Kimball Electronics Inc

Previous wording

We are a global, multifaceted manufacturing solutions provider. We provide electronics manufacturing services (“EMS”), including engineering and supply chain support, to customers in the automotive, medical, and industrial end markets. Our core competency is producing durable electronics, and we further offer contract manufacturing services for non-electronic components, medical disposables, drug delivery solutions, and precision molded plastics. Our manufacturing services, including engineering and supply chain support, utilize common production and support capabilities globally. We are well recognized by our customers and the industry for our excellent quality, reliability, and innovative service. CIRCUITS ASSEMBLY, a leading brand and technical publication for electronics manufacturers worldwide, has previously recognized us four times for achieving the Highest Overall Customer Rating in their Service Excellence Awards, and most recently, we received Highest Overall Customer Ratings in four of their seven categories in 2023.

Current wording

We are a global, multifaceted manufacturing solutions provider. We provide electronics manufacturing services (“EMS”), including engineering and supply chain support, to customers in the automotive, medical, and industrial end markets. Our core competency is producing durable electronics, and we further offer contract manufacturing services for non-electronic components, medical disposables, drug delivery solutions, and precision molded plastics. Our manufacturing services, including engineering and supply chain support, utilize common production and support capabilities globally. We are well recognized by our customers and the industry for our excellent quality, reliability, and innovative service. CIRCUITS ASSEMBLY, a leading brand and technical publication for electronics manufacturers worldwide, has previously recognized us four times for achieving the Highest Overall Customer Rating in their Service Excellence Awards, and most recently, we received Highest Customer Ratings in seven service categories in 2024.

Previous wording

The contract manufacturing services industry is very competitive. As a mid-sized player, we can expect to be challenged by the agility and flexibility of the smaller, regional players, and we can expect to be challenged by the scale and price competitiveness of the larger, global players. We enjoy a unique market position between these extremes which allows us to compete with the larger scale players for high-volume projects, but also maintain our competitive position in the generally lower volume durable electronics market space. We expect to continue to effectively operate in this market space; however, one significant challenge will be maintaining our profit margins while we continue our revenue growth. Pricing is competitive in the market as production efficiencies and material pricing advantages for most projects drive costs and prices down over the life of the projects. This characteristic of the contract electronics marketplace is expected to continue.

Current wording

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. Pricing is competitive in the market as production efficiencies and material pricing advantages for most projects drive costs and prices down over the life of the projects. This characteristic of the contract electronics marketplace is expected to continue.

Previous wording

Net sales in the first quarter of the current fiscal year decreased 15% compared to the prior fiscal year first quarter, with decreases in each of our end market verticals. The decrease in sales to customers in the automotive and medical markets were largely driven by decreased demand. The decrease in sales to customers in the industrial market were related to the sale of GES and continued softness specific to smart metering and climate control production. We expect consolidated net sales to continue to lag when compared to fiscal year 2024 with the continued softness in demand and the loss of a major automotive program (impacts beginning in the third quarter) by our customer that was unrelated to any issues with our workmanship, quality, or ability to produce the product, in addition to the expected consolidated net sales decrease from the divestiture of our GES business.

Current wording

Net sales in the second quarter of the current fiscal year decreased 15% compared to the prior fiscal year second quarter, most significantly in our medical and industrial end market verticals. The decrease in sales to customers in the medical markets were largely driven by adjacent impacts with our major medical customer with the FDA recall and the wind down of other programs. The decrease in sales to customers in the industrial market were related to the sale of GES and declines in smart metering and public safety.

Previous wording

We continue to maintain a strong balance sheet, which included a current ratio of 2.3, a debt-to-equity ratio of 0.4, and Share Owners’ equity of $548 million at September 30, 2024. Recently, we have invested to support our expansions and growth in Mexico, Thailand, and Poland. Refer to the Future Liquidity section of Liquidity and Capital Resources below for further discussion of our liquidity.

Current wording

We continue to maintain a strong balance sheet, which included a current ratio of 2.3, a debt-to-equity ratio of 0.4, and Share Owners’ equity of $537 million at December 31, 2024. Refer to the Future Liquidity section of Liquidity and Capital Resources below for further discussion of our liquidity.

Previous wording

First quarter fiscal year 2025 consolidated net sales decreased 15% compared to the first quarter of fiscal year 2024. The impact from foreign currency fluctuations on net sales was less than 1% in the current quarter compared to the first quarter of fiscal year 2024. By end market vertical, our market verticals fluctuated as follows:

Current wording

Second quarter fiscal year 2025 consolidated net sales decreased 15% compared to the second quarter of fiscal year 2024, and the year-to-date fiscal year 2025 consolidated net sales also decreased 15% compared to the year-to-date period of fiscal year 2024. The impact from foreign currency fluctuations on net sales was less than 1% in the current quarter compared to the second quarter and year-to-date period of fiscal year 2024. By end market vertical, our market verticals fluctuated as follows:

Previous wording

Gross profit as a percent of net sales in the first quarter of fiscal year 2025 declined when compared to the first quarter of fiscal year 2024 as we experienced lost absorption on lower revenue.

Current wording

Gross profit as a percent of net sales in the second quarter of fiscal year 2025 declined when compared to the second quarter of fiscal year 2024 as well as in the first half of the fiscal year as we experienced lost absorption on lower revenue.

Previous wording

Selling and administrative expenses decreased both as a percent of net sales and in absolute dollars in the first quarter of fiscal year 2025 when compared to the first quarter of fiscal year 2024, driven by cost reduction efforts, decreased profit-sharing bonus expense, and the classification of factoring fees.

Current wording

Selling and administrative expenses decreased both as a percent of net sales and in absolute dollars in the second quarter of fiscal year 2025 when compared to the second quarter of fiscal year 2024 as well as in the first half of the fiscal year, driven by cost reduction efforts, the classification of factoring fees, and decreased profit-sharing bonus expense and stock compensation expense driven by the decline in financial results. In the second quarter, the update of bonus and stock compensation performance metrics resulted in a substantial reduction to cumulative expense recorded. Both the second quarter and first half of fiscal year 2024 included a $2.0 million allowance for credit losses, which also contributed to the declines year over year.

Previous wording

In the three months ended September 30, 2024, we recorded pre-tax restructuring expense of $2.3 million for employee-related costs as we undertook restructuring efforts to align our cost structure with reduced end market demand levels.

Current wording

In the three and six months ended December 31, 2024, we recorded pre-tax restructuring expense of $4.7 million and $7.0 million, respectively, for employee-related costs as we undertook restructuring efforts to align our cost structure with reduced end market demand levels and incurred costs related to the Tampa closure in the second quarter.

Previous wording

Interest expense has decreased in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 due to lower interest rates and lower borrowings on credit facilities. Foreign currency/derivative gains (losses) result from net foreign currency exchange rate movements during the periods. The revaluation to fair value of the 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. Prior to fiscal year 2025, factoring fees were recorded in Selling and Administrative Expenses on our Condensed Consolidated Statements of Income.

Current wording

Interest expense has decreased in the three and six months ended December 31, 2024 compared to the three and six months ended December 31, 2023 due to lower borrowings on credit facilities and lower interest rates. Foreign currency/derivative gains (losses) result from net foreign currency exchange rate movements during the periods. The revaluation to fair value of the 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. Prior to fiscal year 2025, factoring fees were recorded in Selling and Administrative Expenses on our Condensed Consolidated Statements of Income.

Previous wording

Our provision (benefit) for income taxes for the three months ended September 30, 2024 and September 30, 2023 was $(0.3) million, or (9.4)% of income before taxes on income, and $2.5 million, or 18.6% of income before taxes on income, respectively. The tax benefit in the three months ended September 30, 2024 was the result of an interest recovery on a prior period tax audit.

Current wording

Our provision (benefit) for income taxes for the six months ended December 31, 2024 and December 31, 2023 was $(0.2) million, or (3.6)% of income before taxes on income, and $5.4 million, or 22.2% of income before taxes on income, respectively. The tax benefit in the six months ended December 31, 2024 is primarily the result of the valuation allowance reversal recorded in the second quarter associated with the expected capital gains from the sale of the Tampa property.

Previous wording

Open orders were down 35% as of September 30, 2024 compared to September 30, 2023. The decrease in open orders from September 30, 2023 is primarily driven by reduced orders due to cancellation of a major automotive program, other automotive customer demand reductions, and medical customer demand reductions. Open orders at a point in time may not be indicative of future sales trends due to the contract nature of our business. Our open orders depend on the lead times from our customers, which have reduced since September 30, 2023 when parts were more constrained, which also contributed to the decline in open orders.

Current wording

Open orders were down 33% as of December 31, 2024 compared to December 31, 2023. The decrease in open orders from December 31, 2023 is primarily driven by reduced orders due to cancellation of a major automotive program, other automotive customer demand reductions, and medical customer demand reductions. Open orders at a point in time may not be indicative of future sales trends due to the contract nature of our business. Our open orders depend on the lead times from our customers, which have reduced since December 31, 2023 when parts were more constrained, which also contributed to the decline in open orders.

Previous wording

Working capital at September 30, 2024 was $439.0 million compared to working capital of $471.7 million at June 30, 2024. The current ratio was 2.3 at both September 30, 2024 and June 30, 2024. The debt-to-equity ratio was 0.4 at September 30, 2024 and 0.5 at June 30, 2024. 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 $263.4 million at September 30, 2024 and $220.1 million at June 30, 2024.

Current wording

Working capital at December 31, 2024 was $397.6 million compared to working capital of $471.7 million at June 30, 2024. The current ratio was 2.3 at both December 31, 2024 and June 30, 2024. The debt-to-equity ratio was 0.4 at December 31, 2024 and 0.5 at June 30, 2024. 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 $280.3 million at December 31, 2024 and $220.1 million at June 30, 2024.

Previous wording

The following table reflects the major categories of cash flows for the first three months of fiscal years 2025 and 2024.

Current wording

The following table reflects the major categories of cash flows for the first six months of fiscal years 2025 and 2024.

Previous wording

Net cash provided by operating activities for the first three months of fiscal year 2025 was driven by net income adjusted for non-cash items and changes in operating assets and liabilities. Net cash provided by operating activities for the first three months of the prior year was driven by net income adjusted for non-cash items, partially offset by changes in operating assets and liabilities.

Current wording

Net cash provided by operating activities for the first six months of fiscal year 2025 was driven by net income adjusted for non-cash items and changes in operating assets and liabilities. Net cash used by operating activities for the first six months of the prior year was driven by changes in operating assets and liabilities, partially offset by net income adjusted for non-cash item.

Previous wording

Net income adjusted for non-cash items provided cash of $16.8 million in the first three months of fiscal year 2025, while changes in operating assets and liabilities provided $28.7 million of cash in the first three months of fiscal year 2025, largely due to a decrease of accounts receivable, which provided cash of $20.1 million primarily resulting from decreased sales volumes compared to the three months ended June 30, 2024, and an increase in advances from customers, which provided cash of $8.7 million. Partially offsetting cash provided by accounts receivable and advances from customers was a decrease in accrued expenses and taxes payable, which used cash of $22.5 million primarily driven by timing of profit-sharing incentive bonus and income tax payments.

Current wording

Net income adjusted for non-cash items provided cash of $28.1 million in the first six months of fiscal year 2025, while changes in operating assets and liabilities provided $46.8 million of cash in the first six months of fiscal year 2025, largely due to a decrease of accounts receivable, which provided cash of $45.5 million, and a decrease of inventory, which provided cash of $28.0 million. Partially offsetting cash provided by accounts receivable and inventory was a decrease in accrued expenses and taxes payable, which used cash of $27.1 million primarily driven by timing of profit-sharing incentive bonus and income tax payments.

Previous wording

The cash used of $9.7 million from changes in operating assets and liabilities in the first three months of fiscal year 2024 was largely due to an increase in inventory, which used cash of $34.0 million, driven by investment to support our newly expanded facilities, a decrease in accounts payable, which used cash of $11.6 million, and an increase in contract assets, which used cash of $8.9 million. Partially offsetting cash used by inventory, accounts payable, and contract assets was a decrease in accounts receivable, which provided cash of $45.3 million primarily resulting from decreased sales volumes compared to the three months ended June 30, 2023.

Current wording

The cash used of $59.0 million from changes in operating assets and liabilities in the first six months of fiscal year 2024, is largely due to a decrease in accounts payable, which used cash of $42.5 million primarily driven by decreased inventory purchases due to lower sales, and a decrease in accrued expenses and taxes payable, which used $9.3 million primarily driven by timing of income tax and profit-sharing incentive bonus payments. Partially offsetting cash used by accounts payable and accrued expenses and taxes payable was an increase in advances from customers, which provided cash of $8.8 million. Partially offsetting the cash used from changes in operating assets and liabilities in the first six months of fiscal year 2024 was net income adjusted for non-cash items which provided cash of $41.1 million.

Previous wording

Net cash provided by investing activities of $5.2 million in the first three months of fiscal year 2025 was largely due to the $18.5 million of proceeds from the sale of GES, partially offset by capital investments of $13.5 million primarily to support new business awards and replacement of older machinery and equipment. See Note 3 - Sale of GES of Notes to Consolidated Financial Statements for more information on the divestiture of GES.

Current wording

Net cash used by investing activities of $1.2 million in the first six months of fiscal year 2025 was largely due to capital investments of $20.0 million primarily to support new business awards and replacement of older machinery and equipment, partially offset by the $18.5 million of proceeds from the sale of GES. See Note 3 - Sale of GES of Notes to Consolidated Financial Statements for more information on the divestiture of GES.

Previous wording

Net cash used for investing activities in the first three months of fiscal year 2024 included $11.3 million cash used for capital investments. The capital investments were primarily to support new business awards, facility expansions, and replacement of older machinery and equipment.

Current wording

Net cash used for investing activities in the first six months of fiscal year 2024 included $24.5 million cash used for capital investments. The capital investments were primarily to support new business awards, facility expansions, and replacement of older machinery and equipment.

Previous wording

For the first three months of fiscal year 2025, net cash used for financing activities of $53.0 million resulted largely from net payments on our credit facilities of $49.1 million. For the first three months of fiscal year 2024, net cash provided by financing activities of $14.0 million resulted largely from net borrowings on our credit facilities of $15.4 million primarily for working capital purposes and capital expenditures.

Current wording

For the first six months of fiscal year 2025, net cash used for financing activities of $97.3 million resulted largely from net payments on our credit facilities of $89.8 million. For the first six months of fiscal year 2024, net cash provided by financing activities of $38.9 million resulted largely from net borrowings on our credit facilities of $40.3 million.

Previous wording

The Company maintains a U.S. primary credit facility (the “primary credit facility”) scheduled to mature May 4, 2027. The primary credit facility provides for $300 million in borrowings, with an option to increase the amount available for borrowing to $450 million at the Company’s request, subject to the consent of each lender participating in such increase. The Company also maintains a 364-day multi-currency revolving credit facility (the “secondary credit facility”), which allows for borrowings up to $100 million and has a maturity date of January 3, 2025. The proceeds of the loans on the primary credit facility and the secondary credit facility are to be used for working capital and general corporate purposes of the Company. We were in compliance with the financial covenants of the primary and secondary credit facilities during the period ended September 30, 2024.

Current wording

The Company maintains a U.S. primary credit facility (the “primary credit facility”) scheduled to mature May 4, 2027. The primary credit facility provides for $300 million in revolving borrowings, with an option to increase the amount available for borrowing to $450 million at the Company’s request, subject to the consent of each lender participating in such increase. On December 20, 2024, the Company entered into an amended and restated credit agreement which resulted in the addition of a term loan borrowing, allowing for term loan borrowings of $100 million repayable in scheduled quarterly installments, and is scheduled to mature on December 20, 2029. This facility is maintained for working capital and general corporate purposes of the Company. The Company terminated its 364-day multi-currency revolving credit facility (the “secondary credit facility”), which previously allowed for borrowings up to $100 million and had a maturity date of January 3, 2025. We were in compliance with the financial covenants of the primary credit facility during the period ended December 31, 2024.

Previous wording

We participate in our customers’ supply chain financing arrangements in order to extend terms for the customer without negatively impacting our cash flow. These arrangements in all cases do not contain recourse provisions which would obligate us in the event of our customers’ failure to pay. Receivables are considered sold when they are transferred beyond the reach of Kimball Electronics and its creditors, the purchaser has the right to pledge or exchange the receivables, and we have surrendered control over the transferred receivables. In the three months ended September 30, 2024 and 2023, we sold, without recourse, $87.3 million and $103.0 million of accounts receivable, respectively. See Note 1 - Business Description and Summary of Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements for more information regarding the factoring arrangements.

Current wording

We participate in our customers’ supply chain financing arrangements in order to extend terms for the customer without negatively impacting our cash flow. These arrangements in all cases do not contain recourse provisions which would obligate us in the event of our customers’ failure to pay. Receivables are considered sold when they are transferred beyond the reach of Kimball Electronics and its creditors, the purchaser has the right to pledge or exchange the receivables, and we have surrendered control over the transferred receivables. In the six months ended December 31, 2024 and 2023, we sold, without recourse, $169.0 million and $198.9 million of accounts receivable, respectively. See Note 1 - Business Description and Summary of Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements for more information regarding the factoring arrangements.

Previous wording

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 $186.8 million at September 30, 2024, including the $100 million secondary credit facility. Our secondary credit facility matures on January 3, 2025. Additionally, accounts receivable factoring arrangements could provide flexible access to cash as needed. While our primary credit facility includes a covenant that limits the amount of sold receivables outstanding at any time, currently and historically, we have been considerably below this limit.

Current wording

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 $226.4 million at December 31, 2024. Additionally, accounts receivable factoring arrangements could provide flexible access to cash as needed.

Previous wording

We expect to continue to prudently invest in capital expenditures, including for capacity expansions and potential acquisitions, that would help us continue our growth as a multifaceted manufacturing solutions company. At September 30, 2024, our capital expenditure commitments were approximately $13 million, consisting primarily of capital related to new program wins. We anticipate our available liquidity will be sufficient to fund these capital expenditures.

Current wording

We expect to continue to prudently invest in capital expenditures, including for capacity expansions and potential acquisitions, that would help us continue our growth as a multifaceted manufacturing solutions company. At December 31, 2024, our capital expenditure commitments were approximately $17 million, consisting primarily of capital related to new program wins. We anticipate our available liquidity will be sufficient to fund these capital expenditures.

Previous wording

We expect to continue our restructuring efforts, including the closure of our Tampa facility. We expect these restructuring efforts to be predominantly cash expenditures to be incurred over approximately the next 12 months and estimate between $10.0 million and $14.0 million of pre-tax restructuring charges, including $8.0 million to $11.0 million for Tampa exit costs. Once Tampa’s operations have ceased, we expect to sell the building and land, with the proceeds from the sale anticipated to exceed the exit costs.

Current wording

We expect to continue our restructuring efforts, including the closure of our Tampa facility. We expect these restructuring efforts to be predominantly cash expenditures to be incurred over the remainder of fiscal year 2025. We estimate additional pre-tax restructuring charges between $5 million to $6 million, including $4 million to $5 million for Tampa exit costs. Once Tampa’s operations have ceased, we expect to sell the building and land, with the proceeds from the sale anticipated to exceed the exit costs.

Previous wording

At September 30, 2024, our foreign operations held cash totaling $75.7 million. Most of our accumulated unremitted foreign earnings have been invested in active non-U.S. business operations, and it is not anticipated such earnings will be remitted to the United States. The Company continually evaluates its global cash needs. If such funds were repatriated or we determined that all or a portion of such foreign earnings are no longer permanently reinvested, we may be subject to applicable non-U.S. income and withholding taxes. Determination of the amount of any potential future unrecognized deferred tax liability on such unremitted earnings is not practicable and is recorded in the period when any foreign earnings are determined to be no longer permanently reinvested.

Current wording

At December 31, 2024, our foreign operations held cash totaling $46.1 million. Most of our accumulated unremitted foreign earnings have been invested in active non-U.S. business operations, and it is not anticipated such earnings will be remitted to the United States. The Company continually evaluates its global cash needs. If such funds were repatriated or we determined that all or a portion of such foreign earnings are no longer permanently reinvested, we may be subject to applicable non-U.S. income and withholding taxes. Determination of the amount of any potential future unrecognized deferred tax liability on such unremitted earnings is not practicable and is recorded in the period when any foreign earnings are determined to be no longer permanently reinvested.

Previous wording

The Company’s Repurchase Plan allows the repurchase of up to $100 million of our common stock. Purchases may be made under various programs, including in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions, all in accordance with applicable securities laws and regulations. The Repurchase Plan has no expiration date but may be suspended or discontinued at any time. The extent to which the Company repurchases its shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements, and other corporate considerations, as determined by the Company’s management team. The Company expects to finance the purchases with existing liquidity. The Company has repurchased $94.7 million of common stock under the Repurchase Plan through September 30, 2024.

Current wording

The Company’s Repurchase Plan allows the repurchase of up to $120 million of our common stock. Purchases may be made under various programs, including in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions, all in accordance with applicable securities laws and regulations. The Repurchase Plan has no expiration date but may be suspended or discontinued at any time. The extent to which the Company repurchases its shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements, and other corporate considerations, as determined by the Company’s management team. The Company expects to finance the purchases with existing liquidity. The Company has repurchased $97.7 million of common stock under the Repurchase Plan through December 31, 2024.

Previous wording

During the first quarter of fiscal year 2025, 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 9 - Fair Valueof Notes to Condensed Consolidated Financial Statements for additional information.

Current wording

During the second quarter of fiscal year 2025, 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 9 - Fair Valueof Notes to Condensed Consolidated Financial Statements for additional information.