Company Quick10K Filing
Quick10K
Kimball Electronics
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$15.67 25 $398
10-Q 2019-03-31 Quarter: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-K 2018-06-30 Annual: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-K 2017-06-30 Annual: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-K 2016-06-30 Annual: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-K 2015-06-30 Annual: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
8-K 2019-07-31 Earnings, Exhibits
8-K 2019-05-28 Regulation FD, Exhibits
8-K 2019-05-07 Earnings, Exhibits
8-K 2019-02-25 Regulation FD, Exhibits
8-K 2019-02-06 Earnings, Exhibits
8-K 2018-11-08 Officers, Shareholder Vote, Regulation FD, Other Events, Exhibits
8-K 2018-11-06 Earnings, Exhibits
8-K 2018-10-01 Other Events, Exhibits
8-K 2018-08-29 Regulation FD, Exhibits
8-K 2018-07-27 Enter Agreement, Earnings, Off-BS Arrangement, Exhibits
8-K 2018-06-26 Regulation FD, Exhibits
8-K 2018-05-11 Enter Agreement, Exhibits
8-K 2018-05-02 Earnings, Exhibits
8-K 2018-02-07 Earnings, Exhibits
ESRT Empire State Realty Trust 4,690
JCOM J2 Global 4,420
AIMC Altra Industrial Motion 2,290
NWN Northwest Natural Holding Company 1,950
INTL Intl Fcstone 717
GPL Great Panther Silver 227
LQDT Liquidity Services 221
SCPH Scpharmaceuticals 66
CVSI CV Sciences 0
ANCB Anchor Bancorp 0
KE 2019-03-31
Part I. Financial Information
Item 1. Financial Statements
Note 1. Business Description and Summary of Significant Accounting Policies
Note 2. Acquisition
Note 3. Revenue From Contracts with Customers
Note 4. Inventories
Note 5. Accumulated Other Comprehensive Income (Loss)
Note 6. Commitments and Contingent Liabilities
Note 7. Credit Facilities
Note 8. Fair Value
Note 9. Derivative Instruments
Note 10. Investments
Note 11. Postemployment Benefits
Note 12. Stock Compensation Plans
Note 13. Goodwill and Other Intangible Assets
Note 14. Share Owners' Equity
Note 15. Earnings per Share
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-10.1 exhibit101summarycompensat.htm
EX-31.1 exhibit31103312019q310q.htm
EX-31.2 exhibit31203312019q310q.htm
EX-32.1 exhibit32103312019q310q.htm
EX-32.2 exhibit32203312019q310q.htm

Kimball Electronics Earnings 2019-03-31

KE 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 ke03312019q310q.htm KIMBALL ELECTRONICS, INC. FORM 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number    001-36454
keilogoonelinecolorcmyk2revi.jpg
KIMBALL ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
Indiana
 
35-2047713
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
1205 Kimball Boulevard, Jasper, Indiana
 
47546
(Address of principal executive offices)
 
(Zip Code)
(812) 634-4000
Registrant’s telephone number, including area code
Not Applicable
Former name, former address and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
Yes  x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes  x   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o
Accelerated filer  x
Emerging growth company  o
Non-accelerated filer  o         
Smaller reporting company  o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes  o    No  x
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
Trading Symbol
Name of each exchange on which registered
Common Stock, no par value
KE
The NASDAQ Stock Market LLC

The number of shares outstanding of the Registrant’s common stock as of April 23, 2019 was 25,418,807 shares.




KIMBALL ELECTRONICS, INC.
FORM 10-Q
INDEX
 
Page No.
 
 
 
 
PART I    FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II    OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

KIMBALL ELECTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except for Share Data)
 
(Unaudited)
 
 

 
March 31,
2019
 
June 30,
2018
ASSETS
 

 
 

Current Assets:
 

 
 

Cash and cash equivalents
$
47,150

 
$
46,428

Receivables, net of allowances of $317 and $482, respectively
225,775

 
173,559

Contract assets
52,222

 

Inventories
213,200

 
201,596

Prepaid expenses and other current assets
23,893

 
15,405

Total current assets
562,240

 
436,988

Property and Equipment, net of accumulated depreciation of $211,681 and $198,672, respectively
140,560

 
137,210

Goodwill
11,409

 
6,191

Other Intangible Assets, net of accumulated amortization of $29,063 and $27,276, respectively
23,038

 
4,375

Other Assets
24,633

 
23,994

Total Assets
$
761,880

 
$
608,758

 
 
 
 
LIABILITIES AND SHARE OWNERSEQUITY
 
 
 
Current Liabilities:
 
 
 
Current portion of borrowings under credit facilities
$
35,544

 
$
8,337

Accounts payable
209,819

 
187,788

Accrued expenses
39,385

 
32,446

Total current liabilities
284,748

 
228,571

Other Liabilities:
 
 
 
Long-term debt under credit facilities, less current portion
91,500

 

Long-term income taxes payable
10,937

 
12,361

Other long-term liabilities
15,220

 
12,299

Total other liabilities
117,657

 
24,660

Share Owners’ Equity:
 
 
 
Preferred stock-no par value
 
 
 
Shares authorized: 15,000,000
Shares issued: None

 

Common stock-no par value
 
 
 
Shares authorized: 150,000,000
Shares issued: 29,430,000

 

Additional paid-in capital
304,515

 
304,215

Retained earnings
126,457

 
99,374

Accumulated other comprehensive loss
(9,080
)
 
(6,899
)
Treasury stock, at cost:

 

Shares: 4,011,000 and 2,898,000, respectively
(62,417
)
 
(41,163
)
Total Share Owners’ Equity
359,475

 
355,527

Total Liabilities and Share Owners’ Equity
$
761,880

 
$
608,758



3



KIMBALL ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except for Per Share Data)
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
March 31
 
March 31
(Unaudited)
2019
 
2018
 
2019
 
2018
Net Sales
$
313,454

 
$
283,938

 
$
863,223

 
$
795,293

Cost of Sales
286,900

 
261,057

 
798,039

 
732,038

Gross Profit
26,554

 
22,881

 
65,184

 
63,255

Selling and Administrative Expenses
12,057

 
11,751

 
33,535

 
32,483

Other General Income

 

 
(92
)
 

Operating Income
14,497

 
11,130

 
31,741

 
30,772

Other Income (Expense):
 
 
 
 
 
 
 
Interest income
19

 
14

 
42

 
50

Interest expense
(1,165
)
 
(140
)
 
(2,644
)
 
(369
)
Non-operating income (expense), net
1,323

 
2,125

 
632

 
4,097

Other income (expense), net
177

 
1,999

 
(1,970
)
 
3,778

Income Before Taxes on Income
14,674

 
13,129

 
29,771

 
34,550

Provision for Income Taxes
2,825

 
2,294

 
5,738

 
23,582

Net Income
$
11,849

 
$
10,835

 
$
24,033

 
$
10,968

 
 
 
 
 
 
 
 
Earnings Per Share of Common Stock:
 

 
 

 
 
 
 
Basic
$
0.46

 
$
0.41

 
$
0.92

 
$
0.41

Diluted
$
0.46

 
$
0.40

 
$
0.92

 
$
0.41

 
 
 
 
 
 
 
 
Average Number of Shares Outstanding:
 
 
 
 
 
 
 
Basic
25,479

 
26,714

 
25,993

 
26,779

Diluted
25,568

 
26,846

 
26,181

 
27,006




4



KIMBALL ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
 
Three Months Ended
 
Three Months Ended
 
March 31, 2019
 
March 31, 2018
(Unaudited)
Pre-tax
 
Tax
 
Net of Tax
 
Pre-tax
 
Tax
 
Net of Tax
Net income
 
 
 
 
$
11,849

 
 
 
 
 
$
10,835

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
(1,693
)
 
$

 
$
(1,693
)
 
$
2,699

 
$

 
$
2,699

Tax Reform impact

 

 

 

 
49

 
49

Postemployment severance actuarial change
61

 
(15
)
 
46

 
134

 
(49
)
 
85

Derivative gain (loss)
748

 
(161
)
 
587

 
1,009

 
(321
)
 
688

Reclassification to (earnings) loss:
 
 
 
 
 
 
 
 
 
 
 
Derivatives
(561
)
 
110

 
(451
)
 
457

 
(57
)
 
400

Amortization of actuarial change
(120
)
 
29

 
(91
)
 
(93
)
 
41

 
(52
)
Other comprehensive income (loss)
$
(1,565
)
 
$
(37
)
 
$
(1,602
)
 
$
4,206

 
$
(337
)
 
$
3,869

Total comprehensive income
 
 
 
 
$
10,247

 
 
 
 
 
$
14,704

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
Nine Months Ended
 
March 31, 2019
 
March 31, 2018
(Unaudited)
Pre-tax
 
Tax
 
Net of Tax
 
Pre-tax
 
Tax
 
Net of Tax
Net income
 
 
 
 
$
24,033

 
 
 
 
 
$
10,968

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
(3,717
)
 
$

 
$
(3,717
)
 
$
7,561

 
$

 
$
7,561

Tax Reform impact

 

 

 

 
49

 
49

Postemployment severance actuarial change
371

 
(89
)
 
282

 
398

 
(146
)
 
252

Derivative gain (loss)
2,487

 
(517
)
 
1,970

 
(1,033
)
 
276

 
(757
)
Reclassification to (earnings) loss:
 
 
 
 
 
 
 
 
 
 
 
Derivatives
(546
)
 
94

 
(452
)
 
961

 
(56
)
 
905

Amortization of actuarial change
(348
)
 
84

 
(264
)
 
(258
)
 
103

 
(155
)
Other comprehensive income (loss)
$
(1,753
)
 
$
(428
)
 
$
(2,181
)
 
$
7,629

 
$
226

 
$
7,855

Total comprehensive income
 
 
 
 
$
21,852

 
 
 
 
 
$
18,823

 
 
 
 
 
 
 
 
 
 
 
 


5



KIMBALL ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
 
 
 
Nine Months Ended
 
March 31
(Unaudited)
2019
 
2018
Cash Flows From Operating Activities:
 
 
 
Net income
$
24,033

 
$
10,968

Adjustments to reconcile net income to net cash (used for) provided by operating activities:
 
 
Depreciation and amortization
21,487

 
19,579

Gain on sales of assets
(6
)
 
(17
)
Deferred income tax and other deferred charges
(1,846
)
 
2,793

Deferred tax valuation allowance
(410
)
 

Stock-based compensation
4,261

 
3,867

Other, net
(278
)
 
236

Change in operating assets and liabilities:
 
 
 
Receivables
(37,399
)
 
(18,193
)
Contract assets
(8,981
)
 

Inventories
(43,786
)
 
(47,049
)
Prepaid expenses and other current assets
(4,560
)
 
3,388

Accounts payable
24,339

 
36,011

Accrued expenses and taxes payable
4,166

 
9,305

Net cash (used for) provided by operating activities
(18,980
)
 
20,888

Cash Flows From Investing Activities:
 
 
 
Capital expenditures
(15,238
)
 
(21,505
)
Proceeds from sales of assets
467

 
218

Payments for acquisitions, net of cash acquired
(43,889
)
 

Purchases of capitalized software
(792
)
 
(567
)
Other, net
(12
)
 
31

Net cash used for investing activities
(59,464
)
 
(21,823
)
Cash Flows From Financing Activities:
 
 
 
Proceeds from credit facilities
91,500

 

Payments on credit facilities
(12,843
)
 

Additional net change in revolving credit facilities
27,300

 
6,250

Repurchases of common stock
(23,431
)
 
(6,460
)
Payments related to tax withholding for stock-based compensation
(1,766
)
 
(1,508
)
Debt issuance costs
(445
)
 

Net cash provided by (used for) financing activities
80,315

 
(1,718
)
Effect of Exchange Rate Change on Cash and Cash Equivalents
(1,149
)
 
2,342

Net Increase (Decrease) in Cash and Cash Equivalents
722

 
(311
)
Cash and Cash Equivalents at Beginning of Period
46,428

 
44,555

Cash and Cash Equivalents at End of Period
$
47,150

 
$
44,244

Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Income taxes
$
7,453

 
$
12,305

Interest expense
$
1,765

 
$
281



6



KIMBALL ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHARE OWNERS’ EQUITY
(Amounts in Thousands, Except for Share Data)
 
Three Months Ended
 
 
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Treasury Stock
 
Total Share Owners’ Equity
(Unaudited)
Additional Paid-In Capital
 
Amounts at December 31, 2018
$
303,125

 
$
114,608

 
$
(7,478
)
 
$
(57,678
)
 
$
352,577

Net income
 
 
11,849

 
 
 
 
 
11,849

Other comprehensive income (loss)
 
 
 
 
(1,602
)
 
 
 
(1,602
)
Compensation expense related to stock compensation plans
1,390

 
 
 
 
 
 
 
1,390

Repurchase of Common Stock (295,000 shares)
 
 
 
 
 
 
(4,739
)
 
(4,739
)
Amounts at March 31, 2019
$
304,515

 
$
126,457

 
$
(9,080
)
 
$
(62,417
)
 
$
359,475

 
 
 
 
 
 
 
 
 
 
Amounts at December 31, 2017
$
301,441

 
$
82,804

 
$
(5,098
)
 
$
(38,071
)
 
$
341,076

Net income
 
 
10,835

 
 
 
 
 
10,835

Other comprehensive income
 
 
 
 
3,869

 
 
 
3,869

Cumulative effect of accounting change
 
 
(49
)
 
 
 
 
 
(49
)
Compensation expense related to stock compensation plans
1,387

 
 
 
 
 
 
 
1,387

Amounts at March 31, 2018
$
302,828

 
$
93,590

 
$
(1,229
)
 
$
(38,071
)
 
$
357,118

 
Nine Months Ended
 
 
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Treasury Stock
 
Total Share Owners’ Equity
(Unaudited)
Additional Paid-In Capital
 
Amounts at June 30, 2018
$
304,215

 
$
99,374

 
$
(6,899
)
 
$
(41,163
)
 
$
355,527

Net income
 
 
24,033

 
 
 
 
 
24,033

Other comprehensive income (loss)
 
 
 
 
(2,181
)
 
 
 
(2,181
)
Cumulative effect of accounting change
 
 
3,050

 
 
 
 
 
3,050

Issuance of non-restricted stock (4,000 shares)
28

 
 
 
 
 
44

 
72

Compensation expense related to stock compensation plans
4,167

 
 
 
 
 
 
 
4,167

Performance share issuance (203,000 shares)
(3,895
)
 
 
 
 
 
2,133

 
(1,762
)
Repurchase of Common Stock (1,320,000 shares)
 
 
 
 
 
 
(23,431
)
 
(23,431
)
Amounts at March 31, 2019
$
304,515

 
$
126,457

 
$
(9,080
)
 
$
(62,417
)
 
$
359,475

 
 
 
 
 
 
 
 
 
 
Amounts at June 30, 2017
$
302,483

 
$
82,671

 
$
(9,084
)
 
$
(33,798
)
 
$
342,272

Net income
 
 
10,968

 
 
 
 
 
10,968

Other comprehensive income
 
 
 
 
7,855

 
 
 
7,855

Cumulative effect of accounting change
 
 
(49
)
 
 
 
 
 
(49
)
Issuance of non-restricted stock (8,000 shares)
65

 
 
 
 
 
90

 
155

Compensation expense related to stock compensation plans
3,751

 
 
 
 
 
 
 
3,751

Performance share issuance (174,000 shares)
(3,471
)
 
 
 
 
 
1,963

 
(1,508
)
Repurchase of Common Stock (325,000 shares)
 
 
 
 
 
 
(6,326
)
 
(6,326
)
Amounts at March 31, 2018
$
302,828

 
$
93,590

 
$
(1,229
)
 
$
(38,071
)
 
$
357,118

  



7



KIMBALL ELECTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Business Description and Summary of Significant Accounting Policies
Business Description:
Kimball Electronics, Inc. (also referred to herein as “Kimball Electronics,” the “Company,” “we,” “us,” or “our”) is a global contract electronics manufacturing services (“EMS”) company that specializes in producing durable electronics for the automotive, medical, industrial, and public safety end markets. We offer a package of value that begins with our core competency of producing “durable electronics” and includes our set of robust processes and procedures that help us ensure that we deliver the highest levels of quality, reliability, and service throughout the entire life cycle of our customers’ products. We have been producing safety critical electronic assemblies for our automotive customers for over 30 years. We further offer diversified contract manufacturing services for non-electronic components, medical disposables, and plastics. The Company acquired GES Holdings, Inc., Global Equipment Services and Manufacturing, Inc., and its subsidiaries (collectively referred to as “GES”) on October 1, 2018, which specialize in production processing and test equipment design, volume contract manufacturing, and global contract services for industrial applications in the semiconductor, electronics, and life sciences industries. We are well recognized by customers and industry trade publications for our excellent quality, reliability, and innovative service.
Basis of Presentation:
The Condensed Consolidated Financial Statements presented herein reflect the consolidated financial position as of March 31, 2019 and June 30, 2018, results of operations for the three and nine months ended March 31, 2019 and 2018, cash flows for the nine months ended March 31, 2019 and 2018, and share owners’ equity for the three and nine months ended March 31, 2019 and 2018. The financial data presented herein is unaudited and should be read in conjunction with the annual Consolidated Financial Statements as of and for the year ended June 30, 2018 and related notes thereto included in our Annual Report on Form 10-K. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted, although we believe that the disclosures are adequate to make the information presented not misleading. Intercompany transactions and balances have been eliminated. Management believes the financial statements include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly the financial statements for the interim periods. The results of operations for the interim periods shown in this report are not necessarily indicative of results for any future interim period or for the entire fiscal year.
Revenue Recognition:
We recognize revenue in accordance with the new standard issued by the Financial Accounting Standards Board (“FASB”), Revenue from Contracts with Customers and all the related amendments (“New Revenue Guidance”). Our revenue from contracts with customers is generated primarily from manufacturing services provided for the production of electronic assemblies, components, and medical disposables built to customer’s specifications. Our customer agreements are generally not for a definitive term, but continue for the relevant product’s life cycle. Typically, our customer agreements do not commit the customer to purchase our services until a purchase order is provided, which is generally short-term in nature. Customer purchase orders primarily have a single performance obligation. Generally, the prices stated in the customer purchase orders are agreed upon prices for the manufactured product and do not vary over the term of the order, and therefore, the majority of our contracts do not contain variable consideration. In limited circumstances, we may enter into a contract where we offer our customer a rebate once specific volume thresholds have been met; in these cases, the rebates are accounted for as variable consideration.
The majority of our revenue is recognized over time as manufacturing services are performed as we manufacture a product to customer specifications with no alternative use and we have an enforceable right to payment for performance completed to date. The remaining revenue for manufacturing services is recognized when the customer obtains control of the product, typically either upon shipment or delivery of the product dependent on the terms of the contract, and the customer is able to direct the use of and obtain substantially all of the remaining benefits from the asset. We generally recognize revenue over time using costs based input methods, in which judgment is required to evaluate assumptions including the total estimated costs to determine our progress towards contract completion and to calculate the corresponding amount of revenue to recognize. Estimated costs include material, direct and indirect labor, and appropriate applied overheads. Costs based input methods are considered a faithful depiction of our efforts and progress

8



toward satisfying our performance obligations for manufacturing services and for which we believe we are entitled to payment for performance completed to date. The cumulative effect of revisions to estimates related to net contract revenues or costs are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated.
We have elected to account for shipping and handling activities related to contracts with customers as costs to fulfill our promise to transfer the associated services and products. Accordingly, we record customer payments of shipping and handling costs as a component of net sales and classify such costs as a component of cost of sales. We recognize sales net of applicable sales or value add taxes. Based on estimated product returns and price concessions, a reserve for returns and allowances is recorded at the time revenue is recognized, resulting in a reduction of net revenue.
Direct incremental costs to obtain and fulfill a contract are capitalized as a contract asset only if they are material, expected to be recovered, and are not accounted for in accordance with other guidance. Incidental items that are immaterial in the context of the contract are recognized as expense in the period incurred.
See section entitled “New Accounting Standards” below for information on the adoption of the New Revenue Guidance and our Annual Report on Form 10-K for the year ended June 30, 2018 for revenue recognition policies for periods prior to fiscal year 2019.
Notes Receivable and Trade Accounts Receivable:
Notes receivable and trade accounts receivable are recorded per the terms of the agreement or sale, and accrued interest is recognized when earned. We determine on a case-by-case basis the cessation of accruing interest, the resumption of accruing interest, the method of recording payments received on nonaccrual receivables, and the delinquency status for our limited number of notes receivable.
In the ordinary course of business, customers periodically negotiate extended payment terms on trade accounts receivable. Customary terms require payment within 30 to 45 days, with any terms beyond 45 days being considered extended payment terms. We 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. In the nine months ended March 31, 2019 and 2018, we sold, without recourse, $191.0 million and $120.1 million of accounts receivable, respectively. Factoring fees were $0.4 million and $0.3 million during the three months ended March 31, 2019 and 2018, respectively, and $1.3 million and $0.8 million during the nine months ended March 31, 2019 and 2018, respectively.
The Company’s China operation, in limited circumstances, may receive banker’s acceptance drafts from customers as payment for their trade accounts receivable. The banker’s acceptance drafts are non-interest bearing and primarily mature within six months from the origination date. The Company has the ability to sell the drafts at a discount or transfer the drafts in settlement of current accounts payable prior to the scheduled maturity date. These drafts, which totaled $2.7 million at March 31, 2019 and $3.8 million at June 30, 2018, are reflected in Receivables on the Condensed Consolidated Balance Sheets until the banker’s drafts are sold at a discount, transferred in settlement of current accounts payable, or cash is received at maturity. Banker’s acceptance drafts sold at a discount or transferred in settlement of current accounts payable during the nine months ended March 31, 2019 and 2018 were $2.3 million and $4.0 million, respectively. See Note 6 - Commitments and Contingent Liabilities of Notes to Condensed Consolidated Financial Statements for more information on banker’s acceptance drafts.
Other General Income:
Other General Income in the nine months ended March 31, 2019 included $0.1 million of pre-tax income resulting from a payment received related to a class action lawsuit in which Kimball Electronics was a class member. The lawsuit alleged that certain suppliers to the EMS industry conspired over a number of years to raise and fix the prices of certain electronic capacitors, resulting in overcharges to purchasers of those components. No Other General Income was recorded in the nine months ended March 31, 2018.

9



Non-operating Income (Expense), net:
Non-operating income (expense), net includes the impact of such items as foreign currency rate movements and related derivative gain or loss, fair value adjustments on supplemental employee retirement plan (“SERP”) investments, government subsidies, bank charges, and other miscellaneous non-operating income and expense items that are not directly related to operations. The gain (loss) on SERP investments is offset by a change in the SERP liability that is recognized in Selling and Administrative Expenses.
Components of Non-operating income (expense), net:
 
Three Months Ended
 
Nine Months Ended
 
March 31
 
March 31
(Amounts in Thousands)
2019
 
2018
 
2019
 
2018
Foreign currency/derivative gain
$
746

 
$
2,093

 
$
91

 
$
3,487

Gain on supplemental employee retirement plan investments
606

 
21

 
99

 
606

Foreign government subsidies
9

 

 
580

 
54

Other
(38
)
 
11

 
(138
)
 
(50
)
Non-operating income (expense), net
$
1,323

 
$
2,125

 
$
632

 
$
4,097

The prior period presentation in the table above has been restated due to the adoption of new guidance issued by the FASB. See section entitled “New Accounting Standards” below for information on the adoption of this new guidance for the presentation of net periodic pension cost and net periodic postretirement benefit cost.
Income Taxes:
In determining the quarterly provision for income taxes, we use an estimated annual effective tax rate which is based on expected annual income, statutory tax rates, and available tax planning opportunities in the various jurisdictions in which we operate. Unusual or infrequently occurring items are separately recognized in the quarter in which they occur.
The U.S. Tax Cuts and Jobs Act (“Tax Reform”) was enacted into law on December 22, 2017. Tax Reform made broad and complex changes to the U.S. tax code, for which complete guidance may have not yet been issued. Tax Reform changes included, but were not limited to, (i) reducing the U.S. corporate statutory tax rate, (ii) requiring a one-time transition tax on certain unremitted earnings of foreign subsidiaries that is payable over an eight-year period, (iii) eliminating U.S. federal income taxes on dividends from foreign subsidiaries, and (iv) bonus depreciation that will allow for full expensing of qualifying property. Tax Reform reduced the U.S. corporate statutory tax rate from 35% to 21% effective upon enactment. The Company has made reasonable estimates of certain effects and, therefore, has recorded provisions for net deferred tax assets at the new applicable rate and the one-time deemed repatriation tax on accumulated unremitted foreign earnings. During the current fiscal year, the Company recorded favorable adjustments to these provisions of $0.3 million, which were recorded within the twelve-month measurement period ended December 31, 2018. As of March 31, 2019, the remaining provision recorded for the one-time deemed repatriation tax is $11.9 million, including $10.9 million recorded in Long-term income taxes payable on the Condensed Consolidated Balance Sheet.
Tax Reform also subjects U.S. corporations to tax on Global Intangible Low-Taxed Income (“GILTI”), which imposes tax on foreign earnings in excess of a deemed return on tangible assets. The Company’s estimates indicate it does not have a material liability under the GILTI tax rules. The Company has elected an accounting policy to record any future GILTI related taxes in the period in which they occur.
The Company entered into a Tax Matters Agreement with Kimball International, Inc. (our “former Parent”) that governs the Company’s rights and obligations after the spin-off from former Parent on October 31, 2014 with respect to tax liabilities and benefits, tax attributes, tax contests, and other tax sharing regarding income taxes, other tax matters, and related tax returns. The Company will continue to have joint and several liabilities with former Parent with the IRS and certain U.S. state tax authorities for U.S. federal income and state taxes for the taxable periods in which the Company was a part of former Parent’s consolidated group. The tax matters agreement specifies the portion, if any, of this liability for which the Company bears responsibility, and former Parent has agreed to indemnify the Company against any amounts for which the Company is not responsible. As of both March 31, 2019 and June 30, 2018, the Company has a receivable from Kimball International recorded for $0.5 million, of which $0.4 million is a long-term receivable, and was recorded in Other Assets on the Condensed Consolidated Balance Sheets, relating to benefits from domestic research and development tax credits.

10



New Accounting Standards:
Adopted in fiscal year 2019:
In August 2018, the FASB issued guidance on changes to the disclosure requirements for fair value measurement. The new guidance modifies the disclosure requirements on fair value measurement which includes among other changes eliminating the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, eliminating the requirement to disclose the policy for timing of transfers between levels, and added a requirement to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period. We adopted this guidance early, as permitted, in our first quarter of fiscal year 2019. As this guidance only impacts disclosures related to fair value measurement, the adoption did not impact our consolidated financial position, results of operations, or cash flows.
In March 2017, the FASB issued guidance on improving the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new guidance changes how employers that sponsor defined benefit pension plans and other postretirement plans present net periodic benefit costs in the income statement. An employer is required to report the service cost component in the same line item as other compensation costs arising from services rendered by the affected employees during the period. Other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside of income from operations. The update also allows only the service cost component to be eligible for capitalization, when applicable. The amendments in this guidance were to be applied retrospectively for the presentation of the service cost component and the other components of the net benefit cost in the income statement, and prospectively for the capitalization of the service cost component in assets. We adopted this guidance in our first quarter of fiscal year 2019. We adopted the guidance on a retrospective basis for the presentation of the service cost component and the other components of the net benefit cost in the income statement. The prior period presentation has been restated. The retrospective adoption for the presentation of the service cost component and the other components of the net benefit cost in the income statement decreased our Operating income and increased our Non-operating income (expense), net by the same amount on our Condensed Consolidated Statements of Income of $110 thousand and $81 thousand for the three months ended March 31, 2019 and 2018, respectively, and $316 thousand and $222 thousand for the nine months ended March 31, 2019 and 2018, respectively. There was no effect to Net income or Earnings per share for the retrospective adoption for the presentation of the service cost component and the other components of the net benefit cost. The impact from the prospective adoption for the capitalization of only the service cost component in assets was not material.
In May 2014, the FASB issued guidance on the recognition of Revenue from Contracts with Customers. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. To achieve this core principle, the guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The guidance addresses several areas including transfer of control, contracts with multiple performance obligations, and costs to obtain and fulfill contracts. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.
The Company adopted the New Revenue Guidance for all contracts using the modified retrospective transition method. We recognized the net cumulative effect of initially applying the New Revenue Guidance as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
A majority of our sales revenue under the New Revenue Guidance will be recognized over time as manufacturing services are performed. This represents a change from our previous revenue recognition pattern as revenue was historically recognized at a point in time when title and risk of loss passed to the customer according to the terms of the contract. The remaining sales revenue for manufactured products will be recognized at a point in time when the customer obtains control of the product if the criteria to recognize revenue over time is not met for a specific contract.

11



The effect of the adoption of the New Revenue Guidance on our Condensed Consolidated Balance Sheet as of July 1, 2018, our Condensed Consolidated Statements of Income for the three and nine months ended March 31, 2019, and our Condensed Consolidated Balance Sheet as of March 31, 2019, resulting primarily from the change to recognize a majority of our revenue over time as manufacturing services are performed, were as follows:
(Amounts in Thousands)
(Unaudited)
Balance at
June 30, 2018
 
Adjustments from Adoption of New Revenue Guidance
 
Balance at
July 1, 2018
ASSETS
 
 
 
 
 
Contract assets
$

 
$
43,241

 
$
43,241

Inventories
201,596

 
(39,169
)
 
162,427

Other Assets
23,994

 
(871
)
 
23,123

 
 
 
 
 
 
LIABILITIES AND SHARE OWNERS’ EQUITY
 
 
 
 
 
Accrued expenses
32,446

 
151

 
32,597

Retained earnings
99,374

 
3,050

 
102,424

 
For the Three Months Ended
 
March 31, 2019
(Amounts in Thousands)
(Unaudited)
As Reported
 
Amounts Excluding Changes Related to New Revenue Guidance
 
Effect of Change
Income Statement
 
 
 
 
 
Net Sales
$
313,454

 
$
310,861

 
$
2,593

Cost of Sales
286,900

 
284,784

 
2,116

Gross Profit
26,554

 
26,077

 
477

 
 
 
 
 
 
Operating Income
14,497

 
14,020

 
477

 
 
 
 
 
 
Income Before Taxes on Income
14,674

 
14,197

 
477

Provision for Income Taxes
2,825

 
2,732

 
93

    Net Income
$
11,849

 
$
11,465

 
$
384

 
 
 
 
 
 
Earnings Per Share of Common Stock
 
 
 
 
 
Basic
$
0.46

 
$
0.45

 
$
0.01

Diluted
$
0.46

 
$
0.45

 
$
0.01



12



 
At or For the Nine Months Ended
 
March 31, 2019
(Amounts in Thousands)
(Unaudited)
As Reported
 
Amounts Excluding Changes Related to New Revenue Guidance
 
Effect of Change
Income Statement
 
 
 
 
 
Net Sales
$
863,223

 
$
854,242

 
$
8,981

Cost of Sales
798,039

 
789,853

 
8,186

Gross Profit
65,184

 
64,389

 
795

 
 
 
 
 
 
Operating Income
31,741

 
30,946

 
795

 
 
 
 
 
 
Income Before Taxes on Income
29,771

 
28,976

 
795

Provision for Income Taxes
5,738

 
5,583

 
155

    Net Income
$
24,033

 
$
23,393

 
$
640

 
 
 
 
 
 
Earnings Per Share of Common Stock
 
 
 
 
 
Basic
$
0.92

 
$
0.90

 
$
0.02

Diluted
$
0.92

 
$
0.89

 
$
0.03

 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
ASSETS
 
 
 
 
 
Contract assets
$
52,222

 
$

 
$
52,222

Inventories
213,200

 
260,605

 
(47,405
)
Other Assets
24,633

 
24,633

 

 
 
 
 
 
 
LIABILITIES AND SHARE OWNERS’ EQUITY
 
 
 
 
 
Accrued expenses
$
39,385

 
$
38,258

 
$
1,127

 
 
 
 
 
 
Retained earnings
$
126,457

 
$
122,767

 
$
3,690

Not Yet Adopted:
In August 2018, the FASB issued guidance on Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This new guidance amends the accounting for implementation, setup, and other upfront costs incurred in a cloud computing hosting arrangement. The amendment aligns the requirement for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendment also requires companies to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, including options to extend the agreement that is in control of the customer. The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The guidance is to be adopted either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.
In February 2016, the FASB issued guidance on leases with subsequent amendments to this new guidance in January 2018, July 2018, and December 2018. The new guidance requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by those leases and requires additional qualitative and quantitative disclosures. Under the current guidance, only capital leases are recognized on the balance sheet. The new guidance will be effective for our fiscal year 2020 interim and annual financial statements. Early application is permitted. The guidance is to be adopted using a modified retrospective transition method, with the option to recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. The Company will adopt this guidance in the first quarter of fiscal year 2020 using the optional transition method of applying the new guidance at July 1, 2019, and if applicable, recognize a cumulative effect adjustment to the beginning balance of retained earnings in

13



fiscal year 2020. Upon adoption, this new guidance will impact our consolidated financial position by increasing total assets and total liabilities as we recognize right-of-use assets and operating lease liabilities. We are currently evaluating the practical expedients and accounting policy elections as well as the overall impact of the adoption of this guidance on our consolidated financial statements.
Note 2. Acquisition
On October 1, 2018, the Company completed the acquisition of GES Holdings, Inc., Global Equipment Services and Manufacturing, Inc., and its subsidiaries (collectively referred to as “GES”). The acquisition included purchasing substantially all of the assets and assuming certain liabilities of GES Holdings, Inc., Global Equipment Services and Manufacturing, Inc., GES Infotek Pvt. Ltd., (India), GES Japan KK, Global Equipment Services and Manufacturing (Suzhou) Co., Ltd., (China), Suzhou Global Equipment Services and Trading Co., Ltd. (China), and acquiring 100% of the capital stock of Global Equipment Services & Manufacturing Vietnam Company Limited.
This acquisition supports the Company’s new platform strategy for expansion and diversification to become a multifaceted manufacturing solutions company. GES specializes in production processing and test equipment design, volume contract manufacturing, and global contract services for industrial applications in the semiconductor, electronics, and life sciences industries.
Incremental costs directly related to the acquisition totaled $1.1 million, which were expensed as incurred, including $0.2 million during the nine months ended March 31, 2019 and these costs were recorded in Selling and Administrative Expenses on our Condensed Consolidated Statements of Income. The operating results of this acquisition are included in the Company’s consolidated financial statements beginning on the acquisition date of October 1, 2018.
The GES acquisition was accounted for as a business combination. As of March 31, 2019, the Company has recorded a net adjusted purchase price of $40.1 million which includes reductions for an estimated net working capital adjustment of $7.6 million and $2.3 million for cash acquired. Cash paid, net of cash acquired, is $43.9 million, and a net receivable due from the seller has been recognized for $3.8 million. The net working capital adjustment is estimated per the asset purchase agreement and is considered preliminary, therefore the purchase price is not final. The acquisition was primarily funded with the Company’s primary credit facility. The Company has determined this acquisition is not a significant subsidiary.
The following table summarizes the preliminary purchase price allocation to assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, with the excess allocated to goodwill. The goodwill is expected to be deductible for tax purposes. The fair values of the assets acquired and the liabilities assumed presented in these financial statements are preliminary and may differ from the final purchase price allocation after the net working capital adjustment is finalized and as the Company obtains additional information during the measurement period, which will end no later than one year from the acquisition date.
(Amounts in Thousands)
October 1, 2018
Receivables
$
18,955

Inventories
7,850

Prepaid expenses and other current assets
1,424

Property and Equipment
9,100

Other Intangible Assets
19,259

Other Assets
498

Goodwill
5,218

Total assets acquired
$
62,304

 
 
Borrowings under Credit Facilities
$
12,843

Accounts payable
4,113

Accrued expenses
1,340

Other long-term liabilities
3,884

Total liabilities assumed
$
22,180

Net assets acquired
$
40,124

Income tax liabilities, indirect tax liabilities, and liabilities for unrecognized tax benefits, including interest and penalties, of $4.2 million have been recorded related to pre-closing tax periods of Global Equipment Services & Manufacturing Vietnam Company Limited of which $3.9 million is in Other long-term liabilities and $0.3 million is included in Accrued expenses. This reflects management’s best assessment of the estimated taxes, interest, and penalties that are more likely than not to be paid, or for indirect

14



taxes the probable amounts due to the tax authorities, including interest and penalties, under the applicable laws in the various jurisdictions.  Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. Included in Receivables is a related indemnification asset of $4.2 million for these estimated tax liabilities. The seller has agreed to indemnify the buyer in the purchase agreements for all taxes allocable to all pre-closing tax periods.
Other Intangible Assets include the estimated fair values for finite-lived intangible assets acquired and are listed in the table below along with their estimated useful lives which are being amortized on a straight-line basis.
(Amounts in Thousands)
Estimated
Fair Value
 
Estimated useful life
(years)
Software
$
379

 
3 to 7
Technology
$
5,060

 
5
Trade name
$
6,369

 
10
Customer relationships
$
7,451

 
15
Note 3. Revenue from Contracts with Customers
We recognize revenue in accordance with the New Revenue Guidance. See Note 1 – Business Description and Summary of Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements for more information regarding our revenue recognition policies and on the adoption of the New Revenue Guidance, including the impact on our Condensed Consolidated Balance Sheet and Condensed Consolidated Statements of Income.
Our revenue from contracts with customers is generated primarily from manufacturing services provided for the production of electronic assemblies, components, and medical disposables in automotive, medical, industrial, and public safety applications, to the specifications and designs of our customers.
The following table disaggregates our revenue by end market vertical for the three and nine months ended March 31, 2019.
 
Three Months Ended
 
Nine Months Ended
(Amounts in Millions)
March 31, 2019
 
March 31, 2019
Vertical Markets:
 
 
 
Automotive
$
127.3

 
$
345.6

Medical
99.1

 
267.0

Industrial
68.0

 
187.6

Public Safety
15.1

 
50.1

Other
4.0

 
12.9

Total net sales
$
313.5

 
$
863.2

Approximately 68% and 70% of our net sales were recognized over time under the New Revenue Guidance for the three and nine months ended March 31, 2019, respectively, as manufacturing services were performed. The remaining sales revenue was primarily recognized when the customer obtained control of the manufactured product under the New Revenue Guidance if the criteria to recognize revenue over time was not met for a specific contract. Revenue recognized for tooling, excess inventory, and other services was not material for the three and nine months ended March 31, 2019.
The timing differences of revenue recognition, billings to our customers, and cash collections from our customers result in billed accounts receivable and unbilled accounts receivable. Contract assets on the Condensed Consolidated Balance Sheet relate to unbilled accounts receivable and occur when revenue is recognized over time as manufacturing services are provided and the billing to the customer has not yet occurred as of the balance sheet date. The Contract assets as of March 31, 2019 of $52.2 million increased from the Contract assets recognized as of the initial adoption of the New Revenue Guidance on July 1, 2018 of $43.2 million as a result of timing differences between revenue recognized and the billings to our customers.
In limited circumstances, the Company may receive payments from customers in advance of the satisfaction of performance obligations primarily for tooling or other miscellaneous services or costs. These advance payments are recognized as contract liabilities until the performance obligations are completed and are included in Accrued expenses on the Condensed Consolidated Balance Sheets, which amounted to $6.5 million and $1.7 million as of March 31, 2019 and June 30, 2018, respectively.

15



Note 4. Inventories
Inventories were valued using the lower of first-in, first-out (“FIFO”) cost and net realizable value. Inventory components were as follows:
(Amounts in Thousands)
March 31, 2019
 
June 30,
2018
Finished products
$
4,263

 
$
25,552

Work-in-process
4,337

 
17,254

Raw materials
204,600

 
158,790

Total inventory
$
213,200

 
$
201,596

As a result of the adoption of the New Revenue Guidance, inventories as of March 31, 2019 have been reduced for the contracts which have been recognized in revenue over time as manufacturing services are performed. Total inventory as of March 31, 2019 is $47.4 million lower than it would have been if we had not adopted the New Revenue Guidance. Inventories as of June 30, 2018 have not been restated and continue to be reported under the accounting guidance in effect at that time. See Note 1 - Business Description and Significant Accounting Policies and Note 3 - Revenue from Contracts with Customers for further information on adoption of the New Revenue Guidance.
Note 5. Accumulated Other Comprehensive Income (Loss)
During the nine months ended March 31, 2019 and 2018, the changes in the balances of each component of Accumulated Other Comprehensive Income (Loss), net of tax, were as follows:
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
 
(Amounts in Thousands)
Foreign Currency Translation Adjustments
 
Derivative Gain (Loss)
 
Post Employment Benefits
Net Actuarial Gain
 
Accumulated Other Comprehensive Income (Loss)
Balance at June 30, 2018
$
(4,357
)
 
$
(3,379
)
 
$
837

 
$
(6,899
)
Other comprehensive income (loss) before reclassifications
(3,717
)
 
1,970

 
282

 
(1,465
)
Reclassification to (earnings) loss

 
(452
)
 
(264
)
 
(716
)
Net current-period other comprehensive income (loss)
(3,717
)
 
1,518

 
18

 
(2,181
)
Balance at March 31, 2019
$
(8,074
)
 
$
(1,861
)
 
$
855

 
$
(9,080
)
 
 
 
 
 
 
 
 
Balance at June 30, 2017
$
(6,876
)
 
$
(2,788
)
 
$
580

 
$
(9,084
)
Tax Reform impact (1)

 
(81
)
 
130

 
49

Other comprehensive income (loss) before reclassifications
7,561

 
(757
)
 
252

 
7,056

Reclassification to (earnings) loss

 
905

 
(155
)
 
750

Net current-period other comprehensive income (loss)
7,561

 
67

 
227

 
7,855

Balance at March 31, 2018
$
685

 
$
(2,721
)
 
$
807

 
$
(1,229
)
(1) In the third quarter of fiscal year 2018, the Company adopted a new accounting standard on accounting for the reclassification of certain tax effects from accumulated other comprehensive income related to Tax Reform.

16



The following reclassifications were made from Accumulated Other Comprehensive Income (Loss) to the Condensed Consolidated Statements of Income:
Reclassifications from Accumulated Other Comprehensive Income (Loss)
 
Three Months Ended
 
Nine Months Ended
 
Affected Line Item in the Condensed Consolidated Statements of Income
 
March 31
 
March 31
 
(Amounts in Thousands)
 
2019
 
2018
 
2019
 
2018
 
Derivative gain (loss) (1)
 
$
571

 
$
(457
)
 
$
541

 
$
(961
)
 
Cost of Sales
 
 
(10
)
 

 
5

 

 
Non-operating income (expense), net
 
 
(110
)
 
57

 
(94
)
 
56

 
Benefit (Provision) for Income Taxes
 
 
$
451

 
$
(400
)
 
$
452

 
$
(905
)
 
Net of Tax
Postemployment Benefits:
 
 
 
 
 
 
 
 
 
 
  Amortization of actuarial gain (2)
 
120

 
93

 
348
 
258
 
Non-operating income (expense), net
 
 
(29
)
 
(41
)
 
(84
)
 
(103
)
 
Benefit (Provision) for Income Taxes
 
 
$
91

 
$
52

 
$
264

 
$
155

 
Net of Tax
Total reclassifications for the period
 
$
542

 
$
(348
)
 
$
716

 
$
(750
)
 
Net of Tax
Amounts in parentheses indicate reductions to income.
(1) See Note 9 - Derivative Instruments of Notes to Condensed Consolidated Financial Statements for further information on derivative instruments.
(2) See Note 11 - Postemployment Benefits of Notes to Condensed Consolidated Financial Statements for further information on postemployment benefit plans. See Note 1 - Business Description and Significant Accounting Policies for further information on the restatement of the prior period presentation in the table above due to the adoption of new guidance issued by the FASB.
Note 6. Commitments and Contingent Liabilities
Standby letters of credit may be issued to third-party suppliers and insurance institutions and can only be drawn upon in the event of the Company’s failure to pay its obligations to a beneficiary. As of March 31, 2019, we had a maximum financial exposure from unused standby letters of credit totaling $0.4 million. We don’t expect circumstances to arise that would require us to perform under any of these arrangements and believe that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect our condensed consolidated financial statements. Accordingly, no liability has been recorded as of March 31, 2019 with respect to the standby letters of credit. The Company also may enter into commercial letters of credit to facilitate payments to vendors and from customers.
The Company’s China operation, in limited circumstances, receives banker’s acceptance drafts from customers as settlement for their trade accounts receivable. We in turn may transfer the acceptance drafts to a supplier of ours in settlement of current accounts payable. These drafts contain certain recourse provisions afforded to the transferee under laws of The People’s Republic of China. If a transferee were to exercise its available recourse rights, the draft would revert back to our China operation and we would be required to satisfy the obligation with the transferee. At March 31, 2019, the drafts transferred and outstanding totaled $1.5 million. No transferee has exercised their recourse rights against us. For additional information on banker’s acceptance drafts, see Note 1 – Business Description and Summary of Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements.
The Company provides only assurance-type warranties for a limited time period, which cover workmanship and assures the product complies with specifications provided by or agreed upon with the customer. We maintain a provision for limited warranty repair or replacement of products manufactured and sold, which has been established in specific manufacturing contract agreements. We estimate product warranty liability at the time of sale based on historical repair or replacement cost trends in conjunction with the length of the warranty offered. Management refines the warranty liability periodically based on changes in historical cost trends and in certain cases where specific warranty issues become known.

17



Changes in the product warranty accrual for the nine months ended March 31, 2019 and 2018 were as follows:
 
Nine Months Ended
 
March 31
(Amounts in Thousands)
2019
 
2018
Product warranty liability at the beginning of the period
$
656

 
$
593

Additions to warranty accrual (including changes in estimates)
40

 
396

Settlements made (in cash or in kind)
(40
)
 
(135
)
Product warranty liability at the end of the period
$
656

 
$
854

Note 7. Credit Facilities
Credit facilities consisted of the following:
 
Availability to Borrow at
 
Borrowings Outstanding at
 
Borrowings Outstanding at
(Amounts in Millions, in U.S Dollar Equivalents)
March 31, 2019
 
March 31, 2019
 
June 30, 2018
Primary credit facility (1) 
$
24.8

 
$
124.8

 
$
6.0

Thailand overdraft credit facility (2) 
2.8

 

 

China revolving credit facility (2) 
7.5

 

 

Netherlands revolving credit facility (2)
8.1

 
2.2

 
2.3

Poland revolving credit facility (3)
16.8

 

 

Total credit facilities
$
60.0

 
$
127.0

 
$
8.3

Less: current portion
 
 
$
(35.5
)
 
$
(8.3
)
Long-term debt under credit facilities, less current portion (4)


 
$
91.5

 
$

(1)
At March 31, 2019, the Company maintains a U.S. primary credit facility (the “primary facility”) dated as of July 27, 2018 and scheduled to mature in July 2023. The primary facility provides for $150 million in borrowings, with an option to increase the amount available for borrowing to $225 million upon request, subject to the consent of each lender participating in such increase. This facility is maintained for working capital and general corporate purposes of the Company including capital expenditures and potential acquisitions. A commitment fee is payable on the unused portion of the credit facility at a rate that ranges from 20.0 to 25.0 basis points per annum as determined by the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA, as defined in the primary facility. Types of borrowings available on the primary facility include revolving loans, multi-currency term loans, and swingline loans. The interest rate on borrowings is dependent on the type of borrowings.
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.
The Company had $0.4 million in letters of credit contingently committed against the credit facility at March 31, 2019.
(2)
At March 31, 2019, the Company also maintains foreign credit facilities in Thailand, China, and the Netherlands. For more information on these foreign credit facilities, refer to our Annual Report on Form 10-K for the year ended June 30, 2018.
(3)
During the current fiscal year, the Company established an uncommitted revolving credit facility for our Poland operation, which allows for borrowings up to 15 million Euro that can be drawn in Euro, U.S. dollars, or Polish Zloty. Proceeds from the facility are to be used for general working capital purposes. Interest on borrowing under this facility is charged at a rate of interest dependent on the denomination of the currency borrowed. The facility matures on December 20, 2019.
(4)
The amount of Long-term debt, less current maturities at March 31, 2019 reflects the borrowings on the primary facility that the Company intends, and has the ability, to refinance for a period longer than twelve months.
The weighted-average interest rate on the borrowings outstanding under the credit facilities at March 31, 2019 was 4.39%.

18




Note 8. Fair Value
The Company categorizes assets and liabilities measured at fair value into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas level 3 generally requires significant management judgment. The three levels are defined as follows:
Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2: Observable inputs other than those included in level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
There were no changes in the inputs or valuation techniques used to measure fair values during the nine months ended March 31, 2019. For more information on inputs and fair valuation techniques used, refer to our Annual Report on Form 10-K for the year ended June 30, 2018.
Recurring Fair Value Measurements:
As of March 31, 2019 and June 30, 2018, the fair values of financial assets and liabilities that are measured at fair value on a recurring basis using the market approach are categorized as follows:
 
March 31, 2019
(Amounts in Thousands)
Level 1
 
Level 2
 
Total
Assets
 
 
 
 
 
Cash equivalents
$
1,116

 
$

 
$
1,116

Derivatives: foreign exchange contracts

 
2,578

 
2,578

Trading securities: mutual funds held in nonqualified SERP
9,030

 

 
9,030

Total assets at fair value
$
10,146

 
$
2,578

 
$
12,724

Liabilities
 

 
 

 
 

Derivatives: foreign exchange contracts
$

 
$
432

 
$
432

Total liabilities at fair value
$

 
$
432

 
$
432

 
 

 
 

 
 

 
June 30, 2018
(Amounts in Thousands)
Level 1
 
Level 2
 
Total
Assets
 
 
 
 
 
Cash equivalents
$
1,099

 
$

 
$
1,099

Derivatives: foreign exchange contracts

 
1,713

 
1,713

Trading securities: mutual funds held in nonqualified SERP
8,769

 

 
8,769

Total assets at fair value
$
9,868

 
$
1,713

 
$
11,581

Liabilities
 

 
 

 
 

Derivatives: foreign exchange contracts
$

 
$
1,867

 
$
1,867

Total liabilities at fair value
$

 
$
1,867

 
$
1,867

We had no level 3 assets or liabilities measured at fair value during the nine months ended March 31, 2019.

19



Nonqualified supplemental employee retirement plan (“SERP”) assets consist primarily of equity funds, balanced funds, bond funds, and a money market fund. The SERP investment assets are offset by a SERP liability which represents Kimball Electronics’ obligation to distribute SERP funds to participants. See Note 10 - Investments of Notes to Condensed Consolidated Financial Statements for further information regarding the SERP.
Financial Instruments Not Carried At Fair Value:
Financial instruments that are not reflected in the Condensed Consolidated Balance Sheets at fair value that have carrying amounts which approximate fair value include notes receivable and borrowings under credit facilities. There were no changes to the inputs and valuation techniques used to assess the fair value of these financial instruments during the nine months ended March 31, 2019. For more information on inputs and fair valuation techniques used, refer to our Annual Report on Form 10-K for the year ended June 30, 2018.
The carrying value of our cash deposit accounts, trade accounts receivable, and trade accounts payable approximates fair value due to the relatively short maturity and immaterial non-performance risk.

Note 9. Derivative Instruments
Foreign Exchange Contracts:
We operate internationally and are therefore exposed to foreign currency exchange rate fluctuations in the normal course of business. Our primary means of managing this exposure is to utilize natural hedges, such as aligning currencies used in the supply chain with the sale currency. To the extent natural hedging techniques do not fully offset currency risk, we use derivative instruments with the objective of reducing the residual exposure to certain foreign currency rate movements. Factors considered in the decision to hedge an underlying market exposure include the materiality of the risk, the volatility of the market, the duration of the hedge, the degree to which the underlying exposure is committed to, and the availability, effectiveness, and cost of derivative instruments. Derivative instruments are only utilized for risk management purposes and are not used for speculative or trading purposes.
We use forward contracts designated as cash flow hedges to protect against foreign currency exchange rate risks inherent in forecasted transactions denominated in a foreign currency. Foreign exchange contracts are also used to hedge against foreign currency exchange rate risks related to intercompany balances denominated in currencies other than the functional currencies. As of March 31, 2019, we had outstanding foreign exchange contracts to hedge currencies against the U.S. dollar in the aggregate notional amount of $32.0 million and to hedge currencies against the Euro in the aggregate notional amount of 73.3 million Euro. The notional amounts are indicators of the volume of derivative activities but may not be indicators of the potential gain or loss on the derivatives.
In limited cases due to unexpected changes in forecasted transactions, cash flow hedges may cease to meet the criteria to be designated as cash flow hedges. Depending on the type of exposure hedged, we may either purchase a derivative contract in the opposite position of the undesignated hedge or may retain the hedge until it matures if the hedge continues to provide an adequate offset in earnings against the currency revaluation impact of foreign currency denominated liabilities.
The fair value of outstanding derivative instruments is recognized on the balance sheet as a derivative asset or liability. When derivatives are settled with the counterparty, the derivative asset or liability is relieved and cash flow is impacted for the net settlement. For derivative instruments that meet the criteria of hedging instruments under FASB guidance, the effective portions of the gain or loss on the derivative instrument are initially recorded net of related tax effect in Accumulated Other Comprehensive Income (Loss), a component of Share Owners’ Equity, and are subsequently reclassified into earnings in the period or periods during which the hedged transaction is recognized in earnings. The ineffective portion of the derivative gain or loss is reported immediately in Non-operating income (expense), net on the Condensed Consolidated Statements of Income. The gain or loss associated with derivative instruments that are not designated as hedging instruments or that cease to meet the criteria for hedging under FASB guidance is also reported immediately in Non-operating income (expense), net on the Condensed Consolidated Statements of Income.
Based on fair values as of March 31, 2019, we estimate that approximately $0.3 million of pre-tax derivative gain deferred in Accumulated Other Comprehensive Loss will be reclassified into earnings, along with the earnings effects of related forecasted transactions, within the next 12 months. Gains on foreign exchange contracts are generally offset by losses in operating income in the income statement when the underlying hedged transaction is recognized in earnings. Because gains or losses on foreign exchange contracts fluctuate partially based on currency spot rates, the future effect on earnings of the cash flow hedges alone is not

20



determinable, but in conjunction with the underlying hedged transactions, the result is expected to be a decline in currency risk. The maximum length of time we had hedged our exposure to the variability in future cash flows was 12 months as of both March 31, 2019 and June 30, 2018.
See Note 8 - Fair Value of Notes to Condensed Consolidated Financial Statements for further information regarding the fair value of derivative assets and liabilities and the Condensed Consolidated Statements of Comprehensive Income for the changes in deferred derivative gains and losses. Information on the location and amounts of derivative fair values in the Condensed Consolidated Balance Sheets and derivative gains and losses in the Condensed Consolidated Statements of Income are presented below.
Fair Value of Derivative Instruments on the Condensed Consolidated Balance Sheets
 
Asset Derivatives
 
Liability Derivatives
 
 
 
Fair Value As of
 
 
 
Fair Value As of
(Amounts in Thousands)
Balance Sheet Location
 
March 31,
2019
 
June 30,
2018
 
Balance Sheet Location
 
March 31,
2019
 
June 30,
2018
Derivatives Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Prepaid expenses and other current assets
 
$
1,309

 
$
758

 
Accrued expenses
 
$
432

 
$
1,857

 
 
 
 

 
 

 
 
 
 

 
 

Derivatives Not Designated as Hedging Instruments:
 
 

 
 
 
 

 
 

Foreign exchange contracts
Prepaid expenses and other current assets
 
1,269

 
955

 
Accrued expenses
 

 
10

Total derivatives
 
 
$
2,578

 
$
1,713

 
 
 
$
432

 
$
1,867


The Effect of Derivative Instruments on Other Comprehensive Income (Loss)
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
March 31
 
March 31
(Amounts in Thousands)
 
 
 
2019
 
2018
 
2019
 
2018
Amount of Pre-Tax Gain or (Loss) Recognized in Other Comprehensive Income (Loss) (OCI) on Derivatives (Effective Portion):
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
 
 
$
748

 
$
1,009

 
$
2,487

 
$
(1,033
)

The Effect of Derivative Instruments on Condensed Consolidated Statements of Income
 
 
 
 
Three Months Ended
 
Nine Months Ended
(Amounts in Thousands)
 
 
 
March 31
 
March 31
Derivatives in Cash Flow Hedging Relationships
 
Location of Gain or (Loss) 
 
2019
 
2018
 
2019
 
2018
Amount of Pre-Tax Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion):
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Cost of Sales
 
$
571

 
$
(457
)
 
$
541

 
$
(961
)
Foreign exchange contracts
 
Non-operating income (expense)
 
(10
)
 

 

 

Total
 
 
 
$
561

 
$
(457
)
 
$
541

 
$
(961
)
 
 
 
 
 
 
 
 
 
 
 
Amount of Pre-Tax Loss Reclassified from Accumulated OCI into Income (Ineffective Portion):
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Non-operating income (expense)
 
$

 
$

 
$
5

 
$

 
 
 
 
 

 
 

 
 
 
 
Derivatives Not Designated as Hedging Instruments
 
 
 
 

 
 

 
 
 
 
Amount of Pre-Tax Gain or (Loss) Recognized in Income on Derivatives:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Non-operating income (expense)
 
$
1,346

 
$
(663
)
 
$
2,838

 
$
(1,744
)
 
 
 
 
 

 
 

 
 
 
 
Total Derivative Pre-Tax Gain (Loss) Recognized in Income
 
$
1,907

 
$
(1,120
)
 
$
3,384

 
$
(2,705
)


21



Note 10. Investments
The Company maintains a self-directed supplemental employee retirement plan (“SERP”) for executive and other key employees. The Company SERP utilizes a rabbi trust, and therefore assets in the SERP portfolio are subject to creditor claims in the event of bankruptcy. The Company recognizes SERP investment assets on the balance sheet at current fair value. A SERP liability of the same amount is recorded on the balance sheet representing an obligation to distribute SERP funds to participants. The SERP investment assets are classified as trading, and accordingly, realized and unrealized gains and losses are recognized in income in the other income (expense) category. Adjustments made to revalue the SERP liability are also recognized in income as selling and administrative expenses and offset valuation adjustments on SERP investment assets. The (decrease)/increase in net unrealized holding gains for the nine months ended March 31, 2019 and 2018 was, in thousands, $(158) and $480, respectively.
SERP asset and liability balances applicable to Kimball Electronics participants were as follows:
(Amounts in Thousands)
March 31,
2019
 
June 30,
2018
SERP investments - current asset
$
1,708

 
$
294

SERP investments - other long-term asset
7,322

 
8,475

    Total SERP investments
$
9,030

 
$
8,769

 
 
 
 
SERP obligation - current liability
$
1,708

 
$
294

SERP obligation - other long-term liability
7,322

 
8,475

    Total SERP obligation
$
9,030

 
$
8,769

Note 11. Postemployment Benefits
The Company maintains severance plans for all domestic employees. These plans provide severance benefits to eligible employees meeting the plans’ qualifications, primarily involuntary termination without cause. There are no statutory requirements for us to contribute to the plans, nor do employees contribute to the plans. The plans hold no assets. Benefits are paid using available cash on hand when eligible employees meet plan qualifications for payment. Benefits are based upon an employee’s years of service and accumulate up to certain limits specified in the plans and include both salary and an allowance for medical benefits. The net periodic postemployment benefit costs were not material for the nine months ended March 31, 2019 and 2018. Unusual or non-recurring severance actions are not estimable using actuarial methods and are expensed in accordance with the applicable U.S. GAAP.
 
 
 
 
 
Note 12. Stock Compensation Plans
The Company maintains a stock compensation plan, the Kimball Electronics, Inc. 2014 Stock Option and Incentive Plan (the “Plan”), which allows for the issuance of up to 4.5 million shares and may be awarded in the form of incentive stock options, stock appreciation rights, restricted shares, unrestricted shares, restricted share units, or performance shares and performance units. The Plan is a ten-year plan with no further awards allowed to be made under the Plan after October 1, 2024. The Company also maintains a nonqualified deferred stock compensation plan, the Kimball Electronics, Inc. Non-Employee Directors Stock Compensation Deferral Plan (the “Deferral Plan”), which allows Non-Employee Directors of the Company’s Board of Directors (the “Board”) to elect to defer all, or a portion of, their retainer fees in stock until retirement or termination from the Board or death. The Deferral Plan allows for issuance of up to 1.0 million shares of the Company’s common stock. For more information on the Plan and the Deferral Plan, refer to our Annual Report on Form 10-K for the year ended June 30, 2018.

22



During the first nine months of fiscal year 2019, the following stock compensation was awarded under the Plan and the Deferral Plan.
Stock Compensation Awarded
 
Quarter Awarded
 
Shares/Units
 
Grant Date Fair Value (2)
Long-Term Performance Shares (1)
 
1st Quarter
 
192,868

 

$20.05

 
 
 
 

 

Unrestricted shares (3)
 
2nd Quarter
 
4,236

 

$17.69

 
 
 
 
 
 
 
Deferred share units (Director compensation) (4)
 
2nd Quarter
 
32,758

 

$17.40


(1) Long-term performance shares were awarded to officers and other key employees. Payouts will be based upon a combination of a bonus percentage attainment component calculated under the Company’s profit sharing incentive bonus plan, adjusted to a three-year average bonus percentage, and a growth attainment component, which is the Company’s growth in sales revenue based on comparison of its three-year compounded annual growth rate (“CAGR”) with the Electronics Manufacturing Services Industry’s three-year CAGR. The long-term performance shares awarded are based on three successive annual performance measurement periods, with each annual tranche having a grant date when economic profit tiers are established and approved by the Compensation and Governance Committee of the Board near the beginning of the applicable fiscal year and a vesting date shortly after the end of each annual period. The number of shares issued will be less than the maximum shares issuable if one or both of the above-mentioned incentive metric maximum thresholds are not obtained.
(2) The grant date fair value is based on the stock price at the date of the award and for long-term performance shares is applicable to the first tranche only.
(3) Unrestricted shares were awarded to a non-employee member of the Company’s Board of Directors as compensation for the portion of director’s annual retainer fees as a result of the directors’ election to be paid in unrestricted shares in lieu of cash payment or deferred share units. Director’s fees are expensed over the period that directors earn the compensation. Unrestricted shares were also awarded to a key employee which were expensed immediately. Unrestricted shares do not have vesting periods, holding periods, restrictions on sales, or other restrictions.
(4) Deferred share units were awarded to non-employee members of the Company’s Board of Directors as compensation for the portion of director’s annual retainer fees as a result of directors’ elections to receive deferred share units in lieu of cash payment or unrestricted shares. Director’s fees are expensed over the period that directors earn the compensation. Deferred share units are participating securities and are payable in common stock upon a Director’s retirement or termination from the Board or death.

Note 13. Goodwill and Other Intangible Assets
A summary of goodwill is as follows:
(Amounts in Thousands)
 
Balance as of June 30, 2018
 
Goodwill
$
19,017

Accumulated impairment
(12,826
)
Goodwill, net
6,191

Goodwill Acquired
5,218

Balance as of March 31, 2019
 
Goodwill
24,235

Accumulated impairment
(12,826
)
Goodwill, net
$
11,409

During the first nine months of fiscal year 2019, we acquired $5.2 million in goodwill resulting from the GES acquisition. See Note 2 - Acquisition of Notes to Condensed Consolidated Financial Statements for more information on this acquisition.

23



A summary of other intangible assets subject to amortization is as follows: