Kimball Electronics(KE) - 2024 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and related notes for Kimball Electronics, Inc Item 1. Financial Statements This section presents Kimball Electronics' unaudited condensed consolidated financial statements and detailed notes for the periods ended March 31, 2024, and June 30, 2023 Condensed Consolidated Balance Sheets Total assets and share owners' equity slightly increased, while liabilities remained stable, with notable shifts in cash, receivables, and borrowings Condensed Consolidated Balance Sheet Highlights (Amounts in Thousands) | Item | March 31, 2024 | June 30, 2023 | Change | % Change | | :----------------------------------- | :------------- | :------------ | :----- | :------- | | ASSETS | | | | | | Cash and cash equivalents | $65,208 | $42,955 | $22,253 | 51.8% | | Receivables, net | $277,894 | $308,167 | $(30,273) | -9.8% | | Inventories | $396,199 | $450,319 | $(54,120) | -12.0% | | Assets held for sale | $29,619 | — | $29,619 | N/A | | Total Assets | $1,260,828 | $1,259,719 | $1,109 | 0.1% | | LIABILITIES | | | | | | Current portion of borrowings | $84,618 | $46,454 | $38,164 | 82.2% | | Accounts payable | $248,174 | $322,274 | $(74,100) | -23.0% | | Liabilities held for sale | $9,369 | — | $9,369 | N/A | | Total current liabilities | $437,881 | $475,148 | $(37,267) | -7.8% | | Long-term debt under credit facilities | $235,000 | $235,000 | $0 | 0.0% | | Total Liabilities | $721,767 | $735,725 | $(13,958) | -1.9% | | SHARE OWNERS' EQUITY | | | | | | Total Share Owners' Equity | $539,061 | $523,994 | $15,067 | 2.9% | | Total Liabilities and Share Owners' Equity | $1,260,828 | $1,259,719 | $1,109 | 0.1% | - The company reported Assets held for sale of $29.6 million and Liabilities held for sale of $9.4 million as of March 31, 2024, which were not present at June 30, 2023, indicating a significant operational change[11] Condensed Consolidated Statements of Income (Loss) For Q3 FY2024, Kimball Electronics reported a net loss of $6.1 million, a significant decline due to decreased sales, goodwill, and asset impairment charges Condensed Consolidated Statements of Income (Loss) Highlights (Amounts in Thousands, Except Per Share Data) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | % Change (3M) | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | % Change (9M) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :------------ | :------------------------------- | :------------------------------- | :------------ | | Net Sales | $425,036 | $484,703 | -12.3% | $1,284,352 | $1,327,288 | -3.2% | | Gross Profit | $33,544 | $42,972 | -21.9% | $103,519 | $106,484 | -2.8% | | Operating Income (Loss) | $(6,431) | $25,220 | -125.5% | $29,669 | $56,280 | -47.3% | | Income (Loss) Before Taxes | $(12,753) | $21,876 | -158.3% | $11,734 | $48,237 | -75.7% | | Net Income (Loss) | $(6,076) | $16,400 | -137.0% | $12,968 | $36,629 | -64.6% | | Basic EPS | $(0.24) | $0.66 | -136.4% | $0.52 | $1.47 | -64.6% | | Diluted EPS | $(0.24) | $0.65 | -136.9% | $0.51 | $1.46 | -65.0% | | Goodwill Impairment | $5,820 | — | N/A | $5,820 | — | N/A | | Asset Impairment | $16,564 | — | N/A | $16,564 | — | N/A | | Restructuring Expense | $1,622 | — | N/A | $1,622 | — | N/A | - The company incurred significant non-recurring charges in the three and nine months ended March 31, 2024, including $5.8 million in goodwill impairment, $16.6 million in asset impairment, and $1.6 million in restructuring expense, heavily impacting operating and net income[13] Condensed Consolidated Statements of Comprehensive Income (Loss) Total comprehensive income for Q3 FY2024 was a loss of $9.5 million, a significant decrease driven by net loss and negative foreign currency translation adjustments Condensed Consolidated Statements of Comprehensive Income (Loss) Highlights (Amounts in Thousands) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net income (loss) | $(6,076) | $16,400 | $12,968 | $36,629 | | Other comprehensive income (loss) | $(3,423) | $3,714 | $(2,018) | $8,494 | | Total comprehensive income (loss) | $(9,499) | $20,114 | $10,950 | $45,123 | | Foreign currency translation adjustments (net of tax) | $(3,871) | $2,094 | $(1,617) | $5,427 | | Derivative gain (loss) (net of tax) | $1,686 | $2,502 | $4,775 | $5,453 | | Reclassification to (earnings) loss: Derivatives (net of tax) | $(1,248) | $(818) | $(4,745) | $(2,103) | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly improved to $24.7 million for the nine months ended March 31, 2024, while investing and financing cash flows decreased Condensed Consolidated Statements of Cash Flows Highlights (Amounts in Thousands) | Cash Flow Category | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | Change | | :------------------------------------ | :------------------------------- | :------------------------------- | :----- | | Net cash provided by (used for) operating activities | $24,717 | $(57,885) | $82,602 | | Net cash used for investing activities | $(37,702) | $(66,497) | $28,795 | | Net cash provided by financing activities | $36,571 | $107,148 | $(70,577) | | Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash | $23,473 | $(17,528) | $41,001 | | Cash, Cash Equivalents, and Restricted Cash at End of Period | $67,337 | $32,323 | $35,014 | - Operating cash flow improved significantly, driven by net income adjusted for non-cash items and changes in operating assets and liabilities, including a decrease in accounts payable and an increase in advances from customers[127][128] - Capital expenditures decreased from $65.5 million in 2023 to $37.1 million in 2024, reflecting a reduction in investment for facility expansions[18][130] Condensed Consolidated Statements of Share Owners' Equity Total Share Owners' Equity increased to $539.1 million, primarily due to net income and stock compensation, partially offset by other comprehensive loss Condensed Consolidated Statements of Share Owners' Equity Highlights (Amounts in Thousands) | Item | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :------------------------------------ | :------------------------------- | :------------------------------- | | Balance at June 30 / July 1 | $523,994 | $453,971 | | Net income | $12,968 | $36,629 | | Other comprehensive income (loss) | $(2,018) | $8,494 | | Compensation expense related to stock compensation plans | $5,138 | $5,183 | | Performance and restricted share issuance | $(1,478) | $(1,416) | | Balance at March 31 | $539,061 | $503,186 | - The company's total share owners' equity increased by $15.1 million from June 30, 2023, to March 31, 2024, primarily due to net income and stock compensation, despite an accumulated other comprehensive loss[21] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the condensed consolidated financial statements, covering various accounting policies and financial instruments Note 1. Business Description and Summary of Significant Accounting Policies Kimball Electronics is a global manufacturing solutions provider, with revenue primarily recognized over time, and is evaluating new accounting standards - Kimball Electronics is a global, multifaceted manufacturing solutions provider specializing in electronics manufacturing services (EMS) for automotive, medical, and industrial end markets, also offering contract manufacturing for non-electronic components, medical disposables, precision molded plastics, and production automation equipment[24] - The majority of the company's revenue (approximately 96-97%) is recognized over time as manufacturing services are performed, with an enforceable right to payment for performance completed to date[28][50] - The company recorded $1.6 million in restructuring expense for employee-related costs in the three and nine months ended March 31, 2024, to align its cost structure with reduced end market demand, with an expectation of $1.0 million to $2.0 million in additional charges[38] Components of Non-operating income (expense), net (Amounts in Thousands) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Foreign currency/derivative gain (loss) | $(536) | $1,328 | $(864) | $2,581 | | Gain (loss) on SERP investments | $277 | $353 | $584 | $458 | | Other | $(271) | $(248) | $(679) | $(380) | | Non-operating income (expense), net | $(530) | $1,433 | $(959) | $2,659 | - New accounting standards on Improvements to Reportable Segment Disclosures (effective after Dec 15, 2023) and Improvements to Income Tax Disclosures (effective after Dec 15, 2024) are being evaluated for their impact on consolidated financial statements[45][46] Note 2. Revenue from Contracts with Customers Revenue is primarily from manufacturing services across automotive, medical, and industrial markets, with most recognized over time, and contract assets/liabilities reflecting timing differences Net Sales by End Market Vertical (Amounts in Millions) | Vertical Markets | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :--------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Automotive | $202.0 | $221.9 | $614.7 | $615.3 | | Medical | $113.0 | $135.5 | $323.5 | $377.1 | | Industrial | $110.0 | $127.3 | $346.2 | $334.9 | | Total net sales | $425.0 | $484.7 | $1,284.4 | $1,327.3 | - Approximately 97% and 96% of net sales for the three months ended March 31, 2024 and 2023, respectively, were recognized over time as manufacturing services were performed[50] - Contract assets, representing unbilled receivables for services performed, were $76.1 million at March 31, 2024, and contract liabilities (advances from customers) were $49.6 million[51][52] Note 3. Assets and Liabilities Held for Sale The company decided to divest its automation, test, and measurement business unit (GES), classifying it as held for sale and incurring significant impairment charges - Kimball Electronics decided to divest its automation, test, and measurement business unit (GES) in Q3 FY2024 to increase focus on EMS operations, classifying it as held for sale[53] - The company recognized impairment charges of $5.8 million on goodwill and $16.6 million on assets held for sale due to the carrying value exceeding the fair value less costs to sell for the disposal group[54][55] Assets and Liabilities Held for Sale (Amounts in Thousands) | Item | March 31, 2024 | | :-------------------------------- | :------------- | | Assets held for sale: | | | Receivables, net | $8,599 | | Inventories | $7,217 | | Property and Equipment, net | $5,822 | | Other Intangible Assets, net | $8,010 | | Valuation Allowance | $(16,264) | | Total Assets held for sale | $29,619 | | Liabilities held for sale: | | | Accounts payable | $4,239 | | Accrued expenses | $2,302 | | Total Liabilities held for sale | $9,369 | Disposal Group Net Sales and Income (Loss) Before Taxes (Amounts in Thousands) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net Sales | $8,105 | $16,755 | $30,903 | $40,577 | | Income (Loss) Before Taxes on Income | $(25,691) | $1,352 | $(25,141) | $(976) | Note 4. Inventories Total inventory decreased to $396.2 million, with $44.1 million in long-term raw materials related to a customer recall, partially offset by customer deposits Inventory Components (Amounts in Thousands) | Item | March 31, 2024 | June 30, 2023 | | :---------------- | :------------- | :------------ | | Finished products | $391 | $432 | | Work-in-process | — | $3,117 | | Raw materials | $395,808 | $446,770 | | Total inventory | $396,199 | $450,319 | - The company has $44.1 million of raw materials inventory classified as long-term, associated with a customer remediating a recall, and has received $29.1 million in related customer deposits[58] Note 5. Accumulated Other Comprehensive Income (Loss) Accumulated Other Comprehensive Income (Loss) shifted to $(13.1) million, primarily due to negative foreign currency translation adjustments and reclassifications of derivative gains Changes in Accumulated Other Comprehensive Income (Loss) (Amounts in Thousands) | Item | Balance at June 30, 2023 | Net current-period other comprehensive income (loss) (9M FY24) | Balance at March 31, 2024 | | :------------------------------------ | :----------------------- | :---------------------------------------------------------- | :------------------------ | | Foreign Currency Translation Adjustments | $(11,832) | $(1,617) | $(13,449) | | Derivative Gain (Loss) | $1,368 | $30 | $1,398 | | Post Employment Benefits Net Actuarial Gain (Loss) | $(582) | $(431) | $(1,013) | | Total Accumulated Other Comprehensive Income (Loss) | $(11,046) | $(2,018) | $(13,064) | Reclassifications from Accumulated Other Comprehensive Income (Loss) to Income (Net of Tax, Amounts in Thousands) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Derivative gain (loss) | $1,248 | $818 | $4,745 | $2,103 | | Amortization of actuarial gain | $(28) | $14 | $(16) | $119 | | Total reclassifications | $1,220 | $832 | $4,729 | $2,222 | Note 6. Commitments and Contingent Liabilities The company provides assurance-type warranties for workmanship and product specifications, with associated liability and expense being immaterial - Kimball Electronics provides assurance-type warranties for workmanship and product compliance, with product warranty liability and expense being immaterial for the nine months ended March 31, 2024 and 2023[61] Note 7. Credit Facilities Total borrowings outstanding increased to $319.6 million with a weighted-average interest rate of 6.9%, and the company remains in compliance with all financial covenants Credit Facilities Summary (Amounts in Millions, in U.S. Dollar Equivalents) | Credit Facility | Available Borrowing Capacity at March 31, 2024 | Borrowings Outstanding at March 31, 2024 | Borrowings Outstanding at June 30, 2023 | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------------------------- | | Primary credit facility | $— | $299.7 | $272.1 | | Secondary credit facility | $89.4 | $10.6 | $— | | Foreign credit facilities (Thailand, China, Netherlands, Poland, Vietnam) | $22.0 | $9.3 | $9.4 | | Total credit facilities | $117.4 | $319.6 | $281.5 | | Less: current portion | | $(84.6) | $(46.5) | | Long-term debt under credit facilities | | $235.0 | $235.0 | - The weighted-average interest rate on borrowings outstanding under the credit facilities increased slightly to 6.9% at March 31, 2024, from 6.8% at June 30, 2023[66] - Financial covenants for the primary and secondary credit facilities require a consolidated total indebtedness to adjusted consolidated EBITDA ratio not greater than 3.0 to 1.0 (or 3.5 to 1.0 after a material acquisition) and an interest coverage ratio not less than 3.5 to 1.0[64][65] Note 8. Fair Value Fair value measurements are categorized into three levels, with recurring measurements primarily in Level 1 and 2, and a non-recurring Level 3 measurement for assets held for sale - Fair value measurements are categorized into three levels: Level 1 for active market quoted prices, Level 2 for observable inputs other than Level 1, and Level 3 for unobservable inputs reflecting management's assumptions[68] Recurring Fair Value Measurements (Amounts in Thousands) | Item | March 31, 2024 (Level 1) | March 31, 2024 (Level 2) | March 31, 2024 (Total) | June 30, 2023 (Level 1) | June 30, 2023 (Level 2) | June 30, 2023 (Total) | | :------------------------------------ | :----------------------- | :----------------------- | :--------------------- | :---------------------- | :---------------------- | :-------------------- | | Assets | | | | | | | | Derivatives: foreign exchange contracts | $— | $4,712 | $4,712 | $— | $6,320 | $6,320 | | Trading securities: mutual funds (SERP) | $5,318 | $— | $5,318 | $8,668 | $— | $8,668 | | Total assets at fair value | $5,318 | $4,712 | $10,030 | $8,668 | $6,320 | $14,988 | | Liabilities | | | | | | | | Derivatives: foreign exchange contracts | $— | $794 | $794 | $— | $1,245 | $1,245 | | Total liabilities at fair value | $— | $794 | $794 | $— | $1,245 | $1,245 | - A non-recurring Level 3 fair value measurement was established for the automation, test, and measurement business unit classified as held for sale, resulting in a $16.3 million valuation allowance based on expected proceeds and estimated carrying value[71] Note 9. Derivative Instruments The company uses foreign exchange forward contracts to manage currency risks, with outstanding notional amounts of $25.6 million and 67.2 million Euro, and expects $3.5 million in pre-tax derivative gain reclassification - As of March 31, 2024, the company had outstanding foreign exchange contracts with aggregate notional amounts of $25.6 million (hedging against USD) and 67.2 million Euro (hedging against EUR)[75] Fair Value of Derivative Instruments on Condensed Consolidated Balance Sheets (Amounts in Thousands) | Item | March 31, 2024 (Assets) | June 30, 2023 (Assets) | March 31, 2024 (Liabilities) | June 30, 2023 (Liabilities) | | :------------------------------------ | :---------------------- | :--------------------- | :--------------------------- | :-------------------------- | | Derivatives Designated as Hedging Instruments | $4,345 | $4,772 | $742 | $844 | | Derivatives Not Designated as Hedging Instruments | $367 | $1,548 | $52 | $401 | | Total derivatives | $4,712 | $6,320 | $794 | $1,245 | - Approximately $3.5 million of pre-tax derivative gain deferred in Accumulated Other Comprehensive Loss is estimated to be reclassified into earnings within the next 12 months[78] Effect of Derivative Instruments on Condensed Consolidated Statements of Income (Pre-Tax Gain/(Loss) in Thousands) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Reclassified from Accumulated OCI (Cost of Sales) | $1,600 | $1,111 | $6,092 | $2,596 | | Recognized in Income (Non-operating income (expense)) | $650 | $(286) | $(223) | $171 | | Total Derivative Pre-Tax Gain (Loss) Recognized in Income | $2,250 | $825 | $5,869 | $2,767 | Note 10. Employee Benefit Plans The company maintains defined contribution and Supplemental Employee Retirement Plans, with total defined benefit postemployment obligations increasing to $7.4 million - Total expense for employer contributions to domestic defined contribution retirement plans was $3.7 million for the nine months ended March 31, 2024, down from $4.2 million in the prior-year period[84] - The Supplemental Employee Retirement Plan (SERP) for executives had total investments and obligations of $5.4 million at March 31, 2024, with realized and unrealized gains/losses recognized in Other Income (Expense)[85] - Total obligations under defined benefit postemployment plans (severance and other benefits) were $7.4 million at March 31, 2024, an increase from $6.6 million at June 30, 2023[86] Note 11. Stock Compensation Plans The 2023 Equity Incentive Plan allows for up to 2.0 million shares, with various stock compensation awards granted during the first nine months of fiscal year 2024 - The Kimball Electronics, Inc. 2023 Equity Incentive Plan, approved by shareholders on November 17, 2023, supersedes the 2014 Plan and allows for the issuance of up to 2.0 million shares[87] Stock Compensation Granted (First Nine Months of FY2024) | Stock Compensation Granted | Quarter Granted | Shares/Units | Grant Date Fair Value | | :-------------------------------- | :-------------- | :----------- | :-------------------- | | Long-Term Performance Shares | 1st Quarter | 172,079 | $29.19 | | Restricted Shares | 1st Quarter | 71,422 | $29.19 | | Long-Term Performance Shares | 2nd Quarter | 35,650 | $25.21 | | Restricted Shares | 2nd Quarter | 23,768 | $25.21 | | Unrestricted Shares | 2nd Quarter | 18,128 | $25.24 | | Deferred Share Units | 2nd Quarter | 26,347 | $25.24 | - Performance share awards vest based on profitability (operating income) and growth (three-year CAGR compared to EMS industry), with potential for 0% to 125% of targeted shares[91] Note 12. Goodwill and Other Intangible Assets Goodwill, net, decreased to $6.2 million due to a $5.8 million impairment and reclassification to held for sale, with other intangible assets also significantly reduced Goodwill Summary (Amounts in Thousands) | Item | Amount | | :------------------------------------ | :----- | | Goodwill, net at June 30, 2023 | $12,011 | | Impairment recorded | $(5,820) | | Goodwill classified as held for sale | $(13,745) | | Accumulated impairment classified as held for sale | $13,745 | | Goodwill, net at March 31, 2024 | $6,191 | Other Intangible Assets, Net (Amounts in Thousands) | Item | March 31, 2024 (Net Value) | June 30, 2023 (Net Value) | | :-------------------- | :------------------------- | :------------------------ | | Capitalized Software | $3,197 | $3,482 | | Customer Relationships | $— | $5,094 | | Technology | $— | $244 | | Trade Name | $— | $3,515 | | Total Other Intangible Assets | $3,197 | $12,335 | - Amortization expense for other intangible assets was $0.5 million for the three months and $2.0 million for the nine months ended March 31, 2024[92] Note 13. Share Owners' Equity The company has a Board-authorized stock repurchase plan for up to $100 million, with $88.8 million repurchased since inception, but no repurchases in the current period - Kimball Electronics has a Board-authorized stock repurchase plan for up to $100 million of common stock, with $88.8 million repurchased since inception through March 31, 2024[94][95] - No share repurchases were made under the plan during the nine months ended March 31, 2024, or 2023[95] Note 14. Earnings Per Share Basic and diluted EPS for Q3 FY2024 were $(0.24) due to a net loss, with all stock compensation awards considered antidilutive and excluded from the calculation Earnings Per Share of Common Stock (Amounts in thousands, except per share data) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net Income (Loss) allocated to common Share Owners | $(6,076) | $16,376 | $12,952 | $36,576 | | Basic weighted average common shares outstanding | 25,118 | 24,898 | 25,084 | 24,868 | | Dilutive weighted average shares outstanding | 25,118 | 25,067 | 25,263 | 25,031 | | Basic EPS | $(0.24) | $0.66 | $0.52 | $1.47 | | Diluted EPS | $(0.24) | $0.65 | $0.51 | $1.46 | - For the three months ended March 31, 2024, all 434,000 outstanding stock compensation awards were considered antidilutive and excluded from the diluted EPS calculation due to the net loss[96] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, covering performance, liquidity, and accounting policies Forward-Looking Statements This section cautions readers that forward-looking statements are subject to various risks and uncertainties, including global economic conditions and geopolitical conflicts - Forward-looking statements are identified by words such as 'believes,' 'anticipates,' 'expects,' and are subject to risks including global economic conditions, geopolitical conflicts, raw material costs, foreign exchange fluctuations, and new business conversion[97] Business Overview Kimball Electronics operates in the competitive EMS industry, facing softening demand, leading to a strategic divestiture and restructuring efforts while maintaining a strong balance sheet - Kimball Electronics operates as a global, multifaceted manufacturing solutions provider in the highly competitive EMS industry, positioned between smaller agile players and larger scale competitors[98][99] - The EMS industry is experiencing softening demand due to global macroeconomic headwinds, including inflation, higher interest rates, and geopolitical uncertainty, leading to elevated inventory levels for the company[102] - In Q3 FY2024, the company decided to divest its automation, test, and measurement business unit (GES) to increase focus on EMS operations and undertook restructuring efforts to align its cost structure with reduced end-market demand[105] - The company maintains a strong balance sheet with a current ratio of 2.0 and a debt-to-equity ratio of 0.6 at March 31, 2024, and has invested in capacity expansions in Mexico, Thailand, and Poland[106] Customer Service Years (% of Net Sales and of Customers) | Customer Service Years | Nine Months Ended March 31, 2024 (% of Net Sales) | Nine Months Ended March 31, 2024 ( of Customers) | Nine Months Ended March 31, 2023 (% of Net Sales) | Nine Months Ended March 31, 2023 ( of Customers) | | :------------------- | :---------------------------------------------- | :------------------------------------------------ | :---------------------------------------------- | :------------------------------------------------ | | More than 10 Years | 75% | 35 | 78% | 31 | | 5 to 10 Years | 20% | 18 | 17% | 19 | | Less than 5 Years | 5% | 12 | 5% | 12 | | Total | 100% | 65 | 100% | 62 | Results of Operations Consolidated net sales decreased by 12% in Q3 FY2024, leading to significant declines in gross profit, operating income, and net income due to lower sales and impairment charges Consolidated Results of Operations (Amounts in Millions, Except for Per Share Data) | Item | Three Months Ended March 31, 2024 | % of Net Sales (2024) | Three Months Ended March 31, 2023 | % of Net Sales (2023) | % Change (3M) | | :------------------------------------ | :-------------------------------- | :-------------------- | :-------------------------------- | :-------------------- | :------------ | | Net Sales | $425.0 | | $484.7 | | -12% | | Gross Profit | $33.5 | 7.9% | $43.0 | 8.9% | -22% | | Selling and Administrative Expenses | $16.8 | 3.9% | $17.8 | 3.7% | -5% | | Operating Income | $(6.4) | -1.5% | $25.2 | 5.2% | -125% | | Net Income | $(6.1) | | $16.4 | | -137% | | Diluted Earnings per Share | $(0.24) | | $0.65 | | -137% | | Open Orders | $831 | | $882 | | -6% | Net Sales by Vertical Market (Amounts in Millions) | Vertical Market | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | % Change (3M) | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | % Change (9M) | | :-------------- | :-------------------------------- | :-------------------------------- | :------------ | :------------------------------- | :------------------------------- | :------------ | | Automotive | $202.0 | $221.9 | -9% | $614.7 | $615.3 | 0% | | Medical | $113.0 | $135.5 | -17% | $323.5 | $377.1 | -14% | | Industrial | $110.0 | $127.3 | -14% | $346.2 | $334.9 | 3% | | Total Net Sales | $425.0 | $484.7 | -12% | $1,284.4 | $1,327.3 | -3% | - Sales to customers in the automotive market decreased 9% in Q3 FY2024 due to overall decreased demand, while medical market sales declined 17% primarily due to decreased sales with a large medical customer remediating a recall[111] - Non-recurring charges in Q3 FY2024 included a $4.4 million after-tax goodwill impairment, a $9.5 million after-tax asset impairment, and a $1.2 million after-tax restructuring charge, significantly impacting net income and EPS[120] Other Income (Expense) (Amounts in Thousands) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Interest income | $83 | $45 | $483 | $88 | | Interest expense | $(5,875) | $(4,822) | $(17,459) | $(10,790) | | Foreign currency/derivative gain (loss) | $(536) | $1,328 | $(864) | $2,581 | | Gain (loss) on SERP investments | $277 | $353 | $584 | $458 | | Other income (expense), net | $(6,322) | $(3,344) | $(17,935) | $(8,043) | Liquidity and Capital Resources Working capital remained stable at $450.1 million, with improved operating cash flow, but Cash Conversion Days increased due to elevated inventory and delayed deliveries - Working capital was $450.1 million at March 31, 2024, with a current ratio of 2.0 and a debt-to-equity ratio of 0.6[122] Cash Conversion Days (CCD) | Metric | Three Months Ended March 31, 2024 | Three Months Ended December 31, 2023 | Three Months Ended March 31, 2023 | | :-------------------------- | :-------------------------------- | :----------------------------------- | :-------------------------------- | | Days Sales Outstanding | 59 | 64 | 54 | | Contract Asset Days | 17 | 18 | 14 | | Production Days Supply on Hand | 103 | 109 | 101 | | Accounts Payable Days | 58 | 65 | 69 | | Advances from Customers Days | 11 | 9 | 8 | | Cash Conversion Days | 110 | 117 | 92 | - The increase in Cash Conversion Days to 110 is attributed to customers pushing out deliveries and elevated inventory levels, which the company is mitigating through customer negotiations for inventory deposits or consignment[124] Major Categories of Cash Flows (Amounts in Millions) | Cash Flow Category | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :------------------------------------ | :------------------------------- | :------------------------------- | | Net cash provided by (used for) operating activities | $24.7 | $(57.9) | | Net cash used for investing activities | $(37.7) | $(66.5) | | Net cash provided by financing activities | $36.6 | $107.1 | - The secondary credit facility was amended on January 5, 2024, increasing the borrowing limit to $100 million from $50 million and extending the maturity to January 3, 2025, to provide more liquidity[136] - Capital expenditure commitments were approximately $14 million at March 31, 2024, primarily for new program wins, facility expansions, and equipment replacement[138] Fair Value No Level 1 or Level 2 financial instruments were affected by market liquidity issues, and valuation techniques for foreign currency derivatives use observable market inputs - Level 1 financial assets were valued using readily available market pricing, and Level 2 foreign currency derivative assets and liabilities were independently valued using observable market inputs[143] Off-Balance Sheet Arrangements As of March 31, 2024, Kimball Electronics did not have any material off-balance sheet arrangements - The company reported no material off-balance sheet arrangements as of March 31, 2024[144] Critical Accounting Policies Financial statements rely on estimates and assumptions, and there have been no material changes to critical accounting policies since the Annual Report on Form 10-K for June 30, 2023 - Financial statements rely on estimates and assumptions based on current facts, prior experience, and reasonable assumptions[145] - There have been no material changes to critical accounting policies since the Annual Report on Form 10-K for the year ended June 30, 2023[146] New Accounting Standards Information regarding new accounting standards is provided in Note 1 to the Condensed Consolidated Financial Statements - Refer to Note 1 for information regarding new accounting standards[147] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes in market risk exposure for foreign currency exchange rates and interest rates were reported compared to the fiscal year ended June 30, 2023 - No material changes in exposure to market risks for foreign currency exchange rates and interest rates were reported compared to the fiscal year ended June 30, 2023[148] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of March 31, 2024, with no material changes in internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of March 31, 2024[149] - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2024[149] PART II OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, other information, exhibits, and signatures Item 1. Legal Proceedings Kimball Electronics and its subsidiaries are not parties to any pending legal proceedings expected to have a material adverse impact on the business or financial condition - The company is not involved in any legal proceedings expected to have a material adverse impact on its business or financial condition[152] Item 1A. Risk Factors For a comprehensive disclosure of risk factors related to Kimball Electronics' business, refer to its Annual Report on Form 10-K for the fiscal year ended June 30, 2023 - For a comprehensive disclosure of risk factors, refer to the Annual Report on Form 10-K for the year ended June 30, 2023[153] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Board authorized a stock repurchase plan for up to $100 million, with $11.2 million remaining, and no common stock was purchased during the three months ended March 31, 2024 - The company has a Board-authorized stock repurchase plan for up to $100 million of common stock[154] - No common stock was purchased during the three months ended March 31, 2024[155] - The maximum value of remaining shares that may be purchased under the Repurchase Plan was $11.2 million at March 31, 2024[155] Item 5. Other Information No officers or directors adopted or terminated any Rule 10b5-1(c) trading arrangements during the three months ended March 31, 2024 - No officers or directors adopted or terminated any Rule 10b5-1(c) trading arrangements during the three months ended March 31, 2024[156] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, CEO and CFO certifications, and Inline XBRL documents - Exhibits include Amended and Restated Articles of Incorporation and By-Laws, CEO and CFO certifications (Rule 13a-14(a)/15d-14(a) and 18 U.S.C. Section 1350), and various Inline XBRL documents[157] SIGNATURES The report is duly signed on behalf of Kimball Electronics, Inc. by its Chief Executive Officer and Chief Financial Officer on May 8, 2024 - The report was signed by Richard D. Phillips, Chief Executive Officer, and Jana T. Croom, Chief Financial Officer, on May 8, 2024[161]