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 byNew 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 22 -------------------------------------------------------------------------------- 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 atJune 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. 23 -------------------------------------------------------------------------------- •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 endedJune 30, 2020 filed with theSEC onAugust 27, 2020 , which is available free of charge through theSEC'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 % 24
--------------------------------------------------------------------------------
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 ofJune 30, 2021 compared toJune 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 atJune 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 ofJune 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"). 25 -------------------------------------------------------------------------------- Other General Income in fiscal year 2021 of$0.4 million resulted from payments received related to class action lawsuits in whichKimball 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 onSeptember 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 followingU.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. 26 -------------------------------------------------------------------------------- Comparing the balance sheet as ofJune 30, 2021 toJune 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 theU.S. primary credit facility. Liquidity and Capital Resources Working capital atJune 30, 2021 was$282.6 million compared to working capital of$285.8 million atJune 30, 2020 . The current ratio was 1.9 and 2.0 atJune 30, 2021 andJune 30, 2020 , respectively. The debt-to-equity ratio was 0.1 and 0.3 atJune 30, 2021 andJune 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 atJune 30, 2021 and$142.5 million atJune 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 5150 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 endedJune 30, 2021 and 2020. Year Ended June 30 (Amounts in Millions) 2021 2020
Net cash provided by operating activities
Cash Flows from Operating Activities Net cash provided by operating activities for the fiscal year endedJune 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 endedJune 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 endedJune 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. 27 -------------------------------------------------------------------------------- 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 ourThailand andMexico 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 endedJune 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 endedJune 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 ourNetherlands facility. Credit Facilities The Company maintains aU.S. primary credit facility (the "primary credit facility") among the Company, the lenders party thereto, andJPMorgan Chase Bank, National Association , as Administrative Agent, andBank of America, N.A ., as Documentation Agent, scheduled to matureJuly 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. AtJune 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. AtJune 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. AtJune 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 atJune 30, 2021 declined$51.5 million fromJune 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. 28 -------------------------------------------------------------------------------- The Company's financial covenants under the primary credit facility require: •a ratio of consolidated total indebtedness minus unencumberedU.S. cash on hand inthe 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 endedJune 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 ofJune 30, 2021 , we maintained the following foreign credit facilities: •A Thailand overdraft credit facility which allows for borrowings up to2.4 million Thai Baht (approximately$0.1 million atJune 30, 2021 exchange rates). We had no borrowings outstanding under this credit facility as ofJune 30, 2021 orJune 30, 2020 . •An uncommitted revolving credit facility for ourNetherlands subsidiary, which allows for borrowings of up to9.2 million Euro (approximately$10.9 million atJune 30, 2021 exchange rates) that can be drawn in Euro,U.S. dollars, or other optional currency. AtJune 30, 2021 and 2020, we had$3.5 million and$6.7 million , respectively, in borrowings outstanding under this credit facility. The facility matures onJune 22, 2022 . •An uncommitted revolving credit facility for ourPoland operation, which allows for borrowings up to5 million Euro (approximately$5.9 million atJune 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 ofJune 30, 2021 orJune 30, 2020 . The facility matures onDecember 20, 2021 . During the current fiscal year, the 364-day multi-currency revolving credit facility (the "secondary credit facility") matured onMay 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 ofKimball 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 endedJune 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 atJune 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 ourThailand andMexico 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. AtJune 30, 2021 , our capital expenditure commitments were approximately$28 million , consisting primarily of commitments for the expansions of ourMexico andThailand 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. 29 -------------------------------------------------------------------------------- AtJune 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 tothe United States in a tax-efficient manner. Our intent is to permanently reinvest the remaining funds outside ofthe United States , and our current plans do not demonstrate a need to repatriate these funds to ourU.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. OnOctober 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 ofSeptember 29, 2016 ,August 23, 2017 ,November 8, 2018 andNovember 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 throughJune 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 ofJune 30, 2021 , we do not have any material off-balance sheet arrangements. Critical Accounting PoliciesKimball Electronics' Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted inthe 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. 30 --------------------------------------------------------------------------------Goodwill and Other Intangible Assets -Goodwill ,$12.0 million as of bothJune 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 ofJune 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 atJune 30, 2021 andJune 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 atJune 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 atJune 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. TheUnited 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. InMarch 2021 , the administrator of LIBOR, theICE Benchmark Administration , announced that it will cease publication of (i) the overnight and 1, 3, 6, and 12 monthsU.S. dollar LIBOR settings afterJune 30, 2023 and (ii) all other LIBOR settings, including the 1 week and 2 monthsU.S. dollar LIBOR settings, afterDecember 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. 31
--------------------------------------------------------------------------------
© Edgar Online, source