in retaliation. These tariffs could force our customers or us to consider various strategic options including, but not limited to, looking for different suppliers, shifting production to facilities in different geographic regions, absorbing the additional costs, or passing the cost on to customers. Ultimately, these tariffs could adversely affect the competitiveness of our domestic operations, which could lead to the reduction or exit of certain U.S. manufacturing capacity. Depending on the types of changes made, demand for our foreign manufacturing facilities could be reduced, or operating costs in our manufacturing facilities could be increased, which could negatively impact our financial performance. Moreover, any retaliatory actions by other countries where we operate could also negatively impact our financial performance.
•The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as “conflict minerals,” originating from the Democratic Republic of Congo (“DRC”) and adjoining countries. These rules could adversely affect the sourcing, supply, and pricing of materials used in our products, as the number of suppliers who provide conflict-free minerals may be limited. We may also suffer reputational harm if we determine that certain of our products contain minerals not determined to be conflict-free or if we are unable to modify our products to avoid the use of such materials. We may also face challenges in satisfying customers who may require that our products be certified as containing conflict-free minerals or that we adopt more stringent guidelines like those fostered by the Responsible Materials Initiative (“RMI”).
•We are subject to a variety of federal, state, local and foreign environmental, health and safety, product stewardship and producer responsibility laws and regulations, including those arising from global pandemics or relating to the use, generation, storage, discharge and disposal of hazardous chemicals used during our manufacturing process, those governing worker health and safety, those requiring design changes, supply chain investigation or conformity assessments, and those relating to the recycling or reuse of products we manufacture. These include EU regulations and directives, such as the Restrictions on Hazardous Substances (“RoHS”), the Waste Electrical and Electronic Equipment (“WEEE”) directives, and the Registration, Evaluation, Authorization, and Restriction of Chemicals (“REACH”) regulation, and similar regulations in China (the Management Methods for Controlling Pollution for Electronic Information Products or “China RoHS”). In addition, new technical classifications of e-Waste being discussed in the Basel Convention technical working group could affect both our customers’ abilities and obligations in electronics repair and refurbishment. If we fail to comply with any present or future regulations or timely obtain any needed permits, we could become subject to liabilities, and we could face fines or penalties, the suspension of production, or prohibitions on sales of products we manufacture. In addition, such regulations could restrict our ability to expand our facilities or could require us to acquire costly equipment, or to incur other significant expenses, including expenses associated with the recall of any non-compliant product or with changes in our operational, procurement and inventory management activities.
ESG issues, including those related to climate change and sustainability, may increase our costs and impose difficult and expensive compliance requirements.
Customers, consumers, investors, and other stakeholders, particularly in the EMS industry, are increasingly focusing on environmental issues, including climate change, water use, deforestation, waste, and other sustainability concerns. Along with our stakeholders and our broader industry, we have increased our focus on sustainability and measurement of our progress against ESG criteria, but we cannot guarantee that we will be able to achieve relevant criteria with our current focus. Our ability to successfully execute relevant initiatives and accurately report our progress presents numerous operational, financial, legal, reputational and other risks, many of which are outside our control, and all of which could have a material negative impact on our business.
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New disclosures, along with the evolving global ESG regulatory landscape, may present increased compliance costs and regulatory or enforcement risks, as well as increased competition from market participants who may adopt more robust ESG reporting and sustainable business practices. If our ESG initiatives fail to satisfy investors, current or potential customers, consumers, and our other stakeholders, our reputation, our ability to sell products and services to customers, our ability to attract or retain employees, and our attractiveness as an investment or business partner could be negatively impacted. Similarly, our failure or perceived failure to pursue or fulfill our goals, targets, and objectives, or to satisfy various reporting standards within the timelines we announce, or at all, could also have similar negative impacts and expose us to government enforcement actions and private litigation.
In addition, our customers have adopted, and may continue to adopt, procurement policies that require us to comply with governance, social, and environmental responsibility provisions. Our customers have also adopted, and may continue to adopt, goals and policies that serve to increase their demand for goods or services that do not produce significant greenhouse gas emissions and are not related to carbon-based energy sources. Furthermore, an increasing number of investors have adopted, and may continue to adopt, ESG policies for their portfolio companies, and various voluntarily sustainability initiatives and organizations have promulgated different social and environmental responsibility and sustainability guidelines. These practices, policies, provisions, and initiatives are under active development, subject to change, can be unpredictable and conflicting, and may prove difficult and expensive for us to comply with and could negatively affect our reputation, business, or financial condition.
Financial Risks
We are exposed to the credit risk of our customers.
The instability of market conditions drives an elevated risk of potential bankruptcy of customers resulting in a greater risk of uncollectible outstanding accounts receivable. Accordingly, we intensely monitor our receivables and related credit risks. The realization of these risks could have a negative impact on our profitability.
Failure to effectively manage working capital may adversely affect our cash flow from operations.
We closely monitor inventory and receivable efficiencies and continuously strive to improve these measures of working capital, but customer financial difficulties, cancellation or delay of customer orders, shifts in customer payment practices, transfers of production among our manufacturing facilities, additional inventory purchases to mitigate potential impact from component shortages, or manufacturing delays could adversely affect our cash flow from operations.
We could incur losses due to asset impairment.
As business conditions change, we must continually evaluate and work toward the optimum asset base. It is possible that certain assets such as, but not limited to, facilities, equipment, intangible assets, or goodwill could be impaired at some point in the future depending on changing business conditions. Such impairment could have an adverse impact on our financial position and results of operations.
Fluctuations in our effective tax rate could have a significant impact on our financial position, results of operations, or cash flows.
Our effective tax rate is highly dependent upon the geographic mix of earnings across the jurisdictions where we operate. Changes in tax laws or tax rates in those jurisdictions could have a material impact on our operating results. Judgment is required in determining the worldwide provision for income taxes, other tax liabilities, interest, and penalties. We base our tax position upon the anticipated nature and conduct of our business and upon our understanding of the tax laws of the various countries in which we have assets or conduct activities. Our tax position, however, is subject to review and possible challenge by taxing authorities and to possible changes in law (including adverse changes to the manner in which the United States and other countries tax multinational companies or interpret their tax laws). We cannot determine in advance the extent to which some jurisdictions may assess additional tax or interest and penalties on such additional taxes. In addition, our effective tax rate may be increased by changes in the valuation of deferred tax assets and liabilities, changes in our cash management strategies, changes in local tax rates, or countries adopting more aggressive interpretations of tax laws.
Several countries where we operate provide tax incentives to attract and retain business. We have obtained incentives where available and practicable. Our taxes could increase if certain incentives were retracted, they were not renewed upon expiration, we no longer qualify for such programs, or tax rates applicable to us in such jurisdictions were otherwise increased. In addition, our growth may cause our effective tax rate to increase, depending on the jurisdictions in which we expand our business or acquire operations. Given the scope of our international operations and our international tax arrangements, changes in tax rates and the manner in which multinational companies are taxed in the United States and other countries could have a material impact on our financial results and competitiveness.
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Certain of our subsidiaries provide financing, products, and services to, and may undertake certain significant transactions with, other subsidiaries in different jurisdictions. Moreover, several jurisdictions in which we operate have tax laws with detailed transfer pricing rules which require that all transactions with non-resident related parties be priced using arm’s length pricing principles and that contemporaneous documentation must exist to support such pricing. Due to inconsistencies among jurisdictions in the application of the arm’s length standard, our transfer pricing methods may be challenged and, if not upheld, could increase our income tax expense. In addition, the Organization for Economic Cooperation and Development continues to issue guidelines and proposals related to transfer pricing and profit shifting that may result in legislative changes that could reshape international tax rules in numerous countries and negatively impact our effective tax rate.
We are exposed to foreign currency risk.
In 2022, the relative value of the U.S. dollar reached its highest levels since 2000 and has appreciated sharply against many foreign currencies. Fluctuations in exchange rates could impact our operating results. Our risk management strategy includes the use of derivative financial instruments to hedge certain foreign currency exposures. Any hedging techniques we implement contain risks and may not be entirely effective. Exchange rate fluctuations could also make our products more expensive than competitors’ products not subject to these fluctuations, which could adversely affect our revenues and profitability in international markets.
A failure to comply with the financial covenants under our credit facilities could adversely impact us.
Our primary credit facility requires us to comply with certain financial covenants. We believe the most significant covenants under our credit facilities are the 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, as defined in our primary credit facility, and the interest coverage ratio. More detail on these financial covenants is discussed in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations. As of June 30, 2023, we had $281.5 million in borrowings under our credit facilities and had total cash and cash equivalents of $43.0 million. In the future, a default on the financial covenants under our credit facilities could cause an increase in the borrowing rates or make it more difficult for us to secure future financing, which could adversely affect our financial condition.
We are exposed to inflation, interest rate, and other banking and capital market risks.
High levels of inflation in the U.S. and other countries where we operate have and may continue to increase our costs and may impact pricing and customer demand, both of which may impact our revenues and earnings. We have exposure to interest rate risk on our borrowings under our credit facilities. The interest rates of these borrowings are based on a spread plus applicable base rate, including the Secured Overnight Financing Rate (“SOFR”), the Euro Interbank Offered Rate (“EURIBOR”), the prime rate of a reference bank, or the federal funds rate. An adverse change in the base rates upon which our interest rates are determined could have a material adverse effect on our financial position, results of operations, or cash flows. Rising interest rates have increased our costs of borrowing. Additionally, volatility in capital markets could present challenges to us if we need to raise funds in the equity market. This, in turn, may cause us to adopt strategies that may be less capital-intensive. Volatility in the credit markets, including due to the recent bank failures as well as the U.S. Federal Reserve Bank’s actions and pace of interest rate increases to combat inflation in the U.S., may have an adverse effect on our ability to obtain debt financing.
General Risk Factors
We will face risks associated with the organic and inorganic growth of our business and we may neither be able to continue that growth nor have the necessary resources to dedicate to that growth.
We plan to expand our business to new customers, new commercial applications, and new commercial markets, including those where we may have limited operating experience, through organic growth and acquisitions. Accordingly, we may be subject to increased business, technology, and economic risks that could materially affect our business. In recent periods, we have increased our focus on organic growth and customer acquisition. In the future, we may increasingly focus on this organic growth, and we may identify inorganic growth opportunities through acquisitions and customer divestitures. Expanding in the verticals in which we are already operating will continue to require significant resources and there is no guarantee that such efforts will be successful or beneficial to us. Historically, sales to new customers have often led to additional sales to the same customers or similarly situated customers. As we expand into and within new and emerging markets for our services, we will likely face additional regulatory scrutiny, risks, and business challenges from our customers, governments, and other stakeholders in those markets. While this approach to growth within new and existing commercial markets and verticals has proven successful in the past, it is uncertain we will achieve the same penetration and organic growth or identify suitable inorganic growth opportunities in the future and our reputation, business, financial condition, and results of operations could be negatively impacted.
18
Changes in financial accounting standards or policies have affected, and in the future may affect, our reported financial condition or results of operations.
We prepare our financial statements in conformity with U.S. GAAP. These principles are subject to interpretation by the Financial Accounting Standards Board (“FASB”), the American Institute of Certified Public Accountants, the SEC, and various bodies formed to interpret and create appropriate accounting policies. A change in these policies can have a significant effect on our reported results and may affect our reporting of transactions that are completed before a change is announced. Changes to those rules or questions as to how we interpret or implement them may have a material adverse effect on our reported financial results or on the way we conduct business. See Note 1 - Business Description and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for more information on the adoption of the new accounting guidance.
Litigation or legal proceedings could expose us to significant liabilities and have a negative impact on our reputation.
We are or may become party to various claims and legal proceedings in the ordinary course of our business. These claims and legal proceedings may include lawsuits or claims relating to contracts, intellectual property, product recalls, product liability, employment matters, environmental matters, regulatory compliance, or other aspects of our business. Even when not merited, the defense of these claims and legal proceedings may divert our management’s attention, and we may incur significant expenses in defending these claims and proceedings. In addition, we may be required to pay damage awards or settlements or become subject to injunctions or other equitable remedies, which could have a material adverse effect on our financial position, cash flows, or results of operations. The outcome of litigation is often difficult to predict, and the outcome of pending or future claims and legal proceedings may have a material adverse effect on our financial position, cash flows, or results of operations. We evaluate these claims and legal proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, we establish reserves or disclose the relevant litigation claims or legal proceedings, as appropriate. These assessments and estimates are based on the information available to management at the time and involve a significant amount of management judgment. Actual outcomes or losses may differ materially from our current assessments and estimates. If actual outcomes or losses differ materially from our current assessments and estimates or additional claims or legal proceedings are initiated, we could be exposed to significant liabilities.
Natural disasters, pandemics, or other catastrophic events may impact our production schedules and, in turn, negatively impact profitability.
Natural disasters, pandemics, or other catastrophic events, including severe weather (including cyclones, hurricanes, and floods) as well as terrorist attacks, power interruptions, fires, and pandemics, could disrupt operations and likewise our ability to produce or deliver products. Our manufacturing operations require significant amounts of energy, including natural gas and oil, and governmental regulations may control the allocation of such fuels to Kimball Electronics. Employees are an integral part of our business, and events such as a pandemic could reduce the availability of employees reporting for work. In the event we experience a temporary or permanent interruption in our ability to produce or deliver product, revenues could be reduced, and business could be materially adversely affected. In addition, catastrophic events, or the threat thereof, can adversely affect U.S. and world economies, and could result in reduced demand for our customers’ products and delayed or lost revenue for our services. Further, any disruption in our IT systems could adversely affect the ability to receive and process customer orders, manufacture products, and ship products on a timely basis, and could adversely affect relations with customers, potentially resulting in reduction in orders from customers or loss of customers. We maintain insurance to help protect us from costs relating to some of these matters, but it may not be sufficient or paid in a timely manner to us in the event of such an interruption.
Item 1B - Unresolved Staff Comments
None.
Item 2 - Properties
As of June 30, 2023, we had twelve manufacturing facilities with two located in Indiana, two in China, two in Mexico, and one located in each of California, Florida, Poland, Romania, Thailand, and Vietnam. These facilities occupy approximately 1,803,000 square feet in aggregate, substantially all of which are owned. We lease facilities in India and Japan that accommodate our software design and other support services. In addition, we own a 42,000 square-foot building to house our headquarters located in Jasper, Indiana.
Generally, our manufacturing facilities are utilized at normal capacity levels on a multiple shift basis. At times, certain facilities utilize reduced shifts due to demand and sales fluctuations. We continually assess our capacity needs and evaluate our operations to optimize our service levels by geographic region. See Item 1A - Risk Factors for information regarding financial and operational risks related to our international operations.
Significant loss of income resulting from a facility catastrophe would be partially offset by business interruption insurance coverage.
19
We hold land leases for our facilities in China, Thailand, and Vietnam with these leases expiring from fiscal year 2030 to 2057. See Note 1 - Business Description and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for additional information concerning leases. In addition, we own approximately 109 acres of land which includes land where our facilities reside.
Item 3 - Legal Proceedings
We and our subsidiaries are not parties to any pending legal proceedings, other than ordinary routine litigation and claims incidental to the business. The outcome of current routine pending litigation and claims, individually and in the aggregate, is not expected to have a material adverse impact on our business or financial condition.
Item 4 - Mine Safety Disclosures
Not applicable.
20
Information about Our Executive Officers
Our executive officers as of August 23, 2023 are as follows:
(Age as of August 23, 2023)
| Name | Age | Office and Area of Responsibility | ||||||||||||||||||
| Richard D. Phillips | 53 | Chief Executive Officer and Director | ||||||||||||||||||
| Adam M. Baumann | 42 | Chief Accounting Officer | ||||||||||||||||||
| Jana T. Croom | 46 | Chief Financial Officer | ||||||||||||||||||
| Jessica L. DeLorenzo | 38 | Vice President, Human Resources | ||||||||||||||||||
| Douglas A. Hass | 47 | Chief Legal and Compliance Officer, Secretary | ||||||||||||||||||
| Steven T. Korn | 59 | Chief Operating Officer | ||||||||||||||||||
| Kathy R. Thomson | 54 | Chief Commercial Officer | ||||||||||||||||||
| Christopher J. Thyen | 60 | Vice President, New Platforms | ||||||||||||||||||
| Isabel S. Wells | 47 | Chief Information Officer | ||||||||||||||||||
Executive officers are appointed annually by the Board of Directors. The following is a brief description of the business experience during the past five or more years of each of our executive officers.
Mr. Phillips was appointed Chief Executive Officer and Director effective March 1, 2023. Mr. Phillips was most recently the President and Chief Executive Officer from 2019 until 2022 for Elkay Manufacturing Company. Previously, Mr. Phillips served as the President, Chief Executive Officer, and Board member from 2017 through 2019, for Essendant, Inc. Mr. Phillips currently serves on the Board of Greenheck Group.
Mr. Baumann was appointed Chief Accounting Officer effective July 1, 2023. He joined Kimball Electronics in April 2019 as Assistant Corporate Controller and served as our Corporate Controller since March 2021. Mr. Baumann was previously employed by Vectren Corporation from 2009 to 2019.
Ms. Croom is our Chief Financial Officer effective July 1, 2021. Ms. Croom joined Kimball Electronics in January 2021 in the role of Vice President, Finance. Prior to joining Kimball Electronics, she held the position of Vice President, Financial Planning and Analysis for NiSource Inc. since August 2019. Previously at NiSource Inc., she served as Director of Operations Planning since March 2017 and Director of Regulatory Affairs since April 2014. Ms. Croom currently serves on the Board of First Energy Corp.
Ms. DeLorenzo was appointed Vice President, Human Resources in June 2018. Ms. DeLorenzo joined Kimball Electronics in 2015 in the position of Director, Organizational Development.
Mr. Hass was appointed Chief Legal and Compliance Officer and Secretary effective January 1, 2022. He joined Kimball Electronics in August 2020 as Associate General Counsel and Assistant Secretary. Prior to Kimball Electronics, Mr. Hass served as General Counsel and Secretary of Lifeway Foods from 2016 through 2020.
Mr. Korn was appointed to the role of Chief Operating Officer effective July 1, 2023. Previously, Mr. Korn was our President, Global Electronics Manufacturing Services Operations since July 2020, and Vice President, North American Operations since 2007.
Ms. Thomson was appointed to the role of Chief Commercial Officer effective July 1, 2023. Previously, Ms. Thomson was our Vice President, Global Business Development and Design Services since August 2018. Prior to joining Kimball Electronics, she held the position of Vice President of Business Development for Creation Technologies since 2012.
Mr. Thyen was appointed our Vice President, New Platforms, in August 2018. Prior to this, he served as Vice President, Business Development since 2008.
Ms. Wells joined Kimball Electronics in April 2022 as Chief Information Officer. Prior to Kimball Electronics, Ms. Wells held the position of Vice President of IT at Avery Dennison since June 2019. From 2011 to 2019, Ms. Wells was Senior Director of IT at Avery Dennison.
21
PART II
Item 5 - Market for Registrant’s Common Equity, Related Share Owner Matters and Issuer Purchases of Equity Securities
Market Information
The Company’s common stock trades on the Nasdaq Global Select Market of The Nasdaq Stock Market LLC (“Nasdaq”) under the symbol: KE.
Dividends
Since inception, we have not paid any dividends on our common stock, and we currently do not have plans to pay dividends in fiscal year 2024. Our Board of Directors (the “Board”) regularly reviews our capital allocation strategy.
Share Owners
On August 2, 2023, the Company’s common stock was owned by approximately 1,079 Share Owners of record.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by this item concerning securities authorized for issuance under equity compensation plans is incorporated by reference to Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Share Owner Matters of Part III.
Issuer Purchases of Equity Securities
On October 21, 2015, our Board approved an 18-month stock repurchase plan (the “Plan”), authorizing the repurchase of up to $20 million worth of our common stock. Then, separately on each of September 29, 2016, August 23, 2017, November 8, 2018, and November 10, 2020, 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 $100 million.
During the three months ended June 30, 2023 and fiscal year 2023, the Company did not purchase any common stock. The Company’s maximum value of remaining shares that may be purchased under the Plan was $11.2 million at June 30, 2023.
22
Performance Graph
The following performance graph is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act and will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent the Company specifically incorporates it by reference into such a filing.
The graph below compares the cumulative total return to Share Owners of the Company’s common stock for the five-year period commencing June 30, 2018 and ending June 30, 2023 to the cumulative total return of the Nasdaq Stock Market (U.S.), the Russell 2000 Electronic Components subindex, and the reference group index that we used in prior years, all for the same period of time. Beginning with our performance graph presented in this Annual Report on Form 10-K, we determined that we would compare our performance to the Russell 2000 Electronic Components subindex instead of the reference group index we used previously. We are currently a member of the Russell 2000 Electronics Components subindex and believe that this market capitalization-weighted index reflects issuers with broadly similar market capitalizations that operate in our industry. We also believe that this subindex provides a more meaningful comparison of the cumulative return of our stock than any other lines of business or published industry index or peer groups (including our prior peer group). Our former cumulative total shareholder return (“TSR”) reference group index was comprised of: Benchmark Electronics, Inc., Flex Ltd., Jabil Inc., Plexus Corp., and Sanmina Corporation, each of which is a publicly traded company in the EMS industry. The public companies included in this former cumulative TSR reference group each have a larger revenue base than we do.
The graph assumes $100 is invested in the Company’s stock and each of the two indexes at the closing market quotations on June 30, 2018 and that dividends, if any, are reinvested. The performances shown on the graph are not necessarily indicative of future price performance.
| 06/30/2018 | 06/30/2019 | 06/30/2020 | 06/30/2021 | 06/30/2022 | 06/30/2023 | |||||||||||||||||||||||||||||||||
| Kimball Electronics, Inc. | $ | 100.00 | $ | 88.74 | $ | 73.99 | $ | 118.80 | $ | 109.84 | $ | 150.98 | ||||||||||||||||||||||||||
| Nasdaq Stock Market (U.S.) | $ | 100.00 | $ | 107.80 | $ | 136.89 | $ | 198.85 | $ | 152.15 | $ | 191.94 | ||||||||||||||||||||||||||
| Russell 2000 Electronic Components subindex | $ | 100.00 | $ | 99.78 | $ | 96.57 | $ | 152.18 | $ | 131.25 | $ | 148.07 | ||||||||||||||||||||||||||
| Former Peer Group Index | $ | 100.00 | $ | 89.79 | $ | 92.01 | $ | 152.93 | $ | 132.76 | $ | 242.88 | ||||||||||||||||||||||||||
23
Item 6 - [Reserved]
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements contained within this document are considered forward-looking under the Private Securities Litigation Reform Act of 1995. The statements may be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “forecasts,” “seeks,” “likely,” “future,” “may,” “might,” “should,” “would,” “could,” “will,” “potentially,” “can,” “goal,” “predict,” and similar expressions. These forward-looking statements are subject to risks and uncertainties including, but not limited to, global economic conditions, geopolitical environment and conflicts such as the war in Ukraine, global health emergencies including the COVID-19 pandemic, availability or cost of raw materials and components, foreign exchange fluctuations, and our ability to convert new business opportunities into customers and revenue. Additional cautionary statements regarding other risk factors that could have an effect on the future performance of Kimball Electronics are located within Item 1A - Risk Factors.
Business Overview
We are a global, multifaceted manufacturing solutions provider. We provide electronics manufacturing services (“EMS”), including engineering and supply chain support, to customers in the automotive, medical, and industrial end markets. Our core competency is producing durable electronics, and we further offer contract manufacturing services for non-electronic components, medical devices, medical disposables, drug delivery devices and solutions, precision molded plastics, and production automation, test, and inspection equipment. Our manufacturing services, including engineering and supply chain support, utilize common production and support capabilities globally. We are well recognized by our customers and the industry for our excellent quality, reliability, and innovative service. CIRCUITS ASSEMBLY, a leading brand and technical publication for electronics manufacturers worldwide, has recognized us four times in the past five years for achieving the Highest Overall Customer Rating in their Service Excellence Awards, and we received awards in all categories in 2022.
The contract manufacturing services industry is very competitive. As a mid-sized player, we can expect to be challenged by the agility and flexibility of the smaller, regional players, and we can expect to be challenged by the scale and price competitiveness of the larger, global players. We enjoy a unique market position between these extremes which allows us to compete with the larger scale players for high-volume projects, but also maintain our competitive position in the generally lower volume durable electronics market space. We expect to continue to effectively operate in this market space; however, one significant challenge will be maintaining our profit margins while we continue our revenue growth. Pricing is competitive in the market as production efficiencies and material pricing advantages for most projects drive costs and prices down over the life of the projects. This characteristic of the contract electronics marketplace is expected to continue.
The Worldwide Manufacturing Services Market - 2023 Edition, a comprehensive study on the worldwide EMS market published by New Venture Research (“NVR”), provided worldwide forecast trends through 2027. NVR projects the worldwide assembly market for electronics products to grow at a compound annual growth rate (“CAGR”) of 4.3% over the next five years, with the EMS industry projected to grow at a CAGR of 5.5%.
We continue to monitor the current economic and industry conditions for uncertainties that may pose a threat to our future growth or cause disruption in business strategy, execution, and timing in the markets in which we compete. The EMS industry continues to experience component shortages, component allocations, and shipping delays, particularly with semiconductors, which were especially challenging in the prior fiscal year. Component shortages or allocations could continue to increase component costs and potentially interrupt our operations and negatively impact our ability to meet commitments to customers. We have taken various actions to mitigate the risk and minimize the impact to our customers as well as the adverse effect component shortages, component allocations, or shipping delays could have on our results; however, the duration or severity of the components shortages is unknown.
Supply chain restraints have also resulted in an industry-wide inflation of components, labor, freight, and other operating costs. Through contractual pricing arrangements and negotiations with our customers, we have been able to mitigate a majority of these cost increases; however, our profitability has been impacted, and necessary extended lead times on inventory purchases has negatively impacted our working capital. The financial impact on our future results cannot be reasonably estimated but could be material.
24
We experienced record sales in the current fiscal year as sales increased 35% from the prior fiscal year, with double-digit increases and annual records in all three of our end market verticals. Beginning in fiscal year 2023, we changed our presentation of revenue for the industrial and public safety end market verticals by combining them in the industrial end market vertical. Prior year periods have been recast to conform to the current year presentation. Sales in all three of our end market verticals have increased when compared to the prior fiscal year from the improved component availability and the launch and ramp-up of new programs.
We have a strong focus on cost control balanced with managing the future growth prospects of our business. We expect to make investments that will strengthen or add new capabilities to our package of value as a multifaceted manufacturing solutions company, including through our recently announced and completed capacity expansions. Managing working capital in conjunction with fluctuating demand levels is likewise key. In addition, a long-standing component of our profit-sharing incentive bonus plan is that it is linked to our financial performance which results in varying amounts of compensation expense as profits change.
We continue to maintain a strong balance sheet as of the end of fiscal year 2023, which included a current ratio of 2.0, a debt-to-equity ratio of 0.5, and Share Owners’ equity of $524 million. Recently, we have invested to support our expansions and growth in Mexico, Thailand, and Poland. At the same time, we have supported our customers through strategic inventory purchases to mitigate part shortages. We expect our balance sheet to normalize as parts shortages abate and our expansions continue to ramp up production. Refer to the Future Liquidity section of Liquidity and Capital Resources below for further discussion of our liquidity.
The continuing success of our business is dependent upon our ability to replace expiring customers/programs with new customers/programs. We monitor our success in this area by tracking the number of customers and the percentage of our net sales generated from them by years of service as depicted in the table below. While variation in the size of program awards makes it difficult to directly correlate this data to our sales trends, we believe it does provide useful information regarding our customer loyalty and new business growth.
| Year End | ||||||||||||||||||||||||||||||||
| Customer Service Years | 2023 | 2022 | 2021 | |||||||||||||||||||||||||||||
| More than 10 Years | ||||||||||||||||||||||||||||||||
| % of Net Sales | 77 | % | 79 | % | 81 | % | ||||||||||||||||||||||||||
| # of Customers | 31 | 34 | 33 | |||||||||||||||||||||||||||||
| 5 to 10 Years | ||||||||||||||||||||||||||||||||
| % of Net Sales | 19 | % | 17 | % | 16 | % | ||||||||||||||||||||||||||
| # of Customers | 22 | 21 | 23 | |||||||||||||||||||||||||||||
| Less than 5 Years | ||||||||||||||||||||||||||||||||
| % of Net Sales | 4 | % | 4 | % | 3 | % | ||||||||||||||||||||||||||
| # of Customers | 12 | 11 | 16 | |||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| % of Net Sales | 100 | % | 100 | % | 100 | % | ||||||||||||||||||||||||||
| # of Customers | 65 | 66 | 72 | |||||||||||||||||||||||||||||
A detailed discussion of risk factors and uncertainties that could have an effect on our performance are located within Item 1A - Risk Factors.
25
Presentation of Results of Operations and Liquidity and Capital Resources
A discussion regarding our financial condition and results of operations for fiscal year 2023 compared to fiscal year 2022 is presented below. A discussion regarding our financial condition and results of operations for fiscal year 2022 compared to fiscal year 2021 can be found under captions entitled “Results of Operations - Fiscal Year 2022 Compared with Fiscal Year 2021” and “Liquidity and Capital Resources” in the section entitled “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended June 30, 2022 filed with the SEC on August 30, 2022, which is available free of charge through the SEC’s website at http://www.sec.gov or the Company’s website, http://investors.kimballelectronics.com. The Company’s website and the information contained therein, or incorporated therein, are not intended to be incorporated into this Annual Report on Form 10-K.
Results of Operations - Fiscal Year 2023 Compared with Fiscal Year 2022
| At or For the Year Ended | |||||||||||||||||||||||||||||
| June 30 | |||||||||||||||||||||||||||||
| (Amounts in Millions, Except for Per Share Data) | 2023 | as a % of Net Sales | 2022 | as a % of Net Sales | % Change | ||||||||||||||||||||||||
| Net Sales | $ | 1,823.4 | $ | 1,349.5 | 35 | % | |||||||||||||||||||||||
| Gross Profit | 156.2 | 8.6 | % | 104.6 | 7.8 | % | 49 | % | |||||||||||||||||||||
| Selling and Administrative Expenses | 68.7 | 3.8 | % | 53.5 | 4.0 | % | 28 | % | |||||||||||||||||||||
| Other General Income | (0.2) | (1.4) | |||||||||||||||||||||||||||
| Operating Income | 87.7 | 4.8 | % | 52.5 | 3.9 | % | 67 | % | |||||||||||||||||||||
| Other Income (Expense) | (13.0) | (8.7) | |||||||||||||||||||||||||||
| Provision for Income Taxes | 18.9 | 12.5 | 52 | % | |||||||||||||||||||||||||
| Net Income | $ | 55.8 | $ | 31.3 | 79 | % | |||||||||||||||||||||||
| Diluted Earnings per Share | $ | 2.22 | $ | 1.24 | 79 | % | |||||||||||||||||||||||
| Open Orders | $ | 798 | $ | 1,192 | (33) | % | |||||||||||||||||||||||
| Net Sales by Vertical Market | For the Year Ended | ||||||||||||||||
| June 30 | |||||||||||||||||
| (Amounts in Millions) | 2023 | 2022 | % Change | ||||||||||||||
| Automotive | $ | 820.1 | $ | 582.2 | 41 | % | |||||||||||
| Medical | 494.0 | 391.7 | 26 | % | |||||||||||||
| Industrial | 474.6 | 358.2 | 33 | % | |||||||||||||
| Other | 34.7 | 17.4 | 99 | % | |||||||||||||
| Total Net Sales | $ | 1,823.4 | $ | 1,349.5 | 35 | % | |||||||||||
Net sales in fiscal year 2023 increased by 35% compared to net sales in fiscal year 2022, which included an unfavorable impact of 3% from foreign exchange fluctuations. By end market vertical, our market verticals fluctuated as follows:
•We experienced record sales to customers in the automotive market during the current fiscal year largely due to the ramp-up of certain programs, new product launches, and improved component availability.
•Sales to customers in the medical market also experienced record net sales, with a double-digit increase in sales when compared to the prior fiscal year. The increase is primarily due to overall increased demand, improved component availability, and launch and ramp-up of new programs. We expect fiscal year 2024 medical market sales to be unfavorably impacted by decreased sales with a large medical customer who is remediating a recall. The cause of the recall is unrelated to the products we provided.
•Beginning in fiscal year 2023, the Company changed its presentation of revenue for the industrial and public safety end market verticals by combining them into the industrial end market vertical. Prior year periods have been recast to conform to the current year presentation. We also experienced record sales to customers in the industrial market during the current fiscal year, as a result of higher end market demand for climate control products which was supported by overall improved component availability, increased automation, test, and inspection equipment sales, and new product launches.
26
A significant amount of sales to Nexteer Automotive, Philips, and ZF accounted for the following portions of our net sales:
| Year Ended June 30 | |||||||||||
| 2023 | 2022 | ||||||||||
| Nexteer Automotive | 15% | 17% | |||||||||
| Philips | 14% | 15% | |||||||||
| ZF | 12% | * | |||||||||
| * amount is less than 10% of total | |||||||||||
Open orders were down 33% as of June 30, 2023 compared to June 30, 2022. The decrease in open orders from June 30, 2022 is driven by decreased order lead times and the overall improvement in component availability, which has increased our ability to fulfill customer orders. Open orders are the aggregate sales price of production pursuant to unfulfilled customer orders, which may be delayed or canceled by the customer subject to contractual termination provisions. The majority of open orders as of June 30, 2023 are expected to be filled within the next twelve months. Open orders at a point in time may not be indicative of future sales trends due to the contract nature of our business and the variability of order lead times among our customers.
Gross profit as a percent of net sales improved in fiscal year 2023 when compared to fiscal year 2022 primarily due to the leverage gained on higher revenue and favorable product mix. Additionally, we experienced lost absorption in the first half of fiscal year 2022 as the prior fiscal year was impacted to a much greater degree than the current fiscal year by component shortages, and as we retained our workforce, our gross profit as a percent of net sales was negatively impacted.
For fiscal year 2023, selling and administrative expenses declined as a percent of net sales but increased in absolute dollars when compared to fiscal year 2022. The selling and administrative expense increase was driven by the increased factoring fees coupled with increased accounts receivable factoring activity, added resources to support our significant growth, wage inflation, and higher incentive-based compensation.
Other General Income in fiscal years 2023 and 2022 consisted of $0.2 million and $1.4 million, respectively, 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.
Other Income (Expense) consisted of the following:
| Other Income (Expense) | Year Ended | ||||||||||
| June 30 | |||||||||||
| (Amounts in Thousands) | 2023 | 2022 | |||||||||
| Interest Income | $ | 153 | $ | 81 | |||||||
| Interest Expense | (16,263) | (2,655) | |||||||||
| Foreign Currency/Derivative Gain (Loss) | 2,769 | (4,182) | |||||||||
| Gain (Loss) on SERP Investments | 701 | (1,563) | |||||||||
| Other | (345) | (499) | |||||||||
| Other Income (Expense), net | $ | (12,985) | $ | (8,818) | |||||||
Interest expense has increased in the year ended June 20, 2023 compared to the year ended June 30, 2022 due to higher interest rates and higher borrowings on credit facilities. The Foreign Currency/Derivative Gain (Loss) resulted from net foreign currency exchange rate movements during the periods. The gain in fiscal year 2023 and the loss in fiscal year 2022 were driven by the respective weakening and strengthening of the U.S. dollar versus foreign currencies that we have exposure to in our business. The revaluation of the fair value of the supplemental employee retirement plan (“SERP”) investments recorded in Other Income (Expense) is offset by the revaluation of the SERP liability recorded in Selling and Administrative Expenses, and thus there is no effect on net income.
27
Our income before income taxes and effective tax rate were comprised of the following U.S. and foreign components:
| Year Ended June 30, 2023 | Year Ended June 30, 2022 | ||||||||||||||||||||||
| (Amounts in Thousands) | Income (Loss) Before Taxes | Effective Tax Rate | Income Before Taxes | Effective Tax Rate | |||||||||||||||||||
| United States | $ | (6,269) | (1.1) | % | $ | 1,542 | 29.8 | % | |||||||||||||||
| Foreign | $ | 81,013 | 23.2 | % | $ | 42,189 | 28.5 | % | |||||||||||||||
| Total | $ | 74,744 | 25.3 | % | $ | 43,731 | 28.5 | % | |||||||||||||||
The consolidated effective tax rate for fiscal year 2023 was unfavorably impacted by the mix of taxable earnings within our various tax jurisdictions and foreign exchange rate movements. The domestic favorable tax rate was favorably impacted by our loss before taxes and the research and development tax credit.
The domestic effective tax rate and the consolidated effective tax rate for fiscal year 2022 were unfavorably impacted by the mix of taxable earnings within our various tax jurisdictions and foreign exchange rate movements.
Our overall effective tax rate will fluctuate depending on the geographic distribution of our worldwide earnings. See Note 10 - Income Taxes of Notes to Consolidated Financial Statements for more information.
We recorded net income of $55.8 million in fiscal year 2023, or $2.22 per diluted share, an increase of 78.6% from fiscal year 2022 net income of $31.3 million, or $1.24 per diluted share.
Comparing the balance sheet as of June 30, 2023 to June 30, 2022, Receivables increased $85.3 million largely due to increased sales volumes. Our inventory balance increased $54.7 million primarily to support our newly expanded facilities. Property and equipment, net increased $60.8 million for expansions at our Mexico, Thailand, and Poland facilities and to support new business awards. Accounts payable increased $22.1 million primarily due to the increased inventory purchases. Borrowings under credit facilities increased $100.9 million primarily due to borrowings on the U.S. primary credit facility for working capital purposes and capital expenditures supporting our expansions.
Liquidity and Capital Resources
Working capital at June 30, 2023 was $454.3 million compared to working capital of $352.3 million at June 30, 2022. The current ratio was 2.0 at June 30, 2023 and 1.9 at June 30, 2022, respectively. The debt-to-equity ratio was 0.5 and 0.4 at June 30, 2023 and June 30, 2022, respectively. Our short-term liquidity available, represented as cash and cash equivalents plus the unused amount of our credit facilities, some of which are uncommitted, totaled $149.1 million at June 30, 2023 and $178.6 million at June 30, 2022.
Cash Conversion Days (“CCD”) are calculated as the sum of Days Sales Outstanding (“DSO”) plus Contract Asset Days (“CAD”) plus Production Days Supply on Hand (“PDSOH”) less Accounts Payable Days (“APD”) and less Advances from Customers Days (“ACD”). CCD, or a similar metric, is used in our industry and by our management to measure the efficiency of managing working capital. The following table summarizes our CCD for the quarterly periods indicated. Beginning in the third quarter of fiscal year 2023, we included Advances from Customers Days in our CCD calculation as these are customer deposits related to inventory. Prior periods have been recast to conform to the current quarter presentation.
| Three Months Ended | ||||||||||||||||||||||||||||||||
| June 30, 2023 | March 31, 2023 | December 31, 2022 | September 30, 2022 | June 30, 2022 | ||||||||||||||||||||||||||||
| DSO | 56 | 54 | 56 | 54 | 53 | |||||||||||||||||||||||||||
| CAD | 14 | 14 | 14 | 14 | 16 | |||||||||||||||||||||||||||
| PDSOH | 97 | 101 | 108 | 106 | 100 | |||||||||||||||||||||||||||
| APD | 65 | 69 | 72 | 73 | 76 | |||||||||||||||||||||||||||
| ACD | 8 | 8 | 9 | 7 | 7 | |||||||||||||||||||||||||||
| CCD | 94 | 92 | 97 | 94 | 86 | |||||||||||||||||||||||||||
We define DSO as the average of monthly trade accounts and notes receivable divided by an average day’s net sales, CAD as the average monthly contract assets divided by an average day’s net sales, PDSOH as the average of monthly gross inventory divided by an average day’s cost of sales, APD as the average of monthly accounts payable divided by an average day’s cost of sales, and ACD as the total customer deposits divided by an average day’s cost of sales. Over the past several quarters, we have supported our customers through strategic inventory builds to mitigate parts shortages, which adversely impacted our PDSOH and CCD metrics. We expect inventory levels and working capital to normalize as the parts shortages abate and our expansions continue to ramp up production.
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Cash Flows
The following table reflects the major categories of cash flows for the fiscal years ended June 30, 2023 and 2022.
| Year Ended June 30 | ||||||||||||||||||||
| (Amounts in Millions) | 2023 | 2022 | ||||||||||||||||||
| Net cash used for operating activities | $ | (13.8) | $ | (83.2) | ||||||||||||||||
| Net cash used for investing activities | $ | (90.5) | $ | (74.8) | ||||||||||||||||
| Net cash provided by financing activities | $ | 99.2 | $ | 103.7 | ||||||||||||||||
Cash Flows from Operating Activities
Net cash used for operating activities for the fiscal year ended June 30, 2023 and the fiscal year ended June 30, 2022 was driven by changes in operating assets and liabilities, partially offset by net income plus non-cash depreciation and amortization charges. Changes in operating assets and liabilities used $107.3 million of cash in the fiscal year ended June 30, 2023 and $152.8 million of cash in the fiscal year ended June 30, 2022, respectively.
The cash used of $107.3 million from changes in operating assets and liabilities in fiscal year 2023 was largely due to an increase in accounts receivable, which used cash of $82.4 million primarily resulting from increased sales volumes, and an increase in inventory, which used cash of $50.2 million, driven by investment to support our expansions. Partially offsetting cash used by inventory was an increase in accounts payable, which provided cash of $20.4 million largely resulting from increased inventory purchases, and an increase in advances from customers, which provided cash of $7.9 million.
The cash used of $152.8 million from changes in operating assets and liabilities in fiscal year 2022 was largely due to an increase in inventory, which used cash of $203.2 million primarily due to the component shortages as we continued to purchase material not impacted by the shortages so we can fulfill our customer orders once the impacted components are received, and an increase in accounts receivable, which used cash of $26.5 million primarily resulting from increased sales volumes. Partially offsetting cash used by inventory was an increase in accounts payable, which provided cash of $89.2 million largely resulting from increased inventory purchases, and an increase in advances from customers, which provided cash of $22.6 million. See Note 1 - Business Description and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for information regarding reclassifications of advances from customers.
Cash Flows from Investing Activities
Net cash used for investing activities during fiscal year 2023 includes $90.7 million cash used for capital investments. The capital investments were primarily for expansions at our Mexico, Thailand, and Poland facilities and to support new business awards.
Net cash used for investing activities during fiscal year 2022 includes $74.7 million cash used for capital investments. The capital investments were primarily for expansions at our Thailand and Mexico facilities and to support new business awards.
Cash Flows from Financing Activities
Net cash provided by financing activities for the fiscal year ended June 30, 2023 resulted largely from net borrowings on our credit facilities of $100.7 million primarily for working capital purposes and capital investments supporting expansions.
Net cash used for financing activities for the fiscal year ended June 30, 2022 resulted largely from net borrowings on our credit facilities of $114.9 million primarily for working capital purposes.
Credit Facilities
The Company maintains a U.S. primary credit facility (the “primary credit facility”) scheduled to mature on May 4, 2027. The primary credit facility provides for $300 million in borrowings, with an option to increase the amount available for borrowing to $450 million at the Company’s request, subject to the consent of each lender participating in such increase. The Company also maintains a 364-day multi-currency revolving credit facility (the “secondary credit facility”), which allows for borrowings up to $50 million and has a maturity date of February 2, 2024. The proceeds of the loans on the primary credit facility and the secondary credit facility are to be used for working capital and general corporate purposes of the Company. We were in compliance with the financial covenants of the primary and secondary credit facilities during the fiscal year ended June 30, 2023.
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We also maintain foreign credit facilities for working capital and general corporate purposes at specific foreign locations rather than utilizing funding from intercompany sources. These foreign credit facilities can be canceled at any time by either the bank or us and generally include renewal clauses. As of June 30, 2023, we maintained foreign credit facilities at our Thailand operation, our EMS operation in China, our Netherlands subsidiary, our Poland operation, and our Vietnam operation.
See Note 7 - Credit Facilities of Notes to Consolidated Financial Statements for more information on our credit facilities, including the terms of the credit facilities such as interest, commitment fees, and debt covenants.
Factoring Arrangements
The Company utilizes accounts receivable factoring arrangements with third-party financial institutions in order to extend terms for the customer without negatively impacting our cash flow. These arrangements in all cases do not contain recourse provisions which would obligate us in the event of our customers’ failure to pay. Receivables are considered sold when they are transferred beyond the reach of Kimball Electronics and its creditors, the purchaser has the right to pledge or exchange the receivables, and we have surrendered control over the transferred receivables. During the fiscal years ended June 30, 2023 and 2022, we sold, without recourse, $485.4 million and $303.4 million of accounts receivable, respectively. See Note 1 - Business Description and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for more information regarding the factoring arrangements.
Future Liquidity
We believe our principal sources of liquidity from available funds on hand, cash generated from operations, and the availability of borrowing under our credit facilities, will be sufficient to meet our working capital and other operating needs for at least the next 12 months. The unused borrowings in USD equivalent under all of our credit facilities totaled $106.1 million at June 30, 2023, including the $50 million secondary facility expiring in February 2024. Additionally, accounts receivable factoring arrangements could provide flexible access to cash as needed. While our primary and secondary credit facilities include a covenant that limits the amount of sold receivables outstanding at any time, currently and historically, we have been considerably below this limit.
We expect to continue to prudently invest in capital expenditures, including for capacity expansions and potential acquisitions, that would help us continue our growth as a multifaceted manufacturing solutions company. We recently completed our Thailand facility expansion in the third quarter of fiscal year 2022, our Mexico facility expansion in the first quarter of fiscal year 2023, and our Poland expansion in the fourth quarter of fiscal year 2023.
At June 30, 2023, our capital expenditure commitments were approximately $13 million, consisting primarily of equipment for the Poland, Mexico, and Thailand facility expansions and capital related to new program wins. We anticipate our available liquidity will be sufficient to fund these capital expenditures.
We have purchase obligations that arise in the normal course of business for items such as raw materials, services, and software acquisitions/license commitments. In certain instances, such as when lead times dictate, we enter into contractual agreements for material in excess of the levels required to fulfill customer orders to help mitigate the potential impact related to component shortages, which require longer lead times. In turn, our material authorization agreements with customers cover a portion of the exposure for material which is purchased prior to having a firm order.
At June 30, 2023, our foreign operations held cash totaling $41.4 million and the aggregate unremitted earnings of our foreign subsidiaries were approximately $420 million. Most of our accumulated unremitted foreign earnings have been invested in active non-U.S. business operations, and it is not anticipated such earnings will be remitted to the United States. Our intent is to permanently reinvest the remaining funds outside of the United States, and our current plans do not demonstrate a need to repatriate these funds to our U.S. operations. However, if such funds were repatriated, a portion of the funds remitted may be subject to applicable non-U.S. income and withholding taxes.
The Company has a Board-authorized stock repurchase plan (the “Plan”) to allow the repurchase of up to $100 million of common stock. Purchases may be made under various programs, including in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions, all in accordance with applicable securities laws and regulations. The Plan has no expiration date but may be suspended or discontinued at any time. The extent to which the Company repurchases its shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements, and other corporate considerations, as determined by the Company’s management team. The Company expects to finance the purchases with existing liquidity. The Company has repurchased $88.8 million of common stock under the Plan through June 30, 2023.
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Our ability to generate cash from operations to meet our liquidity obligations could be adversely affected in the future by factors such as general economic and market conditions, lack of availability of raw material components in the supply chain, a decline in demand for our services, loss of key contract customers, unsuccessful integration of acquisitions and new operations, global health emergencies such as the COVID-19 pandemic, and the related uncertainties around the financial impact, and other unforeseen circumstances. In particular, should demand for our customers’ products and, in turn, our services decrease significantly over the next 12 months, the available cash provided by operations could be adversely impacted.
Fair Value
During fiscal year 2023, no level 1 or level 2 financial instruments were affected by a lack of market liquidity. For level 1 financial assets, readily available market pricing was used to value the financial instruments. Our foreign currency derivative assets and liabilities, which were classified as level 2, were independently valued using observable market inputs such as forward interest rate yield curves, current spot rates, and time value calculations. To verify the reasonableness of the independently determined fair values, these derivative fair values were compared to fair values calculated by the counterparty banks. Our own credit risk and counterparty credit risk had an immaterial impact on the valuation of the foreign currency derivatives. See Note 12 - Fair Value of Notes to Consolidated Financial Statements for more information.
Off-Balance Sheet Arrangements
As of June 30, 2023, we do not have any material off-balance sheet arrangements.
Critical Accounting Policies
Kimball Electronics’ Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the Consolidated Financial Statements and related notes. Actual results could differ from these estimates and assumptions. Management uses its best judgment in the assumptions used to value these estimates, which are based on current facts and circumstances, prior experience, and other assumptions that are believed to be reasonable. Management believes the following critical accounting policies reflect the more significant judgments and estimates used in preparation of our Consolidated Financial Statements and are the policies that are most critical in the portrayal of our financial position and results of operations. Management has discussed these critical accounting policies and estimates with the Audit Committee of the Company’s Board of Directors and with the Company’s independent registered public accounting firm.
Revenue recognition - Kimball Electronics recognizes revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services and products. The majority of our revenue is recognized over time as manufacturing services are performed where we manufacture a product with no alternative use and have an enforceable right to payment for performance completed to date. The remaining revenue is recognized when the customer obtains control of the manufactured product. 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 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 revenue.
Goodwill and Other Intangible Assets - Goodwill, $12.0 million as of both June 30, 2023 and 2022 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. No impairment charges were recorded in fiscal year 2023 or 2022 resulting from our annual impairment tests for all reporting units.
Other Intangible Assets, $12.3 million and $14.7 million as of June 30, 2023 and 2022, respectively, are reported on the Consolidated Balance Sheets and 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.
See Note 1 - Business Description and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for further discussion of the Company’s goodwill and intangible asset accounting policies.
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Taxes - Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. We evaluate the recoverability of our 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 issues, which may require an extended period of time to resolve. However, we believe we have made adequate provision for income and other taxes for all years that are subject to audit. As tax positions are effectively settled, the tax provision will be adjusted accordingly. The liability for uncertain income tax and other tax positions, including accrued interest and penalties on those positions, was $1.8 million at both June 30, 2023 and June 30, 2022.
New Accounting Standards
New accounting standards which have been issued but not yet adopted are typically disclosed in Note 1 - Business Description and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for information regarding New Accounting Standards. Currently, there are no issued but not yet adopted accounting standards that are expected to have a material impact on the Company.
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Rate Risk: Kimball Electronics operates internationally and thus is subject to potentially adverse movements in foreign currency rate changes. Our principal foreign currency exposures include the Euro, Polish zloty, Romanian leu, Chinese renminbi, Thai baht, Vietnamese dong, and Mexican peso. Our risk management strategy includes the use of derivative financial instruments to hedge certain foreign currency exposures. Derivatives are used only to manage underlying exposures and are not used in a speculative manner. Further information on derivative financial instruments is provided in Note 13 - Derivative Instruments of Notes to Consolidated Financial Statements. We estimate that a hypothetical 10% adverse change in foreign currency exchange rates from levels at June 30, 2023 relative to non-functional currency balances of monetary instruments, to the extent not hedged by derivative instruments, would not have a material impact on profitability in an annual period. Actual future gains and losses could have a material impact in an annual period depending on changes or differences in market rates and interrelationships, hedging instruments, timing, and other factors.
Interest Rate Risk: Our primary exposure to market risk for changes in interest rates relates to our primary credit facility, described further in Note 7 - Credit Facilities of Notes to Consolidated Financial Statements, as the interest rates paid for borrowings are determined at the time of borrowing based on market indices. Therefore, although we can elect to fix the interest rate at the time of borrowing, the facility does expose us to market risk for changes in interest rates. We estimate that a hypothetical 10% change in interest rates on borrowing levels at June 30, 2023 would not have a material impact of profitability in an annual period. The interest rate on certain borrowings under our credit facilities, including our primary credit facility, are based on the Secured Overnight Financing Rate (“SOFR”).
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Item 8 - Financial Statements and Supplementary Data
| INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | |||||
| Page No. | |||||
Report of Independent Registered Public Accounting Firm (PCAOB No. | |||||
33
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Kimball Electronics, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting and for the preparation and integrity of the accompanying financial statements and other related information in this report. The consolidated financial statements of the Company and its subsidiaries, including the footnotes, were prepared in accordance with accounting principles generally accepted in the United States of America and include judgments and estimates, which in the opinion of management are applied on an appropriately conservative basis. We maintain a system of internal and disclosure controls intended to provide reasonable assurance that assets are safeguarded from loss or material misuse, transactions are authorized and recorded properly, and that the accounting records may be relied upon for the preparation of the financial statements. This system is tested and evaluated regularly for adherence and effectiveness by employees who work within the internal control processes and by our staff of internal auditors.
The Audit Committee of the Board of Directors, which is comprised of directors who are not employees of the Company, meets regularly with management, our internal auditors, and the independent registered public accounting firm to review our financial policies and procedures, our internal control structure, the objectivity of our financial reporting, and the independence of the independent registered public accounting firm. The internal auditors and the independent registered public accounting firm have free and direct access to the Audit Committee, and they meet periodically, without management present, to discuss appropriate matters.
Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation.
These consolidated financial statements are subject to an evaluation of internal control over financial reporting conducted under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, conducted under the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, management concluded that our internal control over financial reporting was effective as of June 30, 2023.
| /s/ RICHARD D. PHILLIPS | |||||
| Richard D. Phillips | |||||
| Chief Executive Officer | |||||
| August 23, 2023 | |||||
| /s/ JANA T. CROOM | |||||
| Jana T. Croom | |||||
| Chief Financial Officer | |||||
| August 23, 2023 | |||||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Share Owners and the Board of Directors of Kimball Electronics, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Kimball Electronics, Inc. and subsidiaries (the “Company”) as of June 30, 2023 and 2022, the related consolidated statements of income, comprehensive income, share owners’ equity, and cash flows for each of the three years in the period ended June 30, 2023, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of June 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2023, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management’s report on internal control over financial reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition - Contracts Recognized Over Time - Refer to Notes 1 and 2 to the financial statements
Critical Audit Matter Description
The majority of the Company’s revenue is recognized over time as manufacturing services are performed when the Company manufactures a product to customer specifications with no alternative use and for which the Company has an enforceable right to payment for performance completed to date. The Company generally recognizes revenue over time using cost-based input methods to depict the Company’s progress towards meeting its performance obligations, in which judgment is required to evaluate assumptions including the anticipated margins to estimate the corresponding amount of revenue to recognize.
The timing differences of revenue recognition, billings to the Company’s customers, and cash collections from the Company’s 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. The contract asset balance was $78.8 million as of June 30, 2023.
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We identified the Company’s revenue recognition over time for contracts with customers as a critical audit matter because of the judgments required to evaluate assumptions including the anticipated margins to estimate the corresponding amount of revenue to recognize and contract assets to record. This required an increased extent of audit effort due to the significant number of contracts on which the Company recognizes revenue over time, and a high degree of auditor judgment when performing procedures to audit management’s estimate of anticipated margins used to recognize revenue over time and evaluating the results of those procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s estimates of the anticipated margins used to recognize revenue over time and record contract assets included the following, among others:
•We tested the effectiveness of controls over the Company’s recognition of revenue over time and the related contract asset balance, including management’s process for estimating the anticipated margins for products manufactured to customer specifications for which the Company has an enforceable right to payment for performance completed to date.
•We evaluated management’s ability to estimate revenue accurately by comparing actual margins to management’s historical estimates for completed contracts.
•We selected a sample of contracts with customers and performed the following:
▪Evaluated whether the contracts with customers were properly included or excluded in management’s calculation of over time contract revenue based on the terms and conditions of each contract, including whether the Company determined the product has no alternative use and that the Company has an enforceable right to payment for performance completed to date.
▪Compared the transaction prices to the consideration expected to be received based on current rights and obligations under the contracts and any modifications that were agreed upon with the customers.
▪Tested the accuracy and completeness of the costs incurred to date for the respective performance obligations by comparing the quantities on hand and standard cost per the calculation to the Company’s perpetual inventory information and testing any manufacturing variances and purchase price adjustments.
▪Evaluated the calculation of the amount of revenue to recognize for the performance obligation by:
◦Evaluating the reasonableness of management’s anticipated margins used in the Company’s calculation of revenue.
◦Evaluating the appropriateness and consistency of the methods and assumptions used by management to develop the estimates of anticipated margin at completion.
•We tested the mathematical accuracy of management’s calculation of revenue recognized over time and the related contract asset balance.
/s/ | ||||||||
| August 23, 2023 | ||||||||
We have served as the Company’s auditor since 2014.
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KIMBALL ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except for Share Data)
| June 30, 2023 | June 30, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Receivables, net of allowances of $ | |||||||||||
| Contract assets | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
Property and Equipment, net of accumulated depreciation of $ | |||||||||||
| Goodwill | |||||||||||
Other Intangible Assets, net of accumulated amortization of $ | |||||||||||
| Other Assets | |||||||||||
| Total Assets | $ | $ | |||||||||
| LIABILITIES AND SHARE OWNERS’ EQUITY | |||||||||||
| Current Liabilities: | |||||||||||
| Current portion of borrowings under credit facilities | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Advances from customers | |||||||||||
| Accrued expenses | |||||||||||
| Total current liabilities | |||||||||||
| Other Liabilities: | |||||||||||
| Long-term debt under credit facilities, less current portion | |||||||||||
| Long-term income taxes payable | |||||||||||
| Other long-term liabilities | |||||||||||
| Total other liabilities | |||||||||||
| Share Owners’ Equity: | |||||||||||
Preferred stock- | |||||||||||
Shares authorized: Shares issued: | |||||||||||
Common stock- | |||||||||||
Shares authorized: Shares issued: Shares outstanding: | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Treasury stock, at cost: | |||||||||||
Shares: | ( | ( | |||||||||
| Total Share Owners’ Equity | |||||||||||
| Total Liabilities and Share Owners’ Equity | $ | $ | |||||||||
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KIMBALL ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except for Per Share Data)
| Year Ended June 30 | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Net Sales | $ | $ | $ | ||||||||||||||
| Cost of Sales | |||||||||||||||||
| Gross Profit | |||||||||||||||||
| Selling and Administrative Expenses | |||||||||||||||||
| Other General Income | ( | ( | ( | ||||||||||||||
| Operating Income | |||||||||||||||||
| Other Income (Expense): | |||||||||||||||||
| Interest income | |||||||||||||||||
| Interest expense | ( | ( | ( | ||||||||||||||
| Non-operating income (expense), net | ( | ||||||||||||||||
| Other income (expense), net | ( | ( | |||||||||||||||
| Income Before Taxes on Income | |||||||||||||||||
| Provision for Income Taxes | |||||||||||||||||
| Net Income | $ | $ | $ | ||||||||||||||
| Earnings Per Share of Common Stock: | |||||||||||||||||
| Basic | $ | $ | $ | ||||||||||||||
| Diluted | $ | $ | $ | ||||||||||||||
| Average Number of Shares Outstanding: | |||||||||||||||||
| Basic | |||||||||||||||||
| Diluted | |||||||||||||||||
39
KIMBALL ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
| Year Ended June 30, 2023 | Year Ended June 30, 2022 | Year Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Pre-tax | Tax | Net of Tax | Pre-tax | Tax | Net of Tax | Pre-tax | Tax | Net of Tax | |||||||||||||||||||||||||||||||||||||||||||||
| Net Income | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss): | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | $ | $ | $ | $ | ( | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Postemployment actuarial change | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative gain (loss) | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification to (earnings) loss: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivatives | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of actuarial change | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss) | $ | $ | ( | $ | $ | ( | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Total Comprehensive Income | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
40
KIMBALL ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
| Year Ended June 30 | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Cash Flows From Operating Activities: | |||||||||||||||||
| Net income | $ | $ | $ | ||||||||||||||
Adjustments to reconcile net income to net cash (used for) provided by: | |||||||||||||||||
| Depreciation and amortization | |||||||||||||||||
| (Gain) loss on sales of assets | ( | ||||||||||||||||
| Deferred income taxes | ( | ( | |||||||||||||||
| Stock-based compensation | |||||||||||||||||
| Other, net | |||||||||||||||||
| Change in operating assets and liabilities: | |||||||||||||||||
| Receivables | ( | ( | ( | ||||||||||||||
| Contract assets | ( | ( | |||||||||||||||
| Inventories | ( | ( | |||||||||||||||
| Prepaid expenses and other assets | ( | ( | ( | ||||||||||||||
| Accounts payable | |||||||||||||||||
| Advances from customers | |||||||||||||||||
| Accrued expenses and taxes payable | ( | ||||||||||||||||
| Net cash (used for) provided by operating activities | ( | ( | |||||||||||||||
| Cash Flows From Investing Activities: | |||||||||||||||||
| Capital expenditures | ( | ( | ( | ||||||||||||||
| Proceeds from sales of assets | |||||||||||||||||
| Purchases of capitalized software | ( | ( | ( | ||||||||||||||
| Other, net | ( | ( | |||||||||||||||
| Net cash used for investing activities | ( | ( | ( | ||||||||||||||
| Cash Flows From Financing Activities: | |||||||||||||||||
| Proceeds from credit facilities | |||||||||||||||||
| Payments on credit facilities | ( | ||||||||||||||||
| Additional net change in revolving credit facilities | ( | ( | |||||||||||||||
| Settlements on previous year acquisition | |||||||||||||||||
| Repurchases of common stock | ( | ( | |||||||||||||||
| Payments related to tax withholding for stock-based compensation | ( | ( | ( | ||||||||||||||
| Debt issuance costs | ( | ( | |||||||||||||||
| Net cash provided by (used for) financing activities | ( | ||||||||||||||||
| Effect of Exchange Rate Change on Cash, Cash Equivalents, and Restricted Cash | ( | ( | |||||||||||||||
| Net (Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash | ( | ( | |||||||||||||||
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year (1) | |||||||||||||||||
Cash, Cash Equivalents, and Restricted Cash at End of Year (1) | $ | $ | $ | ||||||||||||||
| Supplemental Disclosure of Cash Flow Information | |||||||||||||||||
| Cash paid during the year for: | |||||||||||||||||
| Income taxes | $ | $ | $ | ||||||||||||||
| Interest expense | $ | $ | $ | ||||||||||||||
| Non-cash investing activity: | |||||||||||||||||
| Unpaid purchases of property and equipment at the end of the year | $ | $ | $ | ||||||||||||||
| Year Ended June 30 | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Cash and Cash Equivalents | $ | $ | $ | ||||||||||||||
| Restricted Cash included in Prepaid expenses and other current assets | $ | $ | $ | ||||||||||||||
| Total Cash, Cash Equivalents, and Restricted Cash at end of period | $ | $ | $ | ||||||||||||||
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KIMBALL ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF SHARE OWNERS’ EQUITY
(Amounts in Thousands, Except for Share Data)
| Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Share Owners’ Equity | |||||||||||||||||||||||||
| Amounts at June 30, 2020 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) | |||||||||||||||||||||||||||||
Issuance of non-restricted stock ( | |||||||||||||||||||||||||||||
| Compensation expense related to stock compensation plans | |||||||||||||||||||||||||||||
Performance share issuance ( | ( | ( | |||||||||||||||||||||||||||
Deferred share issuance ( | ( | ||||||||||||||||||||||||||||
Repurchase of Common Stock ( | ( | ( | |||||||||||||||||||||||||||
| Amounts at June 30, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | |||||||||||||||||||||||||||
Issuance of non-restricted stock ( shares) | |||||||||||||||||||||||||||||
| Compensation expense related to stock compensation plans | |||||||||||||||||||||||||||||
Performance share issuance ( | ( | ( | |||||||||||||||||||||||||||
Restricted share units issuance ( | ( | ( | |||||||||||||||||||||||||||
Deferred share issuance ( | ( | ||||||||||||||||||||||||||||
Repurchase of Common Stock ( | ( | ( | |||||||||||||||||||||||||||
| Amounts at June 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) | |||||||||||||||||||||||||||||
Issuance of non-restricted stock ( | |||||||||||||||||||||||||||||
| Compensation expense related to stock compensation plans | |||||||||||||||||||||||||||||
Performance share issuance ( | ( | ( | |||||||||||||||||||||||||||
| Amounts at June 30, 2023 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
42
KIMBALL ELECTRONICS, INC.
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 electronics manufacturing services (“EMS”), including engineering and supply chain support, to customers in the automotive, medical, and industrial end markets. We deliver a package of value that begins with our core competency of producing durable electronics, and we further offer contract manufacturing services for non-electronic components, medical disposables, precision molded plastics, and production automation, test, and inspection equipment. Our design and manufacturing expertise coupled with robust processes and procedures help us ensure that we deliver the highest levels of quality, reliability, and service throughout the entire life cycle of our customers’ products. We deliver award-winning service across our highly integrated global footprint, which is enabled by our largely common operating system, procedures, and standardization. We are well recognized by customers and industry trade publications for our excellent quality, reliability, and innovative service.
Reclassifications:
Advances from customers are now reported separately under Current Liabilities on the Consolidated Balance Sheets and reported separately on the Consolidated Statements of Cash Flows. Advances from customers were previously reported in accounts payable and accrued expenses. Prior period amounts have been reclassified to conform to current period presentation. See Note 2 - Revenue from Contracts with Customers of Notes to Consolidated Financial Statements for more information on advances from customers.
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 shorter or 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.
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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.
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. Our revenue from contracts with customers is generated primarily from manufacturing services provided for the production of electronic assemblies, components, medical devices, 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.
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.
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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 Consolidated Statements of Income.
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. Evaluation of both excess inventory and obsolescence also considers whether customer agreements specify customer obligation to pay for such inventory.
Property, Equipment, and Depreciation:
Property and equipment are stated at cost less accumulated depreciation and depreciated over the estimated useful life of the assets using the straight-line method. Generally, maintenance and repairs are expensed as incurred. 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.
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.
45
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 13 % of the workforce is covered under self-insured medical and short-term disability plans. At June 30, 2023 and 2022, accrued liabilities for self-insurance exposure were $2.7 million and $1.4 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.
46
A summary of significant customers’ net sales and trade receivables as a percentage of consolidated net sales and consolidated trade receivables is as follows:
| Net Sales | Trade Receivables | ||||||||||||||||||||||||||||
| Year Ended June 30 | As of June 30 | ||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2023 | 2022 | |||||||||||||||||||||||||
| Nexteer Automotive | |||||||||||||||||||||||||||||
| Philips | * | * | |||||||||||||||||||||||||||
| ZF | * | * | * | ||||||||||||||||||||||||||
| HL Mando | * | * | * | * | |||||||||||||||||||||||||
| * amount is less than 10% of total | |||||||||||||||||||||||||||||
Off-Balance Sheet Risk:
Off-balance sheet arrangements are limited to standby letters of credit entered into in the normal course of business as described in Note 6 - Commitments and Contingent Liabilities of Notes to Consolidated Financial Statements.
Other General Income:
Other General Income in fiscal years 2023, 2022, and 2021 consisted of $0.2 million, $1.4 million, and $0.4 million, respectively, 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. The fiscal year 2021 amount was partially offset by lawsuit settlement accruals and payments.
Components of Non-operating income (expense), net:
| Year Ended | |||||||||||||||||||||||||||||
| June 30 | |||||||||||||||||||||||||||||
| (Amounts in Thousands) | 2023 | 2022 | 2021 | ||||||||||||||||||||||||||
| Foreign currency/derivative gain (loss) | $ | $ | ( | $ | |||||||||||||||||||||||||
| Gain (loss) on SERP investments | ( | ||||||||||||||||||||||||||||
| Other | ( | ( | ( | ||||||||||||||||||||||||||
| Non-operating income (expense), net | $ | $ | ( | $ | |||||||||||||||||||||||||
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.
47
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. For transactions and balances denominated in currencies other than functional currencies, we use forward purchases to manage exposure to the variability of cash flows and foreign exchange contracts to hedge intercompany balances and other balance sheet positions. Cash receipts and cash payments related to derivative instruments are recorded in the same category as the cash flows from the items being hedged on the Consolidated Statements of Cash Flows. See Note 13 - Derivative Instruments of Notes to Consolidated Financial Statements for more information on derivative instruments and hedging activities.
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, and industrial applications, to the specifications and designs of our customers. Beginning in fiscal year 2023, the Company changed its presentation of revenue for the industrial and public safety end market verticals by combining them into the industrial end market vertical. Prior year periods have been recast to conform to the current year presentation.
The following table disaggregates our revenue by end market vertical for fiscal years 2023, 2022, and 2021:
| Year Ended | |||||||||||||||||
| (Amounts in Millions) | 2023 | 2022 | 2021 | ||||||||||||||
| Vertical Markets: | |||||||||||||||||
| Automotive | $ | $ | $ | ||||||||||||||
| Medical | |||||||||||||||||
| Industrial | |||||||||||||||||
| Other | |||||||||||||||||
| Total net sales | $ | $ | $ | ||||||||||||||
For fiscal years 2023, 2022, and 2021, approximately 95 %, 95 %, and 89 % 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 for which we have an enforceable right to payment for performance completed to date. The remaining sales revenues were recognized at a point in time when the customer obtained control of the products.
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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 $78.8 million and $64.1 million as of June 30, 2023 and 2022, respectively.
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 at June 30:
| (Amounts in Thousands) | 2023 | 2022 | |||||||||
| Finished products | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Raw materials | |||||||||||
| Total inventory | $ | $ | |||||||||
Note 4 Property and Equipment
Major classes of property and equipment consist of the following at June 30:
| (Amounts in Thousands) | 2023 | 2022 | |||||||||
| Land and land use rights | $ | $ | |||||||||
| Buildings and improvements | |||||||||||
| Machinery and equipment | |||||||||||
| Construction-in-progress | |||||||||||
| Total | $ | $ | |||||||||
| Less: Accumulated depreciation | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
The useful lives used in computing depreciation are based on estimated service lives for classes of property, as follows:
| Years | |||||
| Buildings and improvements | |||||
| Machinery and equipment | |||||
| Land use rights | |||||
Depreciation of property and equipment totaled $28.9 million for fiscal year 2023, $26.0 million for fiscal year 2022, and $30.7 million for fiscal year 2021.
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Note 5 Goodwill and Other Intangible Assets
A summary of goodwill is as follows:
| (Amounts in Thousands) | |||||
| Balance as of June 30, 2022 | |||||
| Goodwill | |||||
| Accumulated impairment | ( | ||||
| Goodwill, net | |||||
| Balance as of June 30, 2023 | |||||
| Goodwill | |||||
| Accumulated impairment | ( | ||||
| Goodwill, net | $ | ||||
During fiscal years 2023, 2022, and 2021, no 5.8 2 %. The forecast assumptions used in the annual impairment test are considered management’s best projections for the outlook of this business but are uncertain, and potential events or circumstances, such as trends in the semiconductor and consumer electronics capital equipment markets which GES serves, could have a negative effect on GES’s estimated fair value and result in impairment charges that could be material to the Consolidated Financial Statements.
A summary of other intangible assets subject to amortization is as follows:
| June 30, 2023 | June 30, 2022 | ||||||||||||||||||||||||||||||||||
| (Amounts in Thousands) | Cost | Accumulated Amortization | Net Value | Cost | Accumulated Amortization | Net Value | |||||||||||||||||||||||||||||
| Capitalized Software | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Customer Relationships | ( | ( | |||||||||||||||||||||||||||||||||
| Technology | ( | ( | |||||||||||||||||||||||||||||||||
| Trade Name | ( | ( | |||||||||||||||||||||||||||||||||
| Other Intangible Assets | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
During fiscal years 2023, 2022, and 2021, amortization expense of other intangible assets was, in millions, $3.5 , $3.4 , and $3.3 , respectively. Amortization expense in future periods is expected to be, in millions, $2.6 , $2.0 , $1.6 , $1.5 , and $1.4 in the five years ending June 30, 2028, and $3.2 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.
Note 6 Commitments and Contingent Liabilities
Guarantees:
As of June 30, 2023 and 2022, we had no 0.4 no
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Product Warranties:
Note 7 Credit Facilities
Credit facilities consisted of the following:
| Available Borrowing Capacity at | Borrowings Outstanding at | Borrowings Outstanding at | |||||||||||||||
| (Amounts in Millions, in U.S. Dollar Equivalents) | June 30, 2023 | June 30, 2023 | June 30, 2022 | ||||||||||||||
Primary credit facility (1) | $ | $ | $ | ||||||||||||||
Secondary credit facility (2) | |||||||||||||||||
Thailand overdraft credit facility (3,4) | |||||||||||||||||
China revolving credit facility (3,5) | |||||||||||||||||
Netherlands revolving credit facility (3,6) | |||||||||||||||||
Poland revolving credit facility (3,7) | |||||||||||||||||
Vietnam credit facility (3,8) | |||||||||||||||||
| Total credit facilities | $ | ||||||||||||||||
| Less: current portion | ( | ( | |||||||||||||||
Long-term debt under credit facilities, less current portion (9) | $ | $ | |||||||||||||||
(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, N.A., as Administrative Agent, and Bank of America, N.A., as Documentation Agent, scheduled to mature May 4, 2027. The primary credit facility provides for $300 million in borrowings, with an option to increase the amount available for borrowing to $450 million at the Company’s request, subject to the consent of each lender participating in such increase. This facility is maintained for working capital and general corporate purposes of the Company. A commitment fee is payable on the unused portion of the credit facility which was immaterial to our operating results in fiscal years 2023, 2022, and 2021. The commitment fee on the unused portion of principal amount of the credit facility is payable at a rate that ranges from 10.0 to 25.0 basis points per annum as determined by the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA, as defined in the primary credit facility. Types of borrowings available on the primary credit 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 options:
•any Term Benchmark borrowing denominated in U.S. Dollars will utilize the Secured Overnight Financing Rate (“SOFR”), which is a rate per annum equal to the secured overnight financing rate for such business day published by the SOFR Administrator, the Federal Reserve Bank of New York, on the immediately succeeding business day, plus the Revolving Commitment Term Benchmark spread which can range from 100.0 to 175.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA;
•any Term Benchmark borrowing denominated in Euros will utilize the Euro Interbank Offered Rate (“EURIBOR”) in effect two target days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period as defined in the agreement, plus the Revolving Commitment Term Benchmark spread which can range from 100.0 to 175.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA; or
•the Alternate Base Rate (“ABR”), which is defined as the highest of the fluctuating rate per annum equal to the higher of:
a.Prime Rate in the U.S. last quoted by the Wall Street Journal, and if this is ceased to be quoted, the highest bank prime loan rate or similar loan rate quoted by the Federal Reserve Board;
b.1/2 of 1% per annum above the Federal Funds Effective Rate (as defined under the primary credit facility); or
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c.1 % per annum above the Adjusted SOFR Rate (as defined under the primary credit facility);
plus the Revolving Commitment ABR spread which can range from 0.0 to 75.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA.
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 3.0 3.5
•an interest coverage ratio, defined as that ratio of consolidated EBITDA for such period to cash interest expense for such period, for any period of four consecutive fiscal quarters, to not be less than 3.5
The Company had $0.4
(2) The Company entered into a 364-day multi-currency revolving credit facility agreement on February 3, 2023 (the “secondary credit facility”), which allows for borrowings up to $50 million, among the Company, as borrower, certain subsidiaries of the Company as guarantors, the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Bank of America, N.A., as Documentation Agent. The secondary credit facility has a maturity date of February 2, 2024. The proceeds of the loans are to be used for working capital and general corporate purposes of the Company. A commitment fee on the unused portion of principal amount of this secondary credit facility is payable at 30.0 basis points per annum and was immaterial to our operating results in fiscal year 2023.
The interest rate on borrowings is dependent on the type of borrowings and will be one of the following options:
•any Term Benchmark borrowing denominated in U.S. Dollars will utilize the Secured Overnight Financing Rate (“SOFR”), which is a rate per annum equal to the secured overnight financing rate for such business day published by the SOFR Administrator, the Federal Reserve Bank of New York, on the immediately succeeding business day, plus a Revolving Commitment Term Benchmark spread of 175.0 basis points;
•any Term Benchmark borrowing denominated in Euros will utilize the Euro Interbank Offered Rate (“EURIBOR”) in effect two target days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period as defined in the agreement, plus a Revolving Commitment Term Benchmark spread of 175.0 basis points; or
•the Alternate Base Rate (“ABR”), which is defined as the highest of the fluctuating rate per annum equal to the higher of:
a.Prime Rate in the U.S. last quoted by the Wall Street Journal, and if this is ceased to be quoted, the highest bank prime loan rate or similar loan rate quoted by the Federal Reserve Board;
b.1/2 of 1% per annum above the Federal Funds Effective Rate (as defined under the primary credit facility); or
c.1 % per annum above the Adjusted SOFR Rate (as defined under the primary credit facility);
plus a Revolving Commitment ABR spread of 75.0 basis points.
The Company’s financial covenants under this secondary credit facility are the same as the financial covenants for its primary credit facility.
(3) The Company also maintains foreign credit facilities for working capital and general corporate purposes at specific foreign locations rather than utilizing funding from intercompany sources. These foreign credit facilities can be canceled at any time by either the bank or us and generally include renewal clauses. Interest on borrowing under these facilities is charged at a rate as defined under the respective foreign credit facility.
(4) The Company maintains a foreign credit facility for its operation in Thailand which allows for borrowings of up to $10.1 million.
(5) The Company entered into a foreign credit facility for its EMS operation in China during the current fiscal year which allows for borrowings up to $7.5 million that can be drawn in either U.S. dollars or China Renminbi.
(6) 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 $10.0 million at June 30, 2023 exchange
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(7) The Company entered into a foreign credit facility for its operation in Poland which allows for borrowings up to 5.0 million Euro (approximately $5.4 million equivalent).
(8) The Company entered into a foreign credit facility for its operation in Vietnam which allows for borrowings up to $5.0 million.
(9) 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 May 4, 2027.
The weighted-average interest rate on borrowings outstanding under the credit facilities at June 30, 2023 and June 30, 2022 were 6.8 % and 2.7 %, respectively. Capitalized interest expense was immaterial during fiscal years 2023, 2022, and 2021.
Note 8 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. Beginning January 1, 2022, the Company matches 50% of eligible employee contributions up to 6%. The Company also provides a discretionary employer contribution determined annually by the Talent, Culture, and Compensation Committee of the Company’s Board of Directors. Total expense related to employer contributions to the domestic retirement plans was, in millions, $6.1 , $4.2 , and $1.9 for fiscal years 2023, 2022, and 2021, respectively.
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. 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. As of June 30, 2023, both total investments and obligations under SERP were $8.7 2.7 6.0 10.4 2.6 7.8 0.2 million, $(2.2 ) million, and $1.5 million respectively.
Defined Benefit Postemployment Plans:
Note 9 Stock Compensation Plans
A stock compensation plan was created and adopted by the Company’s Board of Directors (the “Board”) on October 3, 2014. The Kimball Electronics, Inc. 2014 Stock Option and Incentive Plan (the “Plan”) allows for the issuance of up to 4.5 million shares and may be awarded in the form of incentive stock options, stock appreciation rights, restricted shares, unrestricted shares, restricted share units, or performance shares and performance units. The Plan is a ten-year plan with no further awards allowed to be made under the Plan after October 1, 2024.
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 2023, 2022, and 2021 was $6.9 million, $6.2 million, and $3.9 million, respectively. These costs are included in Selling and Administrative Expenses.
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Performance Shares:
The Company awards performance shares to officers and other key employees. The annual performance share awards are approved by the Talent, Culture, and Compensation 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 vested 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.
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 2023 is presented below:
| Number of Shares | Weighted Average Grant Date Fair Value | ||||||||||
| Performance shares outstanding at July 1, 2022 | $ | ||||||||||
| Granted | $ | ||||||||||
| Vested | ( | $ | |||||||||
| Forfeited | ( | $ | |||||||||
| Performance shares outstanding at June 30, 2023 | $ | ||||||||||
As of June 30, 2023, there was approximately $5.2 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 performance periods ending August 2023 through August 2025, with a weighted average vesting period of 1.5 years. The fair value of performance shares is based on the stock price at the date of grant. During fiscal years 2023, 2022, and 2021, respectively, 225,142 , 214,099 , and 239,194 performance shares vested at a fair value of $4.3 million, $3.3 million, and $4.1 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 outstanding 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.
Total Shareholder Return Performance Shares:
Separate from the performance shares described above, total shareholder return (“TSR”) performance shares were awarded to our CEO during fiscal year 2023. This award was approved by the Talent, Culture, and Compensation Committee of the Board. The participant will earn from 0 % to 100 % of the target award based on the total shareholder return ranking of the Company compared to the performance peer group at the end of the -year performance period. TSRs are expensed over the contractual vesting period as earned. The shares will vest on March 1, 2026. If the employment of a holder of a TSR terminates before the TSR has vested for any reason other than death, retirement, or total permanent disability, the TSR will be forfeited. During fiscal year 2023, the Company granted 42,626 TSRs at an average grant date fair value of $16.88 for a total fair value of $0.7 million. The grant date fair value of TSR awards was calculated using a Monte Carlo simulation, with the assistance of a third-party valuation specialist.
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Unrestricted Share Grants:
Unrestricted shares may be granted to key employees and non-employee 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 2023, 2022, and 2021, respectively, the Company granted a total of 13,950 , 6,777 , and 4,235 unrestricted shares at an average grant date fair value of $23.30 , $23.10 , and $15.35 for a total fair value of $0.3 million, $0.2 million, and $0.1 million. Unrestricted shares are 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 that are awarded to key employees are expensed immediately.
Restricted Shares:
Restricted shares may be granted to employees as consideration for services rendered. The contractual life of the restricted shares is three years , with one-third of the interest in the restricted shares vested after year one of the grant, another one-third after year two of the grant, and the final one-third after year three of the grant. Restricted shares are expensed over the contractual vesting period as earned. If the employment of a holder of restricted shares terminates before the restricted share has vested for any reason other than death, retirement, or disability, the restricted shares not yet vested will be forfeited. During fiscal year 2023, the Company granted restricted shares to officers and other key employees for a total fair value of $1.9 million. No
| Number of Shares | Weighted Average Grant Date Fair Value | ||||||||||
| Restricted shares outstanding at July 1, 2022 | $ | ||||||||||
| Granted | $ | ||||||||||
| Vested | ( | $ | |||||||||
| Forfeited | ( | $ | |||||||||
| Restricted shares outstanding at June 30, 2023 | $ | ||||||||||
As of June 30, 2023, there was approximately $0.9 million of unrecognized compensation cost related to restricted shares. The cost is expected to be recognized over vesting periods ending August 2023 through January 2026, with a weighted average vesting period of 1.3 years. The fair value of the restricted shares is based on the stock price at the date of grant. During fiscal year 2023, 6,458 restricted shares vested. During fiscal years 2022 and 2021, respectively, no
During fiscal year 2021, the Company granted 3,322 restricted share units (“RSUs”) to new key employees at an average grant date fair value of $19.63 for a total fair value of $0.1 million, and these RSUs vested in fiscal year 2022. The RSUs were participating securities and upon vesting, the outstanding number of the RSUs were converted to shares of common stock.
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 2023, 2022, and 2021, respectively, 39,032 , 34,480 , and 37,132 deferred share units were granted to non-employee members of the Board at an average grant date fair value of $23.07 , $24.87 , and $15.35 for a total fair value of $0.9 million, $0.9 million, and $0.6 million. During fiscal year 2023, no shares of common stock were issued under the Deferral Plan.
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Note 10 Income Taxes
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 required a one-time transition tax on certain unremitted earnings of foreign subsidiaries that is payable over an eight-year period. As of June 30, 2023 and 2022, the remaining provision recorded for the one-time deemed repatriation tax were $7.8 million and $8.9 million respectively, payable through fiscal year 2026, with the long-term portion recorded in Long-term income taxes payable on the Consolidated Balance Sheets. As of June 30, 2023 and 2022, $1.9 million and $1.0 million of the remaining deemed repatriation tax is short term and is recorded in Accrued expenses on the Consolidated Balance Sheet.
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, 2023 and 2022, were as follows:
| (Amounts in Thousands) | 2023 | 2022 | |||||||||
| Deferred Tax Assets: | |||||||||||
| Receivables | $ | $ | |||||||||
| Inventory | |||||||||||
| Employee benefits | |||||||||||
| Deferred compensation | |||||||||||
| Capitalized research and development | |||||||||||
| Tax credit carryforwards | |||||||||||
| Goodwill | |||||||||||
| Net operating loss carryforward | |||||||||||
| Net foreign currency losses | |||||||||||
| Miscellaneous | |||||||||||
| Valuation Allowance | ( | ( | |||||||||
| Total asset | $ | $ | |||||||||
| Deferred Tax Liabilities: | |||||||||||
| Other intangible assets | $ | $ | |||||||||
| Property and equipment | |||||||||||
| Net foreign currency gains | |||||||||||
| Miscellaneous | |||||||||||
| Total liability | $ | $ | |||||||||
| Net Deferred Income Taxes | $ | $ | |||||||||
During fiscal year 2023, the Company has capitalized research and development expenses that are required to be capitalized as an amortizable asset under Section 174 of the Internal Revenue Code and amortized over a period of five years. This requirement is based on the implementation of Tax Reform effective in tax years beginning as of January 1, 2022. As of June 30, 2023, the Company has a net deferred tax asset from capitalized research and development expenses of $3.5 million.
Income tax benefits associated with the net operating loss carryforwards expire from fiscal year 2023 to 2042. Income tax benefits associated with tax credit carryforwards primarily expire from fiscal year 2025 to 2031. A valuation allowance was provided as of June 30, 2023 and 2022 for deferred tax assets related to certain state credits of $4.3 million and $3.5 million, 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) | 2023 | 2022 | 2021 | ||||||||||||||
| United States | $ | ( | $ | $ | |||||||||||||
| Foreign | |||||||||||||||||
| Total income before taxes on income | $ | $ | $ | ||||||||||||||
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The aggregate unremitted earnings of the Company’s foreign subsidiaries were approximately $420 million as of June 30, 2023. 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, and our current plans do not demonstrate a need to repatriate these funds to our U.S. operations. However, if such funds were repatriated, a portion of the funds remitted may be subject to applicable non-U.S. income and withholding taxes.
The provision for income taxes is composed of the following items:
| Year Ended June 30 | |||||||||||||||||
| (Amounts in Thousands) | 2023 | 2022 | 2021 | ||||||||||||||
| Current Taxes: | |||||||||||||||||
| Federal | $ | $ | $ | ||||||||||||||
| Foreign | |||||||||||||||||
| State | |||||||||||||||||
| Total payable | $ | $ | $ | ||||||||||||||
| Deferred Taxes: | |||||||||||||||||
| Federal | $ | ( | $ | ( | $ | ( | |||||||||||
| Foreign | ( | ||||||||||||||||
| State | ( | ( | ( | ||||||||||||||
| Valuation allowance | |||||||||||||||||
| Total deferred | $ | ( | $ | $ | ( | ||||||||||||
| Total provision for income taxes | $ | $ | $ | ||||||||||||||
A reconciliation of the statutory U.S. income tax rate to the Company’s effective income tax rate follows:
Year Ended June 30 | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||||||||||||||||||||
| (Amounts in Thousands) | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||
| Tax computed at U.S. federal statutory rate | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||
| State income taxes, net of federal income tax benefit | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||
| Foreign tax rate differential | |||||||||||||||||||||||||||||||||||
| Impact of foreign exchange rates on foreign income taxes | ( | ( | |||||||||||||||||||||||||||||||||
| Non-deductible goodwill impairment | |||||||||||||||||||||||||||||||||||
| Valuation allowance | |||||||||||||||||||||||||||||||||||
| Research credit | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||
| Global intangible low tax income | |||||||||||||||||||||||||||||||||||
| Non-deductible compensation | |||||||||||||||||||||||||||||||||||
| Other - net | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Total provision for income taxes | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||
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Changes in the unrecognized tax benefit, excluding accrued interest and penalties, during fiscal years 2023, 2022, and 2021 were as follows:
| (Amounts in Thousands) | 2023 | 2022 | 2021 | ||||||||||||||
| Beginning balance - July 1 | $ | $ | $ | ||||||||||||||
| Tax positions related to prior fiscal years: | |||||||||||||||||
| Additions | |||||||||||||||||
| Reductions | |||||||||||||||||
| Tax positions related to current fiscal year: | |||||||||||||||||
| Additions | |||||||||||||||||
| Reductions | |||||||||||||||||
| Settlements | ( | ||||||||||||||||
| Lapses in statute of limitations | ( | ( | ( | ||||||||||||||
| Ending balance - June 30 | $ | $ | $ | ||||||||||||||
| Portion that, if recognized, would reduce tax expense and effective tax rate | $ | $ | $ | ||||||||||||||
We do not expect the change in the amount of unrecognized tax benefits in the next 12 months to have a significant impact on our results of operations or financial position. We recognize interest and penalties related to unrecognized tax benefits in Provision for Income Taxes on the Consolidated Statements of Income.
Interest and penalties accrued for unrecognized tax benefits as of June 30, 2023, 2022, and 2021 was $0.6 million, $0.6 million, and $1.2 million. Expenses related to interest and penalties in fiscal years 2023, 2022, and 2021 were not material.
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 2018. We are subject to income tax examinations by various, state, local, and foreign jurisdiction tax authorities for years after June 30, 2016.
Note 11 Share Owners’ Equity
Note 12 Fair Value
The Company categorizes assets and liabilities measured at fair value into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas level 3 generally requires significant management judgment. The three levels are defined as follows:
•Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.
•Level 2: Observable inputs other than those included in level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
•Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
There were no changes in the inputs or valuation techniques used to measure fair values during fiscal year 2023.
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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, 2023 and 2022, 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, 2023 | |||||||||||||||||||||||
| (Amounts in Thousands) | Level 1 | Level 2 | Total | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Cash equivalents | $ | — | $ | $ | |||||||||||||||||||
| Derivatives: foreign exchange contracts | |||||||||||||||||||||||
| Trading securities: mutual funds held in nonqualified SERP | |||||||||||||||||||||||
| Total assets at fair value | $ | $ | $ | ||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivatives: foreign exchange contracts | $ | $ | $ | ||||||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | ||||||||||||||||||||
| June 30, 2022 | |||||||||||||||||||||||
| (Amounts in Thousands) | Level 1 | Level 2 | Total | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Cash equivalents | $ | $ | $ | ||||||||||||||||||||
| Derivatives: foreign exchange contracts | |||||||||||||||||||||||
| Trading securities: mutual funds held in nonqualified SERP | |||||||||||||||||||||||
| Total assets at fair value | $ | $ | $ | ||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivatives: foreign exchange contracts | $ | $ | $ | ||||||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | ||||||||||||||||||||
We had no
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 8 - Employee Benefit Plans of Notes to Consolidated Financial Statements for further information regarding the SERP.
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Financial Instruments Not Carried At Fair Value:
| 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 13 Derivative Instruments
Foreign Exchange Contracts:
We operate internationally and are therefore exposed to foreign currency exchange rate fluctuations in the normal course of our business. Our primary means of managing this exposure is to utilize natural hedges, such as aligning currencies used in the supply chain with the sale currency. To the extent natural hedging techniques do not fully offset currency risk, we use derivative instruments with the objective of reducing the residual exposure to certain foreign currency rate movements. Factors considered in the decision to hedge an underlying market exposure include the materiality of the risk, the volatility of the market, the duration of the hedge, the degree to which the underlying exposure is committed to, and the availability, effectiveness, and cost of derivative instruments. Derivative instruments are only utilized for risk management purposes and are not used for speculative or trading purposes.
We use forward contracts designated as cash flow hedges to protect against foreign currency exchange rate risks inherent in forecasted transactions denominated in a foreign currency. Non-designated foreign exchange contracts are also used to hedge against foreign currency exchange rate risks related to intercompany balances and other balance sheet positions denominated in currencies other than the functional currencies. As of June 30, 2023, we had outstanding foreign exchange contracts to hedge currencies against the U.S. dollar in the aggregate notional amount of $14.7 million and to hedge currencies against the Euro in the aggregate notional amount of 64.0 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 Consolidated Balance Sheets as a derivative asset or liability and presented within Prepaid expenses and other current assets and Accrued expenses, respectively. 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, 2023, we estimate that approximately $3.6 million of pre-tax derivative gain 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, 2024. 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
60
See Note 12 - Fair Value of Notes to Consolidated Financial Statements for further information regarding the fair value of derivative assets and liabilities and Note 17 - 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 2023 | June 30 2022 | Balance Sheet Location | June 30 2023 | June 30 2022 | |||||||||||||||||||||||||||||
| Derivatives Designated as Hedging Instruments: | |||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | Prepaid expenses and other current assets | $ | $ | Accrued expenses | $ | $ | |||||||||||||||||||||||||||||
| Derivatives Not Designated as Hedging Instruments: | |||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | Prepaid expenses and other current assets | Accrued expenses | |||||||||||||||||||||||||||||||||
| Total derivatives | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| The Effect of Derivative Instruments on Other Comprehensive Income (Loss) | ||||||||||||||||||||||||||
| June 30 | ||||||||||||||||||||||||||
| (Amounts in Thousands) | 2023 | 2022 | 2021 | |||||||||||||||||||||||
| Amount of Pre-Tax Gain or (Loss) Recognized in Other Comprehensive Income (Loss) (OCI) on Derivatives: | ||||||||||||||||||||||||||
| Foreign exchange contracts | $ | $ | $ | |||||||||||||||||||||||
| 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) | 2023 | 2022 | 2021 | ||||||||||||||||||||||
| Amount of Pre-Tax Gain or (Loss) Reclassified from Accumulated OCI into Income: | ||||||||||||||||||||||||||
| Foreign exchange contracts | Cost of Sales | $ | $ | $ | ( | |||||||||||||||||||||
| 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) | $ | $ | ( | $ | ( | ||||||||||||||||||||
| Total Derivative Pre-Tax Gain (Loss) Recognized in Income | $ | $ | ( | $ | ( | |||||||||||||||||||||
Note 14 Accrued Expenses
Accrued expenses consisted of:
| June 30 | |||||||||||
| (Amounts in Thousands) | 2023 | 2022 | |||||||||
| Taxes | $ | $ | |||||||||
| Compensation | |||||||||||
| Non-inventory advance payments | |||||||||||
| Retirement plan | |||||||||||
| Insurance | |||||||||||
| Other expenses | |||||||||||
| Total accrued expenses | $ | $ | |||||||||
Inventory-related customer advance payments are now reported separately on the Consolidated Balance Sheets and no longer included in accrued expenses. The prior period amount above for advance payments and total accrued expenses have been recast to conform to the current year presentation.
61
Note 15 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.
| Year Ended June 30 | |||||||||||||||||
| (Amounts in Thousands) | 2023 | 2022 | 2021 | ||||||||||||||
| Net Sales: | |||||||||||||||||
| Mexico | $ | $ | $ | ||||||||||||||
| United States | |||||||||||||||||
| Poland | |||||||||||||||||
| China | |||||||||||||||||
| Thailand | |||||||||||||||||
| Other Foreign | |||||||||||||||||
| Total net sales | $ | $ | $ | ||||||||||||||
| June 30 | |||||||||||||||||
| (Amounts in Thousands) | 2023 | 2022 | |||||||||||||||
| Long-Lived Assets: | |||||||||||||||||
| Mexico | $ | $ | |||||||||||||||
| United States | |||||||||||||||||
| Poland | |||||||||||||||||
| Thailand | |||||||||||||||||
| China | |||||||||||||||||
| Other Foreign | |||||||||||||||||
| Total long-lived assets | $ | $ | |||||||||||||||
Note 16 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 | ||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Basic and Diluted Earnings Per Share: | |||||||||||||||||
| Net Income | $ | $ | $ | ||||||||||||||
| Less: Net Income allocated to participating securities | |||||||||||||||||
| Net Income allocated to common Share Owners | $ | $ | $ | ||||||||||||||
| Basic weighted average common shares outstanding | |||||||||||||||||
| Dilutive effect of average outstanding stock compensation awards | |||||||||||||||||
| Dilutive weighted average shares outstanding | |||||||||||||||||
| Earnings Per Share of Common Stock: | |||||||||||||||||
| Basic | $ | $ | $ | ||||||||||||||
| Diluted | $ | $ | $ | ||||||||||||||
62
Note 17 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, 2021 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | |||||||||||||||||||||||||||
| Reclassification to (earnings) loss | ( | ( | ( | ||||||||||||||||||||||||||
| Net current-period other comprehensive income (loss) | $ | ( | $ | $ | $ | ( | |||||||||||||||||||||||
Balance at June 30, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ||||||||||||||||||||||||||||
| Reclassification to (earnings) loss | ( | ( | ( | ||||||||||||||||||||||||||
| Net current-period other comprehensive income (loss) | ( | ||||||||||||||||||||||||||||
Balance at June 30, 2023 | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||||||||
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) | 2023 | 2022 | Consolidated Statements of Income | ||||||||||||||||||||
Derivative Gain (Loss) (1) | $ | $ | Cost of Sales | ||||||||||||||||||||
| ( | ( | Benefit (Provision) for Income Taxes | |||||||||||||||||||||
| $ | $ | Net of Tax | |||||||||||||||||||||
| Postemployment Benefits: | |||||||||||||||||||||||
Amortization of Actuarial Gain (Loss) (2) | $ | $ | Non-operating income | ||||||||||||||||||||
| ( | ( | Benefit (Provision) for Income Taxes | |||||||||||||||||||||
| $ | $ | Net of Tax | |||||||||||||||||||||
| Total Reclassifications for the Period | $ | $ | Net of Tax | ||||||||||||||||||||
Amounts in parentheses indicate reductions to income.
(1) See Note 13 - Derivative Instruments of Notes to Consolidated Financial Statements for further information on derivative instruments.
63
Item 9 - Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A - Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Kimball Electronics maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation of those controls and procedures performed, the Chief Executive Officer and Chief Financial Officer of the Company concluded that its disclosure controls and procedures were effective as of June 30, 2023.
(b) Management’s report on internal control over financial reporting.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations adopted pursuant thereto, the Company included a report of management’s assessment of the effectiveness of its internal control over financial reporting as part of this report. The effectiveness of the Company’s internal control over financial reporting as of June 30, 2023 has been audited by the Company’s independent registered public accounting firm. Management’s report and the independent registered public accounting firm’s attestation report are included in the Company’s Consolidated Financial Statements under the caption entitled “Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm” and are incorporated herein by reference.
(c) Changes in internal control over financial reporting.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2023 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B - Other Information
During the three months ended June 30, 2023, no
Item 9C - Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
64
PART III
Item 10 - Directors, Executive Officers and Corporate Governance
Directors
The information required by this item with respect to Directors is incorporated by reference to the material contained in the Company’s Proxy Statement for its annual meeting of Share Owners to be held November 17, 2023 under the captions “Election of Directors” and “Corporate Governance at Kimball Electronics.”
Committees
The information required by this item with respect to the Audit Committee and its financial expert and with respect to the Nominating and ESG Committee’s responsibility for establishing procedures by which Share Owners may recommend nominees to the Board of Directors is incorporated by reference to the material contained in the Company’s Proxy Statement for its annual meeting of Share Owners to be held November 17, 2023 under the captions “Election of Directors” and “Corporate Governance at Kimball Electronics.”
Information about Our Executive Officers
The information required by this item with respect to Executive Officers of the Registrant is included at the end of Part I of this Annual Report on Form 10-K and is incorporated herein by reference. Additional information about our Executive Officers also appears in the Company’s Proxy Statement for its annual meeting of Share Owners to be held November 17, 2023 under the caption “Information about Our Executive Team.”
Compliance with Section 16(a) of the Exchange Act
The information required by this item with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the material contained in the Company’s Proxy Statement for its annual meeting of Share Owners to be held November 17, 2023 under the caption “Delinquent Section 16(a) Reports.”
Code of Ethics
Kimball Electronics has a code of ethics (its Code of Conduct) that applies to all of its employees, including the Chief Executive Officer, the Chief Financial Officer, and the Corporate Controller (functioning as Principal Accounting Officer). The code of ethics is posted on the Company’s website at http://investors.kimballelectronics.com under Governance Documents. The Company’s website and the information contained therein, or incorporated therein, are not intended to be incorporated into this Annual Report on Form 10-K. We will provide without charge, upon request, a copy of the Code of Conduct. Anyone wishing to obtain a copy should write to ATTN: Code of Conduct Requests, Secretary, Kimball Electronics, 1205 Kimball Boulevard, Jasper, IN 47546. It is our intention to disclose any amendments to the code of ethics on this website. In addition, any waivers of the code of ethics for directors or executive officers of the Company will be disclosed in a Current Report on Form 8-K.
Item 11 - Executive Compensation
The information required by this item is incorporated by reference to the material contained in the Company’s Proxy Statement for its annual meeting of Share Owners to be held November 17, 2023 under the captions “Election of Directors,” “Corporate Governance at Kimball Electronics,” “Compensation Discussion and Analysis,” “Report of the Talent, Culture, and Compensation Committee,” “Compensation Related Risk Assessment,” and “Executive Compensation.”
Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Share Owner Matters
Security Ownership
The information required by this item is incorporated by reference to the material contained in the Company’s Proxy Statement for its annual meeting of Share Owners to be held November 17, 2023 under the caption “Share Ownership Information.”
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by this item is incorporated by reference to the material contained in the Company’s Proxy Statement for its annual meeting of Share Owners to be held November 17, 2023 under the caption “Equity Compensation Plans Information.”
65
Item 13 - Certain Relationships and Related Transactions, and Director Independence
Relationships and Related Transactions
The information required by this item is incorporated by reference to the material contained in the Company’s Proxy Statement for its annual meeting of Share Owners to be held November 17, 2023 under the caption “Corporate Governance at Kimball Electronics.”
Director Independence
The information required by this item is incorporated by reference to the material contained in the Company’s Proxy Statement for its annual meeting of Share Owners to be held November 17, 2023 under the captions “Election of Directors” and “Corporate Governance at Kimball Electronics.”
Item 14 - Principal Accounting Fees and Services
The information required by this item is incorporated by reference to the material contained in the Company’s Proxy Statement for its annual meeting of Share Owners to be held November 17, 2023 under the captions “Selection of Independent Registered Public Accounting Firm” and “Appendix A — Approval Process for Services Performed by the Independent Registered Public Accounting Firm.”
66
PART IV
Item 15 - Exhibits, Financial Statement Schedules
(a)The following documents are filed as part of this report:
(1) Financial Statements:
| The following consolidated financial statements of the Company are found in Item 8 and incorporated herein. | |||||||||||
(2) Financial Statement Schedules:
| Schedules other than those listed above are omitted because they are either not required or not applicable, or the required information is presented in the Consolidated Financial Statements. | |||||||||||
(3) Exhibits
See the Index of Exhibits which immediately precedes the Signatures page in this Annual Report on Form 10-K for a list of the exhibits filed or incorporated herein as a part of this report.
Item 16 - Form 10-K Summary
None.
67
KIMBALL ELECTRONICS, INC.
INDEX OF EXHIBITS
| Incorporated by Reference | ||||||||||||||||||||
| Exhibit No. | Description | Form | Period Ending | Exhibit | Filing Date | |||||||||||||||
2.1(c)(d) | 10-K | 6/30/2018 | 2.2 | 8/28/2018 | ||||||||||||||||
| 2.2 | 10-Q | 12/31/2018 | 2.1 | 2/7/2019 | ||||||||||||||||
2.3(c) | 10-Q | 12/31/2018 | 2.2 | 2/7/2019 | ||||||||||||||||
| 3.1 | 8-K | 3.1 | 2/18/2021 | |||||||||||||||||
| 3.2 | 8-K | 3.2 | 11/15/2022 | |||||||||||||||||
| 4.1 | Filed Herewith | |||||||||||||||||||
10.1(a) | S-8 | 4.3 | 10/30/2014 | |||||||||||||||||
10.2(a) | Filed Herewith | |||||||||||||||||||
10.3(a) | 10 | 10.8 | 9/4/2014 | |||||||||||||||||
10.4(a) | 8-K | 10.1 | 10/25/2016 | |||||||||||||||||
10.5(a) | Filed Herewith | |||||||||||||||||||
10.6(a) | Filed Herewith | |||||||||||||||||||
| 10.7 | 10-Q | 3/31/2022 | 10.1 | 5/6/2022 | ||||||||||||||||
| 10.8 | 10-Q | 12/31/2022 | 10.3 | 2/7/2023 | ||||||||||||||||
10.9(a) | 8-K | 10.2 | 7/6/2021 | |||||||||||||||||
10.10(a) | 10-K | 6/30/2022 | 10.9 | 8/30/2022 | ||||||||||||||||
68
| Incorporated by Reference | ||||||||||||||||||||
| Exhibit No. | Description | Form | Period Ending | Exhibit | Filing Date | |||||||||||||||
10.11(a) | 10-K | 6/30/2022 | 10.10 | 8/30/2022 | ||||||||||||||||
10.12(a) | 8-K | 10.1 | 1/10/2023 | |||||||||||||||||
| 10.13 | 10-Q | 12/31/2022 | 10.2 | 2/7/2023 | ||||||||||||||||
| 21 | Filed Herewith | |||||||||||||||||||
| 23 | Filed Herewith | |||||||||||||||||||
| 24 | Filed Herewith | |||||||||||||||||||
| 31.1 | Filed Herewith | |||||||||||||||||||
| 31.2 | Filed Herewith | |||||||||||||||||||
32.1(b) | Furnished Herewith | |||||||||||||||||||
32.2(b) | Furnished Herewith | |||||||||||||||||||
| 101.INS | Inline XBRL Instance Document - The instance document does not appear in the Interactive Data File because its Inline XBRL tags are embedded within the Inline XBRL document | Filed Herewith | ||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | Filed Herewith | ||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | Filed Herewith | ||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | Filed Herewith | ||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | Filed Herewith | ||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | Filed Herewith | ||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) | Filed Herewith | ||||||||||||||||||
(a) Constitutes management contract or compensatory arrangement.
(b) In accordance with Item 601(b)(32)(ii) of Regulation S-K, the certifications furnished in Exhibit 32.1 and 32.2 will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
(c) Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Registrant will supplementally furnish any of the omitted schedules or exhibits to the Securities and Exchange Commission upon request.
(d) Confidential treatment has been requested and granted as to certain portions of this Exhibit.
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| KIMBALL ELECTRONICS, INC. | ||||||||
| By: | /s/ JANA T. CROOM | |||||||
| Jana T. Croom | ||||||||
| Chief Financial Officer | ||||||||
| August 23, 2023 | ||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
| /s/ RICHARD D. PHILLIPS | ||||||||
| Richard D. Phillips | ||||||||
| Chief Executive Officer and Director | ||||||||
| August 23, 2023 | ||||||||
| /s/ JANA T. CROOM | ||||||||
| Jana T. Croom | ||||||||
| Chief Financial Officer | ||||||||
| August 23, 2023 | ||||||||
| /s/ ADAM M. BAUMANN | ||||||||
| Adam M. Baumann | ||||||||
| Chief Accounting Officer | ||||||||
| August 23, 2023 | ||||||||
70
| Signature | Signature | |||||||
| GREGORY J. LAMPERT * | COLLEEN C. REPPLIER * | |||||||
| Gregory J. Lampert | Colleen C. Repplier | |||||||
| Director | Director | |||||||
| ROBERT J. PHILLIPPY * | GREGORY A. THAXTON * | |||||||
| Robert J. Phillippy | Gregory A. Thaxton | |||||||
| Director | Director | |||||||
| HOLLY A. VAN DEURSEN * | MICHELE A. M. HOLCOMB, PhD * | |||||||
| Holly A. Van Deursen | Michele A. M. Holcomb, PhD | |||||||
| Director | Director | |||||||
| TOM G. VADAKETH * | ||||||||
| Tom G. Vadaketh | ||||||||
| Director | ||||||||
* The undersigned does hereby sign this document on my behalf pursuant to powers of attorney duly executed and filed with the Securities and Exchange Commission, all in the capacities as indicated:
| Date | ||||||||
| August 23, 2023 | /s/ RICHARD D. PHILLIPS | |||||||
| Richard D. Phillips | ||||||||
| As Attorney-In-Fact | ||||||||
71
KIMBALL ELECTRONICS, INC.
Schedule II. - Valuation and Qualifying Accounts
| Description | Balance at Beginning of Year | Additions (Reductions) to Expense | Adjustments to Other Accounts | Write-offs and Recoveries | Balance at End of Year | |||||||||||||||||||||||||||||||||||||||
| (Amounts in Thousands) | ||||||||||||||||||||||||||||||||||||||||||||
| Year Ended June 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| Valuation Allowances: | ||||||||||||||||||||||||||||||||||||||||||||
| Receivables | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Deferred Tax Asset | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Year Ended June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Valuation Allowances: | ||||||||||||||||||||||||||||||||||||||||||||
| Receivables | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
| Deferred Tax Asset | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Year Ended June 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Valuation Allowances: | ||||||||||||||||||||||||||||||||||||||||||||
| Receivables | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Deferred Tax Asset | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
72
Exhibit 4.1
DESCRIPTION OF THE COMPANY’S COMMON STOCK
REGISTERED UNDER SECTION 12 OF THE EXCHANGE ACT OF 1934
The following is a summary of the material terms of the common stock of Kimball Electronics, Inc. (“Kimball Electronics,” the “Company,” “we,” “us,” or “our”) that is based on the Company’s Amended and Restated Articles of Incorporation and Amended and Restated By-Laws. The summaries and descriptions below do not purport to be complete statements of the relevant provisions of the Amended and Restated Articles of Incorporation or the Amended and Restated By-Laws. The summary is qualified in its entirety by reference to these documents, which you must read (along with the applicable provisions of Indiana law) for complete information about our capital stock. The Amended and Restated Articles of Incorporation and Amended and Restated By-Laws are included as exhibits to our Annual Report on Form 10-K.
General
Our authorized capital stock consists of 150 million shares of common stock, no par value per share, and 15 million shares of preferred stock, no par value per share, of which all of the preferred shares are undesignated. Our Board of Directors may establish the rights and preferences of the preferred shares from time to time. Our Common Stock is listed and principally traded on the Nasdaq Global Select Market of The Nasdaq Stock Market LLC under the ticker symbol “KE.”
Common Stock
Each holder of our shares of common stock is entitled to one vote for each share on all matters to be voted upon by the common shareholders, and there are no cumulative voting rights, multiple voting rights, enhanced voting rights, voting certificates, or non-voting shares. Subject to any preferential rights of any outstanding preferred shares, holders of our common shares are entitled to receive ratably the dividends, if any, as may be declared from time to time by our Board of Directors out of funds legally available for that purpose. If there is a liquidation, dissolution, or winding up of our business, holders of our common shares are entitled to ratable distribution of our assets remaining after the payment in full of liabilities and any preferential rights of any then outstanding preferred shares.
Holders of our shares of common stock have no preemptive or conversion rights or other subscription rights, and there are no redemption or sinking fund provisions applicable to the common shares. The rights, preferences and privileges of the holders of our common shares are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred equity that we may designate and issue in the future.
Preferred Stock
Under the terms of our Amended and Restated Articles of Incorporation, our Board of Directors is authorized, subject to limitations prescribed by the Indiana Business Corporation Law (“IBCL”), and by our Amended and Restated Articles of Incorporation, to issue up to 15 million shares of preferred equity in one or more series without further action by our shareholders. Our Board of Directors has the discretion, subject to limitations prescribed by the IBCL and by our Amended and Restated Articles of Incorporation, to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred shares.
We believe that the power of our Board of Directors, without shareholder approval, to amend our Articles of Incorporation to classify or reclassify unissued shares of our preferred shares and thereafter to issue such classified or reclassified shares of preferred equity provides us with flexibility in structuring possible future financings and acquisitions and in meeting other needs which might arise. The additional classes or series will be available for issuance without further action by our shareholders, unless shareholder consent is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Although our Board of Directors does not currently intend to do so, it could authorize us to issue an additional class or series of preferred equity that could, depending upon the terms of the additional class or series, delay, defer or prevent a transaction or a change of control of our Company, even if such transaction or change of control involves a premium price for our shareholders or other shareholders believe that such transaction or change of control may be in their best interests.
Anti-Takeover Effects of Various Provisions of Indiana Law and Our Amended and Restated Articles of Incorporation and Amended and Restated By-Laws
Provisions of the IBCL and our Amended and Restated Articles of Incorporation and Amended and Restated By-Laws could make it more difficult to acquire us by means of a tender offer, a proxy contest or otherwise, or to remove incumbent officers and directors. These provisions, summarized below, are expected to discourage certain types of coercive takeover practices and takeover bids that our Board of Directors may consider inadequate and to encourage persons seeking to acquire control of the
Company to first negotiate with our Board of Directors. We believe that the benefits of increased protection of our ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging takeover or acquisition proposals because, among other things, negotiation of these proposals could result in an improvement of their terms.
Control Share Acquisitions. Under Chapter 42 of the IBCL, an acquiring person or group who makes a “control share acquisition” in an “issuing public corporation” may not exercise voting rights on any “control shares” unless these voting rights are conferred by a majority vote of the disinterested shareholders of the issuing public corporation at a special meeting of those shareholders held upon the request and at the expense of the acquiring person. If control shares acquired in a control share acquisition are accorded full voting rights and the acquiring person has acquired control shares with a majority or more of all voting power, all shareholders of the issuing public corporation have dissenters’ rights to receive the fair value of their shares pursuant to Chapter 44 of the IBCL.
Under the IBCL, “control shares” are shares acquired by a person that, when added to all other shares of the issuing public corporation owned by that person or in respect to which that person may exercise or direct the exercise of voting power, would otherwise entitle that person to exercise voting power of the issuing public corporation in the election of directors within any of the following ranges:
•One-fifth or more but less than one-third;
•One-third or more but less than a majority; or
•A majority or more.
A “control share acquisition” means, subject to specified exceptions, the acquisition, directly or indirectly, by any person of ownership of, or the power to direct the exercise of voting power with respect to, issued and outstanding control shares. For the purposes of determining whether an acquisition constitutes a control share acquisition, shares acquired within any 90-day period or under a plan to make a control share acquisition are considered to have been acquired in the same acquisition.
An “issuing public corporation” means a corporation which has (i) 100 or more shareholders, (ii) its principal place of business or its principal office in Indiana, or that owns or controls assets within Indiana having a fair market value of greater than $1,000,000, and (iii) (A) more than 10% of its shareholders reside in Indiana, (B) more than 10% of its shares owned of record or owned beneficially by Indiana residents, or (C) 1,000 shareholders reside in Indiana.
The provisions described above do not apply if, before a control share acquisition is made, the corporation’s articles of incorporation or bylaws, including a bylaw adopted by the corporation’s board of directors, provide that they do not apply. Our Amended and Restated By-Laws do not so provide and, accordingly, the provisions described above do apply to us.
Certain Business Combinations. Chapter 43 of the IBCL restricts the ability of a “resident domestic corporation” to engage in any combinations with an “interested shareholder” for five years after the date the interested shareholder became such, unless the combination or the purchase of shares by the interested shareholder on the interested shareholder’s date of acquiring shares is approved by the board of directors of the resident domestic corporation before that date. If the combination was not previously approved, then the interested shareholder may effect a combination after the five-year period only if that shareholder receives approval from a majority of the disinterested shareholders or the offer meets Chapter 43’s specified “fair price” criteria.
For purposes of the above provisions, “resident domestic corporation” means an Indiana corporation that has 100 or more shareholders. “Interested shareholder” means any person, other than the resident domestic corporation or its subsidiaries, who is (1) the beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding voting shares of the resident domestic corporation or (2) an affiliate or associate of the resident domestic corporation, which at any time within the five-year period immediately before the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding shares of the resident domestic corporation.
The definition of “beneficial owner” for purposes of Chapter 43 means a person who, directly or indirectly, owns the subject shares, has the right to acquire or vote the subject shares (excluding voting rights under revocable proxies made in accordance with federal law), has any agreement, arrangement or understanding for the purpose of acquiring, holding or voting or disposing of the subject shares, or holds any “derivative instrument” that includes the opportunity, directly or indirectly, to profit or share in any profit derived from any increase in the value of the subject shares.
The above provisions do not apply to corporations that elect not to be subject to Chapter 43 in an amendment to their articles of incorporation approved by a majority of the disinterested shareholders. That amendment, however, cannot become effective until 18 months after its passage and would apply only to share acquisitions occurring after its effective date. Our Amended and Restated Articles of Incorporation do not exclude us from Chapter 43 and, accordingly, the above provisions do apply to us.
Annual Election of Directors
Our Amended and Restated By-Laws provide for a classified board of directors divided into three classes as nearly equal in number as possible.
Each director serves for a term ending on the date of the third annual meeting of shareholders following the annual meeting at which such director was elected. The foregoing notwithstanding, each director will serve until his or her successor shall have been duly elected and qualified, unless such director resigns, becomes disqualified, disabled or otherwise be removed. No director, other than a director who is also an employee of the Company, shall serve more than four (4) consecutive three-year terms in such capacity unless otherwise determined by the Board of Directors; provided, however, that any years spent serving an incomplete term shall not be considered in such calculation. In addition, a director shall automatically retire at the close of the first annual shareholders meeting following his or her 72nd birthday, unless otherwise determined by the Board of Directors. At any meeting of shareholders for the election of directors at which a quorum is present, the election will be determined by a majority of votes cast with respect to the director, provided that if as of the record date for such meeting the number of director nominees to be considered at the meeting exceeds the number of directors to be elected, each director shall be elected by a vote of the plurality of the shares represented in person or by proxy and entitled to vote on the election of directors. As used herein, a majority of the votes cast means that the number of shares voted “for” a director must exceed the number of shares voted “against” such director. Our Amended and Restated By-Laws provide for a director resignation policy, which requires an incumbent director who does not receive the requisite affirmative majority of the votes cast for his or her re-election to immediately tender his or her resignation to the Board of Directors, after which the Compensation and Governance Committee will then make a recommendation to the Board on whether to accept the tendered resignation or to take other action.
Independent Chairperson or Lead Independent Director
The Board of Directors may elect an Independent Chairperson or a Lead Independent Director. If the Board of Directors determines that it will elect an Independent Chairperson or a Lead Independent Director, that Director shall be independent and shall be elected by a majority of the independent directors annually.
Removal of Directors
Our Amended and Restated Articles of Incorporation provide that our directors may be removed only at a meeting of shareholders or directors called expressly for that purpose and, in the case of removal by shareholders, only for cause. In addition, under Section 23-1-33-8(a) of the IBCL, and as provided in our Amended and Restated Articles of Incorporation, a director may be removed, with or without cause, by the affirmative vote of a majority of the directors then in office.
Amendments to Amended and Restated Articles of Incorporation
Our Amended and Restated Articles of Incorporation may be amended to the extent and in the manner permitted or prescribed by statute.
Amendments to By-Laws
Our Amended and Restated Articles of Incorporation and Amended and Restated By-Laws provide that our bylaws may be amended by our Board of Directors or our shareholders.
Size of Board and Vacancies
Our Amended and Restated By-Laws provide that the number of directors on our Board of Directors shall not be less than three or more than ten. Any vacancies created in our Board of Directors resulting from any increase in the authorized number of directors, or the death, resignation, retirement, disqualification, removal from office or other cause, will be filled by a majority of the Board of Directors then in office, even if less than a quorum is present, or by a sole remaining director. Any director appointed to fill a vacancy on our Board of Directors will be appointed for a term expiring at the next election of the class for which such director has been appointed, and until his or her successor has been elected and qualified.
Special Shareholder Meetings
Our Amended and Restated By-Laws provide that only our Board of Directors or expressly authorized officers may call special meetings of our shareholders. Shareholders may not call special shareholder meetings. Business that may be transacted at special shareholder meetings is limited to business stated in the notice of the meeting. Shareholders may not submit business proposals for consideration at, or nominate persons for election as directors at, special shareholder meetings.
Shareholder Action by Unanimous Written Consent
Under Section 23-1-29-4(a) of the IBCL, and as provided in our Amended and Restated By-Laws, shareholders may act without a meeting only by unanimous written consent.
Requirements for Advance Notification of Shareholder Nominations and Proposals
Our Amended and Restated By-Laws establish advance notice procedures with respect to shareholder proposals and nomination of candidates for election as directors other than nominations made by or at the direction of our Board of Directors or a committee of our Board of Directors. Our bylaws also provide that shareholders who intend to solicit proxies in support of director nominees other than our nominees must also comply with the SEC's universal proxy rules, specifically the timely notice and information required by Rule 14a-19 under the Exchange Act. These advance-notice requirements may have the effect of precluding a contest for the election of our directors or the consideration of shareholder proposals if the proper procedures are not followed, or discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal, without regard to whether consideration of those nominees or proposals might be harmful or beneficial to us and our shareholders.
No Cumulative Voting
The IBCL provides that shareholders are denied the right to cumulate votes in the election of directors unless the company’s articles of incorporation provide otherwise. Our Amended and Restated Articles of Incorporation do not provide for cumulative voting.
Undesignated Preferred Shares
The authority that our Board of Directors possess to issue preferred shares could potentially be used to discourage attempts by third parties to obtain control of us through a merger, tender offer, proxy contest or otherwise by making such attempts more difficult or more costly. Our Board of Directors may be able to issue preferred shares with voting or conversion rights that, if exercised, could adversely affect the voting power of the holders of our common equity.
Forum Selection
Our Amended and Restated By-Laws provide that the state and U.S. federal courts located in the State of Indiana will be the sole and exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a claim of breach of a fiduciary duty owed by any of our directors or officers or other employees to us or our shareholders, any action asserting a claim against us or any of our directors or officers or other employees arising pursuant to any provision of the IBCL or our Amended and Restated Articles of Incorporation or Amended and Restated By-Laws or any action asserting a claim against us or any of our directors or officers or other employees governed by the internal affairs doctrine.
Directors’ Duties and Liability
Under Chapter 35 of the IBCL, directors are required to discharge their duties in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances and in a manner that the directors reasonably believe to be in the best interest of the corporation. Under the IBCL, a director is not liable for any action taken as a director, or any failure to act, regardless of the nature of the alleged breach of duty (including alleged breaches of the duty of care, the duty of loyalty, and the duty of good faith) unless the director has breached or failed to perform the duties of the director’s office and the action or failure to act constitutes willful misconduct or recklessness. This exculpation from liability under the IBCL does not affect the liability of directors for violations of the federal securities laws.
Indemnification
Chapter 37 of the IBCL authorizes every Indiana corporation to indemnify its officers and directors under certain circumstances against liability incurred in connection with proceedings to which the officers or directors are made a party by reason of their relationship to the corporation. Officers and directors may be indemnified where they have acted in good faith, and in the case of official action, they reasonably believed the conduct was in the corporation’s best interests, and in all other cases, they reasonably believed the action taken was not against the best interests of the corporation, and in the case of criminal proceedings they either had reasonable cause to believe the action was lawful or there was no reasonable cause to believe the action was unlawful. Chapter 37 of the IBCL also requires every Indiana corporation to indemnify any of its officers or directors (unless limited by the corporation’s articles of incorporation) who were wholly successful, on the merits or otherwise, in the defense of any such proceeding against reasonable expenses incurred in connection with the proceeding. Under certain circumstances, a corporation may also pay for or reimburse the reasonable expenses incurred by an officer or director who is a party to a proceeding in advance of final disposition of the proceeding. Chapter 37 of the IBCL states that the indemnification
provided for therein is not exclusive of any other rights to which a person may be entitled under the corporation’s articles of incorporation, or bylaws or resolutions of the corporation’s board of directors or shareholders.
Our Amended and Restated Articles of Incorporation provide for indemnification, to the fullest extent permitted by the IBCL, of our directors, officers and other employees against liability and reasonable expenses that may be incurred by them in connection with proceedings in which they are made a party by reason of their relationship to Kimball Electronics.
Consideration of Effects on Other Constituents
Chapter 35 of the IBCL provides that a board of directors, in discharging its duties, may consider, in its discretion, both the long-term and short-term best interests of the corporation, taking into account, and weighing as the directors deem appropriate, the effects of an action on the corporation’s shareholders, employees, suppliers and customers and the communities in which offices or other facilities of the corporation are located and any other factors the directors consider pertinent. Directors are not required to consider the effects of a proposed corporate action on any particular corporate constituent group or interest as a dominant or controlling factor. If a determination is made with the approval of a majority of the disinterested directors of the corporation’s board of directors, that determination is conclusively presumed to be valid unless it can be demonstrated that the determination was not made in good faith after reasonable investigation. Chapter 35 specifically provides that specified judicial decisions in Delaware and other jurisdictions, which might be looked upon for guidance in interpreting Indiana law, including decisions that propose a higher or different degree of scrutiny in response to a proposed acquisition of the corporation, are inconsistent with the proper application of the business judgment rule under Chapter 35.
Authorized but Unissued Shares
Our authorized but unissued common and preferred shares will be available for future issuance without shareholder approval. We may use additional shares for a variety of purposes, including future public offerings or private placements to raise additional capital, to fund acquisitions and as employee compensation. The existence of authorized but unissued common and preferred shares could render more difficult, or discourage, an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Broadridge Corporate Issuer Solutions, Inc.
Exhibit 10.2
KIMBALL ELECTRONICS, INC. 2023
EMPLOYEE PROFIT SHARING BONUS PLAN
1.Purpose; Eligibility.
1.1General Purpose. The name of this plan is the Kimball Electronics, Inc. 2023 Employee Profit Sharing Bonus Plan (the “Plan”). The purposes of the Plan are to (a) enable Kimball Electronics, Inc., an Indiana corporation (the “Company”), and any Affiliate to attract and retain the types of Employees who will contribute to the Company's success; (b) to motivate and reward eligible Employees and Consultants by creating a direct relationship between on the achievement of certain corporate, business unit, individual performance goals and individual bonus payouts; (c) to develop in Employees a sense of proprietorship and personal involvement in the development and financial success of the Company; and (d) to encourage Employees to devote their best efforts to the business of the Company, thereby advancing the interests of the Company and its Share Owners.
1.2Eligible Award Recipients. The persons eligible to receive Awards are the Employees and Consultants of the Company and its Affiliates and such other individuals designated by the Committee who are reasonably expected to become Employees or Consultants after the receipt of Awards.
1.3Effective Date. The Plan is effective as of July 1, 2023 (the “Effective Date”), and shall remain in effect until it has been terminated pursuant to Section 10.
2.Definitions. The following terms shall have the following meanings:
“Affiliate” means a corporation or other entity that, directly or through one or more intermediaries, controls, is controlled by or is under common control with, the Company.
“Applicable Laws” means the requirements related to or implicated by the administration of the Plan under applicable state corporate law, United States federal and state securities laws, the Code, and the applicable laws of any foreign country or jurisdiction where Awards are granted under the Plan.
“Award” means an award granted pursuant to the Plan, the payment of which shall be contingent on the attainment of Performance Goals with respect to a Performance Period, as determined pursuant to Section 6.1 by the Committee.
“Base Salary” means the Participant's base salary actually earned during the Performance Period before (a) deductions for taxes or benefits and (b) deferrals of compensation pursuant to any Company or Affiliate-sponsored plans.
“Board” means the Board of Directors of the Company, as constituted at any time.
“Cause” means:
(a) If the Participant is a party to an employment or service agreement with the Company or its Affiliates and such agreement provides for a definition of Cause, the definition contained therein; or (b) If no such agreement exists, or if such agreement does not define Cause: (i) the commission of, or plea of guilty or no contest to, a felony or a crime involving moral turpitude or the commission of any other act involving willful malfeasance or material fiduciary breach with respect to the Company or an Affiliate; (ii) conduct that brings or is reasonably likely to bring the Company or an Affiliate negative publicity or into public disgrace, embarrassment, or disrepute; (iii) gross negligence or willful misconduct with respect to the Company or an Affiliate; (iv) material violation of state or federal securities laws; or (v) material violation of the Company's written policies or codes of conduct, including written policies related to discrimination, harassment, performance of illegal or unethical activities, and ethical misconduct. | |||||
The Committee, in its sole and absolute discretion, shall determine the effect of all matters and questions relating to whether a Participant has been discharged for Cause.
“Code” means the Internal Revenue Code of 1986, as it may be amended from time to time. Any reference to a section of the Code shall be deemed to include a reference to any regulations promulgated thereunder.
“Committee” means a committee of one or more members of the Board appointed by the Board (or if no Committee has been appointed, the Board itself) to administer the Plan in accordance with Section 3.3 and Section 3.4.
“Company” means Kimball Electronics, Inc., and Indiana corporation, and any successor thereto.
“Consultant” means any individual or entity which performs bona fide services to the Company or an Affiliate, other than as an Employee or Director, and who may be offered securities registerable pursuant to a registration statement on Form S-8 under the Securities Act.
“Continuous Service” means that the Participant's service with the Company or an Affiliate, whether as an Employee, Consultant or Director, is not interrupted or terminated. The Participant's Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Participant renders such service, provided that there is no interruption or termination of the Participant's Continuous Service; provided further that if any Award is subject to Section 409A of the Code, this sentence shall only be given effect to the extent consistent with Section 409A of the Code. For example, a change in status from an Employee of the Company to a Director of an Affiliate will not constitute an interruption of Continuous Service. The Committee or its delegate, in its sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal or family leave of absence. The Committee or its delegate, in its sole discretion, may determine whether a Company transaction, such as a sale or spin-off of a division or subsidiary that employs a Participant, shall be deemed to result in a termination of Continuous Service for purposes of affected Awards, and such decision shall be final, conclusive and binding.
“Disability” means that the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment. The determination of whether an individual has a Disability shall be determined under procedures established by the Committee. The Committee may rely on any determination that a Participant is disabled for purposes of benefits under any long-term disability plan maintained by the Company or any Affiliate in which a Participant participates.
“Participant” means as to any Performance Period, those Employees and/or Consultants who are designated by the Committee to participate in the Plan for that Performance Period.
“Performance Criteria” means the performance criteria upon which the Performance Goals for a particular Performance Period are based, which may include any of the following, or such other criteria as determined by the Committee in accordance with Section 5.2:
net earnings or net income (before or after taxes);
basic or diluted earnings per share (before or after taxes);
net revenues or net revenue growth;
gross revenue;
gross profit or gross profit growth;
net operating profit (before or after taxes);
return on assets, capital, invested capital, equity or sales;
cash flow (including, but not limited to, operating cash flow, free cash flow, and cash flow return on capital);
earnings before or after taxes, interest, depreciation and/or amortization (EBITDA);
gross or operating margins;
improvements in capital structure;
budget and expense management;
productivity ratios;
economic value added (including, but not limited to, economic profit) or other value-added measurements;
share price (including, but not limited to, growth measures and total shareholder return);
expense targets;
margins;
operating efficiency;
working capital targets;
enterprise value;
environmental, social, and governance targets;
safety record; and
completion of acquisitions or business expansion.
Such Performance Criteria may relate to the performance of the Company as a whole, a business unit, division, department, individual, or any combination of these and may be applied on an absolute basis and/or relative to one or more peer group companies or indices, or any combination thereof, as the Committee shall determine.
“Performance Goals” means the goals selected by the Committee, in its discretion, to be applicable to a Participant for any Performance Period. Performance Goals shall be based upon one or more Performance Criteria. Performance Goals may include a threshold level of performance below which no Award will be paid and levels of performance at which specified percentages of the Target Award will be paid and may also include a maximum level of performance above which no additional Award amount will be paid.
“Performance Period” means the period for which performance is calculated, which unless otherwise indicated by the Committee, shall be the Plan Year.
“Plan” means the Kimball Electronics 2023 Profit Sharing Bonus Plan, as hereafter amended from time to time.
“Plan Year” means the Company's fiscal year, which commences on July 1 and ends on June 30.
“Pro-Rated Award” means an amount equal to the Award otherwise payable to the Participant subject to the Participant’s Continuous Service for a Performance Period but in which the Participant was actively employed by the Company or an Affiliate for only a portion thereof, multiplied by a fraction, the numerator of which is the number of calendar days the Participant was actively employed by the Company or an Affiliate during the Performance Period and the denominator of which is the number of calendar days in the Performance Period.
“Qualifying Termination” means a Participant’s termination of Continuous Service due to death, Disability, or Retirement. In the case of a Participant's Disability, the termination of Continuous Service shall be deemed to have occurred on the date that the Committee determines that the Participant is Disabled. For the avoidance of doubt, a Participant’s termination of Continuous Service for any other reason shall not constitute a Qualifying Termination.
“Retirement” means a Participant’s termination of Continuous Service, for any reason other than death, after the Participant has attained either (1) the age of 55 after at least ten years of Continuous Service with the Company, or (2) the minimum retirement age under the governmental retirement system for the applicable country of the Participant’s employment (age 62 in the United States).
“Target Award” means the target award payable under the Plan to a Participant for a particular Performance Period, expressed as a percentage of the Participant's Base Salary. In special circumstances, the target award may be expressed as a fixed amount of cash.
3.Administration.
3.1Authority of Committee. The Plan shall be administered by the Committee or, in the Board's sole discretion, by the Board. Subject to the terms of the Plan, the Committee's charter and Applicable Laws, and in addition to other express powers and authorization conferred by the Plan, the Committee shall have the authority:
(a)to construe and interpret the Plan and apply its provisions;
(b)to promulgate, amend, and rescind rules and regulations relating to the administration of the Plan, including, without limitation, such procedures and subplans as are necessary or appropriate to permit participation in the Plan by employees who are foreign nationals or employed outside of the United States;
(c)to authorize any person to execute, on behalf of the Company, any instrument required to carry out the purposes of the Plan;
(d)to delegate its authority to one or more Officers of the Company with respect to Awards that either (1) are made generally to all Participants, or (2) do not involve “insiders” within the meaning of Section 16 of the Exchange Act;
(e)to determine when Awards are to be granted under the Plan;
(f)from time to time to select, subject to the limitations set forth in this Plan, those eligible Award recipients to whom Awards shall be granted;
(g)to prescribe the terms and conditions of each Award, including, without limitation, the Performance Goals; the Performance Period(s); the medium of payment and vesting provisions; whether, to what extent, and under what circumstances Awards may be forfeited or suspended;
(h)to amend any outstanding Awards, including for the purpose of modifying the time or manner of vesting, or the term of any outstanding Award; provided, however, that if any such amendment impairs a Participant's rights or increases a Participant's obligations under their Award or creates or increases a Participant's federal income tax liability with respect to an Award, such amendment shall also be subject to the Participant's consent;
(i)to determine the duration and purpose of leaves of absences which may be granted to a Participant without constituting termination of Continuous Service for purposes of the Plan, which periods shall be no shorter than the periods generally applicable to Employees under the Company's employment policies;
(j)to make decisions with respect to outstanding Awards that may become necessary upon a change in corporate control or an event that triggers adjustments to outstanding Awards;
(k)to interpret, administer, reconcile any inconsistency in, correct any defect in and/or supply any omission in the Plan and any instrument or agreement relating to, or Award granted under, the Plan; and
(l)to exercise discretion to make any and all other determinations which it determines to be necessary or advisable for the administration of the Plan.
3.2Committee Decisions Final. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on the Company and the Participants, unless such decisions are determined by a court having jurisdiction to be arbitrary and capricious.
3.3Delegation by the Committee. The Committee, in its sole discretion, may delegate all or part of its authority and powers under the Plan to one or more directors and/or officers of the Company; provided, however, that the Committee may not delegate its responsibility to make Awards to executive officers.
3.4Agents; Limitation of Liability. The Committee may appoint agents to assist in administering the Plan. The Committee and each member thereof shall be entitled to, in good faith, rely or act upon any report or other information furnished to it or him by any officer or employee of the Company, the Company's certified public accountants, consultants or any other agent assisting in the administration of the Plan.
3.5Indemnification. In addition to such other rights of indemnification as they may have as Directors, members of the Committee, officers, employees, or agents of the Company, and to the extent allowed by Applicable Laws, the Committee and any officers, employees or agents of the Company appointed by the Committee (“Indemnified Parties”) to assist in administering the Plan shall be indemnified by the Company against the reasonable expenses, including attorney's fees, actually incurred in connection with any action, suit or proceeding or in connection with any appeal therein, to which any of the Indemnified Parties may be party by reason of any action taken or failure to act under or in connection with the Plan or any Award granted under the Plan, and against all amounts paid by the Indemnified Parties in settlement thereof (provided, however, that the settlement has been approved by the Company, which approval shall not be unreasonably withheld) or paid by the Indemnified Parties in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that the Indemnified Parties did not act in good faith and in a manner which such person reasonably believed to be in the best interests of the Company, or in the case of a criminal proceeding, had no reason to believe that the conduct complained of was unlawful; provided, however, that within 60 days after the institution of any such action, suit or proceeding, the Indemnified Parties shall, in writing, offer the Company the opportunity at its own expense to handle and defend such action, suit or proceeding.
4.Eligibility and Participation.
4.1No Guarantee of Participation, Employment. Only eligible individuals who are designated by the Committee to participate in the Plan with respect to a particular Performance Period may participate in the Plan for that Performance Period. A Participant shall not have any right to any Award under the Plan until such Award has been paid to such Participant. An individual who is designated as a Participant for a given Performance Period is not guaranteed or assured of (a) continued employment by the Company or an Affiliate or (b) being selected for participation in any subsequent Performance Period.
4.2New Hires; Newly Eligible Participants. At the discretion of the Committee, a newly hired or newly eligible Participant will be eligible to receive a Pro-Rated Award.
5.Terms of Awards.
5.1Determination of Target Awards. Prior to, or reasonably promptly following the commencement of each Performance Period, the Committee, in its sole discretion, shall establish the Target Award for each Participant, the payment of which shall be conditioned on the achievement of the Performance Goals for the Performance Period.
5.2Determination of Performance Goals and Performance Formula. Prior to, or reasonably promptly following the commencement of, each Performance Period, the Committee, in its sole discretion, shall establish in writing the Performance Goals for the Performance Period and shall prescribe a formula for determining the percentage of the Target Award which may be payable based upon the level of attainment of the Performance Goals for the Performance Period. The Performance Goals shall be based on one or more Performance Criteria, each of which may carry a different weight, and which may differ from Participant to Participant.
5.3Adjustments. The Committee is authorized to adjust or modify the calculation of a Performance Goal for a Performance Period in its sole discretion in connection with any one or more of the following events:
(a)asset write-downs;
(b)significant litigation or claim judgments or settlements;
(c)the effect of changes in tax laws, accounting standards or principles, or other laws or regulatory rules affecting reporting results;
(d)any reorganization and restructuring programs;
(e)extraordinary nonrecurring items as described in management's discussion and analysis of financial condition and results of operations appearing in the Company's annual report to shareholders for the applicable year or period;
(f)acquisitions or divestitures;
(g)any other specific unusual or nonrecurring events or objectively determinable category thereof;
(h)foreign exchange gains and losses; and
(i)a change in the Company's fiscal year.
6.Payment of Awards.
6.1Determination of Awards.
(a)Following the completion of each Performance Period, the Committee shall determine the extent to which the Performance Goals have been achieved or exceeded. Subject to Section 6.1(c), if the minimum Performance Goals established by the Committee are not achieved, then no payment will be made.
(b)To the extent that the Performance Goals are achieved, the Committee shall determine the extent to which the Performance Goals applicable to each
Participant have been achieved and shall then determine the amount of each Participant's Award.
(c)In determining the amount of each Award, the Committee may reduce or eliminate the amount of an Award if, in its sole discretion, such reduction or elimination is appropriate.
6.2Form and Timing of Payment. Except as otherwise provided herein, as soon as practicable following the Committee's determination pursuant to Section 6.1 for the applicable Performance Period, each Participant shall earn and be paid a cash lump sum payment of their Award, less required withholdings. In no event shall such payment be made later than 2 1/2 months following the date the Committee determines that the Performance Goals have been achieved.
6.3Deferral of Awards. The Committee may establish one or more programs to permit selected Participants the opportunity to elect to defer receipt of an Award that absent the election would entitle the Participant to payment of an Award. The Committee may establish the election procedures, the timing of such elections, the mechanisms for payments of, and accrual of interest or other earnings, if any, on amounts or other consideration so deferred, and such other terms, conditions, rules and procedures that the Committee deems advisable for the administration of any such deferral program in accordance with Applicable Law.
7.Termination of Continuous Service.
7.1Continuous Service Requirement. Except as otherwise provided in Section 7.2, Awards are earned on the date they are paid; therefore if a Participant's Continuous Service terminates for any reason prior to the date that Awards are paid, all of the Participant's rights to an Award for the Performance Period shall be forfeited.
7.2Termination of Continuous Service Due to Qualifying Termination. If a Participant's Continuous Service is terminated by reason of the Participant's Qualifying Termination during a Performance Period or following a Performance Period but before the date that Awards are paid, the Participant or their beneficiary will be paid a Pro-Rated Award. Payment of such Pro-Rated Award will be made at the same time and in the same manner as Awards are paid to other Participants for the Performance Period. In no event shall such payment be made later than 2 1/2 months following the date the Committee determines that the Performance Goals have been achieved.
8.General Provisions.
8.1Forfeiture Events. A Participant's rights, payments and benefits with respect to an Award shall be subject to reduction, cancellation, forfeiture or recoupment upon the occurrence of certain events, in addition to applicable vesting conditions of an Award, as determined in the Committee’s sole discretion. Such events may include, without limitation, breach of non-competition, non-solicitation, confidentiality, or other restrictive covenants applicable to the Participant, a termination of the Participant's Continuous Service for Cause, or other conduct by the Participant that is detrimental to the business or reputation of the Company and/or its Affiliates.
8.2Clawback. Notwithstanding any other provisions in this Plan, the Company may cancel any Award, require reimbursement of any Award by a Participant, and effect any other right of recoupment provided under the Plan in accordance with any Company policies that may be adopted and/or modified from time to time (“Clawback Policy”). In addition, a
Participant may be required to repay to the Company previously paid compensation, whether provided pursuant to the Plan or otherwise, in accordance with the Clawback Policy. By accepting an Award, the Participant is agreeing to be bound by the Clawback Policy, as in effect or as may be adopted and/or modified from time to time by the Company in its discretion (including, without limitation, to comply with Applicable Laws or stock exchange listing requirements). The action permitted to be taken by the Company under this Section 9.2 is in addition to, and not in lieu of, any and all other rights of the Board and/or the Company under Applicable Laws and shall apply notwithstanding anything to the contrary in the Plan.
8.3Unfunded Plan. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between the Company and any Participant, beneficiary, or legal representative or any other person. To the extent that a person acquires a right to receive payments under the Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts except as expressly set forth in the Plan. The Plan is not intended to be subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA).
8.4Compliance with Legal Requirements. The Plan and the granting of Awards shall be subject to all Applicable Laws, and to such approvals by any regulatory or governmental agency as may be required.
8.5Non-Transferability. A person's rights and interests under the Plan, including any Award previously made to such person or any amounts payable under the Plan may not be assigned, pledged, or transferred, except in the event of the Participant's death, to a designated beneficiary in accordance with the Plan, or in the absence of such designation, by will or the laws of descent or distribution.
8.6Withholding. The Company shall have the right to withhold from any Award, any federal, state or local income and/or payroll taxes required by law to be withheld and to take such other action as the Committee may deem advisable to enable the Company and Participants to satisfy obligations for the payment of withholding taxes and other tax obligations relating to an Award.
8.7Section 409A of the Code. It is intended that payments under the Plan qualify as short-term deferrals exempt from the requirements of Section 409A of the Code. In the event that any Award does not qualify for treatment as an exempt short-term deferral, it is intended that such amount will be paid in a manner that satisfies the requirements of Section 409A of the Code. The Plan shall be interpreted and construed accordingly.
8.8Expenses. The costs of administering the Plan shall be paid by the Company.
8.9Severability. If any of the provisions of the Plan or any Award Agreement is held to be invalid, illegal or unenforceable, whether in whole or in part, such provision shall be deemed modified to the extent, but only to the extent, of such invalidity, illegality or unenforceability and the remaining provisions shall not be affected thereby.
8.10Plan Headings. The headings in the Plan are for purposes of convenience only and are not intended to define or limit the construction of the provisions hereof.
8.11Non-Uniform Treatment. The Committee's determinations under the Plan need not be uniform and may be made by it selectively among persons who are eligible to receive, or actually receive, Awards. Without limiting the generality of the foregoing, the Committee shall be entitled to make non-uniform and selective determinations, amendments, and adjustments, and Awards.
8.12Other Compensation Arrangements. The adoption of this Plan shall not be construed as creating any limitations on the power of the Board or Committee to adopt such other compensation arrangements, subject to shareholder approval if such approval is required, as it may deem desirable for any Participant.
8.13Notice. Any notice to be given to the Company or the Committee pursuant to the provisions of the Plan shall be in writing and directed to the Secretary of the Company at 1205 Kimball Boulevard, Jasper, IN 47546.
8.14Successors. The obligations of the Company under the Plan shall be binding upon any successor corporation or organization resulting from the merger, consolidation or other reorganization of the Company, or upon any successor corporation or organization succeeding to all or substantially all of the assets and business of the Company and its Affiliates, taken as a whole.
9.Amendment or Termination of the Plan. The Board or the Committee may, at any time, amend, suspend, or terminate the Plan in whole or in part. Notwithstanding the foregoing, rights under any Award granted before amendment or termination of the Plan shall not be impaired by any amendment or termination of the Plan unless (a) the Company requests the consent of the Participant and (b) the Participant consents in writing.
10.Choice of Law and Jurisdiction. The law of the State of Indiana shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to such state’s conflict of law rules. Without prejudice to any party’s right to seek emergency, injunctive, or conservatory measures of protection in connection with a breach or anticipated breach of the Plan at any time in a state or federal court of competent jurisdiction within the State of Indiana, the Company and Participants consent to and agree that the exclusive jurisdiction and venue for all matters arising out of or relating to this Plan, or the breach thereof, including any question regarding its existence, validity, or termination, shall be arbitration administered by the American Arbitration Association in accordance with its Employment Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The arbitration shall be held, and the award rendered accompanied by a reasoned opinion, in the English language.
As adopted by the Board of Directors of Kimball Electronics, Inc. on August 23, 2023.
Exhibit 10.5
Kimball Electronics, Inc. Non-Employee Directors Stock Compensation Deferral Plan
Fee Deferral Election Agreement
ONLY COMPLETE THIS AGREEMENT IF YOU WISH TO
DEFER YOUR ANNUAL RETAINER FEE THAT IS PAYABLE IN COMMON STOCK
THIS FEE DEFERRAL ELECTION AGREEMENT (“Agreement”) is entered into pursuant to the provisions of the Kimball Electronics, Inc. Non-Employee Directors Stock Compensation Deferral Plan (“Plan”). Capitalized terms used but not defined herein shall have the meanings set forth in the Non-Employee Directors Stock Compensation Deferral Plan.
1. Fee Deferral Election. I hereby elect to defer receipt of the _______________% of Fees, paid to me by the Company after the date of this Agreement unless I supersede this deferral election with a new Agreement. This Agreement supersedes all of my prior deferral elections.
2. Designated Deferral Period. The Plan provides for a Designated Deferral Period. The Fees deferred pursuant to this Agreement that are credited to my Deferred Fee Stock Account will be paid or commence to be paid to me (or my Beneficiary), as applicable, within sixty (60) days following the date of my death or Termination.
3. Method of Payment. I hereby elect that the distribution of the Fees deferred pursuant to this Agreement that are credited to my Deferred Fee Stock Account made on account of my Termination be paid as follows: (check one)
in a single lump sum payment
OR in
three substantially equal annual installments
I understand that Plan payments/distributions made on account of an Unforeseeable Emergency or my death will be made in a single lump sum payment.
4. Deemed Investment of Deferred Fee Stock Account. I understand that each amount credited to my Deferred Fee Stock Account pursuant to this Agreement shall be deemed to be invested in Stock Units until payment/distribution of the balance of the subaccount relating thereto. I also understand that this deemed investment is merely a device used to determine the amount payable to me under the Plan and does not provide me with any rights or interests in any shares of Common Stock or any other particular funds, securities, or property of the Company or any of its affiliates. I also understand that my right to receive payments/distributions under the Plan makes me a general creditor of the Company with no greater right or priority than any other general creditor of the Company.
5. Miscellaneous. I understand that this Agreement is subject to the terms, conditions, and limitations of the Plan, as in effect from time to time, in all respects and that, except as expressly permitted by the Plan, all elections made in this Agreement are irrevocable. I acknowledge that I have received, read and understand the Plan document. I agree to accept as final and binding all decisions and interpretations of the Plan Administrator and the Company relating to the Plan and this Agreement.
______________________ _____________________________
Date Signature
_____________________________
Printed Name
Received and accepted on behalf of the Company on this ____ day of _____________, ______.
By: ______________________________________
Exhibit 10.6
Kimball Electronics, Inc. Non-Employee Directors Stock Compensation Deferral Plan
Annual Retainer Fee Election Agreement
This election must be received by the Company Secretary, no later than November 1 immediately before that calendar year for which the Director wishes to make an election. For example, an election submitted on October 5, 2022 would be effective November 1, 2023. An election submitted on November 5, 2022 would be effective November 1, 2024.
Election to Receive Shares in Lieu of Cash
I hereby elect to receive my Annual Retainer Fees as follows:
Annual Retainer Fees: _____ % Common Stock
_____ % Cash
100 %
By the election I understand and agree:
•This election is irrevocable once submitted to the Company, will be effective for the Plan Year that begins November 1 of the year immediately after the year in which I make this election, and will continue for my Annual Retainer Fees for future Plan Years unless I timely submit a new Director Compensation Election Form modifying or revoking this election.
•I will receive in lieu of cash the number of shares of Company common stock determined by multiplying the Annual Retainer Fee by the percentage of Common Stock I elected above and dividing the total by the Fair Market Value on the Accounting Date. Fractional shares will be rounded up.
•Annual Retainer Fees for each Plan year are paid as soon as practical after the Company’s annual meeting of Share Owners on a date as determined by the Company Secretary, but in no event later than December 31st of the year of the annual Share Owner meeting.
•Both the issuance of cash or stock in lieu of cash will trigger the reporting of taxable income to me.
Capitalized terms used but not defined herein shall have the meanings set forth in the Non-Employee Directors Stock Compensation Deferral Plan.
______________________ _____________________________
Date Signature
_____________________________
Printed Name
Exhibit 21
KIMBALL ELECTRONICS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
As of June 30, 2023, the significant subsidiaries of the Registrant were as follows:
Jurisdiction of Incorporation | Percent of Voting Stock Owned By the Registrant | ||||||||||
| Kimball Electronics Group, LLC | Indiana | 100% | |||||||||
| Kimball Electronics (Thailand) Ltd. | Thailand | 100% | |||||||||
| Kimball Electronics Poland Sp. z o.o. | Poland | 100% | |||||||||
| Kimball Electronics (Nanjing) Co. Ltd. (LLC) | China | 100% | |||||||||
| Kimball Electronics Tampa, Inc. | Florida | 100% | |||||||||
| Kimball Electronics Mexico, Inc. | Texas | 100% | |||||||||
| Kimball Electronics - Mexico S.A. de C.V. | Mexico | 100% | |||||||||
| Kimball Electronics Netherlands B.V. | Netherlands | 100% | |||||||||
| Kimball Electronics Romania S.R.L. | Romania | 100% | |||||||||
| Kimball Electronics Indianapolis, Inc. | Indiana | 100% | |||||||||
| Kimball Electronics Indiana, Inc. | Indiana | 100% | |||||||||
| Kimball Electronics Netherlands II B.V. | Netherlands | 100% | |||||||||
| Global Equipment Services & Manufacturing Vietnam Company/Limited | Vietnam | 100% | |||||||||
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-199728, 333-199731, and 333-214233 on Form S-8 of our report dated August 23, 2023, relating to the financial statements of Kimball Electronics, Inc., and the effectiveness of Kimball Electronics, Inc.’s internal control over financial reporting appearing in this Annual Report on Form 10-K of Kimball Electronics, Inc. for the year ended June 30, 2023.
| /s/ Deloitte & Touche LLP | ||
| Indianapolis, Indiana | ||
| August 23, 2023 | ||
Exhibit 24
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint RICHARD D. PHILLIPS, his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, in name, place and stead, to sign the Annual Report of Kimball Electronics, Inc. on Form 10-K (and each amendment thereto, if any) pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, for the fiscal year ended June 30, 2023, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto the attorney-in-fact full power and authority to sign such document on behalf of the undersigned and to make such filing, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that the attorney-in-fact, or their substitutes, may lawfully do or cause to be done by virtue hereof.
Date: August 8, 2023
/s/ Gregory J. Lampert | /s/ Colleen C. Repplier | ||||
| Gregory J. Lampert | Colleen C. Repplier | ||||
/s/ Robert J. Phillippy | /s/ Gregory A. Thaxton | ||||
| Robert J. Phillippy | Gregory A. Thaxton | ||||
/s/ Holly A. Van Deursen | /s/ Michele A. M. Holcomb, PhD | ||||
| Holly A. Van Deursen | Michele A. M. Holcomb, PhD | ||||
/s/ Tom G. Vadaketh | |||||
| Tom G. Vadaketh | |||||
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULE 13a-14(a)/15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard D. Phillips, certify that:
1.I have reviewed this Annual Report on Form 10-K of Kimball Electronics, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | August 23, 2023 | |||||||
| /s/ RICHARD D. PHILLIPS | ||||||||
| RICHARD D. PHILLIPS Chief Executive Officer and Director | ||||||||
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULE 13a-14(a)/15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jana T. Croom, certify that:
1.I have reviewed this Annual Report on Form 10-K of Kimball Electronics, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | August 23, 2023 | |||||||
| /s/ JANA T. CROOM | ||||||||
| JANA T. CROOM Chief Financial Officer | ||||||||
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Kimball Electronics, Inc. (the “Company”) on Form 10-K for the period ended June 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard D. Phillips, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: | August 23, 2023 | |||||||
| /s/ RICHARD D. PHILLIPS | ||||||||
| RICHARD D. PHILLIPS Chief Executive Officer and Director | ||||||||
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Kimball Electronics, Inc. (the “Company”) on Form 10-K for the period ended June 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jana T. Croom, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: | August 23, 2023 | |||||||
| /s/ JANA T. CROOM | ||||||||
| JANA T. CROOM Chief Financial Officer | ||||||||