KIMBALL ELECTRONICS: Management Report and Analysis of Financial Position and Operating Results (Form 10-K)

Business Overview
We are a global, multifaceted manufacturing solutions provider. We provide
contract electronics manufacturing services ("EMS") and diversified
manufacturing services, including engineering and supply chain support, to
customers in the automotive, medical, industrial, and public safety end markets.
Our core competency is producing durable electronics, and we further offer
diversified contract manufacturing services for non-electronic components,
medical devices, medical disposables, drug delivery devices and solutions,
precision molded plastics, and production automation, test, and inspection
equipment. Our manufacturing services, including engineering and supply chain
support, utilize common production and support capabilities globally. We are
well recognized by our customers and the industry for our excellent quality,
reliability, and innovative service. For the third time in four years, we were
recognized in 2021 for achieving the Highest Overall Customer Rating in CIRCUITS
ASSEMBLY's 2021 Service Excellence Awards. CIRCUITS ASSEMBLY is a leading brand
and technical publication for electronics manufacturers worldwide.
The contract manufacturing services industry is very competitive. As a mid-sized
player, we can expect to be challenged by the agility and flexibility of the
smaller, regional players, and we can expect to be challenged by the scale and
price competitiveness of the larger, global players. We enjoy a unique market
position between these extremes which allows us to compete with the larger scale
players for high-volume projects, but also maintain our competitive position in
the generally lower volume durable electronics market space.  We expect to
continue to effectively operate in this market space; however, one significant
challenge will be maintaining our profit margins while we continue our revenue
growth. Price increases are uncommon in the market as production efficiencies
and material pricing advantages for most projects drive costs and prices down
over the life of the projects.  This characteristic of the contract electronics
marketplace is expected to continue.
The Worldwide Manufacturing Services Market - 2021 Edition, a comprehensive
study on the worldwide EMS market published by New Market Research ("NVR"),
provided worldwide forecast trends through 2025. NVR projects the worldwide
assembly market for electronics products to grow at a compound annual growth
rate ("CAGR") of 3.4% over the next five years, with the EMS industry projected
to grow at a CAGR of 7.1%.
We continue to monitor the current economic and industry conditions for
uncertainties that may pose a threat to our future growth or cause disruption in
business strategy, execution, and timing in the markets in which we compete. The
COVID-19 pandemic continues to impact the global economy, and we are actively
monitoring its impact on all our operations. The well-being and safety of our
employees remains our number one priority, and we are following guidelines
suggested by applicable authorities, including utilizing protective shields,
face masks, body temperature scanning, social distancing, and proper hygiene as
appropriate for our operations. Our response to each positive case in our
facilities follows our procedures for communication to our employees, contact
tracing, self-quarantining, testing, and sanitization of the affected work
areas. Because of the variety of critical medical device assemblies we
manufacture around the world, our facilities were classified as "essential
businesses" or otherwise permitted to operate under shelter in place orders or
other similar orders during government-mandated COVID-19 shutdowns, but all have
been affected to varying degrees by COVID-19. We continue to maintain close
contact and communication with our customers and our supply chain to ensure
safety measures follow appropriate guidelines for the health and safety of all
parties and to minimize disruption of operations. While the availability of
vaccines is encouraging, significant uncertainties and risks still exist related
to the effectiveness and uptake of the various vaccines and the severity and
duration of the impact of COVID-19 on our end markets, the supply chain, the
health and availability of our workforce, and global macroeconomic conditions;
therefore, its financial impact on our future results cannot be reasonably
estimated but could be material.
The EMS industry is currently experiencing component shortages and component
allocations, particularly with semiconductors driven by the strong demand in
consumer electronics and the beginning of a global recovery. Component shortages
or allocations could increase component costs and potentially interrupt our
operations and negatively impact our ability to meet commitments to customers.
The semiconductor shortage has adversely impacted global manufacturing,
including the automotive industry, leading to automakers temporarily suspending
production in recent months. We have taken various actions to mitigate the risk
and minimize the impact to our customers as well as the adverse effect component
shortages or allocations could have on our results; however, the duration or
severity of the semiconductor shortage is unknown, and its financial impact on
our results cannot be reasonably estimated but could be material.
Demand from customers in the automotive market is gaining momentum, after
recently being adversely impacted by COVID-19, as we experienced a record sales
quarter in our automotive vertical in the second quarter of fiscal year 2021 and
growth in the second half of fiscal year 2021 over the second half of fiscal
year 2020. We are monitoring, however, the current shortage of semiconductors
and the continuing impact on global automobile production. We anticipate demand
from customers in the automotive market to remain strong during fiscal year
2022, but we expect a stronger second half of fiscal year 2022 than
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the first half as we expect the supply to catch up with the demand. In the
medical market, sales returned to the pre-COVID-19 pandemic levels starting with
the second quarter of fiscal year 2021 after we experienced a record sales
quarter in the first quarter of fiscal year 2021 due to the significant increase
in demand for medical assemblies, specifically those related to respiratory care
and patient monitoring products, as a direct result of COVID-19. Sales were
adversely impacted in the medical market due to lower demand for non-critical
medical products, but we believe this demand will increase as elective
procedures resume to pre-COVID-19 levels. In the industrial market, we had
record sales in the current fiscal year in large part due to improved sales of
automation, test, and inspection equipment and higher end market demand for
climate control products. Sales to customers in the public safety market were
lower in fiscal year 2021 compared to fiscal year 2020 primarily due to the
phase out of certain programs.
We have a strong focus on cost control and closely monitor market changes and
our liquidity in order to proactively adjust our operating costs and
discretionary capital spending as needed. 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 and
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
2021, which included a current ratio of 1.9, a debt-to-equity ratio of 0.1, and
Share Owners' equity of $442 million. 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 $206.7 million at June 30,
2021.
In addition to the above discussion related to the current market conditions,
management currently considers the following events, trends, and uncertainties
to be most important to understanding our financial condition and operating
performance:
•Employees throughout our business operations are an integral part of our
ability to compete successfully, and the stability of the management team is
critical to long-term Share Owner value. Our talent management and succession
planning processes help to maintain stability in management.
•Due to the contract and project nature of the contract manufacturing industry,
fluctuation in the demand for our products and variation in the gross margin on
those programs is inherent to our business. Effective management of
manufacturing capacity is, and will continue to be, critical to our success.
•The nature of the EMS industry is such that the start-up of new customers and
new programs to replace expiring programs occurs frequently. While our
agreements with customers generally do not have a definitive term and thus could
be canceled at any time with little or no notice, we generally realize
relatively few cancellations prior to the end of the product's life cycle. We
attribute this to our focus on long-term customer relationships, meeting
customer expectations, required capital investment, and product qualification
cycle times. As such, our ability to continue contractual relationships with our
customers, including our principal customers, is not certain. New customers and
program start-ups generally cause margin dilution early in the life of a
program, which are generally recovered as the program becomes established and
matures.
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•Risk factors within our business include, but are not limited to, general
economic and market conditions, component availability, customer order delays,
globalization, global health emergencies including the COVID-19 pandemic, impact
related to tariffs and other trade barriers, foreign currency exchange rate
fluctuations, rapid technological changes, supplier and customer financial
stability, the contract nature of this industry, the concentration of sales to
large customers, and the potential for customers to choose a dual sourcing
strategy or to in-source a greater portion of their manufacturing. The
continuing success of our business is dependent upon our ability to replace
expiring customers/programs with new customers/programs. We monitor our success
in this area by tracking the number of customers and the percentage of our net
sales generated from them by years of service as depicted in the table below.
While variation in the size of program awards makes it difficult to directly
correlate this data to our sales trends, we believe it does provide useful
information regarding our customer loyalty and new business growth. Additional
risk factors that could have an effect on our performance are located within
  Item 1A - Risk Factors  .
                                               Year End
Customer Service Years                           2021       2020       2019
More than 10 Years
% of Net Sales                                    81  %      76  %      78  %
# of Customers                                    33         38         37
5 to 10 Years
% of Net Sales                                    16  %      11  %      11  %
# of Customers                                    23         19         17
Less than 5 Years
% of Net Sales                                     3  %      13  %      11  %
# of Customers                                    16         21         21
Total
% of Net Sales                                   100  %     100  %     100  %
# of Customers                                    72         78         75


Presentation of Results of Operations and Liquidity and Capital Resources
A discussion regarding our financial condition and results of operations for
fiscal year 2021 compared to fiscal year 2020 is presented below. A discussion
regarding our financial condition and results of operations for fiscal year 2020
compared to fiscal year 2019 can be found under captions entitled "Results of
Operations - Fiscal Year 2020 Compared with Fiscal Year 2019" 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, 2020 filed with the SEC on August 27,
2020, 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 2021 Compared with Fiscal Year 2020
                                                                        At 

or for the year ended

                                                                                 June 30
(Amounts in Millions, Except for Per Share                             as a % of Net                          as a % of Net
Data)                                                2021                  Sales               2020               Sales               % Change
Net Sales                                     $    1,291.8                                 $ 1,200.6                                           8  %
Gross Profit                                  $      118.0                    9.1  %       $    83.8                 7.0  %                   41  %
Selling and Administrative Expenses           $       52.7                    4.0  %       $    43.9                 3.7  %                   20  %
Other General Income                          $        0.4                                 $       -
Goodwill Impairment                           $          -                      -  %       $     7.9                 0.6  %
Operating Income                              $       65.7                    5.1  %       $    32.0                 2.7  %                  105  %

Net Income                                    $       56.8                                 $    18.2                                         212  %
Diluted Earnings per Share                    $       2.24                                 $    0.71
Open Orders                                   $      749.0                                 $   421.0                                          78  %


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Net sales by vertical market for the year ended

                                          June 30
(Amounts in Millions)               2021           2020         % Change
Automotive                       $   551.5      $   457.4           21  %
Medical                              384.8          397.8           (3) %
Industrial                           293.7          271.0            8  %
Public Safety                         48.1           56.2          (14) %
Other                                 13.7           18.2          (25) %
Total Net Sales                  $ 1,291.8      $ 1,200.6            8  %


Net sales in fiscal year 2021 increased by 8% compared to net sales in fiscal
year 2020 including a favorable 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 as the automotive industry was returning to more normalized
levels from the prior fiscal year, during which many automakers suspended
production in our fourth fiscal quarter due to the COVID-19 pandemic. Sales to
customers in the automotive market also improved from the ramp-up of certain
programs, including programs for fully electric vehicles.
•Sales to customers in the medical market were down slightly in the current
fiscal year when compared to the prior fiscal year due to the lower demand for
non-critical medical products due to the COVID-19 pandemic. Fiscal years 2021
and 2020 benefited from the temporary increase in demand for medical assemblies,
specifically those related to respiratory care and patient monitoring products
as a direct result of the COVID-19 pandemic and related global shortage of
respiratory equipment.
•We also experienced record sales to customers in the industrial market during
the current fiscal year, as a result of improved sales of automation, test, and
inspection equipment and higher end market demand for climate control products,
which were partially offset by decreased demand for smart metering products.
•Sales to customers in the public safety market were lower in fiscal year 2021
compared to fiscal year 2020 primarily due to the phase out of certain programs.
A significant amount of sales to Nexteer Automotive and Philips accounted for
the following portions of our net sales:
                         Year Ended June 30
                       2021              2020
Nexteer Automotive     17%               14%
Philips                15%               16%


Open orders were up 78% as of June 30, 2021 compared to June 30, 2020, primarily
from an increase in the automotive vertical. The increase in open orders in the
automotive market is driven by the overall increase in demand coupled with the
global semiconductor and other component shortages, which has limited our
ability to fulfill customer orders. Open orders in the automotive market were
down at June 30, 2020 due to the severe impact of the COVID-19 pandemic on the
automotive industry in the prior year. 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.
Substantially all of the open orders as of June 30, 2021 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.
Additionally, COVID-19 could impact the timing of fulfillment of open orders.
Gross profit as a percent of net sales improved to 9.1% in fiscal year 2021 from
7.0% in fiscal year 2020 primarily due to improved operating execution,
favorable product mix within our automotive vertical driven by a shift to more
mature and larger programs, and favorable foreign currency fluctuations, which
were partially offset by higher profit-sharing incentive bonus expense.
For fiscal year 2021, selling and administrative expenses increased both as a
percent of net sales and in absolute dollars compared to fiscal year 2020. The
current fiscal year selling and administrative expenses increased in absolute
dollars from the prior fiscal year primarily due to an increase in
profit-sharing incentive bonus expense, higher salary and related payroll costs,
and the increase in the fair value of the liability for the supplemental
employee retirement plan ("SERP").
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Other General Income in fiscal year 2021 of $0.4 million resulted from payments
received related to class action lawsuits in which Kimball Electronics was a
class member, partially offset by lawsuit settlement accruals and payments. No
Other General Income was recorded during fiscal year 2020.
We recorded a non-cash pre-tax goodwill impairment charge of $7.9 million during
fiscal year 2020 related to our GES reporting unit. See   Note 6 - Goodwill and
Other Intangible Assets   of Notes to Consolidated Financial Statements for more
information on goodwill impairment. No goodwill impairment charge was recorded
during fiscal year 2021.
Other Income (Expense) consisted of the following:
Other Income (Expense)                                            Year Ended
                                                                    June 30
(Amounts in Thousands)                                        2021          2020
Interest Income                                             $   102      $     60
Interest Expense                                             (2,165)       (4,421)
Foreign Currency/Derivative Gain                              4,806         

420

Gain on SERP Investments                                      2,073         

848

Adjustments after Measurement Period of GES Acquisition          53        (3,785)
Other                                                          (518)           39
Other Income (Expense), net                                 $ 4,351      $ (6,839)


The Foreign Currency/Derivative Gain resulted from net foreign currency exchange
rate movements during the period. 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.
The Adjustments after Measurement Period of GES Acquisition are amounts recorded
after the twelve-month measurement period which ended on September 30, 2019,
with the fiscal year 2020 amount reflecting the final net working capital
adjustment on the GES acquisition as determined by the dispute resolution
procedure provided for under the terms of the asset purchase agreement. See
  Note 2 - Acquisition   of Notes to Consolidated Financial Statements for more
information on this acquisition. The decrease in interest expense was driven by
lower borrowings on credit facilities and lower interest rates. Other includes
fees associated with our credit facilities, amortization of actuarial gains
(losses), and other miscellaneous items that are not directly related to
operations.
Our income before income taxes and effective tax rate were comprised of the
following U.S. and foreign components:
                                                    Year Ended June 30, 2021                          Year Ended June 30, 2020
                                            Income Before                                     Income (Loss)
(Amounts in Thousands)                          Taxes              Effective Tax Rate          Before Taxes          Effective Tax Rate
United States                              $      10,439                       11.4  %       $      (6,117)                      28.7  %
Foreign                                    $      59,615                       20.2  %       $      31,274                       27.9  %
Total                                      $      70,054                       18.9  %       $      25,157                       27.7  %


When compared to the statutory rate, the domestic effective tax rate for fiscal
year 2021 was favorably impacted by research and development credits. The
consolidated effective tax rate was also favorably impacted by the mix of
taxable earnings within our various tax jurisdictions and foreign exchange rate
movements.
The domestic effective tax rate and the consolidated effective tax rate for
fiscal year 2020 were unfavorably impacted by tax expense due to the global
intangible low-taxed income tax provisions of the Tax Cuts and Jobs Act ("Tax
Reform") and the valuation allowance recorded related to state tax credits,
partially offset by favorable tax credits.
Our overall effective tax rate will fluctuate depending on the geographic
distribution of our worldwide earnings. See   Note 11 - Income Taxes   of Notes
to Consolidated Financial Statements for more information.
We recorded net income of $56.8 million in fiscal year 2021, or $2.24 per
diluted share, an increase of 212% from fiscal year 2020 net income of $18.2
million, or $0.71 per diluted share. Fiscal year 2020 results include the
following non-recurring charges previously discussed: a $6.9 million after-tax
non-cash goodwill impairment charge, or $0.28 per diluted share, and the $2.9
million after-tax net working capital adjustment on the GES acquisition, or
$0.11 per diluted share.
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Comparing the balance sheet as of June 30, 2021 to June 30, 2020, Receivables
increased $23.2 million largely due to increased sales volumes and customer
sales mix. Contract assets decreased $24.5 million as a result of the impact of
timing of shipments and related billings to our customers. Our inventory balance
decreased $18.7 million due to the consumption of the inventory build at the end
of the prior fiscal year to support the increased demand for medical assemblies
and changes in customers' forecasts as a result of COVID-19 in addition to the
current component shortages reducing our inventory levels. Also contributing to
the inventory balance decrease was the reimbursement from certain customers for
the excess raw material inventory we purchased based on their forecasts during
the ramp-up due to COVID-19. Borrowings under credit facilities decreased $51.9
million largely due to payments on the U.S. primary credit facility.
Liquidity and Capital Resources
Working capital at June 30, 2021 was $282.6 million compared to working capital
of $285.8 million at June 30, 2020. The current ratio was 1.9 and 2.0 at
June 30, 2021 and June 30, 2020, respectively. The debt-to-equity ratio was 0.1
and 0.3 at June 30, 2021 and June 30, 2020, 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 $206.7
million at June 30, 2021 and $142.5 million at June 30, 2020.
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"). 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.
                                                                            

Three months ended

                             June 30, 2021              March 31, 2021              December 31, 2020             September 30, 2020             June 30, 2020
DSO                                53                         57                           58                             51                           50
CAD                                14                         17                           19                             19                           22
PDSOH                              61                         56                           58                             64                           76
APD                                64                         64                           60                             58                           67
CCD                                64                         66                           75                             76                           81


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, and APD as the
average of monthly accounts payable divided by an average day's cost of sales.
Cash Flows
The following table reflects the major categories of cash flows for the fiscal
years ended June 30, 2021 and 2020.
                                                     Year Ended June 30
(Amounts in Millions)                                 2021            2020

Net cash flow generated by operating activities $ 130.1 $ 72.8
Net cash used for investing activities $ (38.8) $ (38.5)
Net cash used for financing activities $ (53.1) $ (17.9)


Cash Flows from Operating Activities
Net cash provided by operating activities for the fiscal year ended June 30,
2021 was driven both by net income adjusted for non-cash items and changes in
operating assets and liabilities. Net cash provided by operating activities for
the fiscal year ended June 30, 2020 was primarily driven by net income adjusted
for non-cash items. Changes in operating assets and liabilities provided $40.4
million and $7.9 million of cash for the fiscal years ended June 30, 2021 and
2020, respectively.
The cash provided of $40.4 million from changes in operating assets and
liabilities in fiscal year 2021 was primarily due to a decrease in contract
assets, which provided cash of $24.5 million as a result of the impact of timing
of shipments and related billings to our customers, the decrease in inventory,
which provided cash of $18.6 million primarily due to the consumption of the
inventory build at the end of the prior fiscal year in addition to the
reimbursement from certain customers for the excess raw material inventory we
purchased based on their forecasts during the ramp-up due to COVID-19, and the
increase in accounts payable, which provided cash of $14.6 million. Partially
offsetting cash provided by contract assets and inventory was an increase in
accounts receivable, which used cash of $28.4 million primarily resulting from
increased sales volumes and customer sales mix.
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The cash provided of $7.9 million from changes in operating assets and
liabilities in fiscal year 2020 was primarily due to a decrease in accounts
receivable, which provided cash of $41.9 million largely due to the increased
utilization of accounts receivable factoring arrangements. Partially offsetting
cash provided by the decrease in accounts receivable was an increase in contract
assets, which used cash of $18.4 million to support the increased demand for
medical assemblies in addition to certain contracts with customers beginning to
meet the criteria to recognize revenue over time during the fiscal year, and an
increase in inventory, which used cash of $15.1 million primarily to support the
increased demand for medical assemblies.
Cash Flows from Investing Activities
Net cash used for investing activities during fiscal year 2021 includes $39.4
million cash used for capital investments. The capital investments were
primarily for machinery and equipment for capacity purposes and to support new
business awards in addition to capital investments for the beginning of
expansions at our Thailand and Mexico facilities.
Net cash used for investing activities during fiscal year 2020 includes $38.7
million cash used for capital investments. The capital investments were
primarily for machinery and equipment for capacity purposes and to support new
business awards.
Cash Flows from Financing Activities
Net cash used by financing activities for the fiscal year ended June 30, 2021
resulted largely from net payments on our credit facilities of $52.3 million.
Net cash used by financing activities for the fiscal year ended June 30, 2020
resulted largely from net payments on our primary credit facility of $11.4
million, repurchases of our common stock under an authorized stock repurchase
plan, and the remittance of tax withholdings on share-based payments, which were
partially offset by borrowings of $3.3 million on our Netherlands facility.
Credit Facilities
The Company maintains a U.S. primary credit facility (the "primary credit
facility") among the Company, the lenders party thereto, and JPMorgan Chase
Bank, National Association, as Administrative Agent, and Bank of America, N.A.,
as Documentation Agent, scheduled to mature July 27, 2023. The primary credit
facility provides for $150 million in borrowings, with an option to increase the
amount available for borrowing to $225 million at the Company's request, subject
to the consent of each lender participating in such increase.
The proceeds of the loans on the primary credit facility are to be used for
working capital and general corporate purposes of the Company including capital
expenditures and acquisitions. A portion of the credit facility, not to exceed
$15 million of the principal amount, was available for the issuance of letters
of credit. A commitment fee on the unused portion of the principal amount of the
credit facility was payable at a rate that ranged from 20.0 to 25.0 basis points
per annum as determined by the Company's ratio of consolidated total
indebtedness to adjusted consolidated EBITDA.
The interest rate on borrowings is dependent on the type of borrowings and will
be one of the following two options:
•the London Interbank Offered Rate ("LIBOR") in effect two business days prior
to the advance (adjusted upwards to reflect bank reserve costs) for such
interest period as defined under the primary credit facility, plus the
Eurocurrency Loans spread which can range from 125.0 to 175.0 basis points based
on the Company's ratio of consolidated total indebtedness to adjusted
consolidated EBITDA; or
•the Alternate Base Rate ("ABR"), which is defined as the highest of the
fluctuating rate per annum equal to the higher of
a.JPMorgan's prime rate;
b.1% per annum above the Adjusted LIBO Rate (as defined under the primary credit
facility); or
c.1/2 of 1% per annum above the Federal Funds Effective Rate (as defined under
the primary credit facility);
plus the ABR Loans spread which can range from 25.0 to 75.0 basis points based
on the Company's ratio of consolidated total indebtedness to adjusted
consolidated EBITDA.
At June 30, 2021, we had $62.7 million in borrowings under the primary credit
facility and $0.4 million in letters of credit against the primary credit
facility. At June 30, 2021, $40.0 million of the borrowings were classified as
long term as the Company intends, and has the ability, to refinance for a period
longer than twelve months. At June 30, 2020, we had $111.4 million in borrowings
under the primary credit facility and $0.4 million in letters of credit against
the primary credit facility, and $91.5 million of the borrowings were classified
as long term. Our debt classified as long term at June 30, 2021 declined $51.5
million from June 30, 2020 as we remitted payment of $46.5 million for
borrowings under the primary credit facility and reclassified $5.0 million of
the borrowings under the primary credit facility to short term as we have the
intent and the ability to repay within twelve months.
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The Company's financial covenants under the primary credit facility require:
•a ratio of consolidated total indebtedness minus unencumbered U.S. cash on hand
in the United States in excess of $15 million to adjusted consolidated EBITDA,
determined as of the end of each of its fiscal quarters for the then most
recently ended four fiscal quarters, to not be greater than 3.0 to 1.0, and
•a fixed charge coverage ratio, determined as of the end of each of its fiscal
quarters for the then most recently ended four fiscal quarters, to not be less
than 1.10 to 1.00.
We were in compliance with the financial covenants during the fiscal year ended
June 30, 2021.
Kimball Electronics has foreign credit facilities available to satisfy
short-term cash needs at specific foreign locations rather than funding from
intercompany sources. These foreign credit facilities can be canceled at any
time by either the bank or us. As of June 30, 2021, we maintained the following
foreign credit facilities:
•A Thailand overdraft credit facility which allows for borrowings up to 2.4
million Thai Baht (approximately $0.1 million at June 30, 2021 exchange rates).
We had no borrowings outstanding under this credit facility as of June 30, 2021
or June 30, 2020.
•An uncommitted revolving credit facility for our Netherlands subsidiary, which
allows for borrowings of up to 9.2 million Euro (approximately $10.9 million at
June 30, 2021 exchange rates) that can be drawn in Euro, U.S. dollars, or other
optional currency. At June 30, 2021 and 2020, we had $3.5 million and $6.7
million, respectively, in borrowings outstanding under this credit facility. The
facility matures on June 22, 2022.
•An uncommitted revolving credit facility for our Poland operation, which allows
for borrowings up to 5 million Euro (approximately $5.9 million at June 30, 2021
exchange rates) that can be drawn in Euro, U.S. dollars, or Polish Zloty. We had
no borrowings outstanding under this credit facility as of June 30, 2021 or
June 30, 2020. The facility matures on December 20, 2021.
During the current fiscal year, the 364-day multi-currency revolving credit
facility (the "secondary credit facility") matured on May 18, 2021, which
allowed for borrowings up to $30.0 million. We did not extend the secondary
credit facility as it was intended to provide additional domestic liquidity at
the enterprise level to help support the increased demand in medical assemblies
that is attributable to the COVID-19 pandemic, and we had no borrowings on the
secondary credit facility during its term.
Factoring Arrangements
The Company may utilize accounts receivable factoring arrangements with
third-party financial institutions in order to extend terms for the customer
without negatively impacting our cash flow.  These arrangements in all cases do
not contain recourse provisions which would obligate us in the event of our
customers' failure to pay.  Receivables are considered sold when they are
transferred beyond the reach of Kimball Electronics and its creditors, the
purchaser has the right to pledge or exchange the receivables, and we have
surrendered control over the transferred receivables.  During the fiscal years
ended June 30, 2021 and 2020, we sold, without recourse, $306.3 million and
$280.7 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 $100.3 million at June 30, 2021. We
expect to continue to prudently invest in capital expenditures, including for
capacity expansions and potential acquisitions, that would help us continue our
growth and development as a multifaceted manufacturing solutions company. In
fiscal year 2021, we have approved capacity expansions at our Thailand and
Mexico facilities. We are in a solid financial position to be able to weather
the continuing impact of COVID-19; however, significant uncertainties and risks
exist related to the severity and duration of its impact to certain markets, the
supply chain, and global macroeconomic conditions.
At June 30, 2021, our capital expenditure commitments were approximately $28
million, consisting primarily of commitments for the expansions of our Mexico
and Thailand facilities, capital related to new program wins, and productivity
improvements including automation. 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.
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At June 30, 2021, our foreign operations held cash totaling $105.2 million and
the aggregate unremitted earnings of our foreign subsidiaries were approximately
$313 million. Most of these accumulated unremitted foreign earnings have been
invested in active non-U.S. business operations, and we expect we may only
repatriate a minor amount of these earnings to the United States in a
tax-efficient manner. 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.
On October 21, 2015, the Company's Board of Directors approved a resolution to
authorize an 18-month stock repurchase plan (the "Plan") to allow the repurchase
of up to $20 million of 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. The Plan 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 $79.7 million of common stock under the Plan through
June 30, 2021.
Our ability to generate cash from operations to meet our liquidity obligations
could be adversely affected in the future by factors such as general economic
and market conditions, lack of availability of raw material components in the
supply chain, a decline in demand for our services, loss of key contract
customers, unsuccessful integration of acquisitions and new operations, global
health emergencies such as the COVID-19 pandemic, the duration and severity of
the COVID-19 pandemic and the related uncertainties around the financial impact,
and other unforeseen circumstances. In particular, should demand for our
customers' products and, in turn, our services decrease significantly over the
next 12 months, the available cash provided by operations could be adversely
impacted.
The preceding statements include forward-looking statements under the Private
Securities Litigation Reform Act of 1995. Certain factors could cause actual
results to differ materially from forward-looking statements.
Fair Value
During fiscal year 2021, 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 13 - Fair Value   of Notes to Consolidated Financial Statements for more
information.
Off-Balance Sheet Arrangements
As of June 30, 2021, 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.
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Goodwill and Other Intangible Assets - Goodwill, $12.0 million as of both
June 30, 2021 and 2020 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 2021 resulting from our annual impairment tests for all
reporting units. In fiscal year 2020, we reported a $7.9 million goodwill
impairment charge for our GES reporting unit, partially offset by a $1.0 million
reduction in income tax expense associated with the deferred tax asset
established for the deductible portion of the impaired goodwill.
Other Intangible Assets, $17.0 million and $19.3 million as of June 30, 2021 and
2020, 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, along with
  Note 6 - Goodwill and Other Intangible Assets   for further discussion of the
calculated fiscal year 2020 goodwill impairment charge.
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 $3.0 million
and $4.5 million at June 30, 2021 and June 30, 2020, respectively.
New Accounting Standards
See   Note 1 - Business Description and Summary of Significant Accounting
Policies   of Notes to Consolidated Financial Statements for information
regarding New Accounting Standards.
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 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 14
- 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, 2021 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.
Interest Rate Risk: Our primary exposure to market risk for changes in interest
rates relates to our primary credit facility, described further in   Note 8 -
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, 2021 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
LIBOR. The United Kingdom's Financial Conduct Authority announced that after
2021 it would no longer persuade or compel panel banks to submit the rates
required to calculate LIBOR. In March 2021, the administrator of LIBOR, the ICE
Benchmark Administration, announced that it will cease publication of (i) the
overnight and 1, 3, 6, and 12 months U.S. dollar LIBOR settings after June 30,
2023 and (ii) all other LIBOR settings, including the 1 week and 2 months U.S.
dollar LIBOR settings, after December 31, 2021. If LIBOR is discontinued and we
transition to a new rate, interest rates on our current or future indebtedness
may be adversely affected. The Company is monitoring these developments.

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