Company Quick10K Filing
Kimball Electronics
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 26 $391
10-Q 2020-02-06 Quarter: 2019-12-31
10-Q 2019-11-06 Quarter: 2019-09-30
10-K 2019-08-27 Annual: 2019-06-30
10-Q 2019-05-08 Quarter: 2019-03-31
10-Q 2019-02-07 Quarter: 2018-12-31
10-Q 2018-11-07 Quarter: 2018-09-30
10-K 2018-08-28 Annual: 2018-06-30
10-Q 2018-05-03 Quarter: 2018-03-31
10-Q 2018-02-08 Quarter: 2017-12-31
10-Q 2017-11-02 Quarter: 2017-09-30
10-K 2017-08-29 Annual: 2017-06-30
10-Q 2017-05-04 Quarter: 2017-03-31
10-Q 2017-02-02 Quarter: 2016-12-31
10-Q 2016-11-03 Quarter: 2016-09-30
10-K 2016-08-25 Annual: 2016-06-30
10-Q 2016-05-05 Quarter: 2016-03-31
10-Q 2016-02-04 Quarter: 2015-12-31
10-Q 2015-11-05 Quarter: 2015-09-30
10-K 2015-08-28 Annual: 2015-06-30
10-Q 2015-05-12 Quarter: 2015-03-31
10-Q 2015-02-12 Quarter: 2014-12-31
10-Q 2014-11-19 Quarter: 2014-09-30
8-K 2020-02-24 Regulation FD, Exhibits
8-K 2020-02-05 Earnings, Exhibits
8-K 2019-12-11 Other Events, Exhibits
8-K 2019-11-19 Regulation FD, Exhibits
8-K 2019-11-07 Officers, Amend Bylaw, Shareholder Vote, Other Events, Exhibits
8-K 2019-11-05 Earnings, Exhibits
8-K 2019-09-05 Officers, Exhibits
8-K 2019-08-27 Regulation FD, Exhibits
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
KE 2019-12-31
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. Leases
Note 15. Share Owners' Equity
Note 16. 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-31.1 exhibit31112312019q210q.htm
EX-31.2 exhibit31212312019q210q.htm
EX-32.1 exhibit32112312019q210q.htm
EX-32.2 exhibit32212312019q210q.htm

Kimball Electronics Earnings 2019-12-31

KE 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
COHU 642 1,104 589 555 193 -94 -24 847 35% -35.4 -9%
VPG 469 342 108 301 123 25 48 395 41% 8.3 7%
CTRL 440 257 54 274 141 41 29 419 51% 14.7 16%
POWL 433 437 141 504 82 5 21 346 16% 16.7 1%
KE 391 764 394 1,182 88 32 75 341 7% 4.6 4%
AMOT 381 311 199 354 101 0 22 494 29% 22.0 0%
PKE 343 190 30 56 18 113 117 293 33% 2.5 60%
IIN 199 116 27 120 36 -1 2 190 30% 102.9 -1%
TRNS 193 114 53 167 40 7 16 215 24% 13.7 7%
SPA 178 225 149 389 80 2 24 177 21% 7.4 1%

10-Q 1 ke12312019q210q.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 December 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
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

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

The number of shares outstanding of the Registrant’s common stock as of January 24, 2020 was 25,198,049 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)
 
 

 
December 31,
2019
 
June 30,
2019
ASSETS
 

 
 

Current Assets:
 

 
 

Cash and cash equivalents
$
52,203

 
$
49,276

Receivables, net of allowances of $259 and $270, respectively
196,323

 
225,555

Contract assets
67,007

 
51,929

Inventories
202,402

 
203,840

Prepaid expenses and other current assets
22,578

 
24,713

Total current assets
540,513

 
555,313

Property and Equipment, net of accumulated depreciation of $224,957 and $216,955, respectively
147,761

 
143,629

Goodwill
19,936

 
18,104

Other Intangible Assets, net of accumulated amortization of $31,180 and $29,874, respectively
20,742

 
22,188

Other Assets
29,013

 
24,877

Total Assets
$
757,965

 
$
764,111

 
 
 
 
LIABILITIES AND SHARE OWNERSEQUITY
 
 
 
Current Liabilities:
 
 
 
Current portion of borrowings under credit facilities
$
27,930

 
$
34,713

Accounts payable
195,159

 
197,001

Accrued expenses
35,979

 
43,196

Total current liabilities
259,068

 
274,910

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

 
91,500

Long-term income taxes payable
9,765

 
9,765

Other long-term liabilities
20,794

 
18,082

Total other liabilities
122,059

 
119,347

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
305,041

 
305,917

Retained earnings
147,192

 
133,982

Accumulated other comprehensive loss
(8,945
)
 
(7,628
)
Treasury stock, at cost:

 

Shares: 4,235,000 and 4,011,000, respectively
(66,450
)
 
(62,417
)
Total Share Owners’ Equity
376,838

 
369,854

Total Liabilities and Share Owners’ Equity
$
757,965

 
$
764,111



3



KIMBALL ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except for Per Share Data)
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
December 31
 
December 31
(Unaudited)
2019
 
2018
 
2019
 
2018
Net Sales
$
307,084

 
$
284,149

 
$
620,469

 
$
549,769

Cost of Sales
286,573

 
263,705

 
577,765

 
511,139

Gross Profit
20,511

 
20,444

 
42,704

 
38,630

Selling and Administrative Expenses
11,827

 
10,232

 
22,905

 
21,478

Other General Income

 

 

 
(92
)
Operating Income
8,684

 
10,212

 
19,799

 
17,244

Other Income (Expense):
 
 
 
 
 
 
 
Interest income
7

 
17

 
25

 
23

Interest expense
(1,149
)
 
(1,090
)
 
(2,357
)
 
(1,479
)
Non-operating income (expense), net
1,285

 
(520
)
 
73

 
(691
)
Other income (expense), net
143

 
(1,593
)
 
(2,259
)
 
(2,147
)
Income Before Taxes on Income
8,827

 
8,619

 
17,540

 
15,097

Provision for Income Taxes
2,215

 
1,504

 
4,330

 
2,913

Net Income
$
6,612

 
$
7,115

 
$
13,210

 
$
12,184

 
 
 
 
 
 
 
 
Earnings Per Share of Common Stock:
 

 
 

 
 
 
 
Basic
$
0.26

 
$
0.27

 
$
0.52

 
$
0.46

Diluted
$
0.26

 
$
0.27

 
$
0.52

 
$
0.46

 
 
 
 
 
 
 
 
Average Number of Shares Outstanding:
 
 
 
 
 
 
 
Basic
25,247

 
25,993

 
25,371

 
26,250

Diluted
25,330

 
26,036

 
25,503

 
26,404




4



KIMBALL ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
 
Three Months Ended
 
Three Months Ended
 
December 31, 2019
 
December 31, 2018
(Unaudited)
Pre-tax
 
Tax
 
Net of Tax
 
Pre-tax
 
Tax
 
Net of Tax
Net income
 
 
 
 
$
6,612

 
 
 
 
 
$
7,115

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
2,463

 
$

 
$
2,463

 
$
(1,366
)
 
$

 
$
(1,366
)
Postemployment severance actuarial change
(69
)
 
17

 
(52
)
 
97

 
(22
)
 
75

Derivative gain (loss)
1,304

 
(297
)
 
1,007

 
(208
)
 
68

 
(140
)
Reclassification to (earnings) loss:
 
 
 
 
 
 
 
 
 
 
 
Derivatives
(899
)
 
185

 
(714
)
 
(85
)
 
11

 
(74
)
Amortization of actuarial change
(103
)
 
26

 
(77
)
 
(117
)
 
28

 
(89
)
Other comprehensive income (loss)
$
2,696

 
$
(69
)
 
$
2,627

 
$
(1,679
)
 
$
85

 
$
(1,594
)
Total comprehensive income
 
 
 
 
$
9,239

 
 
 
 
 
$
5,521

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
Six Months Ended
 
December 31, 2019
 
December 31, 2018
(Unaudited)
Pre-tax
 
Tax
 
Net of Tax
 
Pre-tax
 
Tax
 
Net of Tax
Net income
 
 
 
 
$
13,210

 
 
 
 
 
$
12,184

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
(1,202
)
 
$

 
$
(1,202
)
 
$
(2,024
)
 
$

 
$
(2,024
)
Postemployment severance actuarial change
(234
)
 
69

 
(165
)
 
310

 
(74
)
 
236

Derivative gain (loss)
1,579

 
(329
)
 
1,250

 
1,739

 
(356
)
 
1,383

Reclassification to (earnings) loss:
 
 
 
 
 
 
 
 
 
 
 
Derivatives
(1,310
)
 
265

 
(1,045
)
 
15

 
(16
)
 
(1
)
Amortization of actuarial change
(205
)
 
50

 
(155
)
 
(228
)
 
55

 
(173
)
Other comprehensive income (loss)
$
(1,372
)
 
$
55

 
$
(1,317
)
 
$
(188
)
 
$
(391
)
 
$
(579
)
Total comprehensive income
 
 
 
 
$
11,893

 
 
 
 
 
$
11,605

 
 
 
 
 
 
 
 
 
 
 
 


5



KIMBALL ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
 
 
 
Six Months Ended
 
December 31
(Unaudited)
2019
 
2018
Cash Flows From Operating Activities:
 
 
 
Net income
$
13,210

 
$
12,184

Adjustments to reconcile net income to net cash provided by (used for) operating activities:
 
 
Depreciation and amortization
14,986

 
14,007

(Gain) loss on sales of assets
6

 
(150
)
Deferred income tax and other deferred charges
441

 
(1,473
)
Deferred tax valuation allowance
377

 
(445
)
Stock-based compensation
2,175

 
2,854

Other, net
139

 
(335
)
Change in operating assets and liabilities:
 
 
 
Receivables
28,924

 
282

Contract assets
(15,078
)
 
(6,388
)
Inventories
1,313

 
(36,635
)
Prepaid expenses and other assets
1,052

 
(765
)
Accounts payable
(256
)
 
12,257

Accrued expenses and taxes payable
(8,007
)
 
213

Net cash provided by (used for) operating activities
39,282

 
(4,394
)
Cash Flows From Investing Activities:
 
 
 
Capital expenditures
(21,929
)
 
(8,517
)
Proceeds from sales of assets
91

 
401

Payments for acquisitions, net of cash acquired

 
(43,889
)
Purchases of capitalized software
(180
)
 
(648
)
Other, net
44

 
172

Net cash used for investing activities
(21,974
)
 
(52,481
)
Cash Flows From Financing Activities:
 
 
 
Proceeds from credit facilities

 
66,000

Payments on credit facilities

 
(10,386
)
Additional net change in revolving credit facilities
(6,783
)
 
12,398

Repurchases of common stock
(6,108
)
 
(18,537
)
Payments related to tax withholding for stock-based compensation
(1,012
)
 
(1,766
)
Debt issuance costs

 
(445
)
Net cash (used for) provided by financing activities
(13,903
)
 
47,264

Effect of Exchange Rate Change on Cash and Cash Equivalents
(478
)
 
(954
)
Net Increase (Decrease) in Cash and Cash Equivalents
2,927

 
(10,565
)
Cash and Cash Equivalents at Beginning of Period
49,276

 
46,428

Cash and Cash Equivalents at End of Period
$
52,203

 
$
35,863

Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Income taxes
$
4,875

 
$
4,733

Interest expense
$
2,684

 
$
1,020



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 September 30, 2019
$
304,112

 
$
140,580

 
$
(11,572
)
 
$
(63,867
)
 
$
369,253

Net income
 
 
6,612

 
 
 
 
 
6,612

Other comprehensive income (loss)
 
 
 
 
2,627

 
 
 
2,627

Issuance of non-restricted stock (3,000 shares)
21

 
 
 
 
 
44

 
65

Compensation expense related to stock compensation plans
908

 
 
 
 
 
 
 
908

Repurchase of Common Stock (179,000 shares)
 
 
 
 
 
 
(2,627
)
 
(2,627
)
Amounts at December 31, 2019
$
305,041

 
$
147,192

 
$
(8,945
)
 
$
(66,450
)
 
$
376,838

 
 
 
 
 
 
 
 
 
 
Amounts at September 30, 2018
$
301,729

 
$
107,493

 
$
(5,884
)
 
$
(44,454
)
 
$
358,884

Net income
 
 
7,115

 
 
 
 
 
7,115

Other comprehensive income (loss)
 
 
 
 
(1,594
)
 
 
 
(1,594
)
Issuance of non-restricted stock (4,000 shares)
28

 
 
 
 
 
44

 
72

Compensation expense related to stock compensation plans
1,368

 
 
 
 
 
 
 
1,368

Repurchase of Common Stock (748,000 shares)
 
 
 
 
 
 
(13,268
)
 
(13,268
)
Amounts at December 31, 2018
$
303,125

 
$
114,608

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

 
Six Months Ended
 
 
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Treasury Stock
 
Total Share Owners’ Equity
(Unaudited)
Additional Paid-In Capital
 
Amounts at June 30, 2019
$
305,917

 
$
133,982

 
$
(7,628
)
 
$
(62,417
)
 
$
369,854

Net income
 
 
13,210

 
 
 
 
 
13,210

Other comprehensive income (loss)
 
 
 
 
(1,317
)
 
 
 
(1,317
)
Issuance of non-restricted stock (4,000 shares)
22

 
 
 
 
 
48

 
70

Compensation expense related to stock compensation plans
2,138

 
 
 
 
 
 
 
2,138

Performance share issuance (181,000 shares)
(3,036
)
 
 
 
 
 
2,027

 
(1,009
)
Repurchase of Common Stock (409,000 shares)
 
 
 
 
 
 
(6,108
)
 
(6,108
)
Amounts at December 31, 2019
$
305,041

 
$
147,192

 
$
(8,945
)
 
$
(66,450
)
 
$
376,838

 
 
 
 
 
 
 
 
 
 
Amounts at June 30, 2018
$
304,215

 
$
99,374

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

Net income
 
 
12,184

 
 
 
 
 
12,184

Other comprehensive income (loss)
 
 
 
 
(579
)
 
 
 
(579
)
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
2,777

 
 
 
 
 
 
 
2,777

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

 
(1,762
)
Repurchase of Common Stock (1,025,000 shares)
 
 
 
 
 
 
(18,692
)
 
(18,692
)
Amounts at December 31, 2018
$
303,125

 
$
114,608

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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  



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, multifaceted manufacturing solutions provider. We provide contract electronics manufacturing services (“EMS”) and diversified manufacturing services, including engineering and supply chain support, to customers in the automotive, medical, industrial, and public safety end markets. 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 further offer diversified contract manufacturing services for non-electronic components, medical disposables, precision molded plastics, and production automation, test, and inspection equipment. 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 December 31, 2019 and June 30, 2019, results of operations for the three and six months ended December 31, 2019 and 2018, cash flows for the six months ended December 31, 2019 and 2018, and share owners’ equity for the three and six months ended December 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, 2019 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:
Our revenue is generated from contracts with customers primarily for manufacturing services provided for the production of electronic assemblies, components, medical disposables, and automation, test, and inspection equipment all 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 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.

8



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.
Notes Receivable and Trade Accounts Receivable:
The Company’s 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 six months ended December 31, 2019 and 2018, we sold, without recourse, $142.4 million and $127.3 million of accounts receivable, respectively. Factoring fees were $0.5 million and $0.4 million during the three months ended December 31, 2019 and 2018, respectively, and $1.1 million and $0.8 million during the six months ended December 31, 2019 and 2018, respectively. Factoring fees are recorded in Selling and Administrative Expenses on our Condensed Consolidated Statements of Income.
One of the Company’s China operations, 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 $4.0 million at December 31, 2019 and $4.2 million at June 30, 2019, 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 six months ended December 31, 2019 and 2018 were $0.8 million and $1.2 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 six months ended December 31, 2018 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. No Other General Income was recorded in the six months ended December 31, 2019.
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.

9



Components of Non-operating income (expense), net:
 
Three Months Ended
 
Six Months Ended
 
December 31
 
December 31
(Amounts in Thousands)
2019
 
2018
 
2019
 
2018
Foreign currency/derivative gain (loss)
$
770

 
$
45

 
$
(343
)
 
$
(655
)
Gain (loss) on SERP investments
502

 
(626
)
 
480

 
(507
)
Foreign government subsidies
65

 
105

 
65

 
571

Other
(52
)
 
(44
)
 
(129
)
 
(100
)
Non-operating income (expense), net
$
1,285

 
$
(520
)
 
$
73

 
$
(691
)
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.
Deferred income tax assets and liabilities, recorded in Other Assets and Other long-term liabilities, respectively, in the Condensed Consolidated Balance Sheets, are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. We evaluate the recoverability of deferred tax assets each quarter by assessing the likelihood of future taxable income and available tax planning strategies that could be implemented to realize our deferred tax assets. If recovery is not likely, we provide a valuation allowance based on our best estimate of future taxable income in the various taxing jurisdictions and the amount of deferred taxes ultimately realizable. Future events could change management’s assessment.
We operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex uncertain tax positions, which may require an extended period of time to resolve. A tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. We maintain a liability for uncertain income tax and other tax positions, including accrued interest and penalties on those positions. As tax positions are effectively settled, the tax liability is adjusted accordingly. We recognize interest and penalties related to unrecognized tax benefits in Provision for Income Taxes on the Condensed Consolidated Statements of Income.
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. As of December 31, 2019 and June 30, 2019, the remaining provision recorded for the one-time deemed repatriation tax was $9.8 million, payable through fiscal year 2026, and is recorded in Long-term income taxes payable on the Condensed Consolidated Balance Sheets.
New Accounting Standards:
Adopted in fiscal year 2020:
In February 2016, the Financial Accounting Standards Board (“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 previous guidance, only capital leases were recognized on the balance sheet. We adopted this standard on July 1, 2019, the beginning of our first quarter of fiscal year 2020, under the modified retrospective method. As allowed by the July 2018 amendment, the Company has not recast the comparative periods.
We elected the “package of practical expedients,” which permits us not to reassess under the new standard our prior conclusions about lease identification, classification, and initial direct costs. We also elected the short-term lease recognition exemption, permitting us not to recognize right-of-use assets and lease liabilities for leases with a term of 12 months or less and do not include a purchase option whose exercise is reasonably certain.

10



Lease assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our estimated incremental borrowing rate, unless the implicit rate is readily determinable. The estimated incremental borrowing rate is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.
The adoption resulted in the recognition of $2.6 million of right-of-use assets and lease liabilities on our Condensed Consolidated Balance Sheet, primarily for our real estate operating leases. The adoption did not have a material effect on our results of operations or cash flows. There was no cumulative-effect adjustment to equity. See Note 14 - Leases of Notes to Condensed Consolidated Financial Statements for more information on leases.
In August 2017, the FASB issued guidance on Derivatives and Hedging. The pronouncement expands and refines hedge accounting, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The Company adopted this during the first quarter of fiscal year 2020 with an immaterial effect on our Condensed Consolidated Financial Statements.
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 December 2019, the FASB issued guidance on Simplifying the Accounting for Income Taxes, intended to simplify various aspects related to the accounting for income taxes. The guidance is effective for fiscal years beginning after December 15, 2020 and for interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the 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 supported the Company’s strategy for growth and diversification into a multifaceted manufacturing solutions company. GES specializes in design, production, and servicing of automation, test, and inspection equipment for industrial applications in the semiconductor, electronics, and life sciences industries.
Incremental costs directly related to the acquisition has totaled $1.7 million, which were expensed as incurred and were recorded in Selling and Administrative Expenses on our Condensed Consolidated Statements of Income. These costs incurred during the three and six months ended December 31, 2019 and 2018 were not material. 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. The Company has recorded a net adjusted purchase price of $42.4 million which includes a reduction for an estimated net working capital adjustment of $7.6 million. The net working capital adjustment as provided for in the agreement is being disputed by the sellers of GES and is continuing to be resolved through the dispute resolution procedure provided for under the terms of the asset purchase agreement.
Cash paid, net of cash acquired, was $43.9 million, and a net receivable due from the seller was recognized for $3.8 million. The acquisition was primarily funded with the Company’s primary credit facility. The Company determined this acquisition is not a significant subsidiary.

11



The following table summarizes the final 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. Measurement period adjustments during the first quarter of fiscal year 2020 included a reduction of $2.0 million to Property and Equipment as a result of additional information obtained related to the valuation of certain equipment as of the acquisition date and a $0.2 million reduction in Other long-term liabilities to adjust deferred tax liabilities on the equipment. These measurement period adjustments to the purchase price allocation in the first quarter of fiscal year 2020 increased Goodwill by $1.8 million. The twelve-month measurement period ended on September 30, 2019. Adjustments after the measurement period related to the purchase price allocation, specifically as it relates to an adjustment for the final resolution of the net working capital adjustment, as applicable, will be recorded in earnings during the period of resolution and will not be reflected in goodwill. For tax purposes, $4.5 million of the goodwill recorded is expected to be deductible.
(Amounts in Thousands)
October 1, 2018
Cash
$
2,257

Receivables
15,656

Inventories
6,454

Prepaid expenses and other current assets
1,424

Property and Equipment
7,037

Other Intangible Assets
19,259

Other Assets
498

Goodwill
13,745

Total assets acquired
$
66,330

 
 
Borrowings under Credit Facilities
$
12,843

Accounts payable
4,113

Accrued expenses
1,340

Other long-term liabilities
5,653

Total liabilities assumed
$
23,949

Net assets acquired
$
42,381

Income tax liabilities, indirect tax liabilities, and liabilities for unrecognized tax benefits, including interest and penalties, of $4.2 million were recorded related to pre-closing tax periods of Global Equipment Services & Manufacturing Vietnam Company Limited of which $3.9 million was recorded in Other long-term liabilities and $0.3 million was included in Accrued expenses. This reflects management’s best assessment of the estimated taxes, interest, and penalties as of the acquisition date that are more likely than not to be paid, or for indirect 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 significantly different from our current estimate of the tax liabilities. Included in Receivables was a related indemnification asset of $4.2 million for these estimated tax liabilities. The seller has agreed to indemnify the Company 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
 
$
19,259

 
 

12




Note 3. Revenue from Contracts with Customers
The following table disaggregates our revenue by end market vertical for the three and six months ended December 31, 2019 and 2018.
 
Three Months Ended
 
Six Months Ended
 
December 31
 
December 31
(Amounts in Millions)
2019
 
2018
 
2019
 
2018
Vertical Markets:
 
 
 
 
 
 
 
Automotive
$
134.9

 
$
112.4

 
$
259.3

 
$
218.3

Medical
85.7

 
85.7

 
187.0

 
167.9

Industrial
66.4

 
62.2

 
131.1

 
119.6

Public Safety
14.6

 
17.9

 
31.7

 
35.0

Other
5.5

 
5.9

 
11.4

 
9.0

Total net sales
$
307.1

 
$
284.1

 
$
620.5

 
$
549.8

For the three months ended December 31, 2019 and 2018, approximately 69% of our net sales were recognized over time as manufacturing services were performed under a customer contract on a product with no alternative use and we have an enforceable right to payment for performance completed to date. For the six months ended December 31, 2019 and 2018, approximately 69% and 71% of our net sales, respectively, were recognized over time. The remaining sales revenues were primarily recognized at a point in time when the customer obtained control of the manufactured product.
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 Sheets relate to unbilled accounts receivable and occur when revenue is recognized over time as manufacturing services are provided and the billing to the customer has not yet occurred as of the balance sheet date. Contract assets were $67.0 million and $51.9 million as of December 31, 2019 and June 30, 2019, respectively.
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 $4.3 million and $6.3 million as of December 31, 2019 and June 30, 2019, respectively.
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)
December 31, 2019
 
June 30,
2019
Finished products
$
3,977

 
$
2,708

Work-in-process
3,306

 
4,119

Raw materials
195,119

 
197,013

Total inventory
$
202,402

 
$
203,840



13



Note 5. Accumulated Other Comprehensive Income (Loss)
During the six months ended December 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 (Loss)
 
Accumulated Other Comprehensive Income (Loss)
Balance at June 30, 2019
$
(6,848
)
 
$
(1,598
)
 
$
818

 
$
(7,628
)
Other comprehensive income (loss) before reclassifications
(1,202
)
 
1,250

 
(165
)
 
(117
)
Reclassification to (earnings) loss

 
(1,045
)
 
(155
)
 
(1,200
)
Net current-period other comprehensive income (loss)
(1,202
)
 
205

 
(320
)
 
(1,317
)
Balance at December 31, 2019
$
(8,050
)
 
$
(1,393
)
 
$
498

 
$
(8,945
)
 
 
 
 
 
 
 
 
Balance at June 30, 2018
$
(4,357
)
 
$
(3,379
)
 
$
837

 
$
(6,899
)
Other comprehensive income (loss) before reclassifications
(2,024
)
 
1,383

 
236

 
(405
)
Reclassification to (earnings) loss

 
(1
)
 
(173
)
 
(174
)
Net current-period other comprehensive income (loss)
(2,024
)
 
1,382

 
63

 
(579
)
Balance at December 31, 2018
$
(6,381
)
 
$
(1,997
)
 
$
900

 
$
(7,478
)
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
 
Six Months Ended
 
Affected Line Item in the Condensed Consolidated Statements of Income
December 31
 
December 31
 
(Amounts in Thousands)
2019
 
2018
 
2019
 
2018
 
Derivative gain (loss) (1)
$
899

 
$
87

 
$
1,310

 
$
(30
)
 
Cost of Sales
 

 
(2
)
 

 
15

 
Non-operating income (expense), net
 
(185
)
 
(11
)
 
(265
)
 
16

 
Benefit (Provision) for Income Taxes
 
$
714

 
$
74

 
$
1,045

 
$
1

 
Net of Tax
Postemployment Benefits:
 
 
 
 
 
 
 
 
 
  Amortization of actuarial gain (2)
103

 
117

 
205

 
228

 
Non-operating income (expense), net
 
(26
)
 
(28
)
 
(50
)
 
(55
)
 
Benefit (Provision) for Income Taxes
 
$
77

 
$
89

 
$
155

 
$
173

 
Net of Tax
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
$
791

 
$
163

 
$
1,200

 
$
174

 
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.

14




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 December 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 December 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.
One of the Company’s China operations, 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 December 31, 2019, the drafts transferred and outstanding totaled $0.6 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.
Changes in the product warranty accrual for the six months ended December 31, 2019 and 2018 were as follows:
 
Six Months Ended
 
December 31
(Amounts in Thousands)
2019
 
2018
Product warranty liability at the beginning of the period
$
958

 
$
656

Additions to warranty accrual (including changes in estimates)
(289
)
 
66

Settlements made (in cash or in kind)
(30
)
 
(39
)
Product warranty liability at the end of the period
$
639

 
$
683


15




Note 7. Credit Facilities
Credit facilities consisted of the following:
 
Unused Borrowings at
 
Borrowings Outstanding at
 
Borrowings Outstanding at
(Amounts in Millions, in U.S Dollar Equivalents)
December 31, 2019
 
December 31, 2019
 
June 30, 2019
Primary credit facility (1) 
$
36.9

 
$
112.7

 
$
122.8

Thailand overdraft credit facility
3.0

 

 

China revolving credit facility
7.5

 

 

Netherlands revolving credit facility
3.6

 
6.7

 
3.4

Poland revolving credit facility
16.8

 

 

Total credit facilities
$
67.8

 
$
119.4

 
$
126.2

Less: current portion
 
 
$
(27.9
)
 
$
(34.7
)
Long-term debt under credit facilities, less current portion (2)


 
$
91.5

 
$
91.5

(1)
At December 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 and will be one of the two options:
the London Interbank Offered Rate (“LIBOR”) in effect two business days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period as defined in the agreement, plus the Eurocurrency Loans spread which can range from 125.0 to 175.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA; or
the Alternate Base Rate (“ABR”), which is defined as the highest of the fluctuating rate per annum equal to the higher of
a.
JPMorgan’s prime rate;
b.
1% per annum above the Adjusted LIBOR Rate (as defined in the Credit Agreement); or
c.
1/2 of 1% per annum above the Federal Funds Effective Rate (as defined in the Credit Agreement);
plus the ABR Loans spread which can range from 25.0 to 75.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA.
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 1.1 to 1.0.
The Company had $0.4 million in letters of credit contingently committed against the credit facility at December 31, 2019.
(2)
The amount of Long-term debt, less current maturities at December 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 December 31, 2019 was 3.7%.


16



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 six months ended December 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, 2019.
Recurring Fair Value Measurements:
As of December 31, 2019 and June 30, 2019, 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:
 
December 31, 2019
(Amounts in Thousands)
Level 1
 
Level 2
 
Total
Assets
 
 
 
 
 
Cash equivalents
$
1,134

 
$

 
$
1,134

Derivatives: foreign exchange contracts

 
1,609

 
1,609

Trading securities: mutual funds held in nonqualified SERP
10,020

 

 
10,020

Total assets at fair value
$
11,154

 
$
1,609

 
$
12,763

Liabilities
 

 
 

 
 

Derivatives: foreign exchange contracts
$

 
$
446

 
$
446

Total liabilities at fair value
$

 
$
446

 
$
446

 
 

 
 

 
 

 
June 30, 2019
(Amounts in Thousands)
Level 1
 
Level 2
 
Total
Assets
 
 
 
 
 
Cash equivalents
$
1,123

 
$

 
$
1,123

Derivatives: foreign exchange contracts

 
1,832

 
1,832

Trading securities: mutual funds held in nonqualified SERP
9,268

 

 
9,268

Total assets at fair value
$
10,391

 
$
1,832

 
$
12,223

Liabilities
 

 
 

 
 

Derivatives: foreign exchange contracts
$

 
$
299

 
$
299

Total liabilities at fair value
$

 
$
299

 
$
299

We had no level 3 assets or liabilities measured at fair value during the six months ended December 31, 2019.
The nonqualified supplemental employee retirement plan (“SERP”) assets consist primarily of equity funds, balanced funds, bond funds, and a money market fund. The SERP investment assets are offset by a SERP liability which represents the Company’s obligation to distribute SERP funds to participants. See Note 10 - Investments of Notes to Condensed Consolidated Financial Statements for further information regarding the SERP.

17



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 six months ended December 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, 2019.
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 December 31, 2019, we had outstanding foreign exchange contracts to hedge currencies against the U.S. dollar in the aggregate notional amount of $30.2 million and to hedge currencies against the Euro in the aggregate notional amount of 76.6 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 gain or loss on the derivative instrument is initially recorded net of related tax effect in Accumulated Other Comprehensive Income (Loss), a component of Share Owners’ Equity, and are subsequently reclassified into earnings in the period or periods during which the hedged transaction is recognized in earnings. The gain or loss associated with derivative instruments that are not designated as hedging instruments or that cease to meet the criteria for hedging under FASB guidance is also reported immediately in Non-operating income (expense), net on the Condensed Consolidated Statements of Income.
Based on fair values as of December 31, 2019, we estimate that approximately $0.8 million of a 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 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 December 31, 2019 and June 30, 2019.

18



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.
We adopted a new accounting standard effective July 1, 2019 which eliminated the requirement to separately measure and report hedge ineffectiveness. See Note 1 - Business Description and Summary of Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements for more information on the adoption of this new accounting standard.
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
 
December 31,
2019
 
June 30,
2019
 
Balance Sheet Location
 
December 31,
2019
 
June 30,
2019
Derivatives Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Prepaid expenses and other current assets
 
$
1,231

 
$
1,136

 
Accrued expenses
 
$
262

 
$
278

 
 
 
 

 
 

 
 
 
 

 
 

Derivatives Not Designated as Hedging Instruments:
 
 

 
 
 
 

 
 

Foreign exchange contracts
Prepaid expenses and other current assets
 
378

 
696

 
Accrued expenses
 
184

 
21

Total derivatives
 
 
$
1,609

 
$
1,832

 
 
 
$
446

 
$
299

The Effect of Derivative Instruments on Other Comprehensive Income (Loss)
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
 
December 31
 
December 31
(Amounts in Thousands)
 
 
 
2019
 
2018
 
2019
 
2018
Amount of Pre-Tax Gain or (Loss) Recognized in Other Comprehensive Income (Loss) (OCI) on Derivatives:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
 
 
$
1,304

 
$
(208
)
 
$
1,579

 
$
1,739

The Effect of Derivative Instruments on Condensed Consolidated Statements of Income
 
 
 
 
Three Months Ended
 
Six Months Ended
(Amounts in Thousands)
 
 
 
December 31
 
December 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:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Cost of Sales
 
$
899

 
$
87

 
$
1,310

 
$
(30
)
Foreign exchange contracts
 
Non-operating income (expense)
 

 
(2
)
 

 
15

Total
 
 
 
$
899

 
$
85

 
$
1,310

 
$
(15
)
 
 
 
 
 
 
 
 
 
 
 
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)
 
$
(638
)
 
$
928

 
$
1,060

 
$
1,492

 
 
 
 
 

 
 

 
 
 
 
Total Derivative Pre-Tax Gain (Loss) Recognized in Income
 
$
261

 
$
1,013

 
$
2,370

 
$
1,477



19



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 increase/(decrease) in net unrealized holding gains for the six months ended December 31, 2019 and 2018 was, in thousands, $296 and $(729), respectively.
SERP asset and liability balances applicable to Kimball Electronics participants were as follows:
(Amounts in Thousands)
December 31,
2019
 
June 30,
2019
SERP investments - current asset
$
1,905

 
$
1,728

SERP investments - other long-term asset
8,115

 
7,540

    Total SERP investments
$
10,020

 
$
9,268

 
 
 
 
SERP obligation - current liability
$
1,905

 
$
1,728

SERP obligation - other long-term liability
8,115

 
7,540

    Total SERP obligation
$
10,020

 
$
9,268

Note 11. Postemployment Benefits
The Company maintains severance plans for all domestic employees and other statutory required postemployment plans for certain foreign subsidiaries. The domestic severance plans provide severance benefits to eligible employees meeting the plans’ qualifications, primarily involuntary termination without cause. The foreign postemployment plans include local pension, retirement, or severance plans. 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. The net periodic postemployment benefit costs were not material for the six months ended December 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 Plan was re-approved by the Company’s Share Owners at its annual meeting on November 7, 2019. 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, 2019.

20



During the first six months of fiscal year 2020, 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
 
252,878

 

$14.39

 
 
 
 

 

Unrestricted shares (3)
 
1st Quarter
 
500

 

$14.39

 
 
 
 
 
 
 
Unrestricted shares (3)
 
2nd Quarter
 
3,758

 

$17.30

 
 
 
 
 
 
 
Deferred share units (4)
 
2nd Quarter
 
32,950

 

$17.30

(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 Board during the second quarter of fiscal year 2020 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 during the first quarter of fiscal year 2020 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 Board 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 in a lump sum or installments in accordance with deferral elections 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, 2019
 
 
Goodwill
 
$
30,930

Accumulated impairment
 
(12,826
)
Goodwill, net
 
18,104

Goodwill, Additions
 
1,832

Balance as of December 31, 2019
 
 
Goodwill
 
32,762

Accumulated impairment
 
(12,826
)
Goodwill, net
 
$
19,936

During the first quarter of fiscal year 2020, we added $1.8 million to goodwill resulting from measurement period adjustments to the purchase price allocation of the GES acquisition. See Note 2 - Acquisition of Notes to Condensed Consolidated Financial Statements for more information on this acquisition.

21



A summary of other intangible assets subject to amortization is as follows:
 
December 31, 2019
 
June 30, 2019
(Amounts in Thousands)
Cost
 
Accumulated
Amortization
 
Net Value
 
Cost
 
Accumulated
Amortization
 
Net Value
Capitalized Software
$
31,875

 
$
27,353

 
$
4,522

 
$
32,015

 
$
27,124

 
$
4,891

Customer Relationships
8,618

 
1,760

 
6,858

 
8,618

 
1,506

 
7,112

Technology
5,060

 
1,271

 
3,789

 
5,060

 
766

 
4,294

Trade Name
6,369

 
796

 
5,573

 
6,369

 
478

 
5,891

Other Intangible Assets
$
51,922

 
$
31,180

 
$
20,742

 
$
52,062

 
$
29,874

 
$
22,188

During the three months ended December 31, 2019 and 2018, amortization expense of other intangible assets was, in millions, $0.8 and $0.7, respectively. During the six months ended December 31, 2019 and 2018, amortization expense of other intangible assets was, in millions, $1.6 and $0.9, respectively.
The estimated useful life of internal-use software ranges from 3 years to 10 years. The amortization period for the customer relationships, technology, and trade name intangible assets is 15 years, 5 years, and 10 years, respectively. We have no intangible assets with indefinite useful lives which are not subject to amortization.
Note 14. Leases
The Company determines if a contract is or contains a lease at inception. The Company leases certain office, manufacturing, and warehouse facilities under operating leases, in addition to land on which certain office and manufacturing facilities reside. These operating leases expire from fiscal year 2020 to 2057. The Company has a minimal number of finance leases with an immaterial impact on its Condensed Consolidated Financial Statements.
Operating lease costs for the three and six months ended December 31, 2019 were $0.3 million and $0.6 million, respectively, including short-term and variable lease costs. Cash payments for operating leases included in the measurement of lease liabilities for the six months ended December 31, 2019 were $0.4 million, which is included in Cash Flows from Operating Activities in the Condensed Consolidated Statement of Cash Flows.
The lease assets and liabilities, which exclude leases with terms of 12 months or less, as of December 31, 2019 were as follows:
(Amounts in Thousands)
 
Operating lease right-of-use assets (included in Other Assets)
$
2,246

Operating lease liability, current (included in Accrued expenses)
$
777

Operating lease liability, noncurrent (included in Other long-term liabilities)
$
1,469

Weighted average remaining lease term in years - operating leases
5.3

Weighted average discount rate - operating leases
3.5
%

22



Future lease payments as of December 31, 2019 are as follows:
(Amounts in Thousands)
 
2020 (1)
$
452

2021
710

2022
575

2023
95

2024
95

Thereafter
475

Total undiscounted lease payments
$
2,402

Less: imputed interest
156

Total lease liabilities
$
2,246

(1) Represents estimated lease payments for the remaining six-month period ending June 30, 2020.
As reported under the previous lease accounting standard, the aggregate future minimum rental payments on our operating leases, as of June 30, 2019, were, in millions, $0.8, $0.7, $0.6, $0.1, and $0.1 for the five years ending June 30, 2024, respectively, and $0.5 million thereafter.
Note 15. Share Owners’ Equity
On October 21, 2015, the Board authorized an 18-month stock repurchase plan (the “Stock Repurchase Plan”) allowing a repurchase of up to $20 million worth of common stock. Then, separately on each of September 29, 2016, August 23, 2017, and November 8, 2018, the Board extended and increased the Stock Repurchase Plan to allow the repurchase of up to an additional $20 million worth of common stock with no expiration date, which brought the total authorized stock repurchases under the Plan to $80 million. 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 Stock Repurchase Plan may be suspended or discontinued at any time.
During the six months ended December 31, 2019, the Company repurchased $6.1 million of common stock at an average price of $14.93 which was recorded as Treasury stock, at cost in the Condensed Consolidated Balance Sheets. Since the inception of the Stock Repurchase Plan, the Company has repurchased $74.0 million of common stock at an average cost of $15.03 per share.
Note 16. Earnings Per Share
Basic and diluted earnings per share were calculated as follows under the two-class method:
 
Three Months Ended
 
Six Months Ended
 
December 31
 
December 31
(Amounts in thousands, except per share data)
2019
 
2018
 
2019
 
2018
Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
   Net Income
$
6,612

 
$
7,115

 
$
13,210

 
$
12,184

   Less: Net Income allocated to participating securities
9

 
7

 
17

 
9

   Net Income allocated to common Share Own